Section 1

Understanding Business Activity

Chapter 3 Enterprise, Business Growth and Size

 Enterprise and Entrepreneurship
• New businesses are started by people called entrepreneurs.
• Although the ideas for a business are often diffèrent, entrepreneurs usually:
■ have an idea for a new business
■ are prepared to invest their own savings
■ accept the risks of failure
■ want to make all the decisions about the management of the business.

• The idea for an enterprise – meaning a project or business – may be any of the following:
■ a new idea for a good or service
■ offering an existing good or service in a way that has not been offered before
■ offering an existing good or service in a new location.
 Entrepreneur
• People who set up business are called entrepreneurs. They are owners who
organizes, operates, and take risk for a new business venture. Without them
the businesses would not exist in the private sector.
• Roles of Entrepreneur
• Entrepreneurs are innovators (Innovation the business ideas)
• Entrepreneurs are responsible for organizing other factors of production
(organizing the necessary resources)
• Entrepreneurs have to make all the key decisions (Decision Making on
location, finance, product range, pricing, production methods, etc.)
• Entrepreneurs are risk takers (Risk taking of losing money invested in the
business)
Characteristics of a successful
entrepreneur
• Innovative: good at thinking at new ideas for goods and services or new ways of
offering.
• Self-motivated and determined: drive to keep going even when things get difficult.
• Self-confident: strong beliefs in their own ability and ideas.
• Multi-skilled: understanding the functions of finance, operations, human resources and
marketing.
• Leadership qualities: good communication skills, ability to motivate others and good
decision-makers.
• Initiative: designing a good plan for achieving the business’ objectives.
• Results driven: focused on achieving results and make sure products are sold for profit.
• Risk-taker: prepared to take risk, see failure as a positive experience to be learned from.
• Good at net working: prepared to learn from other.
Business Plan
• Business plan: a detailed written document outlining the purpose
and aims of a business and how it plans to achieve them.
• Document with important information about business e.g business
objective, operations, finance, owners.
• It is usually drawn up when starting up a new business or when there
will be an important change in how the business is run, like starting a
new service or investing in a new outlet.
 Contents Business Plan
A business plan describes:
■ brief history and summary of the business and the objectives of the business and details
of the entrepreneur.
■ Full details of the products and how it is to be manufactured and distributed, strategy for
developing products or services in the future to remain competitive and grow the business.
■ the target market – the current size, potential for growth and the product’s main
competitors.
■ business locations and how product will reach customers (physical location, internet sales
or mail order).
■ Organization structure and management and details of employees (HR) required.
■ financial forecasts – a cash-flow forecast and projected sales, costs and profit for at least
the first year of trading.
■ Sources of capital (how much capital the business will need and where will it come from)
How Business Plan assists entrepreneurs

• It is helpful to motivate employees. Having the objectives of the business set down
clearly will help motivate the employee. A business plan puts every employees onto the
same page which would bring the company a greater chance of success.
• It is easier to monitor the progress of business. It includes the objectives and financial
forecasts which would be target a business aims at.
• It would reduce the risk of failure. By documenting the various details about the
business, the owners will find it much easier to run it since the plan guides the owners
through each stage of starting and managing the business. It is a way to work through
potential obstacles to success.
• It is helpful to effectively allocate resources. It sets out the resources required such as
finance, the number and skills of workers needed, and how the goods and services will be
marketed to consumers.
• It is helpful to raise funding for the business. The information it contains can be used to
persuade lenders such as banks and investors to provide finance to the business.
Limitations of Business Plans
• It takes times and resources to develop a business plan since it needs
to analyze the business environment.
• It requires expertise in multiple fields for it to be successful. A broad
range of opinions and input is usually necessary. Otherwise, a
business plan turn out to be inaccurate.
• Inflexibility, discouraging creativity, innovation, initiative and
experimentation after the plan is set.
• Being irrelevant when the business environment is rapidly changing
Activity 1
Mama Meals on Wheels
When Naisiadet Mason moved back to Kenya from working abroad she realised that no one delivered
food from all the restaurants in Nairobi. A few restaurants did have their own delivery service but this was
limited to how close customers’ homes were to the restaurants.
Naisiadet loves good food, as opposed to ‘junk food’, and thought that delivering meals from restaurants
in Nairobi direct to the homes of customers was a good business idea. She carried out market research and
found that only 5% of people in Nairobi could afford the services she was going to offer. These were mostly
middle income earners who get home tired after work and do not want to go to the trouble of making their
own meals.
Naisiadet set up Mama Meals on Wheels in 2010 using her own savings to buy delivery motorbikes and
other startup costs. The business has been successful and now employs fourteen workers. Grocery delivery
has been added to the service Mama Meals on Wheels offers to its customers. Naisiadet puts the success of
the business down to offering good customer service. ‘Quality on time delivery every time’ is the business’s
motto.
However, despite the early success of her business, Naisiadet realised that not having a business plan
when she set up her business may have been a mistake.
Source: adapted from http://www.youtube.com/watch?v=AmR8L0MHxD0 and
www.mamamealsonwheels.com
Activity 1
TASK
a Mama Meals on Wheels is in the tertiary sector. Identify the other two sectors.
b Identify two reasons why Naisiadet might be described as an entrepreneur.
c Identify and explain two benefits to Naisiadet of researching the market for her proposed
business.
d Do you think it was a mistake for Naisiadet not to have a business plan for her business?
Justify your answer.
Why government supports business start-up

