Enterprise, business growth

and size

Students should be able to explain:

• the importance of enterprise to new businesses

• the key characteristics of successful entrepreneurs

 Entrepreneur

• Entrepreneur is a person who organises, operates and takes the risk for a

new business venture.

• When one decides to take the risk of setting up their own business either

part-time or full time, that individual is an entrepreneur.

 BENEFITS OF BEING AN Entrepreneur

• Independence: able to choose how to use time and money.

• Able to put own ideas into practice.

• May become famous and successful if the business grows.

• May be profitable and the income might be higher than working being an

employee in another business.

• Able to make use of personal interest and skills

 DISADVANTAGES OF BEING AN Entrepreneur

• Risk- many new entrepreneurs’ businesses fail, especially if there is poor

planning.

• Capital: Entrepreneur will have to put their own money into the business and,

possibly, find other sources of capital.

• Lack of knowledge and experience in starting and operating a business.

• Opportunity cost: lost income from not being an employee of another business.
 Characteristics of successful entrepreneurs

• Not everyone would make a good entrepreneur.

• Why?

• Probably not - some people do not like risk or working independently.

• They will prefer to be an employee of a large business instead.

 Characteristics of successful entrepreneurs

• Hardworking: Working long hours and having short holidays which is typical of

many entrepreneurs to making their business successful.

• Risk taker: Making decisions to produce goods or services that people might

buy is potentially risky.

• Creative: A new business needs new ideas to make products and services

different from other existing firms which will lead to the business attracting

more customers.
 Characteristics of successful entrepreneurs

• Optimistic: Looking forward to a better future is essential, thus being

positive. You should not think about failure because if you think only

of failure you will fail.

• Self-confident: Being able to convince other people of your skills and

to convince banks, other lenders and customers that your business is

going to be successful.
 Characteristics of successful entrepreneurs

• Innovative: Being able to put new ideas into practice in interesting and different

ways.

• Independent: Entrepreneurs will often have to work on their own before they can

afford to employ others. Entrepreneurs must be motivated and be able to work

without any help.

• Effective communicator: Talking clearly and confidently to banks, other lenders,

customers and government agencies about the new business will raise the profile of

the new business.

 SUMMARY

• Entrepreneur is a person who organises, operates and takes the risk for a new

business venture.

• When one decides to take the risk of setting up their own business either part-

time or full time, that individual is an entrepreneur

 SUMMARY
• Benefits of being an entrepreneur

 Independence: able to choose how to use time and money.

 Able to put own ideas into practice.

 May become famous and successful if the business grows.

• May be profitable and the income might be higher than working being an

employee in another business.

 How a business plan assists entrepreneurs

• A business plan is a document containing the business objectives and

important details about the operations, finance and owners of the new

business.

• A bank will certainly ask an entrepreneur for a business plan before agreeing

to a loan or overdraft to help finance the new business.

 How a business plan assists entrepreneurs
• By completing a business plan (most banks are able to give business owners a
ready-printed form to fill out).

• The entrepreneur is supposed to think ahead and plan carefully ahead.

• The entrepreneur will have to consider:

 What products or services do I intend to provide and which consumers am I

aiming at?

 What will be my main costs and will enough products be sold to pay for them?

 Where will the firm be located?

 How a business plan assists entrepreneurs

 What machinery and how many people will be required in the business?

• The bank will be reluctant to lend money to the business without a detailed plan .

• This is because the owners of the new business cannot show that they have thought

seriously about the future and planned to meet the challenges that they will

certainly meet.
 How a business plan assist entrepreneurs

• Even with a detailed business plan, the bank might not offer a client a loan if

the bank manager believes that the plan is not well completed (for example,

poorly forecasted cash flow).

 SUMMARY
• A business plan is a document containing the business objectives and important

details about the operations, finance and owners of the new business.

• Things that can be seen in the business plan are:

 Business name

 Type of organization

 Business aim
 SUMMARY
 Product

 Price

 Business aim

 Market research undertaken and results etc.

