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1.3 Enterprise Business Growth and Size

1.3.1 Characteristics of Successful Entrepreneurs

An entrepreneur is someone who invests capital, takes a risk and starts up and operates a new business venture.

Entrepreneurship drives business growth and innovation. You need to be able to identify and explain four different characteristics of successful entrepreneurs.

⭐⭐⭐Top Tip ⭐⭐⭐
It’s helpful to have an entrepreneur who has inspired you in mind when thinking of examples, like Mark Zuckerberg or Michelle Phan.  

Creativity, also known as innovation or vision, is the ability to generate new ideas or fresh thinking for new products or services to gain competitive advantage.

Resilience,  also known as optimism or the ability to bounce back. All entrepreneurs will face many setbacks and have to overcome these and not give up on their aims.

Hard Working,  entrepreneurs often have to work long, irregular hours late into the night and on weekends, especially during the start-up phase of the business.

Multi tasking,  also known as problem-solving or independence. Before they can afford to hire experts, entrepreneurs will have to juggle all the tasks of the business and develop skills in many different areas like marketing, finance and operations.

Contents of a business plan and how business plans assist entrepreneurs

“Failing to plan is planning to fail” and a business plan is no exception. It is considered crucial if a business is going to survive.

Business plan questions can come up as simple knowledge questions on the contents of a business plan, or you may have to explain how a business plan increases the chances of a startups’ success.

You may be asked longer Paper 2 question or shorter knowledge based Paper 1 questions like this one:

Past Paper Question Example  
Paper 1 (b) Identify four different sections of a business plan.  
Section 1:..........................................................................................................................  
Section 2:..........................................................................................................................   
Section 3:..........................................................................................................................  
Section 4:.......................................................................................................................... [4]  

A business plan is a document setting out a business's objectives and how it will achieve them.

It is usually drawn up when starting up a new business or when there will be an important change in how the business is run, like starting a new service or investing in a new outlet.

We will run through four of the most common sections, but other sections could be included depending on the type of business.

Finance concerns how much capital the business will need and where will it come from. For example, $10,000 start-up capital required from a bank loan.

It will also look at forecast revenue and costs so the business can estimate how much profit they will make. It makes sure there is enough capital to start the business.

It can also show banks or potential investors the business has a solid plan to control costs, earn revenue and repay loans.

The Marketing Plan involves researching the market and planning how to sell a product or service. It ensures there is a sufficient budget in place to pay for marketing campaigns and outlines strategies for building a customer base. It can also help forecast future volume demand.

The Operations section shows how the product or service will be produced. It ensures the firm can find suppliers, and produce effectively at the output needed to ensure the customer demand is satisfied.

Human Resources outlines the employees that will be required, and what skills or training they will need. It means entrepreneurs can employ the right people for the job and the business can be productive quickly. For example, a restaurant will have to find skilled chefs and train service staff.

Why and how governments support business startups

Governments around the world spend billions of dollars helping startups and entrepreneurs. There are a number of ways governments can help startups.

Training schemes help entrepreneurs draw up a business plan and forecast their sales and costs for the first year.

Grants are payments for equipment or to help with start-up costs.

Governments can also offer tax breaks, free office space, and subsidies for hiring new employees.

So why do governments help?

Link  Unit 6.1 Government control over the economy

This links with Unit 6 and government objectives, because successful startups help governments achieve many of their targets.

Employment creation: successful startups employ workers and reduce unemployment.

Economic growth: entrepreneurs contribute to developing economic activity by creating profits, and paying employees and suppliers.

Innovation and technological change: often entrepreneurs come up with new ideas which can inspire other startups, and make the economy more competitive and productive.


1.3.2 Methods and Problems of Measuring Business Size

Methods of measuring business size

Business size is not a hugely popular topic in IGCSE exam questions, it’s more likely to come up in short answer questions like this one:

Past Paper Question Example  
Paper 1 (a) Identify two methods of measuring business size  
Method 1 …………...........................................................................................................................  
Method 2…………...........................................................................................................................[2]    

However, it’s still important to learn the four main methods of measuring business size and be aware of the limitations of the different methods of measuring business size.

Let’s use the example of X-Ray Microchips and Yummy Oranges.

CompanyNumber of employeesCapital EmployedValue of Output
X-Ray Microchips4 Designers
6 Maintenance Staff

10 Total employees
High tech production line $100,000500 microchips at $100 = $500,000
Yummy Oranges480 Farm workers
20 Managers

500 Total Employees
Basic fruit picking tools $20,000500,000 oranges at $1 = $500,000

The first method of measuring business size is the number of employees. Simply add up all of the employees in X-Ray Microchips and Yummy Oranges and see which one has more.

The difficulty is that some large businesses may have invested in machinery,  and have a high output but a low number of employees. If we only look at the number of employees as a means of measuring business size, it may   give a misleading impression of business size.

Capital employed is  calculated by adding up the value of all the assets in a business like buildings and machinery. X-Ray Microchips has much more capital employed than Yummy  Oranges, because it is a high technology business and has to invest high levels of capital in its production line.

Value of output is calculated by multiplying market value of the product by the level of output.

Value of output = market value of the product x the level of output

At Yummy Oranges the value of output is 500,000 oranges x $1 =$500,000

However, we can’t be sure that all the oranges will be sold or the prices might change, which limits the accuracy of this figure.

