Section 1

Understanding
business activity
 Chapter 3

Enterprise, business growth

and size
 Entrepreneur
Person who combines production factors
and takes risk for a new business venture

Important Business plan

definitions Document that contains the business
objectives and details of a new business

Capital employed
The total value of capital used in the
business
 Internal growth
When business expands operations
with own finances

Important External growth

definitions When business growth comes from a
merger/takeover of another firm

Takeover/merger
 T: When business buys other business
 M: When two business become one
 Horizontal integration
Merging with another business in the same
industry and stage of production

Important Vertical integration

definitions Merging with another business in same
industry but at different stage of production

Conglomerate integration
Merging with another business in a
completely different industry
 Benefits of Disadvantages of
entrepreneurship entrepreneurship
1. Independence
1. Risk
2. Using your own ideas
2. Capital
3. May become famous
4. May be more profitable 3. Lack of knowledge
5. Use personal interests
4. Opportunity cost
 Characteristic Reason
Hard working Long hours and short holidays are typical
Risk Taker Making decisions is not easy
Creative New business needs new ideas
Optimistic If you only think of failure, you will fail
Self confident Believe in yourself or others will not
Innovative You must make your ideas work
Independent Work hard on your own
Effective communicator Talk clearly and effectively
 Elements of a business plan

Financial
Description Product Market
Info
 Elements of a business plan

Location Structure Strategy

 Reduce Increase
unemployment output
Why Benefit society

government
Further
supports
Increase
growth start ups competition
 Employed
Methods of Value of output
people value
measuring
business size

Capital
employed value Value of sales
 Why business grows How business grows
1. High profit for owners 1. Internal growth (own money)

2. Status and prestige 2. External growth (with others)

3. Economies of scale a) Horizontal

4. Larger market share b) Vertical

c) Conglomerate
Horizontal Integration

Same industry and level

 Vertical integration
Backward
(buying supply)

Forward
Same industry,
(buying outlet)
different stage
 Conglomerate integration

Different industries
 Benefits of integration
Horizontal
• Less competitors
• Economies of scale
• Bigger share of the market
Forward vertical
• Guaranteed outlet
• Retailer margin absorbed
• Prevent competitor sales
• Information on customers
Backward vertical
• Guaranteed supply
• Supplier margin absorbed
• Prevent supply to competitor
• Controlled costs
Conglomerate
• Diversified risk
• Transfer of ideas
Problems of expansion Possible solutions

1. Difficult to control 1. Operate as small units)

2. Poor communication 2. Use latest IT equipment

3. Not enough finance 3. Expand more slowly

4. Management styles 4. Communicate reasons

Why some businesses remain small

Owner’s
Type Market size objective
 Cause of business failures

Lack of Change of Over

Liquidity
skills environment expansion