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Chapter 3 - Enterprise, business growth & size

Entrepreneur

An entrepreneur is a person who organizes, operates & takes the risk for a new business venture

Benefits of being an entrepreneur

Disadvantages of being an entrepreneur

Independence - able to choose how to use time and money

Risk - many new entrepreneurs’ businesses fail

Able to put down ideas into practice

Capital - entrepreneurs will have to put their own money into the business & find other sources of capital

May become famous & successful if business grows

Lack of knowledge & experience in starting and operating a business

may become profitable & the income might be higher than being an employee

Opportunity cost - lost income from not being an employee of another business

Able to make use of personal income & skills

Business Plan

  • Document containing the business objectives & key details about the operations, finance, and owners of the new business

  • Also used to help gain finance - careful planning reduces risks of failure

A business plan shows:

  • What products / services to provide

  • Which market share I aim

  • Future business plan

  • Cash flow

  • Business’ main costs

  • Location

  • Resources required


Why the government supports business start-ups

  • Reduce unemployment - creates new jobs

  • Increase competition - consumers have more choices

  • Increase output - contributes to country’s economy

  • Benefits society - supports disadvantaged groups

  • Can grow further - become important in the future

What support does the government often give to start-ups?

Business start-up needs

Government often gives support by

Business idea & help

Organizing advice & support session by experienced businesspeople

Premises

‘Enterprise zones’ which provide low-cost premises to startup businesses

Finance

Loans for small businesses at low-interest rates. Grants, if business startup in depress area of high unemployment

Labour

Grants to small businesses to train employees & help increase their productivity

Research

Encouraging universities to make their research facilities available to new businesses entrepreneurs

Comparing Business sizes

Who would be interested in comparing business sizes?

  • Investors - where to put savings for a good return

  • Government - different tax rates for small/large businesses

  • Competitors - comparing other firms, usually in the same industry

  • Workers - To have some idea of how many people are working with them

  • Banks - How important a loan might be compared to its overall size

Methods to measure business size:

1. Number of employees

Simple & easy to understand

Issues:

  • Capital intensive firms - automated factories that require fewer employees - high output levels - capital is expensive to produce high levels of output

  • Labour intensive firms - lots of manual labor requiring many employees

  • MORE EMPLOYEES DOES NOT NECESSARILY MEAN MORE OUTPUT

2. Value of output sold & sales

  • effective only in comparing companies in the same industry

  • used to calculate market share

Issues:

  • Not suitable for comparing different industries

3. Capital employed

  • Capital invested in business, money & machinery

Issues:

  • Capital intensive firms & labor-intensive firms

4. Profit

  • Profit = revenue - total costs

  • Not an accurate way of comparing business sizes

  • Used to measure efficiency (the degree to which something is done well without wasted energy or effort) compared to sales

  • Profit depends on efficiency & skills of managers as well

There is no ‘best’ method to compare business size. Correct method depends on what needs to be established/compared

To get an accurate answer, 2 or more methods should be used


Growth

  • More profits for income

  • Status for managers / owners

  • Higher salaries

  • Lower costs, economies of scale

  • Larger market share (more influence on suppliers/ distributors / consumers attracted to well-known brands)

How do Businesses grow?

Internal growth

  • Happens through the expansion of business via new branches, shops, factories

  • It is a time-taking method

External Growth

Mergers

A merger is when the owners of two businesses agree to join their businesses together to make one business

Takeover (or acquisition)

A takeover is when one business buys out the owners of another business, which then becomes part of the ‘predator’ business (the business which has taken it over)

Buyout

The purchase of one firm by another

Horizontal integration

Horizontal integration is when one business merges with or takes over another one in the same industry at the same stage of production

  • less competition

  • opportunities for ‘economies of scale’

  • Larger market share

Vertical integration

Businesses at different stages of production integrate.