 Human resource plan

 Details of the business owners

 SUMMARY
 Production details and business costs

 Location of business

 Equipments required

 Forecast profit

 Cash flow

 Finance
 Enterprise, business growth
and size

Students should be able to explain:

• the importance of a business plan to an entrepreneur

 Why governments support business start-ups

• Most governments offer support to entrepreneurs.

• This encourages them to set up new businesses. There are several reasons why

this support is given.

 Reduce unemployment: new businesses will often create jobs to help reduce

unemployment.

 Increase competition: new businesses give consumers more choice and compete

with already established businesses.

 Why governments support business start-ups
 Increase output: the economy benefits from increased output of goods and services.

 Benefit society: entrepreneurs may create social enterprises which offer benefits to

society other than jobs and profit (for example, supporting disadvantaged groups in

society).

 Can grow further: all large businesses were small once so by supporting today's

new firms the government may be helping some firms that will grow to become

very large and important in the future.

 What support do governments often give to
start-up businesses?
Business start-ups need Support governments often gives
Business idea and help Organising advice and support sessions offered by
experienced business people
Premises ‘Enterprise zones’, which provide low-cost premises to start-
up businesses
Finance Loans for small businesses at low interest rates.
Grants, if businesses start up in depressed areas of high
unemployment

Labour Grants to small businesses to train employees and help

increase their productivity
Research Encouraging universities to make their research facilities
available to new business entrepreneurs
Comparing the size of
businesses
 Comparing the size of businesses
• Businesses can vary greatly in terms of size.

• Firms can be owned and run by a single individual.

• At the other extreme, some businesses employ hundreds of thousands of workers

all over the world.

• Some firms produce output worth hundreds of dollars a year, whilst the biggest

businesses sell goods valued at billions or trillions of dollars each year.

 Comparing the size of businesses
• Business size can be measured in a number of ways.

• The most common are:

 Number of employees

 Value of output

 Value of sales

 Value of capital employed .

• They all have advantages and limitations.

 Number of employees
• This method is easy to calculate and compare with other businesses.

• The limitation of this method are:

 Some firms use production methods which employ very few people but which

produce high output levels. This is true for automated factories which use the

latest computer-controlled equipment.

 Number of employees
 Another problem is: should two part-time workers who work half of a working

week each, be counted as one employee – or Two?

 Value of output
• Calculating the value of output is a common way of comparing business size in

the same industry - especially in manufacturing industries.

• Limitations of this method are:

 A high level of output does not mean that a business is large when using the other

methods of measurement.
 Value of output
 A firm employing few people might produce several very expensive computers

each year. This might give higher output figures than a firm selling cheaper

products but employing more workers.

 The value of output in any time period might not be the same as the value of sales

if some goods are not sold.

 Value of sales
• This is often used when comparing the size of retailing businesses - especially

retailers selling similar products (for example, food supermarkets).

• Limitations of this method is:

 It could be misleading to use this measure when comparing the size of businesses

that sell very different products (for example, a market stall selling sweets and a

retailer of luxury handbags or perfumes).

 Value Of capital employed
• This means the total value of capital invested into the business.

• Limitations of this method is:

 This has a similar problem to that of the ‘number of employees’ measure. A

company employing many workers may use labour-intensive methods of

production. These give low output levels and use little capital equipment.
 pEOPLE wHO findS it useful to compare the size of businesses
• Investors: To know which business to put their savings/ investment into.

• Governments: often there are different tax rates for small and large businesses or help in

collecting tax revenue.

• Competitors: To compare their size and importance with other firms.

• Workers: To have some idea of how many people they might be working with or job

security.

• Banks: To see how important a loan to the business is compared to its overall size.
 COnCLUSION
• There is no perfect way of comparing the size of businesses.

• It is quite common to use more than one method and to compare the results

obtained.
 RECAP
• Business size can be measured in a number of ways.

