Aminiya School

Grade 9 Business Studies

1.3 Enterprise, Business Growth and Size

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 1.3 ENTERPRISE, BUSINESS GROWTH AND SIZE

The term “enterprise” has two common meanings.

Firstly, an enterprise is simply another name for a business.

Secondly, and perhaps more importantly, the word enterprise describes the actions of
someone who shows some initiative by taking a risk by setting up, investing in and
running a business.

An entrepreneur is a person who organizes, operates and takes risks for a new
business venture. The entrepreneur brings together the various factors of production
to produce goods or services. Check below to see whether you have what it takes to
be a successful entrepreneur

The essential functions of an Entrepreneur.

1. Risk-bearing function:

The functions of an entrepreneur as risk bearer are specific in nature. The

entrepreneur assumes all possible risks of business which emerges due to the
possibility of changes in the tastes of consumers, modern techniques of production
and new inventions. Such risks are not insurable and incalculable. In simple terms
such risks are known as uncertainty concerning a loss.

2. Organizational Function:

Entrepreneur as an organizer and his organizing function is a function whereby the

entrepreneur brings together various factors of production, ensures continuing
management and renders risk-bearing functions as well. His definition associates
entrepreneur with the functions of coordination, organization and supervision.

3. Innovative Function:

The basic function an entrepreneur performs is to innovate new products, services,

ideas and information’s for the enterprise. As an innovator, the entrepreneur foresees
the potentially profitable opportunity and tries to exploit it. He is always involved in the
process of doing new things.

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 4. Decision Making Function:

The most vital function an entrepreneur discharges refers to decision making in

various fields of the business enterprise. He is the decision maker of all activities of
the enterprise.

Characteristics of successful entrepreneurs

Characteristics Reasons why important

Long hours and short holidays are typical for many entrepreneurs
Hard working to make their business successful.
Making decisions to produce goods or services that people might
Risk taker buy is potentially risky.
A new business needs new ideas – about products, services, and
Creative ways of attracting customers- to make it different from other
existing firms.
Looking forward to better future is essential, if you think only of
Optimistic failure you will fail!
Being self- confident is necessary to convince other people of
Self-confident your skills and to convince banks, other lenders and customers
that your business is going to successful.
Being able to put new ideas into practice in interesting in different
Innovative ways is also important.
Entrepreneurs will often have to work on their own before they
Independent can afford to employ to others.
Entrepreneurs must be well motivated and be able to work
without any help
Talking clearly and confidently to banks other lenders, customers
Effective communicator and government agencies about the new business will raise the
profile of the new business.

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What is a business plan?

A business plan is a document containing the business objectives and important

details about the operations, finance and owners of the new business.

It provides a complete description of a business and its plans for the first few years;
explains what the business does, who will buy the product or service and why; provides
financial forecasts demonstrating overall viability; indicates the finance available and
explains the financial requirements to start and operate the business.

Contents of a business plan

• The owner: educational background and what any previous experience in

doing previously
• The business: name and address of the business and detailed description of
the product or service being produced and sold; how and where it will be
produced, who is likely to buy it, and in what quantities
• The market: describe the market research that has been carried out, what it
has revealed and details of prospective customers and competitors
• Advertising and promotion: how the business will be advertised to potential
customers and details of estimated costs of marketing
• Costs: indication of the cost of producing the product or service, the prices it
proposes to charge for the products
• Finance: how much of the capital will come from savings and how much will
come from borrowings
• Cash flow: forecast income (revenue) and outgoings (expenditures) over the
first year
• Expansion: brief explanation of future plans

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How business plans assist entrepreneurs

➢ The information it contains can be used to persuade lenders, such as banks

and investors to provide finance to the business.
➢ The plan gives the business a sense of purpose and direction. It sets out the
resources required by the business such as finance, the number and skills of
workers needed, and how the goods and services will be marketed to
consumers.
➢ The objectives and financial forecasts provide the business with targets to aim
at and enable the business to monitor its progress.

Why governments support business start-ups

Most governments offer support to entrepreneurs. This encourages them to set up

new business. There are several reasons why this support is given.

• They provide employment to a lot of people

• They contribute to the growth of the economy
• They can also, if they grow to be successful, contribute to the exports of the
country
• Start-ups often introduce fresh ideas and technologies into business and
industry

What support do governments often give to start-up businesses?