•Governments are keen to encourage new start-up businesses because of the

benefits they bring to the economy. These benefits include:
Job creation – although small firms may not individually employ many workers,
together they employ a very large percentage of the working population.
The entrepreneurs who start up new businesses bring ideas for goods and
services that increase the variety of products available. This helps to create a
greater consumer choice in the market.
The more businesses there are in the marketplace the greater the competition.
Competition usually results in lower prices and better quality of goods and
services.
Why government supports business start-up cont’d


Filling the market gap: Small businesses often provide specialist goods and services to
consumers which larger businesses are less interested in supplying because they are
only interested in mass marketing. Also, these smaller businesses often provide the
goods and services needed by the larger firms in the industry, for example a small firm
that produces electronic components used by large computer manufacturers.

Start-up businesses begin life as a small business, but some will grow and become the
larger businesses of the future. The country will benefit from the advantages larger
businesses bring to the economy.

Some start-up and smaller businesses often have much lower costs than larger
businesses and can pass this on to the consumer through lower prices.
How government supports business start-up

• The most common types of government support include:

■ grants and interest free or low interest loans
■ lower taxation rates on profits in the early years
■ rent-free premises for a certain period of time
■ free or subsidised training for workers
■ information, advice and support from specialist agencies.
Measuring Size of business
 It is not always clear what the difference
between small, medium and large
businesses.
 In different industries, size is measured in
different ways.
 Different ways of measuring size are:
 Number of employees;
 Turnover or revenue/output value;
 Market share;
 Capital employed
Measuring Size

• EU definition of size
 Different ways of measuring size
• No. of people employed
• Large businesses need to produce a much greater output or provide their services
to a much larger market than smaller businesses. Therefore, larger businesses
usually employ many more employees than smaller businesses in the same
industry, for example a local general store and a large national supermarket.
• Easy to calculate.
• However, it is difficult to compare businesses in different industries. For example,
huge modern farm working with the latest machinery may employ just a few
people. In contract, a local supermarket may employ a 100 or more people.
• Not relevant for capital-intensive
• Problems of counting part time workers: Should part-time workers, who work half
of a working week each, be counted as one employee or two?
 Different ways of measuring size
• Value of output/sales
• The amount businesses earn from selling their products is often used to compare
the size of businesses in the same industry. A small business will have much lower
revenue than a larger business. The larger the market a business serves, the more
revenue the business is likely to earn.
• However, it is not a good measure when comparing businesses in different
industries. (a market stall selling sweets and a retailer of luxury handbags)
Different ways of measuring size
• Value of capital employed
• This the value of all long-term finance invested in a business. It is used to buy the
things that a business needs before it can produce goods and services, for example
factory/office buildings, machinery and inventory.
• A small business will invest less capital than a large business in the same industry.
• For example, a small baker will only need one shop, one food mixer, one oven and a
small inventory of raw materials. A large bread manufacturer will need production
lines, industrial mixers, large ovens and a large inventory of raw materials.
• Not relevant
• To compare different industries
• To use in labour intensive business
Different ways of measuring size
• Market Share
• The larger the share of the total market the larger the business.
• However, this measure can also be misleading.
• Look at the data for three firms shown in Table 3.1. Firm A and Firm B are in the same
industry. Firm C is in a different industry from A and B.
Limitations of measuring size
Comparing business size is useful to investor, governments,
competitors, workers, and banks. However it has some limitations.