• The most common are:

 Number of employees

 Value of output

 Value of sales

 Value of capital employed

WHY OWNERS/ SHAREHOLDERS WILL WANT

THEIR BUSINESS TO GROW

 LESSON OBJECTIVE

• Students should be able to:

 Explain why owners will want their business to grow.

 Explain how businesses grow.

 Explain the likely benefits of integration

 WHY OWNERS WILL WANT THEIR BUSINESS TO GROW

• The owners of businesses often want their firm to expand.

• Some likely benefits of expansion are:

 The possibility of higher profits for the owners.

 Higher salaries are often paid to managers who control bigger firms which gives

more status and prestige for the owners and managers.

 WHY OWNERS WILL WANT THEIR BUSINESS TO GROW

• Some likely benefits of expansion are:

 Lower average costs (Economies of scale)

 Larger share of the market (the proportion of total market sales held by one

business). This gives a business more influence when dealing with suppliers and

distributors.
 HOW BUSINESSES GROW
• Businesses can expand in two main ways:

 By internal growth

 By external growth
 INTERNAL GROWTH

• Internal growth occurs when a business expands its existing operations.

• For example, a school owner could open another branch in another town - this growth

is often paid for by profits from the existing business or an additional capital.

• This type of growth is often quite slow but easier to manage than external growth.
 HOW BUSINESSES GROW INTERNALLY

• Increase the number of customers.

• Increasing the product portfolio

• Entering into new markets

• Developing e-commerce

• Outsourcing

• Franchising
 EXTERNAL GROWTH

• External growth is when a business takes over or merges with another business.

• It is often called integration as one firm is integrated into another one.

• So external growth , involves a takeover or a merger with another business.

 EXTERNAL GROWTH

• There are three types of external growth. They are:

 Horizontal merger (or horizontal integration)

 Vertical merger (or vertical integration)

 Conglomerate merger (or conglomerate integration)

 Horizontal merger (or horizontal integration)

• This is when one firm merges with or takes over another one in the same industry

at the same stage of production.

 Example a bank taking over another bank or

 A tractor manufacturer taking over another tractor manufacturer.

 ADVANTAGES OF Horizontal integration

• The merger reduces the number of competitors in the industry.

• There are opportunities for economies of scale.

• The combined business will have a bigger share of the total market than either

firm before the integration.

 VERtICal integration

• When one firm merges with or takes over another one in the same industry but at

a different stage of production.

• Vertical integration can be forward or backward.

• Forward vertical integration is when a firm integrates with another firm which is

• at a later stage of production (i.e. closer to the consumer).

 FORWARD Vertical merger (integration )

• Example of forward vertical integration is:

 a copper wire maker merges with an electrical product manufacturer.

 A bicycle tyre manufacturer merges with a bicycle advertising company.

 A car manufacturer takes over a car retailing business.

 ADVANTAGES OF Forward vertical integration
• The merger gives an assured outlet for their product.

• The profit margin made by the retailer is absorbed by the expanded business.

• The retailer could be prevented from selling competing company’s product.

• Information about consumer needs and preferences can now be obtained directly

by the manufacturer.
 Backward Vertical merger (integration)

• Backward vertical integration is when a firm integrates with another firm at an

earlier stage of production (closer to the raw material supplies, in the case of a

manufacturing firm).

• Example of Backward vertical integration is:

 a copper wire maker merges with a copper mine.

 A car manufacturer takes over a firm supplying car body parts.

 ADVANTAGES OF Backward vertical integration

• The merger gives an assured supply of important components.

• The profit margin of the supplier is absorbed by the expanded business.

• The supplier could be prevented from supplying other manufacturers.

• Costs of components and supplies for the manufacturer could be controlled.

Conglomerate merger (or conglomerate integration)
• It is when one firm merges with or takes over a firm in a completely different

industry.

• This is also known as diversification because the business now has activities in

more than one industry which means that the business has spread the risks.
Conglomerate merger (or conglomerate integration)
• Examples are:

 a newspaper business takes over a social networking company.

