Chapter 3 - Enterprise, business growth & size

Entrepreneur

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

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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

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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

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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

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

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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:

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1. Number of employees

Simple & easy to understand

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==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^^

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2. Value of output sold & sales

• effective only in comparing companies in the same industry
• used to calculate market share

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==Issues:==

• Not suitable for comparing different industries

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3. Capital employed

• Capital invested in business, money & machinery

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==Issues:==

• Capital intensive firms & labor-intensive firms

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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

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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

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Growth

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• 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)

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How do Businesses grow?

Internal growth

• Happens through the expansion of business via new branches, shops, factories
• It is a time-taking method

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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

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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

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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

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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

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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

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Problems of Expansion

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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.

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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

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3) Owners’ objectives

• More interested in keeping control, knowing all their staff and customers
• Running a large business can cause more stress & worrying

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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

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