• There is no perfect way of comparing the size of the business.

• Take care before drawing any conclusions about the size of a business,
because different measures can produce different results.
• Before deciding on how to describe the size of a business it is a good
idea to use more than one measure
Why some businesses grow and other remain small?

• Growth is a long-term objective of most,

but not all businesses.
• Some businesses prefer to remain small,
while others wish to expand.
• For example, a chocolatier making
specialist, hand-made chocolates may want
to stay small, while a chocolate
manufacturer who wants to produce
chocolates for the mass market will want to
grow.
Why owners may want to expand their businesses?

• Expanding a business can bring many benefits;

• Increase in profit
• Increase in market share
• Economies of scale
• Greater power to control the market
• Protection from the risk of takeover
 Why owners may want to expand their businesses?
•Increase in profit:
•Business growth may increase its profit through higher output and higher
sales while controlling its cost.
•Increase in market share:
•Business growth may result in increase in market share.
•Higher profile (products and brands become more widely known) makes it
easier for the business to continue to grow; launching new products and
entering new market is more easier.
•However, the growth in sales value does not automatically increase in market
share. It depends on the growth in the total market.
 Why owners may want to expand their businesses?
•Economies of scale:
•Business growth may reduce the average production cost as a result of economies of
scale. Lower production cost would increase the profit for the business. Also, it
would increase the business’ competitiveness if it lower its selling price, resulting in
higher sales.
•Greater power to control the market:
• Larger businesses have greater power to control the market activities for example
pricing in the industry. They may even be able to influence government policy to
their advantages.
 Why owners may want to expand their businesses?
•Protection from the risk of takeover:
•Public limited companies are often at a risk of takeover. This is achieved by
buying at least 51% of the company’s shares.
•Friendly takeover: takeover is welcomed by the company’s directors and
shareholders.
•Hostile takeover: the directors don’t agree the takeover.
•The larger the company, the more difficult and more expensive to takeover
because a greater number of shares must be bought.
 Different ways of growing business
• Two ways of growth: Internal growth and External growth.
• Internal growth occurs when a business expands its existing operations by
• increasing the number of goods it can produce for example by buying more or better
machinery,
• developing new product and finding new markets.
• opening a new branch in another locations.
• It is slow means of growth but easier to manage than external growth. There
is a risk that other businesses, using an external growth strategy, grow much
faster. These larger firms may then dominate the market and remove the
opportunity for other businesses to expand.
Different ways of growing business
• External growth occurs when a business takes over or merges with another
business in the same or different industry. 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.
• Selling franchise and developing joint venture are some ways of business
growth.
Four main types of Merger/take over
 Horizontal take over
• This is when one firm takes over another one in the same industry, in the same sector
of business activity.
• For example, when a firm that manufacturers furniture merges with another firm
that also manufactures furniture.
• Benefits:
• Reduce number of competitors in the market, this would reduce the price pressure and the
company can command a better price for its products.
• Opportunities of economies of scale; reduce costs and increase profit for the business.
• It can bring efficiency by eliminating areas of duplication between two companies.
• Get the better prices from suppliers since the company has more purchasing power.
• Bigger market share, a stronger market presence and higher profile in the market, this would
give pressure for other competitors.
• It may be a much simpler and quicker way to expand into further key locations, this would
allow the company to grow geographically in a few months.
Forward Vertical take over
• Forward vertical integration is when one firm takes over another firm who is
customer in the same industry. (for example, Furniture manufacturers merge
with Furniture Retails store)
• Benefits:
• Assured outlet for the business ,
• The profit margin of the retailer is now absorbed by the expanded firm,
• The retailer can be prevented from selling the goods of competitors.
 Backward Vertical take over