 If ICS merges with Dangote Cement.

 A construction company buys a holiday company

Conglomerate merger (or conglomerate integration)
• Examples of conglomerate are:

 Despite Group of Companies

 Mark and Spencer

 Kirkland
 ADVANTAGES OF Conglomerate merger (or
conglomerate integration)

• The business has different sources of revenue.

• There might be a transfer of ideas between the different sections of the business

even though they operate in different industries.

 For example, an insurance firm buying an advertising agency could benefit from

better promotion of its insurance activities as a result of the agency’s new ideas.
 ASSIGNMENT 1
• Case study- Nestle takeover of large Chinese sweet maker

• Nestle is the largest food and confectionery manufacturer in the world . The
company made the decision to take over Hsu Fu Chi International (based in
Guandong, China). This Chinese company makes sweets and snacks. The
takeover cost US$ 1.7billion. It will now be easier for Nestle to sell its products in
China. There should also be cost savings from the takeover. Some consumers are
worried that there might be less choice of sweets and snacks than before the
takeover. Also, perhaps Nestle might increase prices now that there will be less
competition in the sweet and snack market.
 ASSIGNMENT 1
• a) Is this take over an example of ‘horizontal’ or ‘vertical’ integration? Explain your
answer.

• b) Identify and explain two possible reasons why Nestle took over the Hsu Fu Chi
company.

• c) Do you think consumers in China will benefit from this takeover? Explain your
answer.
• Problems of business growth-and how to overcome

them.

why some businesses stay small.

main reasons why some businesses fail

 LESSON OBJECTIVE
• Students should be able to:

 Explain the problems of business growth - and how to overcome them

 Explain why some businesses stay small

 Explain the main reasons why some businesses fail

 Problems of business growth - and how to overcome them

• Not all business expansion leads to success.

• There are several reasons why business expansion can fail to increase profit or

achieve the other objectives set by managers.

 Problems of business growth - and how to overcome them
Problem resulting from expansion Possible ways to overcome problem

Larger business is difficult to control Operate the business in small units- this is a form of

(Diseconomies of scale) decentralization.

Larger business leads to poor Operate the business in smaller units

communication Use latest IT equipment and telecommunications -

but even these can cause problems.

 Problems of business growth - and how to overcome them
Problem resulting from expansion Possible ways to overcome problem

Expansion costs so much that business is Expand more slowly - use profits from the business
short of finance. to expand (expanding slowly) to pay for further
growth.
Ensure sufficient long-term finance is available.

Integrating with another business is more Introducing a different style of management

difficult than expected (e.g. different requires good communication with the workforce –
management styles or 'way of doing things) they will need to understand the reason for the
change.
 Why do some businesses stay small?
• Not all businesses grow. Some stay small, employing few people and using

relatively little capital.

• The following are the reasons why many businesses remain small:

 the type of industry the business operates in

 the market size

 the owners’ objectives.

 The type of industry the business operates in
• The following are some examples of industries where most firms remain small:

hairdressing, car repairs, window cleaning, plumbers, catering, etc.

• Firms in these industries offer personal services or specialised products.

• If they were to grow too large, they would find it difficult to offer the close and

personal service demanded by consumers.

• It is often very easy for new firms to be set up and this creates new competition.
 The SIZE OF THE MARKET
• If the market (the total number of customers) is small, the businesses are likely to

remain small.

• This is true for firms, such as shops, which operate in rural areas far away from

cities.

• This is why firms which produce goods or services of a specialised kind, appeal

only to a limited number of consumers, such as very luxurious cars or expensive

fashion clothing, remain small.

 Owners' objectives

• Some business owners prefer to keep their firm small so that they could keep

control of a small business.

• They would want to know all of their staff and customers rather than running a

much larger business.

• Owners would want to avoid the stress and worry of running a large firm.
 Why some businesses fail

• Not all businesses are successful.

