Rehab A.

Gawad: 0559665739

Chapter 3: Enterprise, business growth and size

Enterprise and entrepreneurship

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

Benefits of being an entrepreneur Disadvantages of being an entrepreneur

Independence
Can put own ideas into practice
May become famous and successful
May become profitable and get a higher
income than if employed in another business
Can make use of personal interests and skills
Risk of failure especially if poor planned
Capital is limited as the have to invest their
own money in the business. The may also
need to search for additional sources of
finance
May lack knowledge and experience in starting
and operating a business
May experience opportunity cost as they lose
the income that they would have earned if
employed in another business

Characteristics of successful entrepreneurs:

Characteristics of Reasons why important

successful
entrepreneurs
Hard working They work long hours and take short holidays to make their business
successful
Risk taker Deciding on products which people may buy is potentially risky (wrong
decision - products will not sell)
Creative They should find new ideas about products, services, ways of attracting
customers to differentiate their business from others
Optimistic Being able to look forward to a better future is essential for success
Self-confident It is important to convince other people of your skills and convince banks,
and other lenders and customers that your business is going to be
successful
Innovative Being able to put new ideas into practice in interesting and different ways
Independent They will need to work on their own before they can afford to employ
others. They must be well motivated to work without an 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.

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Why governments support business start-ups?

Governments support entrepreneurs and encourage them to set up new businesses for several
reasons:

1. Reduce unemployment:
Small businesses are usually labor intensive so they create jobs to help reduce
unemployment
2. Increase competition
Increased competition allows more choices to consumers and may result in lower prices.
3. Increase output
The economy will benefit from increased output of goods and services. Living standards
will rise
4. Benefit society
Entrepreneurs may create social enterprises which benefits society such as supporting
disadvantaged groups in society
5. Can grow further
The support offered by the government may help some firms to grow and become very
large and important in the future.

What support do governments often give to start-up businesses?

1. Business idea and help

Government organizes advising and support sessions offered by experienced business
people
2. Premises
Low cost premises to start-up businesses
3. Finance
Low interest rates loans to small businesses
Grants if start-up in depressed areas of high unemployment
4. Labour
Grants to small businesses to train employees and help increase their productivity
5. research
Encourage universities to make their research facilities available to new business
enterprises.

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

How a business plan assists entrepreneurs?

1. Supports an overdraft or bank loan request

Without a business plan banks will be reluctant to lend money to the business
2. Careful planning reduces risks of failure
It allows the manager to think seriously about the future and plan to meet the
challenges that they will meet.

Main parts of a business plan:

1. Type of product
2. Cash flow
3. Business costs
4. Location
5. Resources required

Comparing the size of businesses

Businesses can vary greatly in terms of size. Business size can be measured in a number of
ways:

1. Number of employees

Advantages Limitations
Some businesses (capital intensive)
easy to calculate and compare with other employ very few people but their value of
businesses output is high. (i.e considered small using
number of employees method but large
using value of output or value of capital
employed)
Should two part-time workers be counted
as one employee or two?

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2. Value of output

Advantages
Useful in comparing businesses in the
same industry – especially manufacturing
industries
Limitations
Some businesses employ very few people
but their value of output is high. (i.e
considered small using number of
employees method but large using value
of output)
The value of output may differ than the
value of sales at a point in time if products
aren’t sold. This five an inaccurate
measure of the size of the business

3. Value of sales

Advantages
Useful when comparing the size of
retailing businesses – especially those
selling similar products
Limitations
Misleading if used to compare size of
retailers selling very different products
such as, minimarket and retailer of luxury
handbags or perfumes

4. Value of capital employed

Advantages Limitations
Some capital intensive businesses employ
very few people but their value of output
is high. (i.e considered small using number
of employees method but large using
value of capital employed)

Note: there is no prefect way of comparing the size of businesses. It is quite common to use
more than one method and to compare the results obtained.

Who would find it useful to compare the size of businesses?

1. Investors : to decide which business to invest in

2. Governments: to charge a tax rate as the rates differ based on the size of the business
3. Competitors: to compare their size and importance with other businesses
4. Workers: to know how many people they might be working with

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5. Banks: to determine the importance of a loan to the business compared to its overall
size

What are the advantages of business growth?

