Chapter 3 - Enterprise, business

growth and size

By

Bhavya Palkhiwala
 Enterprise and Entrepreneurship
Entrepreneur is a person who
organises, operates and take
the risk for a new business
venture.

Entrepreneurship is the new

business venture created by
the entrepreneur.
 Disadvantages of being an
Benefits of being an Entrepreneur Entrepreneur
➔ Independence - Able to choose ➔ Risk - many new entrepreneurs’
how to use time and money. businesses fail, especially if there
is poor planning.
➔ Able to put own ideas into practice.
➔ Capital - entrepreneurs have to put
➔ May become famous and
their own money into the business
successful if the business grows
and, possibly, find other source of
➔ May be profitable and the income capital.
might be higher than working as an
➔ Lack of knowledge and experience
employee.
in starting and operating a
➔ Able to make use of personal business
interests and skills
➔ Opportunity cost - Lost income
from not being an employee.
 Characteristics of successful entrepreneurship
Hard Working Long hours and short holidays for making their business successful

Risk taker Making decisions to produce goods or services that people might buy is
potentially risky

Creative New ideas about product , services, ways to attract customer - to make it
different

Optimistic Looking forward to better future

Self - confident Necessary to convince other people of your skills and also the lender, bank
and customer that business is going to be successful

Innovative Able to put new ideas into practice in interesting & different ways

Independent Often work on their own because they can’t afford new employee.

Effective communicator Talking confidently to banks, leaders, customers and govt. agencies about
the new business will raise the profile of the new business.
 Contents of Business plans assist Entrepreneurs

Description of the
Products and services Market research Business location
business

Organisation structure
Financial Information Business strategy
and management
Reasons why government support
business start-ups
Reduce New businesses will often create jobs to help reduce
unemployment unemployment.

Increase New businesses give customers more choice and

competition compete with already established businesses.

The economy benefits from increased output of

Increase output goods and services.

Benefit Create social enterprise which offer benefits to

society society other than jobs and profit

All large businesses were small once. Groth of

Can grow business is dependent on the support provided by the
further government
How government support business
start-ups
Government supports business start-ups
Needs Government support

Business idea and help Organising training for entrepreneurs that gives advice, and
support sessions offered by experienced business people

Premises Enterprise zone, which provide low-cost premises to start-up

businesses

Finance Loans at low interest rates

Grants, if businesses start up in depressed areas of high
unemployment

Labour Grants to train employees and help increase their productivity

Research Encouraging universities to make their research facilities

available to new business entrepreneurs
 Comparing the business size - Useful

Investors: Before Governments: Competitors:

deciding which Often there are different To compare their size
business to put their tax rates for small and and importance with
savings into. large businesses. other firms..

Workers: Banks:
To have some idea of To see how important a loan
how many people they to the business is compared
might be working with. to its overall size.
 Ways to measure the Business size

Capital employed Number of employees

Market share Value of the business

Number of outlets Number/ value of output

Amount of profit Value of sales

 Benefits:
The value of all the business assets
added up shows how much the business
could be worth. This gives a value for
Capital the business that reflects what it has
invested and what it would be worth if
Employed sold.

The amount of money invested in Drawbacks:

the business It is difficult to value assets accurately.
For example, DHL delivery vans may be
worth very little but the business could
give a high estimate of their worth in
their accounts
 Benefits:
This provides a useful comparison
against businesses in the same
industry. It shows how much of the
Market Share money being spent in the market is
coming to the businesses.
The total amount of sales a
Drawbacks:
business has as a percentage of
Comparison of market share is not
the total sales in the market.
possible. Market may be small, so even
the business has large share. It doesn't
mean it is a large business.
 Benefits:
This gives a geographic idea, as each
outlet will take up a certain amount of
space. This can then be used to
Number of compare it with other businesses.