• The rate of failure of newly formed businesses is high in some countries, over 50

percent close down within five years of being set-up.

• Even old -established businesses close down because they make losses or

sometimes run of cash.

 The main reasons why some businesses fail

 Poor management

 Failure to plan for change

 Poor financial management

 Over-expansion

 Risks of new business start-ups

 Poor management

• This is a common cause of most new business failures.

• Lack of experience can lead to bad decisions, such as locating the business in an

area with high costs but low demand.

• Family businesses fail because the sons and daughters of the founders are not

necessarily good managers and are reluctant to recruit professional managers.

 Failure to plan for change

• The business environment is constantly changing.

• This adds to the risk and uncertainty of operating a business.

• New technology, powerful new competitors and major economic changes are just

some of the factors that can lead to business failures if they are not responded to

effectively (Correctly).
 Poor financial management
• Shortage of cash (lack of liquidity) means that workers, suppliers, landlords and

government cannot be paid what they are owed.

• Failure to plan or forecast cash flows can lead to this problem and is a major

cause of businesses of all sizes failing.

 Over-expansion

• This is when a business expands too quickly.

• It can lead to big problems of management and finance.

• If these are not solved, the difficulties can lead to the whole business closing

down.
 Risks of new business start-ups

• Many new businesses fail due to lack of financial and other resources and

research.

• In addition, the owner of a new business may lack the experience and decision

making skills of managers who work for larger businesses.

• This means that new businesses are nearly always more at risk of failing.
 PAST QUESTION

• NSN is a multinational company. It makes cars. Over the years, technology has changed

production methods. NSN uses just-in-time inventory control in all its factories. NSN plans

to open a new factory in country Z creating 7 000 jobs. Country Z’s Government has

offered an $80m grant to NSN. A spokesperson for NSN said: ‘Governments should

support business activity.

 PAST QUESTION

• There were also other factors that influenced our decision to build the new factory

there including the possible effects of economic growth.’

 Identify two reasons why a government might support business activity.

11_7115_11_2021_1.2
 SOLUTION

• Create jobs

• Increase competition / develop a market

• Increase output / economic growth/GDP

• Benefit society (small) businesses can grow into large/ important ones in the future

• Generate new ideas

• Can produce (a future source of) tax revenue

 PAST QUESTION

• Aurelie is a sole trader. She started her small hotel 1 year ago using government

support. Aurelie knew it would be important to build good customer relationships.

She is worried about how the Government’s plan to introduce a new tourist tax of

$1 per tourist per night might affect her business.

• Identify two ways a government can support new business start-ups

 SOLUTION

• Offer grants

• Loans for small businesses

• Low tax rates / tax relief / tax breaks

• Offer advice / support / information / mentors

• Provide (free / low-cost) training

• Low cost / rent-free premises

 PAST QUESTION
• SWB is in the secondary sector. It produces 150 000 wooden bookcases each week using

batch production. SWB sells all its output to one customer. Quality control is important.

SWB has 240 employees, of which 100 are part-time workers. SWB’s managers use

noticeboards around the factory and meetings with employees every month to help

reduce communication barriers. The Operations Manager is considering introducing just-

in-time inventory control to reduce the amount of waste. Define ‘secondary sector’.
 SOLUTION

• Firms that process and manufacture goods from natural resources [2] OR

• Manufacture goods using the raw materials provided by the primary sector [2] OR

• Uses manufacturing to transform the raw materials generated in the primary

sector into a product [2]

 PAST QUESTION

• SCT is a small business that manufactures handmade tables. SCT has 50 trained

employees. The Operations Manager uses an autocratic leadership style when

making decisions. Some of SCT’s employees are demotivated and the business

has a high rate of labour turnover. SCT is planning to relocate to a new factory in

the same country.