⭐⭐⭐Top Tip ⭐⭐⭐
Usually when comparing business size it’s best to compare like with like.  So  compare orange producers with other fruit producers or microchip manufacturers with other technology suppliers.  
⚠⚠ DANGER!  ⚠⚠
Profit is NOT a measure of business size. If a huge multinational like Netflix makes a loss, it doesn’t mean that a sole trader hairdresser is a larger organisation, as they earned a $100 profit.  

1.3.3 Business Growth

Some companies grow to global domination like the tech giants Facebook, Apple, Amazon, Netflix and Google (FAANG), with a combined market capitalization of over $4.1 trillion as of January 2020. Others stay small like your local corner store.

Business growth may not come up too often as a stand alone question, but it is crucial in understanding other concepts. The importance of business growth is often an important part of longer, higher-scoring questions.

Why the owners of a business may want to expand the business

Profit is the easiest one to remember. The bigger a company grows, the more products or services it can sell. Therefore, if a business grows there is a greater potential to make profit.

Link  Unit 4.2.2 Economies of Scale

Economies of scale:  as companies grow larger they can cut costs by buying in bulk, and can afford to invest in technology or machinery that lowers the unit cost of each item they produce, cutting costs and increasing profits.

Diversification or spreading risk. As a business grows it can produce different products and it lowers its dependence on one product. For example, a car rental company may expand to also offer van and truck rental. This means if there is a downturn in the car rental market the business can can still rely on revenue from the truck market.

Market domination: as companies grow they gain greater market share and greater control of the market. For example, if a coffee shop in a small town has a number of outlets, it can have a large influence over setting prices for of a cup of coffee in that town.

Different ways in which businesses can grow

For IGCSE two different examples of how a business can grow is sufficient.

External Growth is when a business expands by taking over or merging with another business. For example, Facebook took over photo-sharing platform social Instagram for $1 billion in 2012.

Internal Growth (or organic growth) is when a company expands by building another outlet or adding another service rather than taking over another business.   For example,  Ed’s Coffee expands by renting another shop, redecorating, employing staff and starts operating.

External growth is quicker than internal growth,  but riskier and requires higher capital investment. It’s more expensive to buy an existing business than expand your own operations from scratch, but much quicker, as the business is already running and has a customer base and suppliers.

Problems linked to business growth and how these might be overcome

As growth is a major change in how a business operates, the disruption brings challenges which must be overcome.

We’ll look at two examples of problems linked to growth and how they could be solved.

Link  Unit 2.4 Communication    
Link Unit 4.2 Diseconomies of scale

Communication: as a business grows, more people are employed in more locations. It becomes increasingly difficult to ensure everyone is getting clear messages, and for management to know what is going on in every part of the business.

To overcome this, businesses can set up clear communication channels with the assistance of modern technology (email and instant messaging) to keep all staff updated. We’ll look at this further in Unit 2.4.

Finance: expansion involves a high capital cost which puts pressure on a company's finances and cash flow.

The solution can be to expand more slowly,  and ensure that there are suitable long term sources of finance available.

Why some businesses stay small

Some businesses decide to stay small, but for others expansion is never an option because of a lack of capital. In this section we find out the different reasons why some businesses stay small.

Owner’s objectives: some business owners start their own business as they want to have control over their lives. If a business expands it will involve more responsibility, stress, risk and a higher workload. So the business stays small to allow the owners greater work-life balance.

Access to capital: some business owners can’t expand due as they have no access to capital. This may be because they can’t get a bank loan or find an investor to finance business growth. This is particularly the case in the developing world, where there are millions of small business owners who can’t expand because of high-interest rates, or they lack the assets required as collateral for a bank loan.

Contact with customers: for many small business owners what makes them successful and what motivates them is the close relationship with customers.  For example, a yoga teacher may expand her business by employing other teachers and operating more classes. However, this would mean she would spend less time giving a personalised service to her loyal customers, and more time in the office controlling and organising.

Past Paper Question Example   Paper 2 (a) Explain two possible reasons why Roscoe wants the business to remain small. [8]  

1.3.4 Why Some Business Fail

The business world is tough, and for all the business success we hear about, there are also many failures. The failure rate (where businesses go bankrupt or stop trading) is about 50% within five years in the USA. So there is only a 1 in 2 chance of any business making it to their 5th birthday.

Why does this happen?

Lack of management skills. Business managers have to be experts in finance, marketing, operations and all aspects of the business. It is very difficult to master every part of business and mistakes or bad choices can lead to failure.

Startups are particularly vulnerable, as they are just starting out and lack the experience or expertise of competitors, and will inevitably make mistakes.

Changes in the business environment. Changes in the business environment can affect the whole economy like a recession, where the economy gets smaller.  Changes in the business environment may also just affect a small section of the economy. For example, online shopping has made it very difficult for ordinary “bricks and mortar” shops to compete. Many high street shops have closed down as they can’t compete on price and convenience with Amazon and Alibaba.

Lack of finance/liquidity. Startups often underestimate how much money they will need to survive, and it can be a real challenge to predict sales accurately. If revenue is lower than costs the business will ultimately fail. More established companies can base their sales forecasts on previous results.

All companies will fail if they don’t have enough money coming into the business to be able to pay their short term debts.

Link Unit 5.2 Cash Flow

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