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
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