 PAST QUESTION

• Identify two ways of measuring the size of a business. 03_0450_12_2021_1.17

 SOLUTION
• (Value of) capital employed

• Number of customers / volumes of output / number of services

• Value of output / value of sales / revenue

• Number of employees

• Value of business

• Market share
 PAST QUESTION

• Kara’s business makes wax candles. She sells them to retailers at low prices. She

gives retailers 60 days to pay. Kara has to pay her suppliers when raw materials are

delivered. Kara used crowd-funding to set up her business. The bank would not give

Kara a loan as she did not have a business plan. Last year revenue was $50 000.

Demand is increasing but Kara is not yet able to benefit from economies of scale. She

said: ‘Cash-flow is a problem. All cash inflows are used to buy inventory.’
 PAST QUESTION

• Outline two reasons why a bank might want Kara to produce a business plan

before agreeing to give a loan. 06_7115_11_2020_1.4

 SOLUTION
• Supports request for finance/shows ability to repay [k] increasing chance of getting finance for her candle

business [app]

• Shows planning/thought seriously about issues [k] such as recognizing that cash-flow is a problem [app]

• Provide (important) information about business [k] such as demand is increasing [app]

• Shows what security/assets the business has which can be used to support any loan [k]

 Other appropriate responses should also be credited.

 PAST QUESTION
• ALB is a large bank. It has 300 branches and 5 000 employees. ALB provides a range of

financial services to its business customers. As it operates in a competitive market, ALB aims

to maintain customer loyalty. Last year ALB’s profit decreased to $3 000m. The Managing

Director is analyzing ways to reduce ALB’s costs. She also has to decide how new legal

controls over employment issues might affect the business. The Government plans to improve

protection of employees by changing laws on the minimum wage and health and safety.
 PAST QUESTION
• State two problems of using the number of employees to measure the size of a business.

06_7115_12_2020_1.3
 SOLUTION

• Might use a lot of machines,

• Difficult to count part-time employees

 PAST QUESTION

• Kala always wanted to be an entrepreneur. She used to work for a business which downsized

its workforce 5 years ago. She then decided to start up CHL. She produced a business plan

which helped her obtain finance. Kala now designs customised sports clothes for women.

Kala sells these products directly to customers using e-commerce. She has a loyal customer

base of 25-40 year olds. However, Kala is worried about increased competition in this niche

market. One idea she has is to target different market segments. Define ‘business plan’.
• A document containing the business aims/objectives and important details about

the operations, finance and owners of a business [2] OR

• States aim and/or objectives and shows how business aims to achieve them [2]

• Partial definition e.g. a document showing what the business intends to do [1]
 PAST QUESTION

• DWT makes solar panels in country Y. This is a low-cost country which is experiencing rapid

economic growth. DWT’s production method makes use of specialisation. All 120 of DWT’s

employees know that ensuring quality production is important. DWT imports some of its raw

materials. The Government of country Y plans to introduce import tariffs of 50%. DWT’s

Managing Director said: ‘This decision will affect all of our stakeholders. Why do

governments introduce trade restrictions such as import controls?’

 PAST QUESTION

• a. Define ‘specialisation’. (2 marks)

• B. Identify two reasons why a government support new businesses. (2 marks)

• C. Explain one objective of customers and pressure of DWT. (6 marks)

06_7115_12_2020_1.3
 SOLUTION

• A. Way in which work is divided so each worker concentrates on a specific task

so become expert at it [2] Or When people and businesses concentrate on what

they are best at [2].

 SOLUTION

• B. Create jobs

• Increase competition / develop a market

• Increase output / economic growth/GDP

• Benefit society (small) businesses can grow into large/ important ones in the future

• Generate new ideas

• Can produce (a future source of) tax revenue

 SOLUTION
• C. Customers

 would want high quality products [k] to achieve value for money [an] which is why quality

production is important [app]

 may want affordable prices [k]

 SOLUTION

• Pressure groups

Encourage the use of sustainable methods [k] such as solar panels [app] to protect

the environment [an]

Reduce/limit amount of pollution/environmental damage [k].