Forward Vertical integration: One business takes over another business that comes after it in the chain of production. This moves closer to the consumers

  • Assured outlet / retailer for their product

  • profit from the retailer can be absorbed by the expanded business

  • Retailers could be prevented from selling competitors’ products

  • Consumer needs & preferences obtained directly by the manufacturer

Backward Vertical Integration: One business takes over another business that comes after it in the chain of production. This moves further away from the consumers

  • Assured supply of important components

  • Profit margin of supplier now absorbed by expanded business

  • Supplier could be prevented from supplying to other manufacturer

  • Cost of components & supplies for manufacturer could be controlled

Conglomerate Integration: One big business integrates with another, smaller business, in a completely different market.

  • Business is now more diversified in its activities

  • Spreads out the risk (makes it safer)

  • Transfer of ideas between different sections


Problems of Expansion

Problems

Solutions

Large Business is difficult to control

Operate the business in small units

Larger businesses lead to poorer communication

Use the latest IT equipment and telecommunications

Expansion costs so much that business is short of finance

Expand slowly - ensure sufficient long-term finance

Integrating with another business is more difficult than expected

Introducing a different style of management, good communication


Why do some businesses stay small?

1) Type of industry

  • To offer personal / specialized products

  • If it is too large, it would lose the personal touch demanded by customers

  • These businesses are often easy to set up - creates new competition - keeps businesses relatively small.

2) Market size

  • The total number of consumers is small - businesses are likely to stay small

  • True for those in rural areas where their customer base is small

  • Usually produce specialized goods that are expensive

3) Owners’ objectives

  • More interested in keeping control, knowing all their staff and customers

  • Running a large business can cause more stress & worrying


Why do some businesses fail?

  • Poor management: Lack of management skills and experience - Bad decisions (location, managers, promotion & products)

  • Failure to plan for change: Changes in the business environment - technology, competition, economy - risk / uncertainty

  • Poor financial management: shortage of cash (liquidity problems) - cannot meet obligations (suppliers/government/ landlords/ bankers)

  • Over expansion: Too quickly - problems in finance/ management

  • Risks of new business startups: More difficult to survive if new - need adequate financial resources, planning research, experience, decision-making skills

Entrepreneur

An entrepreneur is a person who organizes, operates & takes the risk for a new business venture

Benefits of being an entrepreneur

Disadvantages of being an entrepreneur

Independence - able to choose how to use time and money

Risk - many new entrepreneurs’ businesses fail

Able to put down ideas into practice

Capital - entrepreneurs will have to put their own money into the business & find other sources of capital

May become famous & successful if business grows

Lack of knowledge & experience in starting and operating a business

may become profitable & the income might be higher than being an employee

Opportunity cost - lost income from not being an employee of another business

Able to make use of personal income & skills

Business Plan

  • Document containing the business objectives & key details about the operations, finance, and owners of the new business

  • Also used to help gain finance - careful planning reduces risks of failure

A business plan shows:

  • What products / services to provide

  • Which market share I aim

  • Future business plan

  • Cash flow

  • Business’ main costs

  • Location

  • Resources required


Why the government supports business start-ups

  • Reduce unemployment - creates new jobs

  • Increase competition - consumers have more choices

  • Increase output - contributes to country’s economy

  • Benefits society - supports disadvantaged groups

  • Can grow further - become important in the future

What support does the government often give to start-ups?

Business start-up needs

Government often gives support by

Business idea & help

Organizing advice & support session by experienced businesspeople

Premises

‘Enterprise zones’ which provide low-cost premises to startup businesses

Finance

Loans for small businesses at low-interest rates. Grants, if business startup in depress area of high unemployment

Labour

Grants to small businesses to train employees & help increase their productivity

Research

Encouraging universities to make their research facilities available to new businesses entrepreneurs

Comparing Business sizes

Who would be interested in comparing business sizes?