Outlets
Drawbacks:
The number of shops the Outlets are not equal to sales or profit. A
business owns and runs business can have lots of outlets but not
many customers. Outlets do not show
the sale value of product or the number
of the product sold.
No Monetary value.
 Benefits:
Show the scale (extent) on which the
business operates.
Number of Drawbacks:
Employees You cannot compare on basis of no. of
employees. Eg. A factory employ less
Total number of people who people whereas supermarket employs
work in the business more people. Business may have less
but skilled employees and in some
cases many employees but still hold less
value.
 Benefits:
This can be a good reflection of the true
worth in the marketplace, as many
businesses are bought because of their
Value of the potential to be worth a lot in the future.

business Drawbacks:
This measure can be inaccurate as
The price another business is sometimes a business will be bought for
willing to pay to own the more than it is worth. Eg. Instagram was
business. bought for $1 billion when it had yet to
make profit. Investors may see a lower
value compared with a shareholder.
 Benefits:
This shows how much the business is
producing and how much people are
willing to pay for these products. It can
be easily compared with the
competitors.
Value of Output
Drawbacks:
this is the value of the products Revenue alone does not take into
or services sold. account the costs of the business. Large
revenues are often reduced when costs
are taken away. Revenues can vary
depending on how well the economy is
doing.
 Benefits:
This shows how much the business is
able to sell and specifically used to

Value of Sales measure the business size when

comparing competitors business.
The total sales made by the
Drawbacks:
company
The method cannot be used for the
business which falls in different industry.
 Benefits:
This method can be used to measure
the business where their profits are

Amount of profit taken into consideration. Easy way of

measuring business size.
The total profit made by the
Drawbacks:
company
The method cannot be used as the profit
is fluctuating and can be manipulated.
 Benefit of expanding business

More status and

Possibility of Managers earn
prestige for the
higher profit higher salaries
owners

Lower cost Large share in market

 Different ways in which
businesses can grow

Internal growth
Other outlets in same city External Growth
or across the country Takeover or merger with
another business
1. Horizontal Integration
2. Vertical Integration
3. Conglomerate
integration
External Growth
 Benefits:
● Reduces the number of competitors
Horizontal merger in the industry.
● They have bigger share of the total
or market than either business before
Horizontal Integration the integration.
● Increase in revenue
When one firm merges with another or ● Product expansion and greater
takes over another one in same industry efficiency.
at the same stage of production.
Limitation:
● Legal issues
● Management conflicts
 Benefits of Forward Integration:
Vertical merger or ● The merger gives an assured outlet for its
Vertical Integration product.
● The profit margin made by the retailer is
When one business merges with absorbed by the expanded business.
another or takes over another one in ● Information about consumer needs and
same industry but at a different stage of preferences can be obtained directly.
production.
Benefits of Backward Integration:
● The merger gives an assured supply of
important components.
● The profit margin of the supplier is
absorbed by the expanded business.
● The supplier could be prevented from
supplying to other manufacturers.
● Costs of components and supplies for the
manufacturer could be controlled.
 Benefits:
Conglomerate merger ● The business has diversified activities
or Conglomerate and this will spread the risks taken by
the business.
Integration ● There might be a transfer of ideas
between the different sections of the
When one business merges with
business.
another or takes over another business
in a completely different industry. This is
also called as Diversification.
Limitations
● Conflicts of ideas and strategies
● Complications in the management
Style.
Problems linked to business growth and how these might be
overcome
Problem resulting from expansion Possible ways to overcome problem

Larger business is difficult to control Operate the business in small units - this is a form of
decentralisation

Larger business leads to poor Use latest IT equipment and telecommunications - but
communication even these can cause problems

Expansion costs so much that business is Expand more slowly - use profits from slowly
short of finance expanding business to pay for further growth
Ensure sufficient long-term finance is available

Integrating with another business is more Introducing a different style of management requires
difficult than expected good communication with the workforce - they will
(eg. different management styles or ‘ways need to understand the reasons for the change.
of doing things’)
Why some businesses remain small

Type of Industry Owners’ Objectives

Market size
● Some industries where ● Sometimes owners wish
● If the market - that is
businesses remain small to avoid the stress and
total number of
- hairdressing, worry of running a large
customers - is small, the
convenience store. business.
businesses are likely to
● Businesses in these ● Some business owners
remain small.
industries offer personal prefers to keep their
● Shops which operates in
services or specialised business small -
rural areas far from
products. interested in keeping
cities.
● If they were to grow too control, knowing all their
● Special kind of products
large, they would find it staff and customers,
or services - luxurious
difficult to offer the than running a large
cars, expensive jewelry.
personal services. business.
Cause of business failure

Lack of management skills Poor financial management

Changes in business
Over - expansion
environment