Business start-ups Governments often give support by:

need:
Business idea and help Organizing advice and support sessions offered by experienced
business people
Premises ‘Enterprise zones’ which provide low-cost premises to start-up
businesses
Finance Loans for small businesses at low interest rates
Grants, if businesses start up in depressed areas of high
unemployment.
Labour Grants to small businesses to train employees and help increase
their productivity.
research Encouraging universities to make their research facilities
available to new business entrepreneurs.

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COMPARING THE SIZE OF BUSINESSES

Businesses can vary greatly in terms of size. On other hand, firms can be owned and
run by a single individual. At this extreme, some businesses employ hundreds of or it
thousands of workers all over the world. Some Firms produce output worth hundreds
of dollars a year, whilst the biggest businesses sell goods valued at billions of dollars
a year.

People who find it useful to compare the businesses are:

1- Investors- To decide which business to put their savings.

2- Government-To decide the rate of tax to be charged.
3- Competitors- To compare their size and importance with other firms.
4- Workers- To have some ideas of how many people they might be working with
5- Banks- To see how important a loan to the business is compared to its size

The size of the businesses can be measured in number of ways. The most common
ways are:-

• number of employees
• value of output
• Value of sales
• Value of capital employed.

Number of employees

This method is easy to calculate and compare with other businesses.

Limitations: some firms use production methods which employ very few people but
which produce high output levels. This is true for automated factories which use the
latest computer controlled equipment. These firms are called capital investments firms
– they use a great deal of capital (high cost) equipment to produce their output.
Therefore a company with high output levels could employ fewer people than a
business which produce less output. Another problem is: should two part time workers
who work half of a working week each, be counted as one employee- or two?

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Value of output

Calculating the value of output is a common way of comparing business size in a same
industry- especially in manufacturing industries.

Limitations: a high level of output does not mean that a business is large when using
the other methods of measurement. A firm employing few people might produce
several very expensive computers each year. This might give higher output figures
than a firm selling cheaper products but employing more workers. The value of output
in any time period might not be the same as the value of sales if some goods are not
sold.

Value of sales

This is often use when comparing the size of retailing businesses – especially retailers
selling similar products (for example, food supermarkets).

Limitations: it could be misleading to use this measure when comparing the size of
businesses that sell very different products (for example, a market stall selling sweets
and a retailer of luxury handbags or perfumes).

Value of capital employed

This means the total amount of capital invested into the business.

Limitations: this has a similar problem to that of the ‘number of employees’ measure.
A company employing many workers may use labor- intensive methods of production.
These give low output levels and use little capital equipment. There is no prefect way
of comparing the size of businesses. It is quite common to use more than one method
and compare the results obtained.

Why do owners often want their businesses to grow?

The owners of businesses often want their firm to expand. What advantages will a
business and its owners gain from expansion? Here are some likely benefits:

• The possibility of higher profits for the owners

• More status and prestige for the owners and managers-higher salaries are often
paid to managers who control the bigger firms
• Lower average costs
• Larger share of its market- the proportion of total market sales it makes is greater.

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This business more influence when dealing with suppliers and distributors and
consumers are often attracted to the ‘big names’ in an industry.

HOW CAN BUSINESS GROW?

The owners of businesses often want their firm to expand. There are certain
advantages of expanding business for owners and business.

Advantages of expansion

• The possibility of higher profits for the owners

• More status and prestige for the owners and managers
• Higher salaries are paid to manages who control the bigger firms
• Lower average cost (economies of scale)
• Growth of business often means that it controls a larger share of its market- This
gives a business more influence when dealing with suppliers and distributor and
consumers are attracted to the ‘big names’ in an industry.

Businesses can expand in two main ways-

1- By INTERNAL GROWTH, for example, a restaurant owner could open another

restaurant in other towns – this growth is often paid for by profits from the exisiting
business. This type of growth is often quite slow but easier to manage than external
growth.
2- By EXTERNAL GROWTH, involving a TAKE-OVER or MERGER with another
business.

Three types of external growth

• Horizontal merger (or horizontal integration) – when one firm merges with or takes
over another one in the same industry at the same stage of production.
• Vertical merger (or vertical integration) – when one firm merges with or take over
another one in the same industry, but at a different stage of production. Vertical
integration can be forward or backward.
✓ Vertical integration forward occurs when a firm integrates with another firm which
is at a later stage of production.