• Backward vertical integration is when one firm takes over another firm who is
its supplier in the same industry. (for example, Furniture manufacturers merge
with wood suppliers)
• Benefits:
• Assured supply of raw materials and 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.
Conglomerate take over
• This is when one firm takes over another one in a completely different
industry. (for example, Furniture manufacturers merge with Clothing
producers)
• Benefits:
• Spreading risk by having activities in more than one industry, country.
• Transfer of business ideas could help improve the quality and demand for the two
products.
 Drawbacks of growth (merger/take over)
• Diseconomies of scale: It is difficult and complex to control. When the managers have no skills to
manage effectively, it could lead to poor communication, coordination, decision-making and inefficiency.
This will increase the business’s average costs and reduce its profit margins.
• A large initial investment is required. Because of high expansion cost, the business is short of finance.
This would lead to cash flow problems and business failure.
• Any two businesses that are brought together are likely to have different ways of doing things. They may
have different objectives, pay and other conditions of work, and different management styles. All of
these factors could result in conflict between management and workers and even between different
groups of workers.
• The business will inherit all problems that run with the acquired business. For example, the acquired
business has a history of disappointing customer, the predator business may also have a hard time
convincing people that things will change under its direction.
• The integration of two firms will change the control of the business for the original owners. There will be
a loss of control. This may happen if a sole trader becomes a partnership.
• When two separate businesses are brought together, managers and workers in each business may fear
loss of their jobs or status. When two companies have two people doing similar tasks, one of them
frequently is laid off.
Why some businesses
stay small?
Why some businesses stay small?
• Owner Choice: some businesses might not have growth objective
because:
• The owner does not want the responsibility or workload of managing a larger
business.
• The owner wants to keep total control of the business and fears that growth
will reduce the level of control they have over decision making and day-to-day
management.
• The owner wants to maintain a close relationship with customers and provide a
personal service.
• The owner does not want to take the risk of having growth objective. Additional
capital is required; if the growth is not successful, they have to pay the business
debts.
Why some businesses stay small?
• Market Size:
• Market size can influence the growth of business. For example, businesses that
serve a local market-such as hairdresser, taxi firms or dentists, may not to offer
their services beyond the local neighborhood.
• Access and availability of capital:
• Some small businesses have difficulty to obtain loans from banks and other lenders.
• Market condition:
• Some industries are dominated by a few very large companies and it is difficult for
smaller business to compete. Market domination often means that consumers have
a brand loyalty to the larger businesses that can offer lower prices than smaller
firms due to them enjoying the benefits of economies of scale. .
Why some
businesses fail?
 Why some businesses fail?
• Poor planning and lack of objectives:
• The lack of detailed business plan and detailed costings and profit predictions
is often a cause of business failure.
• Clear objectives are essential for business success. If the business owners fail
to set objectives, this would lead to business failure because of the lack of
focus and directions.
• Poor cash Management:
• Sometimes businesses do not manage the inflow and outflow of cash
effectively and they do not have enough cash to pay the debts and expenses.
Careless spending would create the cash flow problems. Shortage of cash
(insufficient working capital) means that workers, suppliers, and government
cannot be paid what they are owed; this would cause the businesses to fail.
Why some businesses fail?
• Poor choice of location:
• Choosing the right location is very important for businesses such as retailers,
restaurants and leisure facilities, which need to be located close to the
customers/market.
• Lack of skill and experience in Management:
• Some new businesses fail because their owners are not sufficiently skilled and lack
of experience in management.
• Lack of experience and poor management could lead to bad decisions for example
wrong decision to enter inappropriate market, wrong location decisions, etc.
• If the business has no management experience and skills, it should hire
professional manager, otherwise, it would be fail in the competitive market.
Why some businesses fail?
• Failure to invest in new technology:
• A business that does not invest in the latest technology will often find it is
unable to compete in terms of price, design and quality.
• Some are not prepared to take risk and invest money-they are too cautious; so
they fail to develop new products or to adopt new technology.
• Many people like new, innovative and up-to-date products so relying on old
products can lead to the collapse of the business.
• Businesses that do not install the latest and more efficient production
technology will tend to have higher costs and lose out to rivals that do invest in
new technology.
• For example; if retailers fail to adopt online technology, they will lose sales and
collapse because increasing numbers of people do their shopping online.
Why some businesses fail?
• Poor marketing:
• Successful businesses are ones that identify and then meet the needs
of their customers. Businesses that do not carry out market research
are likely to fail.
• Market research is essential to new businesses for identifying the
potential size of market, the level of competitors and finding on what
consumers want.
• Businesses may struggle to compete if their marketing is weak.
• A business might invest too heavily in inappropriate marketing
campaigns (promotions and advertising); using expensive television
advertising instead of cost-effective social media.
Why some businesses fail?
• Lack of finance:
• New businesses often lack the finance they need to take full advantage of the opportunities
available to them.
• The established firms with poor track record may also be difficult to raise finance because of the
high risk for investors.
• Both new and established businesses may fail if they cannot attract funding.
• Intense competition:
• All businesses face competition.
• Increase in globalization and international trade means that competition is increased.
• Businesses that are unable to compete on price and quality are unlikely to survive in the long-
run.
• Many small businesses collapse because they are overrun by larger competitors in the market.
• Competitors might bring out superior products, read market conditions more effectively, charge
lower price because of their lower costs, use destroyer pricing (very high discounting).
Why some businesses fail?
• Economic influences:
• Unemployment, high interest rate, and taxation may reduce the amount of
money consumers have to spend on goods and services produced by
business.
• This, in turn, will reduce businesses’ earnings from sales and profits.
• Firms that are well established may have the finance to continue even when
they are making a loss. However, new businesses may fail when the economic
condition is difficult.
 Past Paper (Papre1 short questions)
(1) Identify two reasons why a government might support business start-ups. (2/20 May11)
(2) Define entrepreneur. (2/20 Nov13)
(3) Identify two ways of measuring the size of a business. (2/21 Feb 12)
(4) Identify four ways to measure the size of a business. (4/21 May 11)
(5)Identify two reasons why a government might support business activity. (2/21Nov11)
(6) Identify two ways a government can support new business start-ups. (2/21Nov12)
Past Paper (Papre1 Six Mark Question)
(1) Do you think being creative is the most important characteristic of
being successful entrepreneur? Justify your answer. (6/20 Nov 12)
(2) Do you think a takeover of a competitor is the best way for a large
business to grow? Justify your answer. (6/21 Feb 12)
(3) Do you think a successful entrepreneur has to be a good manager?
Justify your answer. (6/21Nov 12)
Past Paper (Papre1 Six mark question)
Hashim is an entrepreneur. He plans to start up as a sole trader by opening a small gift shop next to a popular
tourist site. His market research shows that October to June are the months when sales are likely to be highest.
His first business failed within 6 months of start up because of poor financial planning. This time, Hashim has
produced a cash-flow forecast, show in Table1, as part of his business plan. His parents have agreed to give
him an interest free loan for the shop rent. He is hoping to arrange trade credit from suppliers.
Table 1 Cash flow forecast
July August September October
Cash inflow 80 140 180 240
Cash outflow 300 180 180 180
Net cash flow (220) (40) Y 60
Opening balance 0 (220) (260) (260)
Closing balance X (260) (260) (200)

