CHAPTER 3 BUSINESS NOTES: ENTERPRISE, BUSINESS GROWTH AND SIZE
Enterprise and entrepreneurship
Entrepreneur – A person who organises, and operates a business.
Characteristics of successful entrepreneurs
Hard working – Long hours of work are needed to become successful
Risk taker – Entrepreneurs never know if business idea will succeed
Creative – Business ideas different from competitors
Self-confident – Necessary to convince banks and investors.
Effective communicator – Talk clearly to banks, customers, employees
about business.
Business Plan – Document with important information about your business
e.g. Business objective, operations, finance, owners
Business plan is needed to
Apply for bank loans
Plan business to reduce risk of failure
Business plan includes
Products and services that you will sell
Costs of your business
Location of the business
What do I need to operate my business e.g. Machines, employees
Governments supports new businesses because
New businesses creates jobs (reduce unemployment)
Increased competition (Businesses competing with each other means
prices may be lowered)
Business may grow larger and contribute to the country
Government supports new businesses by
Loans at low interest rates
Land to set up businesses at low costs
Grants (money) to train employees
Use research facilities at public universities
Business advice from experts
1.3.2 – Methods and problems of measuring
business size
Methods of measuring size of a business
Number of employees – Easy to calculate and compare with
competitors. However, some businesses can produce higher output with fewer
employees. e.g. Some factories uses machines.
Value of output – Easy to calculate and compare with competitors.
However, some businesses may be very small but producing very expensive
products such as brand name clothing while a very large factory may be
producing cheap clothing.
Value of sales – Easy to calculate and compare with other businesses.
However, value may be different for businesses for example, a sports car dealer
may sell 2 cars a day while a normal car dealer e.g. Toyota may sell 20 cars a
day.
Value of capital employed – Simple to compare with other businesses.
However, this method is inaccurate because different factories will use
different types of capital e.g. A factory may use expensive machinery and
another may depend on employees.
There is no perfect way to compare businesses. Every business is different.
1.3.3 – Why some businesses grow and other
remain small
Why do businesses grow?
Increased chances of higher profit
Better status and prestige of the owners and employees
Lower average cost (more negotiating power)
Increased control of the market
Ways businesses can grow
Internal Growth – Business grows by itself (Business gets larger as profit
increases e.g. more customers)
External Growth – Take-over or merger with another business.
1. Horizontal integration – Firms in the same industry at the same stage of
production merges. e.g. 2 Bakeries merging to form a larger business
2. Vertical integration – Business expands by merging with another
business in another stage of production. There are 2 types of vertical
integration. Backwards and fowards. Backward vertial integration is when a
business merges with another business in the previous stage of production for
example, Bakery merges with wheat farm. Foward is when a business merges
with a business in the next stage of production e.g. Sugar farm merges with
candy factory.
Advantage of vertical integration is to have more control over distribution of
goods and services.
Conglomerate merger – Two businesses in a completely different industry
combine to form a new business. e.g. Insurance company buys an advertising
agency.
Joint Ventures – Two or more business agree to start a new project together.
Problems of business growth
Large businesses are difficult to control. Solution – Operate in business
in small parts.
Costs of expansion are high. Solution – Expand slowly
There can be poor communication in large businesses. Solution – use
technology to communicate e.g. email. Operate the business in small parts.
Why do some businesses remain small?
Type of industry e.g. hair salons stay small because of the connection
with their customers, if they grow too large they won’t be able to offer
personal service to their regular customers.
Market size Some businesses such as stores in small towns are likely to
remain small due to the limited amount of customers. Businesses that produce
specialised goods such as brand name clothing or luxury cars are also likely to
remain small.
Owner’s objective Some owners want to keep their businesses small to
keep full control and know all their employees and customers. Running a large
business can become stressful.
1.3.4 – Why some businesses fail
Poor management – Many businesses fail due to poor management
from lack of experience by the managers.
Failure to plan for change – The business environment is constantly
changing, Businesses need to change to keep up with technology.
Poor financial management – Shortage of money means that the
businesses cannot be operated. Businesses needs to always make sure they
have enough money
Over expansion – Some businesses expand too quickly and not have
enough money to operate.
Startup risk – Starting up a new business is always risky, entrepreneurs
may lack experience and not be able to compete with larger businesses.
