Cambridge IGCSE Business Studies 1.3 – Enterprise, business growth and size

1.3.1 – Enterprise and entrepreneurship

Entrepreneur – A person who organises, and operates a business.

Characteristics of successful entrepreneurs

• Hard working – Long hours of work are needed to become successful
• Risk taker – Entrepreneurs never know if business idea will succeed
• Creative – Business ideas different from competitors
• Self-confident – Necessary to convince banks and investors.
• Effective communicator – Talk clearly to banks, customers, employees about business.

Business Plan – Document with important information about your business e.g. Business objective, operations, finance, owners

Business plan is needed to

• Apply for bank loans
• Plan business to reduce risk of failure

Business plan includes 

• Products and services that you will sell
• Costs of your business
• Location of the business
• What do I need to operate my business e.g. Machines, employees

Governments supports new businesses because

• New businesses creates jobs (reduce unemployment)
• Increased competition (Businesses competing with each other means prices may be lowered)
• Business may grow larger and contribute to the country

Government supports new businesses by

• Loans at low interest rates
• Land to set up businesses at low costs
• Grants (money) to train employees
• Use research facilities at public universities
• Business advice from experts

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1.3.2 – Methods and problems of measuring business size

Methods of measuring size of a business

• Number of employees – Easy to calculate and compare with competitors. However, some businesses can produce higher output with fewer employees. e.g. Some factories uses machines.

 

• Value of output  – Easy to calculate and compare with competitors. However, some businesses may be very small but producing very expensive products such as brand name clothing while a very large factory may be producing cheap clothing.

 

• Value of sales – Easy to calculate and compare with other businesses. However, value may be different for businesses for example, a sports car dealer may sell 2 cars a day while a normal car dealer e.g. Toyota may sell 20 cars a day.

 

• Value of capital employed – Simple to compare with other businesses. However, this method is inaccurate because different factories will use different types of capital e.g. A factory may use expensive machinery and another may depend on employees.

There is no perfect way to compare businesses. Every business is different.

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1.3.3 – Why some businesses grow and other remain small

Why do businesses grow?

• Increased chances of higher profit
• Better status and prestige of the owners and employees
• Lower average cost (more negotiating power)
• Increased control of the market

Ways businesses can grow

• Internal Growth – Business grows by itself (Business gets larger as profit increases e.g. more customers)
• External Growth – Take-over or merger with another business.

1. Horizontal integration – Firms in the same industry at the same stage of production merges. e.g. 2 Bakeries merging to form a larger business
2. Vertical integration – Business expands by merging with another business in another stage of production. There are 2 types of vertical integration. Backwards and fowards. Backward vertial integration is when a business merges with another business in the previous stage of production for example, Bakery merges with wheat farm. Foward is when a business merges with a business in the next stage of production e.g. Sugar farm merges with candy factory.

Advantage of vertical integration is to have more control over distribution of goods and services.

Conglomerate merger – Two businesses in a completely different industry combine to form a new business. e.g. Insurance company buys an advertising agency.

Joint Ventures – Two or more business agree to start a new project together.

Problems of business growth

• Large businesses are difficult to control. Solution – Operate in business in small parts.
• Costs of expansion are high. Solution – Expand slowly
• There can be poor communication in large businesses. Solution – use technology to communicate e.g. email. Operate the business in small parts.

Why do some businesses remain small?

• Type of industry e.g. hair salons stay small because of the connection with their customers, if they grow too large they won’t be able to offer personal service to their regular customers.
• Market size Some businesses such as stores in small towns are likely to remain small due to the limited amount of customers. Businesses that produce specialised goods such as brand name clothing or luxury cars are also likely to remain small.
• Owner’s objective Some owners want to keep their businesses small to keep full control and know all their employees and customers. Running a large business can become stressful.

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1.3.4 – Why some businesses fail

• Poor management – Many businesses fail due to poor management from lack of experience by the managers.
• Failure to plan for change – The business environment is constantly changing, Businesses need to change to keep up with technology.
• Poor financial management – Shortage of money means that the businesses cannot be operated. Businesses needs to always make sure they have enough money
• Over expansion – Some businesses expand too quickly and not have enough money to operate.
• Startup risk – Starting up a new business is always risky, entrepreneurs may lack experience and not be able to compete with larger businesses.