1.3 – Enterprise, Business Growth and Size

Entrepreneurship

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!

• Risk taker
• Creative
• Optimistic
• Self-confident
• Innovative
• Independent
• Effective communicator
• Hard working

 

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.

Some of the content of a regular business plan are:

• Executive summary: brief summary of the key features of the business and the 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
• Premises and equipment: details of planning regulations, costs of premises and the need for equipment and buildings
• Business organisation: whether the enterprise will take the form of sole trader, partnership, company or cooperative
• 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

Making a business plan before actually starting the business can be very helpful. By documenting the various details about the business, the owners will find it much easier to run it. There is a lesser chance of losing sight of the mission and vision of the business as the objectives have been written down. Moreover, having the objectives of the business set down clearly will help motivate the employees. A new entrepreneur will find it easier to get a loan or overdraft from the bank if they have a business plan.

 

Government support for business startups

According to startup.com, “a startup is a company typically in the early stages of its development. These entrepreneurial ventures are typically started by 1-3 founders who focus on capitalizing upon a perceived market demand by developing a viable product, service, or platform”.

Why do governments want to help new start-ups?

• 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

How do governments support businesses?

• Organise advice: provide business advice to potential entrepreneurs, giving them information useful in staring a venture, including legal and bureaucratic ones
• Provide low cost premises: provide land at low cost or low rent for new firms
• Provide loans at low interest rates
• Give grants for capital: provide financial aid to new firms for investment
• Give grants for training: provide financial aid for workforce training
• Give tax breaks/ holidays: high taxes are a disincentive for new firms to set up. Governments can thus withdraw or lower taxation for new firms for a certain period of time

 

Measuring business size

Businesses come in many sizes. They can be owned by a single individual or have up to 50 shareholders. They can employ thousands of workers or have a mere handful. But how can we classify a business as big or small?

Business size can be measured in the following ways:

• Number of employees: larger firms have larger workforce employed
• Value of output: larger firms are likely to produce more than smaller ones
• Value of capital employed: larger businesses are likely to employ much more capital than smaller ones

However, these methods have their limitations and are not always accurate. Example: When using the ‘number of employees’ method to compare business size is not accurate as a capital intensive firm ( one that employs a large amount of capital equipment) can produce large output by employing very little labour (workers). Similarly, value of capital employed is not a reliable measure when comparing a capital-intensive firm with a labour-intensive firm. Output value is also unreliable because some different types of products are valued differently, and the size of the firm doesn’t depend on this.

 

Business growth

Businesses want to grow because growth helps reduce their average costs in the long-run, help develop increased market share, and helps them produce and sell to them to new markets.

There are two ways in which a business can grow- internally and externally.

Internal growth

This occurs when a business expands its existing operations. For example, when a fast food chain opens a new branch in another country. This is a slow means of growth but easier to manage than external growth.

External growth

This is when a business takes over or merges with another business. It is sometimes called integration as one firm is ‘integrated’ into the other.

A merger is when the owner of two businesses agree to join their firms together to make one business.

A takeover occurs when one business buys out the owners of another business , which then becomes a part of the ‘predator’ business.

External growth can largely be classified into three types:

• • Horizontal merger/integration: This is when one firm merges with or takes over another one in the same industry at the same stage of production. For example, when a firm that manufactures furniture merges with another firm that also manufacturers furniture.
    Benefits:
    • Reduces number of competitors in the market, since two firms become one.
    • Opportunities of economies of scale.
    • Merging will allow the businesses to have a bigger share of the total market.

• •  Vertical merger/integration: This is when one firm merges with or takes over
    another firm in the same industry but at a different stage of production. Therefore, vertical integration can be of two types:
    • Backward vertical integration:  When one firm merges with or takes over another firm in the same industry but at a stage of production that is behind the ‘predator’ firm. For example, when a firm that manufactures furniture merges with a firm that supplies wood for manufacturing furniture.
      Benefits:
      • Merger gives assured supply of essential components.
      • The profit margin of the supplying firm is now absorbed by the expanded firm.
      • The supplying firm can be prevented from supplying to competitors.
    • Forward vertical integration: When one firm merges with or takes over another firm in the same industry but at a stage of production that is ahead of  the ‘predator’ firm. For example, when a firm that manufactures furniture merges with a furniture retail store.
      Benefits:
      • Merger gives assured outlet for their product.
      • The profit margin of the retailer is now absorbed by the expanded firm.
      • The retailer can be prevented from selling the goods of competitors.

• Conglomerate merger/integration: This is when one firm merges with or takes over a firm in a completely different industry. This is also known as ‘diversification’. For example, when a firm that manufactures furniture merges with a firm that produces clothing.
  Benefits:
  • Conglomerate integration allows businesses to have activities in more than one country. This allows the firms to spread its risks.
  • There could be a transfer of ideas between the two businesses even though they are in different industries. This transfer o ideas could help improve the quality and demand for the two products.

 

Drawbacks of growth

• Difficult to control staff: as a business grows, the business organisation in terms of departments and divisions will grow, along with the number of employees, making it harder to control, co-ordinate and communicate with everyone
• Lack of funds: growth requires a lot of capital.
• Lack of expertise: growth is a long and difficult process that will require people with expertise in the field to manage and coordinate activities
• Diseconomies of scale: this is the term used to describe how average costs of a firm tends to increase as it grows beyond a point, reducing profitability. This is explored more deeply in a later section.

 

Why businesses stay small

Not all businesses grow.Some stay small, employ a handful of workers and have little output. Here are the reasons why.

• Type of industry: some firms remain small due to the industry they operate in. Examples of these are hairdressers, car repairs, catering, etc, which give personal services and therefore cannot grow.
• Market size: if the firm operates in areas where the total number of customers is small, such as in rural areas, there is no need for the firm to grow and thus stays small.
• Owners’ objectives: not all owners want to increase the size of their firms and profits. Some of them prefer keeping their businesses small and having a personal contact with all of their employees and customers, having flexibility in controlling and running the business, having more control over decision-making, and to keep it less stressful.

 

Why businesses fail

Not all businesses are successful. The main reasons why they fail are:

• Poor management: this is a common cause of business failure for new firms. The main reason is lack of experience and planning which could lead to bad decision making. New entrepreneurs could make mistakes when choosing the location of the firm, the raw materials to be used for production, etc, all resulting in failure
• Over-expansion: this could lead to diseconomies of scale and greatly increase costs, if a firms expands too quickly or over their optimum level
• Failure to plan for change: the demands of customers keep changing with change in tastes and fashion. Due to this, firms must always be ready to change their products to meet the demand of their customers. Failure to do so could result in losing customers and loss. They also won’t be ready to quickly keep up with changes the competitors are making, and changes in laws and regulations
• Poor financial management: if the owner of the firm does not manage his finances properly, it could result in cash shortages. This will mean that the employees cannot be paid and enough goods cannot be produced. Poor cash flow can therefore also cause businesses to fail

Why new businesses are at a greater risk of failure

•  Less experience: a lack of experience in the market or in business gets a lot of firms easily pushed out of the market
• New to the market: they may still not understand the nuances and trends of the market, that existing competitors will have mastered
• Don’t a lot of sales yet: only by increasing sales, can new firms grow and find their foothold in the market. At a stage when they’re not selling much, they are at a greater risk of failing
• Don’t have a lot of money to support the business yet: financial issues can quickly get the better of new firms if they aren’t very careful with their cash flows. It is only after they make considerable sales and start making a profit, can they reinvest in the business and support it

 

 

Notes submitted by Lintha

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