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1. Understanding Business Activity

1.3 Enterprise, Business Growth and Size

Business Studies, CIE IGCSE (0450)

1.3.1 Enterprise and Entrepreneurship

• CHARACTERISTICS OF SUCCESSFUL ENTREPRENEURS
• Entrepreneurs: An individual who has an idea for a business takes the financial
risk of starting and managing a business.

• Entrepreneurs usually:
• Have an idea for a new business
• Are prepared to invest their own savings
• Accept risks of failure
• Want to make all decisions about the management of the business.
• Characteristics of successful entrepreneurs:
• Innovative: Think about new ideas for goods and services.
• Self motivated and determined: drive to keep going
• Self Confident: Strong belief of their ability and ideas
• Multi-skilled: Good understanding of functions like finance, marketing and HR
• Leadership Qualities: good communication skills, and motivate others
• Initiative: Able to develop a good plan to achieve business objectives
• Results driven: Focused on achieving results and sell products for profit.
• Risk-taker: prepared to take risks, knowing failure is a possibility.
• Good at Networking: Prepared to learn from others.

• CONTENT OF A BUSINESS PLAN AND HOW THEY ASSIST

ENTREPRENEURS

• Business Plan: A detailed written document outlining the purpose and aims of a
business which is often used to persuade lenders and investors to finance the
business proposal.

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• Contents of the Business Plan:
• The Business - Includes details of the entrepreneur, idea of the business, and
information of about skills and expertise of managers or workers who need to
be recruited.

• Business Opportunity - Information of product, Market research and why

customers will buy the product

• The Market - Current size, Potential growth, and Product’s main competitors.
• Objectives of the Business - What Business hopes to achieve
• Financial Forecasts - A cash-flow forecast and projected sales, revenue and
profit for at least the first year of trading. (Revenue: The amount a business
earns from the sale of their products.)

• How Business Plans assist Entrepreneurs:

• Information can be used to persuade lenders and investors to provide finance
to the business.

• Plan gives business a sense of purpose and direction. Sets out resources
required by business such as finance, skills and number of workers etc.

• Financial forecasts provides business with targets to aim at and enables

business to monitor its progress.

• WHY AND HOW GOVERNMENTS SUPPORT START-UPS

• Business Start-up: A newly formed business. They usually start small, but some
might grow to become much bigger.

• Why Governments support Start-ups:

• Job Creation: Together they employ a huge working population, reducing
unemployment.

• Increased Variety of Products: Bring ideas for goods and services that
increase the variety of products available creating a great consumer choice in
the market.

• Increased Competition: The more businesses there are in the market place,
the greater the competition resulting in lower prices and better quality of goods
and services.

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• Specialist Goods: Small businesses often provide with goods and services to
consumers which larger businesses are less interested in supplying(mass
market).

• Become Larger business: Some Start-up businesses often become larger

businesses in the future. The country will benefit form the advantages the
larger businesses bring to the economy.

• Lower Costs: Some startup businesses often have lower costs than larger
businesses, so sell products at lower prices.

• How Government support Startups:

• Grants and interest free or low interest loans
• Lower taxation rates on profits in early years
• Rent free premises for certain period of time
• Free or subsidised training for workers
• Information, advice and support from specialist agencies
1.3.2 The methods and problems of measuring business size:
• METHODS OF MEASURING BUSINESS SIZE
• Capital Employed: Value of all long term finance invested in a business. Used to buy
things that a business needs before it can produce goods and services.

• A small business will invest less capital than a large business in the same
industry.

• Problem because: some industries such as car manufacturing need a very large
capital investment in factories and machinery others such as computers and
software design do not.

• Value of Output: The amount businesses earn from selling their products.
• A small business will have much lower revenue and earnings from sales than a
larger business.

• The larger the market a business serves the more revenue the business is likely
to earn.

• Problem because: Doesn’t fairly compare businesses in different industries.

• Number of Employees: Large businesses usually employ many different employees
than small business in the same example.

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• Problem because: Two business can produce similar level of outputs, but Firm
with automated production will require far fewer workers than the one which is
using traditional methods.

• Market Share: The larger the share of the market, larger the business.
• Misleading as: if a market is a small one, some businesses may have a larger
market share, though value of output may be smaller than a firm which may have
a larger value of output with a smaller market share in a larger market.