1. Owners will gain higher profits

2. Owners and managers will gain more status and prestige
3. Managers of bigger firms earn higher salaries
4. Business will produce with lower average cost due to economies of scale
5. Business will gain a higher market share which gives he business more influence when
dealing with suppliers and distributors. Also consumers are attracted to big names

How can businesses growth?

1. Internal growth: growth paid for by profits from existing business. For example opening
a new branch.
Advantage: this type of growth is easier to manage than external growth
Disadvantage: it is quite slow
2. External growth / integration: is when a business takes over or merges with another
business.
a. A merger: is when the owners of two businesses agree to join their firms
together to make one business.
b. A takeover / acquisition: is when one business buys out the owners of another
business which becomes part of the ‘predator’ business.

Examples of external growth:

1. Horizontal merger / horizontal integration:

Is when one firm merges with or takes over another one in the same industry at the
same stage of production.
Advantages of horizontal integration:
 Reduces the number of competitors in the industry
 Can benefit from economies of scale
 The combined business will have a bigger market share than either firm
before the integration

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2. Vertical merger / vertical integration

Is when one firm merges with or takes over another one in the same industry but at a
different stage of production.
It can be forward or backwards:
a. Forward vertical integration: is when a firm integrates with another firm
which is at a later stage of production (i.e closer to consumer) ex.: farm
integrates with supermarket
Advantages of forward vertical integration:
 Assured outlet for the products of the predator
 Profit margin made by the retailer is absorbed by the new expanded
business
 The retailer could be prevented from selling competing products
 Information about consumer needs and preferences can now be
obtained directly by the manufacturer
b. Backward vertical integration: is when a firm integrates with another firm at
an earlier stage of production (i.e closer to the raw material supplies, in the
case of a manufacturing firm) ex: a business making clothes merges with a
business supplying fabrics.
Advantages of backward vertical integration:
 Assured supply of important components
 Profit margin of the supplier is absorbed by the new expanded
business
 The supplier could be prevented from supplying competing
manufacturers.
 Cost of components and supplies for the manufacturer could be
controlled.

3. Conglomerate merger/ conglomerate integration (diversification)

Is when one firm merges with or takes over another firm in a completely different
industry. For example, a construction business merging with clothes manufacturer.
Advantages of conglomerate integration:
 Spread the risk taken by the business
 Transfer of ideas between the different sections of the business even
though they operate in different industries

Problems of business growth and how to overcome them

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Business growth may fail to increase profits and achieve the other objectives set by managers
due to several reasons.

Problem resulting from expansion Possible ways to overcome problem

difficult to control
Poor communication
Financial problems due to expansion cost
integration may lead to difficulty in managing
the business due to different management
styles or ways of doing things
 Decentralization - operate the
business in small units
 Operate the business in small units
 Use latest IT equipment and
telecommunications
 Expand more slowly using profits from
existing business
 Ensure sufficient long-term finance is
available
 Good communication with the
workforce to explain the reasons for
the change

Why do some businesses stay small?

1. The type of industry the business operates in

If the business expands, it will be difficult to offer the close and personal service
demanded by consumers. For example, hairdresser
It is very easy for new firms to set up in competition with existing ones which keeps the
existing firms relatively small.
2. The market size
The total number of customers is small thus business is likely to remain small. For
example, shops in rural areas or producers of specialized kind of products
3. The owners objectives
Owner likes to keep control of his business. Owners may also wish to avoid the stress
and worry of running a large firm.

Why some businesses fail?

1. Poor management
Lack of experience may lead to bad decisions. For example, locating in an area with high
location cost and low demand
Owner with poor management skills may be reluctant to hire a professional manager.
2. Failure to plan for change

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A business may fail due to failure to respond quickly and effectively to new changes in
the business environment. For example, failure to respond to new technology, powerful
competitors and economic changes
3. Poor financial management
Shortage of cash may lead the business to stop trading. It may be caused by failure to
plan or forecast cash flows.

4. Over expansion
Expansion may lead to management and financial problems, if not solved then the
whole business will fail.
5. Risks of new business start-ups
New businesses are at a higher risk of failing than existing, well established ones due to
lack of
a. experience and decision making skills of managers
b. finance, other resources
c. research