Chapter 3 – Enterprise, business growth and size

This chapter will explain:

- The importance of enterprise to new business
- The key characteristic of successful entrepreneurs
- The importance of business plan to an entrepreneur
- How to measure and compare the size of business
- How business can expand internally and by merger and takeover
- Why some businesses remain small

Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,

Aug 2016
Chapter 3 – Enterprise, business growth and size

Enterprise and entrepreneurship

Definition:-
Entrepreneur: is a person who organises, operates and takes the risk
for a new business venture.

Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,

Aug 2016
Chapter 3 – Enterprise, business growth and size

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 as an
employee for another business
- Able to make use personal interests and skills

Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,

Aug 2016
Chapter 3 – Enterprise, business growth and size

Disadvantages of being an entrepreneur:

- Risk – many new entrepreneurs’ businesses fail, especially if there is
poor planning
- Capital – entrepreneurs will have to put their own money into the
business and, probably find other sources of capital
- Lack of knowledge and experience in starting and operating a
business
- Opportunity cost – lost of income from not being an employee of
another business

Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,

Aug 2016
 Chapter 3 – Enterprise, business growth and size

Entrepreneur Nationality Main business interest

Virgin group of companies including airline,
Richard Branson UK
mobile phones and train services
Reliance group of companies including
Dhirubhai Ambani India
chemicals, IT and retailing
Pan Shiyi China Property
Herman Mashaba South Africa Cosmetics
Mark Zukerberg USA Social networking site Facebook
Steve Wozniak USA Apple computers
Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,
Aug 2016
Characteristics of Reasons why important
successful
entrepreneurs
Hard working Long hours and short holidays are typical for many entrepreneurs to make 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 – about products, services, ways of attracting
customers, to make business different from other existing firms.

Optimistic Looking forward to a better future is essential – if you think only of failure, you
will fail

Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,

Aug 2016
Characteristics of Reasons why important
successful
entrepreneurs
Self-confident Being self confident is necessary to convince other people of your skills and to
convince banks, other lender and customers that your business is going to be
successful.
Innovative Being able to put new ideas into practice in interesting and different ways is
also important.
Independent Entrepreneurs will often have to work on their own before they can afford to
employ others. Entrepreneurs must be well motivated and be able to work
without any help.
Effective Talking clearly and confidently to banks, other lenders, customers and
communicator government agencies about the new business will raise the profile of the new
business.

Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,

Aug 2016
 Chapter 3 – Enterprise, business growth and size

Why governments support business start-ups

- Reduce unemployment
- Increase competition
- Increase output
- Benefit society
- Can grow further

Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,

Aug 2016
 Chapter 3 – Enterprise, business growth and size
What support do government often give to start-up businesses?
Business start-up need: Government often support by
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 business start-up in depressed areas of
high unemployment
Labour Grans to small businesses to train employees and
help increase productivity
Research Encouraging universities to make their research
facilities available to new business entrepreneurs.
Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,
Aug 2016
 Chapter 3 – Enterprise, business growth and size
Business Plan
What is a business plan?
A business plan is a business document containing the business
objectives and important details about the operations, finance and
owners of the new business.
Summary

Which products Cash flow Business costs Location Resources required

BUSINESS PLANS

uses
To help gain Careful planning
finance Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,
reduces risks
Aug 2016
 Chapter 3 – Enterprise, business growth and size

Read on Page 23 of your course book:

How a business plan assist entrepreneurs.

Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,

Aug 2016
 Chapter 3 – Enterprise, business growth and size

• Comparing the size of businesses

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

Investors How safe is it to invest in a business

Government Tax
Competitors Compare their firm with other firm
Workers Job security, how many people they will be working with
Banks Make sure if they can get a loan back from a business

Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,

Aug 2016
 Chapter 3 – Enterprise, business growth and size

Ways of measuring the size of a business:

• Number of employees: Does not work on capital intensive firms that use
machinery
• 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
• Capital employed: Does not work on labor 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.

Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,

Aug 2016
 Chapter 3 – Enterprise, business growth and size

Activity 3.4 Comparing business size

You are employed by Company A which makes motorcycles.
You have been asked to write a brief report to the Managing
Director comparing the size of your company with three
others in the same industry.
Use the following information in your report.
State the advantages and disadvantages of each ways of
comparing business size.

Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,

Aug 2016
 Workers employed Capital employed Value of output ($m)
Company A 20 000 50 100
Company B 5 000 150 300
Company C 3 000 60 160
Company D 15 000 180 150

- Company A is bigger in terms of employment but is this a misleading measure in

this case? It is not the biggest in terms of output (it has lower output than all
others).
- Company B has high capital employed. It is this why its output is so much higher
than A?
- D uses more capital than B but produces lower value of output compared to B.
- Clearly companies have very different ways of producing output in this industry
(either many workers or high capital employed).
- Perhaps output in this industry is therefore best measure as companies are all in
the same industry. Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,
Aug 2016
 Chapter 3 – Enterprise, business growth and size
Business Growth
All owners want their business to expand. They reap these benefits:
• Higher profits
• More status, power and salary for managers
• Low average costs (economies of scale)
• Higher market share

Types of expansion
• Internal Growth: Organic growth. Growth paid for by owners capital or
retained profits
• External Growth: Growth by taking over or merging with another business.

Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,

Aug 2016
 Chapter 3 – Enterprise, business growth and size

Types of mergers (and main benefits):

Horizontal merger: Merging with a business in the same business sector.
• Reduces number of competitors in industry
• Economies of scale
• Increase market share

Vertical merger:
Forward vertical merger:

• Assured outlet for products

• Profit made by retailer is absorbed by manufacturer
• Prevent retailer from selling products of other businesses
• Market research on customers transferred directly to the manufacturer
Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,
Aug 2016
 Chapter 3 – Enterprise, business growth and size

Backward vertical merger:

• Constant supply of raw materials
• Profit from primary sector business is absorbed by manufacturer
• Prevent supplier from supplying other businesses
• Controlled cost of raw materials

Conglomerate merger:
• Spreads risks
• Transfer of new ideas from one section of the business to another

Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,

Aug 2016
 Chapter 3 – Enterprise, business growth and size

Problems of business growth – and how to overcome them

- Not all business expansion leads to success
- There are several reasons why business expansion fail to
increase profit or achieve other objectives set by managers:-
Problems from expansion:
- Larger business is difficult to control
Possible ways to overcome problem:
- Operate the business in small units – this is a form of
decentralisation.
Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,
Aug 2016
 Chapter 3 – Enterprise, business growth and size
Problems of business growth – and how to overcome them
Problems from expansion:
- Larger business leads to poor communication
Possible ways to overcome problem:
- Operate the business in small units
- Use IT equipment and telecommunications (but even these can
cause problems)
Problems from expansion:
- Expansion costs so much that business is short of finance
Possible ways to overcome problem:
- Expand more slowly – use profits from slowly expanding business to
pay for growth.
- Ensure sufficient long-term finance is available
Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,
Aug 2016
 Chapter 3 – Enterprise, business growth and size

Problems of business growth – and how to overcome them

Problems from expansion:
- Integrating with another business is more difficult than
expected, example: different management styles or ways of
doing things
Possible ways to overcome problem:
- Introducing a different style of management requires good
communication with workforce – they will need to understand
the reasons for the change.

Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,

Aug 2016
 Chapter 3 – Enterprise, business growth and size

Why some businesses stay small?

There are some reasons why some businesses stay small. They are:
• Type of industry the business is in: Industries offering personal service or
specialized products. They cannot grow bigger because they will lose the
personal service demanded by customers. E.g.: hairdressers, cleaning,
convenience store, etc.
• Market size: If the size of the market a business is selling to is too small, the
business cannot expand. E.g.: luxury cars (Lamborghini), expensive fashion
clothing, etc.
• Owner's objectives: Owners might want to keep a personal touch with staff
and customers. They do not want the increased stress and worry of running a
bigger business.
Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,
Aug 2016
 Chapter 3 – Enterprise, business growth and size
Why some businesses fail
- Poor management
- Failure to plan for change
- Poor financial management
- Over-expansion
- Risks of new business start ups

Refer exam style questions Paper 1

Question 1

Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,

Aug 2016
Chapter 3 – Enterprise, business growth and size

Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,

Aug 2016
Chapter 3 – Enterprise, business growth and size

Business Studies for Sec 3, BBS PIK. Compiled by Victor Lua,

Aug 2016