Enterprise, business growth and size

1.3 Enterprise, Business Growth and Size

This chapter explores the role of the entrepreneur, how new business start-ups are planned and supported, how business size is measured, methods of business growth, and why businesses may remain small or fail.

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1. Enterprise and Entrepreneurship

Characteristics of Successful Entrepreneurs

An entrepreneur is an individual who takes the financial risk of starting and managing a new business venture. Key characteristics include:

• Hard working: Long hours and dedication are needed to build a new business.
• Risk taker: Willing to risk personal capital and security on an enterprise.
• Creative and innovative: Developing new ideas, products, or unique ways of delivering services.
• Self-confident and optimistic: Believing in their ideas and motivating others.
• Effective communicator: Able to negotiate with suppliers, pitch to banks, and lead workers.
• Resilient: Determined to persevere through setbacks.

Business Plans

A business plan is a formal document setting out who is setting up the enterprise, its objectives, operational strategy, marketing strategy, and financial forecasts.

Main Contents of a Business Plan:

• The Business: Name, legal structure, description of product or service.
• Objectives: Short-term and long-term targets (e.g. survival, growth, sales).
• Market Strategy: Market research findings, target market, competitor analysis, pricing, and promotion.
• Operations: Location, production methods, required premises, equipment, and suppliers.
• Human Resources: Management team, number of workers, and required skills.
• Financial Forecasts: Cash flow forecast, projected profit and loss statement, break-even analysis, and start-up capital required.

How Business Plans Assist Entrepreneurs:

• Securing finance: Banks and investors require a detailed business plan before approving loans or providing capital.
• Providing direction and reducing risk: Helps identify potential weaknesses, market gaps, and cash flow deficits in advance.
• Setting clear targets: Allows owners to monitor progress against forecasts and make adjustments.

Government Support for Start-ups

Governments often encourage and support business start-ups for several reasons:

• Job creation: Reduces unemployment in the economy.
• Economic growth: Increases the country's total output of goods and services (GDP).
• Increased competition: Gives consumers wider choice and keeps prices competitive.
• Innovation: Encourages new technologies, ideas, and efficient production methods.

How Governments Support Start-ups:

• Financial support: Providing grants (non-repayable sums) or low-interest loans.
• Premises and Enterprise Zones: Offering low-rent premises or tax holidays in areas of high unemployment.
• Training and advice: Providing free mentorship, business advisory schemes, and management training.
• Information services: Offering market research data and export advice.

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2. Measuring Business Size

Methods of Measuring Business Size

Business size can be measured using several indicators:

• Number of employees: Simple to measure, but inaccurate when comparing capital-intensive businesses with labour-intensive ones.
• Value of output: Total financial value of goods or services produced over a time period.
• Value of sales (Revenue): Total revenue earned from selling goods or services.
• Capital employed: Total value of long-term capital invested in the business.

Limitations of Measuring Size

No single measure is completely reliable on its own:

• A business with few employees using automated technology (capital-intensive) may produce higher output and revenue than a labour-intensive firm with hundreds of workers.
• Value of output or sales varies greatly depending on the price of the goods sold (e.g. high-value luxury goods vs. low-value bulk items).

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3. Business Growth

Why Businesses Want to Grow

• Higher profits: Greater sales volume leads to potential for increased total profits.
• Economies of scale: Lower average costs per unit as output expands.
• Larger market share: Greater brand recognition and influence over market prices.
• Diversification of risk: Spreading risk across multiple products or markets.

Methods of Business Growth

Growth can be achieved internally or externally:

1. Internal (Organic) Growth

Occurs when a business expands by using its own retained profits or borrowing to increase production capacity, hire more staff, open new branches, or develop new products. It is slower and safer, avoiding cultural clashes.

2. External Growth (Integration / Mergers and Takeovers)

Occurs when businesses combine through a merger or takeover. Forms of external integration include:

• Horizontal Integration: Merging with or taking over a firm in the same industry at the same stage of production (e.g. two car manufacturers merging).
  Benefits: Removes a direct competitor, gains economies of scale, increases market share.
• Forward Vertical Integration: Merging with or taking over a customer firm in the same industry at a later stage of production (e.g. a shoe manufacturer buying a chain of shoe retail shops).
  Benefits: Controls retail outlets, prevents competitors from selling in those outlets, captures retail profit margin.
• Backward Vertical Integration: Merging with or taking over a supplier firm in the same industry at an earlier stage of production (e.g. a chocolate manufacturer buying a cocoa plantation).
  Benefits: Secures supply of raw materials, controls component costs and quality.
• Conglomerate Integration (Diversification): Merging with or taking over a firm in a completely different industry (e.g. an airline buying a hotel chain or food processing firm).
  Benefits: Spreads business risk across diverse markets.

Problems Linked to Business Growth and How to Overcome Them

• Diseconomies of scale: As a firm becomes too large, average costs per unit may increase due to communication breakdown, poor coordination, and low worker morale.
  Solution: Decentralise decision-making and introduce smaller, dedicated management teams.
• Coordination and management difficulties: Managing a large workforce across multiple locations is challenging.
  Solution: Invest in better management information systems and clear organisational hierarchies.
• Cash flow shortages: Rapid growth (overtrading) requires large upfront capital for stock and equipment before revenue comes in.
  Solution: Control expansion rate and secure adequate long-term funding before expanding.

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4. Small Businesses and Business Failure

Why Some Businesses Remain Small

• Market size is small: Niche or specialised local markets cannot support large-scale production (e.g. bespoke wedding cakes, local plumbing).
• Owner's personal preference: Some owners prefer to keep total control, avoid heavy workloads, and protect their work-life balance.
• Personalised service: Customers value personal contact and customisation, which large firms cannot easily provide (e.g. hairdressers, boutique accountants).
• Capital limitations: Lack of access to large amounts of finance needed for expansion.

Why Businesses Fail

Both new and established businesses face risk of failure. Common causes include:

• Poor cash flow management: Running out of liquid cash to pay day-to-day bills (the most common cause of start-up failure).
• Poor management skills: Lack of experience in planning, leadership, accounting, or marketing.
• Failure to adapt to change: Inability to respond to changes in consumer tastes, competitor actions, or new technology.
• Over-expansion (Overtrading): Growing too quickly without sufficient working capital.
• Poor market research: Producing goods or services that do not meet customer needs.

Why new businesses are at greater risk: Start-ups lack experience, lack customer brand loyalty, find it harder to secure bank finance, and have smaller financial reserves to survive initial trading losses.