Enterprise, Business Growth and Size
Enterprise and entrepreneurship
- An entrepreneur is a person who organizes, operates and takes the risk for a new business venture.
Characteristics
- Hard working (long hours and short holidays are typical for many entrepreneurs to make their business successful)
- Risk-taker (willing to invest their own savings into an uncertain venture)
- Creative (new ideas about products, services, ways of attracting customers, to make it different from other firms)
- Optimistic (looking forward to a better future)
- Self-confident (to convince other people of your skills, convince banks, other lenders, and customers that your business wil be successful)
- Innovative (being able to put new ideas into practice in different ways)
- Independent (have to work on their own before employing others)
- Effective communicator (talking clearly and confidently to banks, other lenders, customers and govt. agencies about the business).
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.
- A business plan is important because:
- it forces the entrepreneur to think ahead and identify potential problems before they happen, reducing the risk of failure.
- banks and investors will refuse to lend capital without this business plan because the plan proves the business can repay its debts.
Contents
| Element | What it includes |
|---|---|
| Overview/summary | A clear statement of the business idea and core products |
| Objectives | The short-term and long-term targets |
| Market research | Data about consumer demographics, market size, competitors |
| Marketing strategy | The planned price, promotional tactics, distribution channels |
| Operations | Details on how production will occur, location, equipment needed |
| Finance | Cash flow forecasts, projected income statements, break-even targets |
| People & resources | Management structure, staff requirements, job roles |
Government’s support for start-ups
Why?
- To reduce unemployment
- To increase competition (gives consumers more choice)
- To increase output (economy benefits from this)
- To benefit society
- To make the business grow further
How?
| Business start-ups need | Support is given by |
|---|---|
| Business idea and help | Organizing training for entrepreneurs that gives advice, and support sessions offered by experienced business people |
| Premises | Enterprise zones, which provide low-cost premises |
| Finance | Loans for small businesses at low interest rates and grants if businesses start up in depressed areas of high unemployment |
| Labor | Grants to small businesses to train employees and help increase productivity |
| Research | Encouraging universities to make their research facilities available to new business entrepreneurs |
- A loan is a sum of money borrowed from a bank or govt. that must be paid back over an agreed period of time, usually with an extra cost called interest.
- A grant is a sum of money given to a business by a govt. or supporting organization that does NOT have to be paid back, provided the business uses it for the agreed purpose (such as setting up in a high-unemployment area).
Methods and limitations of measuring business size
Methods
- Number of employees: Easy to calculate and compare with other businesses.
- Value of output: Total financial revenue earned from selling goods.
- Volume of output: Physical quantity of units produced and sold.
- Capital employed: Total value of long-term capital investments (e.g. machinery, factories) inside the firm.
Limitations
- Number of employees: Some firms use production methods which employ very few people but produce high output levels. This is commmon for highly automated factories.
- Value of output: A high level of output does not mean that a business is large when using the other methods of measurement.
- Example: A firm employing few people might produce several highly expensive computers each year. This might give higher output figures than a firm selling cheaper products but more workers.
- Capital employed: Similar limitation to the number of employees. A company employing many workers may use labor-intensive methods of production, giving low output levels and use little capital equipment.
Why some businesses grow and others remain small
- 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 bigger businesses.
- Lower average costs.
- Larger share of its market. The proportion of total market sales it makes is greater, giving the business more influence when dealing with suppliers and distributors, and consumers are often attracted to the ‘big names’ in an industry.
Methods
- By internal growth:
- Internal growth occurs when a business expands its existing operations. Examples include creating brand-new products, and setting up websites to target new global markets.
- By external growth:
- External growth is when a business takes over or merges with another business. This is through a merger or a takeover.
Types of integration
- A merger is when the owners of two businesses agree to join their business together to make one business.
- Horizontal integration is when one business merges with or takes over another on ein the same industry at the same stage of production.
- Vertical integration is when one business merges with or takes over another one in the sam eindustry but at a different stage of production. Can be forward or backward.
- Forward is merging with a business at a later stage of production.
- Backward is merging with a business at an earlier stage of production.
Benefits and limitations
- Horizontal integration:
- Advantages: Reduces no. of competitors, opportunities for economies of scale, bigger share of the total market
- Disadvantages: High risk of management and staff culture clashes.
- Forward vert. integration:
- Advantages: Guaranteed outlet for its product, profit margin made by retailer is absorbed by expanded business, info about consumer needs and preferences are obtained by manufacturer.
- Disadvantages: Might lack operational experience running a retail sector shop.
- Backward vert. integration:
- Advantages: Guaranteed supply of important components, profit margin of supplier is absorbed by expanded business, supplier prevented from supplying other manufacturers, costs of components and supplies are controlled.
- Disadvantages: Managing raw material extraction requires totally different skills than final production.
Problems linked to growth
| Problem | How to overcome it |
|---|---|
| Diseconomies of scale (larger business is difficult to control it) | Operate the business in small units (decentralization) |
| Poor communication | Operate business in small units, use latest IT equipment and telecommunications |
| Expansion costs so much that business is short of finance | Expand more slowly (use profits from slowly expanding business to pay for growth) and ensure sufficient long-term finance is available |
| Integrating with another business is difficult (different ways of doing this) | Introducing a different management style requires good communicatoin with the workforce. They will need to understand the reasons for the change |
Why some businesses remain small
- Business usually remain small because of:
- the type of industry the business operates in
- the market size
- the owners’ objectives.
Type of industry
- Examples of industries where small businesses are common are hairdressing, window cleaning, convenience stores, car repairs, plumbers. Businesses in these industries offer personal services or specialized products.
- If they grew too large, it would be challenging to offer the close and personal service demanded by customers.
Market size
- If the total number of customers is small, the businesses are most likely going to remain small. This also applies to businesses that produce goods or services of a specialized kind because this only appeals to a limited number of consumers.
Owners’ objectives
- The business can remain small depending on the owners’ preferences. The owner might keep their business small because they have a close relationship with staff, or it is easier to manage and avoids stress.
Why businesses succeed or fail
| Success | Failure |
|---|---|
| Excellent management skills | Lack of management skills |
| High demand and product that meets consumer needs | Unplanned changes in business environment |
| Economic opportunities | Liquidity problems or poor financial management |
| Strong financial capital | Over-expansion |