Unit 3: Enterprise, Business Growth and Size

 Enterprise and entrepreneurship

An entrepreneur is a person who organizes, operates and takes risks for a new business
venture. The entrepreneur brings together the various factors of production to produce goods
or services.

Characteristic of a successful entrepreneur

o Risk taker
o Creative
o Self-confident
o Innovative
o Independent
o Effective communicator
o Hard working

Benefits and drawbacks of being an entrepreneur

Benefits Drawbacks

 Why governments support business start-up?

Most governments offer support to entrepreneurs. This encourage them to set up new
businesses. There are several reasons why this supports is given:

 Reduce unemployment – more jobs are created

 Increase competition – gives consumers more choice and compete with existing
businesses
 Increase output – economy benefits from increase
 Benefit society – create social enterprise which offer benefits to society
 Can grow further – the business can expand into large business

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  What support do governments give to start-up businesses?
 Business ideas and help
 Premises
 Finance
 Labour
 Research

 How can business plan assist an entrepreneur?

 Business plan
A business plan is a document containing the business objectives and important details about
the operations, finance and owners of the new business.
A business plan comprises of:

 The business location

 What products or services the business intend to provide
 Its business costs, cash flow
 Resources required-machinery, labours
Uses of a business plan

Making a business plan before actually starting the business can be very helpful by
documenting the various details about the business:
1. The owners will find it much easier to run it.
2. There is a lesser chance of losing sight of the mission and vision of the business as
the objectives have been written down.
3. Moreover, having the objectives of the business set down clearly will help motivate
the employees.
4. A new entrepreneur will find it easier to get a loan or overdraft from the bank if they
have a business plan.

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  Comparing business sizes
Businesses vary in size, and there are some ways to measure them. For some people, this
information could be very useful:

 Investors - how safe it is to invest in businesses

 Government - tax
 Competitors - compare their firm with other firms
 Workers - job security, how many people they will be working with
 Banks - can they get a loan back from a business.

Business size can be measured in the following ways:

 Number of employees.

 Value of output. Does not take into account people employed. Does not take into
account sales revenue.

 Value of sales. Does not take into account people employed.

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  Capital employed. Does not work on labour intensive firms. High capital but low
output means low efficiency.

You cannot measure a business’s size by its profit, because profit depends on too many
factors not just the size of the firm.

 Why do owners often want their businesses to grow?

There are several reasons behind the expansion of a business:

 Possibility of higher profits

 More status and prestige for owners and managers
 Lower average costs-benefit from economies of scale
 Larger share of its market

 Business growth
How can a business grow?
There are two ways in which a business can grow- internally and externally.

Business
Growth

Internally Externally

Merger or
takeover

Horizontal vertical Conglomerate

Forward Backward

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 1. Internal growth
This occurs when a business expands its existing operations. For example, when a fast food
chain opens a new branch in another country. This is a slow means of growth but easier to
manage than external growth.

2. External growth
This is when a business takes over or merges with another business. It is sometimes called
integration as one firm is ‘integrated’ into the other.

 A merger is when the owner of two businesses agree to join their firms together to
make one business.
 A takeover occurs when one business buys out the owners of another business, which
then becomes a part of the ‘predator’ business.

External growth can largely be classified into three types:

1. Horizontal merger/integration: This is when one firm merges with or takes over
another one in the same industry at the same stage of production. For example, when
a firm that manufactures furniture merges with another firm that also manufacturers
furniture.
Benefits:

 Reduces number of competitors in the market, since two firms become one.
 Opportunities of economies of scale.
 Merging will allow the businesses to have a bigger share of the total market.

2. Vertical merger/integration: This is when one firm merges with or takes over
another firm in the same industry but at a different stage of production. Therefore,
vertical integration can be of two types:

i. Backward vertical integration: When one firm merges with or takes over another
firm in the same industry but at a stage of production that is behind the ‘predator’
firm. For example, when a firm that manufactures furniture merges with a firm
that supplies wood for manufacturing furniture.
Benefits:

 Merger gives assured supply of essential components.

 The profit margin of the supplying firm is now absorbed by the expanded firm.
 The supplying firm can be prevented from supplying to competitors.

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 ii. Forward vertical integration: When one firm merges with or takes over another
firm in the same industry but at a stage of production that is ahead of the ‘predator’
firm. For example, when a firm that manufactures furniture merges with a
furniture retail store.
Benefits:

 Merger gives assured outlet for their product.

 The profit margin of the retailer is now absorbed by the expanded firm.
 The retailer can be prevented from selling the goods of competitors.

3. Conglomerate merger/integration: This is when one firm merges with or takes over
a firm in a completely different industry. This is also known as ‘diversification’. For
example, when a firm that manufactures furniture merges with a firm that produces
clothing.
Benefits:

 Conglomerate integration allows businesses to have activities in more than one

country. This allows the firms to spread its risks.
 There could be a transfer of ideas between the two businesses even though they are
in different industries. This transfer of ideas could help improve the quality and
demand for the two products.

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  Why businesses stay small
Not all businesses grow.Some stay small, employ a handful of workers and have little output.
Here are the reasons why.

1. Type of industry: Some firms remain small due to the industry they operate in.
Examples of these are hairdressers, car repairs, catering, etc, which give personal
services and therefore cannot grow.
2. Market size: If the firm operates in areas where the total number of customers is
small, such as in rural areas, there is no need for the firm to grow and thus stays small.
3. Owners’ objectives: Not all owners want to increase the size of their firms and
profits. Some of them prefer keeping their businesses small and having a personal
contact with all of their employees and customers.

 Why businesses fail

Not all businesses are successful. For new firms especially, the rate of failure is rather high.
The main reasons why they fail are:

1. Poor management: This is a common cause of business failure for new firms. The
main reason is lack of experience which could lead to bad decision making. New
entrepreneurs could make mistakes when choosing the location of the firm, the raw
materials to be used for production, etc, all resulting in failure.
2. Over-expansion: This could lead to diseconomies of scale and greatly increase costs.
This could happen if a firms expands too quickly or over their optimum level.
3. Failure to plan for change: The demands of customers keep changing with change
in tastes and fashion. Due to this, firms must always be ready to change their products
to meet the demand of their customers. Failure to do so could result in losing
customers and loss.
4. Poor financial management: If the owner of the firm does not manage his finances
properly, it could result in cash shortages. This will mean that the employees cannot
be paid and enough goods cannot be produced. Poor cash flow can therefore also
cause businesses to fail.