(1) Identify and explain two ways in which a business plan might help
Hasmin’s new business to be successful. (6/19May13)
Past Paper (Papre1 Six mark question)
FGH is a private limited company. FGH has a tall hierarchical organizational
structure. It is a book retailer which plans to take over one of its competitors for $
800 m. If the takeover happens, FGH would have 6500 bookshops across 20
countries. FGH’s managing Director said: “we expect to reduce total costs by $ 300
m each year after the takeover. We will stop all off-the-job training of employees”.
The managing director thinks FGH would benefit from becoming a public limited
company but some of the other directors cannot decide if this is a good idea.

(2) Do you think FGH should take over other business? Justify your
answer. (6/19 May11)
Past Paper (Papre1 Six mark question)
Homeright is a company that makes furniture such as tables and chairs. The company is
successful and has grown rapidly in recent years. However the directors have found it difficult
to manage the speed of growth The Managing Director recently said that even more growth is
planned for next year. The product range will be doubled and foreign markets entered.

(3) (a) Identify two possible reasons why the directors want Homeright to grow.
(2)
(b) Identify and explain two problems to Homeright’s management that rapid
growth could cause. (6)
(4) Do you think economies of scale are the most important reason for taking
over another business? Justify your answer. (6/21 June 11)
Past Paper
(1) Identify and explain two possible reasons for the failure of the business that Peter used
to work for. (8/19/paper2/CIE)
(2) Explain how the following three factors could cause Ruben’s new business to fail; (lack
of management experience; insufficient working capital; poor planning)
(12/21/paper2/CIE)
(3) Consider the following three characteristics that may be required for entrepreneurs opening a shop
located at the airport. Which is the most important characteristic for an entrepreneur to be successful?
Justify your answer. (12/21/paper2/CIE)
• Risk taker, Creative, Optimistic