  • Investors - where to put savings for a good return

  • Government - different tax rates for small/large businesses

  • Competitors - comparing other firms, usually in the same industry

  • Workers - To have some idea of how many people are working with them

  • Banks - How important a loan might be compared to its overall size

Methods to measure business size:

1. Number of employees

Simple & easy to understand

Issues:

  • Capital intensive firms - automated factories that require fewer employees - high output levels - capital is expensive to produce high levels of output

  • Labour intensive firms - lots of manual labor requiring many employees

  • MORE EMPLOYEES DOES NOT NECESSARILY MEAN MORE OUTPUT

2. Value of output sold & sales

  • effective only in comparing companies in the same industry

  • used to calculate market share

Issues:

  • Not suitable for comparing different industries

3. Capital employed

  • Capital invested in business, money & machinery

Issues:

  • Capital intensive firms & labor-intensive firms

4. Profit

  • Profit = revenue - total costs

  • Not an accurate way of comparing business sizes

  • Used to measure efficiency (the degree to which something is done well without wasted energy or effort) compared to sales

  • Profit depends on efficiency & skills of managers as well

There is no ‘best’ method to compare business size. Correct method depends on what needs to be established/compared

To get an accurate answer, 2 or more methods should be used


Growth

  • More profits for income

  • Status for managers / owners

  • Higher salaries

  • Lower costs, economies of scale

  • Larger market share (more influence on suppliers/ distributors / consumers attracted to well-known brands)

How do Businesses grow?

Internal growth

  • Happens through the expansion of business via new branches, shops, factories

  • It is a time-taking method

External Growth

Mergers

A merger is when the owners of two businesses agree to join their businesses together to make one business

Takeover (or acquisition)

A takeover is when one business buys out the owners of another business, which then becomes part of the ‘predator’ business (the business which has taken it over)

Buyout

The purchase of one firm by another

Horizontal integration

Horizontal integration is when one business merges with or takes over another one in the same industry at the same stage of production

  • less competition

  • opportunities for ‘economies of scale’

  • Larger market share

Vertical integration

Businesses at different stages of production integrate.

Forward Vertical integration: One business takes over another business that comes after it in the chain of production. This moves closer to the consumers

  • Assured outlet / retailer for their product

  • profit from the retailer can be absorbed by the expanded business

  • Retailers could be prevented from selling competitors’ products

  • Consumer needs & preferences obtained directly by the manufacturer

Backward Vertical Integration: One business takes over another business that comes after it in the chain of production. This moves further away from the consumers

  • Assured supply of important components

  • Profit margin of supplier now absorbed by expanded business

  • Supplier could be prevented from supplying to other manufacturer

  • Cost of components & supplies for manufacturer could be controlled

Conglomerate Integration: One big business integrates with another, smaller business, in a completely different market.

  • Business is now more diversified in its activities

  • Spreads out the risk (makes it safer)

  • Transfer of ideas between different sections


Problems of Expansion

Problems

Solutions

Large Business is difficult to control

Operate the business in small units

Larger businesses lead to poorer communication

Use the latest IT equipment and telecommunications

Expansion costs so much that business is short of finance

Expand slowly - ensure sufficient long-term finance

Integrating with another business is more difficult than expected

Introducing a different style of management, good communication


Why do some businesses stay small?

1) Type of industry

  • To offer personal / specialized products

  • If it is too large, it would lose the personal touch demanded by customers

  • These businesses are often easy to set up - creates new competition - keeps businesses relatively small.

2) Market size

  • The total number of consumers is small - businesses are likely to stay small

  • True for those in rural areas where their customer base is small

  • Usually produce specialized goods that are expensive

3) Owners’ objectives

  • More interested in keeping control, knowing all their staff and customers

  • Running a large business can cause more stress & worrying


Why do some businesses fail?

  • Poor management: Lack of management skills and experience - Bad decisions (location, managers, promotion & products)

  • Failure to plan for change: Changes in the business environment - technology, competition, economy - risk / uncertainty

  • Poor financial management: shortage of cash (liquidity problems) - cannot meet obligations (suppliers/government/ landlords/ bankers)

  • Over expansion: Too quickly - problems in finance/ management

  • Risks of new business startups: More difficult to survive if new - need adequate financial resources, planning research, experience, decision-making skills