✓ Vertical integration backward occurs when a firm integrates with another firm at
an early stage of production.

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• Conglomerated merger (or conglomerate integration) – When one firm mergers
with or take over a firm in a completely different industry. This is also known as
DIVERSIFICATION.

Advantages of horizontal integration

• The merger reduces the number of competitors in the industry.

• There are opportunities for economies of scale
• The combined business will have a bigger share of the total market than either firm
before the integration.

Advantages of Forward Vertical integration

For example, a car manufacturer takes over a car retailing business.

• The merger gives an assured outlet for their product.

• The profit margin made by other business is absorbed by the expanded business.
• The retailer could be prevented from selling competing makes of car.
• Information about consumer needs and preferences can now be obtained directly
by the manufacturer.

Backward Vertical Integration

For example, a car manufacturer takes over a firm supplying car body panels.

• 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 other manufacturers.
• Costs of components and supplies for the manufacturer could be controlled.

Conglomerate integration

The business now has activities in more than one industry. This means that the
business has diversified its activities and this will spread risks taken by the business.
For example, suppose that a newspaper business took over a social networking
company. If sales of newspapers fell due to changing consumer demand, sales from
advertising on social network sites could be rising at the same time due to increased
interest in this form of communication.

There might be a transfer of ideas between the different sections of the business even
though they operate in different industries. For example, an insurance firm buying an

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 advertising agency could benefit from better promotion of its insurance activities as a
result of the agencies’ new ideas.

Problems of business growth-and how to overcome them

Problems resulting from expansion Possible ways to overcome problem

Larger business is difficult to control Operate the business in small- this is a form of
(diseconomies of scale) decentralization

Larger business leads to poor Operate the business in smaller units

communication Use latest IT equipment and telecommunication
but 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
difficult than expected (e.g. different requires good communication with the
management styles or ways of doing things) Workforce- they will need to understand the
reasons for the change

Why do some businesses stay small?

Not all business grows. Some stay small. There are several reasons why some
business remains small. They are

• The types of industry the business operates in

• The market size
• The owner’s objectives.

The types of industry the business operates in

Firms in industries such as hair dressing, car repairs, window cleaning, convenience
stores, plumper’s, catering etc. often remain small. Firms in these industries offer
personal services or specialized products. If they were to grow too large, they would
find out difficult to offer the close and personal service demanded by the consumers.
In these industries, it is often very easy for new firms to be set up and this creates new
competition. This helps to keep existing firms relatively small.

Market size

If the market- that is the total number of customers- is small, the businesses are likely
to remain small. This is true for firms, such as shops, which operate in rural areas far
away from cities. It is also why firms which produce goods or services of a specialized
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kind, which appeal only to a limited number of consumers, such as very new luxuries
cars or expensive fashion clothing remain small.

Owner’s Objectives

Some business owners prefer to keep their firm small. They could be more interested
in keeping control of a small business, knowing all of their staff and customers, than
running a much larger businesses. Owners sometimes wish to avoid the stress and
worry of running a large firm.

Why some businesses fail?

• Poor management - this is a common cause of new business failures. Lack of

experience can lead to bad decisions, such as locating the business in an area
with high costs but low demand. Family businesses can fail because the sons and
daughters of the founders of a business do not necessarily make good managers
– and they might be reluctant to recruit professional managers.
• Failure to plan for change – the business environment is constantly changing –
this features in many of the later chapters. This adds to the risk and uncertainty of
operating a business. New technology, powerful new competitors and major
economic changes are just some of the factors that can lead to business failures if
they are not responded to effectively.
• Poor financial management- shortage of cash (lack of liquidity) means that
workers, suppliers, landlords and government cannot be paid what they are owed.
Failure to plan or forecast cash flows can lead to this problem and is a major cause
of businesses of all sizes failing.
• Over-expansion – when a business expands too quickly it can lead to big
problems of management and finance. If these are not solved, the difficulties can
lead to the whole business closing down.
• Risks of new business start-ups- many new businesses fail due to lack of
financial and other resources, poor planning and inadequate research. In addition,
the owner of a new business may lack the experience and decision making skills
of managers who work for larger businesses. This means that new businesses are
nearly always more at risk of failing than existing, well established businesses.

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