1.3.3 Why some businesses grow and others remain small:

• WHY OWNERS MAY WANT TO EXPAND THEIR BUSINESS
• Increase in Profits: Growth results in increase in output. If output is sold, then sales
increase, which increases revenue, and therefore profit (if costs are kept in control)

• Increase in Market Share: Increase in market share results in business growth, so

products and brand name become more widely known. Launching products is less
risky. Sales may also increase.

• Economies of Scale: As businesses grow there is reduction in average costs due to

higher efficiency and production, this will lead to increase in profits.

• Greater power to control market: Larger businesses have greater control over their
own prices, and can also set price for other businesses. Sometimes they can also
influence government policy to their advantage.

• Protection from the risk of takeover: The larger the company the more expensive and
and difficult a hostile and unwanted takeover becomes reducing chances of
takeovers for public limited companies.

• DIFFERENT WAYS BUSINESSES EXPAND

• Businesses grow in different ways either internally (organic growth) or externally
(inorganic growth)

• Internal Growth: Occurs when a business expands by: (it is often slow but avoids
problems of external growth.)

• Increasing the number of goods it can produce. Ex. Buying more machinery
• Developing new products
• Finding new markets for their products

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• External Growth: Takes place when a business merges with or takes over other
another business in the same or different industry. This process is known as
integration.

• Horizontal Integration: Brings together two firms in the same industry, who are
also in same sector of business activity.

• Forward vertical Integration: Brings together two firms in the same industry, but
one is a customer of the other.

• Backward Vertical Integration: Brings together two firms in the same industry, but
one is a supplier to the other.

• Conglomerate Integration: Bringing together two firms which are in completely

different industries.

• PROBLEMS LINKED TO BUSINESS GROWTH

• Internal growth is usually slow, other businesses using external growth may grow
very fast.These larger firms may dominate market, and remove opportunity for other
businesses to expand.

• Due to mergers, managers and workers may fear loss of job; maybe complex to take
control, leading to poor decision making and inefficiency.

• If business becomes too large then diseconomies of scale may occur; increasing
average costs and decreasing profit margin.

• Businesses bought together may have different management styles, objectives, pay
and conditions of work, which may lead to conflicts between groups and workers.

• Integration will change control of business for original owners, there may be loss of
control.

• How to overcome these problems: Careful Planning is required. Senior managers

should make sure enough resources are available. Workers should be fully aware of
the plans to avoid conflicts

• WHY SOME BUSINESSES REMAIN SMALL

• Owner’s Choice:
• Doesn’t want increased responsibility and workload.
• Wants total control of business, fears growth will reduce level of control over day-
to-day decision making.

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• Wants to maintain close relationship with customers & provide personal service.
• Don’t want to take the risk of growth, as growth requires finance, and if growth is
slow, the business’s borrowing cannot be repaid on time.

• Market Size:
• Not all businesses have market share as a objective.
• Local market services, may not want to offer there services beyond the
neighbourhood.

• Consumers will not travel further distance, when a similar service is available
near to them.

• Access and Availability of Capital:

• Due to lack of capital and difficulty in getting bank loans and other sources of
finance, this is one of the biggest factors preventing expansion.

• Market domination:
• Very large companies in the market dominate the market and make it very hard
for small businesses to compete.

• Consumers have a brand loyalty to bigger firm as they can offer services at lower
prices due to economies of scale.

1.3.4 Why some (new or established) businesses fail and why

new businesses are at greater risk of failing:
• CAUSES OF BUSINESS FAILURE:
• Poor Planning and Lack of Objectives: Lack of detailed business plan, New business
owners often fail to set objectives; so business lacks focus and direction.

• Poor Cash Management: Businesses don't handle cash inflow and outflow effectively;
they do not have enough money for expenses and debts.

• Poor Choice of Location: If businesses aren’t located properly or closer to market/raw

materials then there is lack of demand and sales, resulting in failure.

• Poor Management: Lack of management skills and experience to run business,

results in conflicts and business failure.

• Failure to invest in new technologies: Unable to compete with others in terms of

Price, design, and quality; so business fails to survive.

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• Poor Marketing: Market research is essential to new businesses for identifying size of
potential market, level of competition and funding out what consumers want.

• Lack of Finance: Lack of finance doesn’t allow businesses to make the most of the
opportunities they receive, sometimes even failing.

• Competition: Globalisation gives access to wider markets, increasing competition.

Businesses unable to compete on price and quality are unlikely to survive in the long
run.

• Economic Influences: Unemployment, High interest rates, and taxation may reduce
the amount of money consumers have to spend; reducing business earnings and
thereby causing failure.