Enterprise, business growth and size
Contents: 9 sections
Entrepreneurs
An entrepreneur is a person who takes the risk of setting up and running a business, putting their own money and time into an idea that might fail.
0264 asks for the characteristics of successful entrepreneurs. A list of adjectives is thin, so attach each one to what it lets the person do.
| Characteristic | What it lets the entrepreneur do |
|---|---|
| Risk taking | Commit savings to an untested idea when the outcome is genuinely unknown |
| Hard working | Cover long hours in the first years, when there are few or no employees to share the load |
| Innovative | Spot a gap rivals have not filled, or a cheaper way of doing the same job |
| Self confident | Persuade a bank to lend and suppliers to give trade credit before any sales exist |
| Effective at decision making | Choose quickly on price and staffing without a management team to consult |
| Good at organising | Bring the land, labour and capital together and keep them working |
| Determined | Carry on after a setback rather than closing at the first bad month |
None of these earns much on its own. The mark comes from tying the characteristic to the business in front of you: determination matters more to someone opening the fifth restaurant on a street than to someone taking over an established round of customers.
The business plan
A business plan is a written document describing the business, its objectives and how it intends to reach them. 0264 names the sections it expects you to know.
| Section | What goes in it |
|---|---|
| Overview or summary | What the business is, what it sells and to whom |
| Objectives | What it aims to achieve, and by when |
| Resources | Premises, equipment and materials needed |
| Market research | Evidence that customers exist and what they want |
| Marketing | The product, its price, where it is sold and how it is promoted |
| Finance | How much is needed, where it comes from, a cash flow forecast |
| People | Who will be employed, with what skills |
| Operations | How the product will be made or delivered |
The plan matters for two separate reasons. Outside the business, a bank will not usually lend to a start-up without one, because the plan is the evidence that the owner has thought about demand and about repayment. Inside the business, writing it finds the problems on paper rather than after the money is spent: the finance section reveals in week one that the shop cannot cover its rent at the planned price, which is cheaper than discovering it in month six.
A plan is a forecast, not a guarantee. Its assumptions about demand and costs can turn out wrong, and it takes time and money to produce. That is the evaluation point when a question asks whether writing one is worth it.
Why and how governments support start-ups
Governments help new businesses because new businesses create jobs, pay tax once profitable, increase output, and may compete with imports or sell abroad. The methods 0264 names are grants, advice, low-cost loans and training schemes, and each carries a different limitation, which is where the evaluation marks live.
| Support | What it does | Limitation |
|---|---|---|
| Grants | Money that does not need repaying, often for a set purpose | Usually conditional, and rarely enough for every applicant |
| Low-cost loans | Finance below normal interest, so repayments are affordable | Still repayable, so a failing business is left with debt |
| Advice | Free or cheap guidance on planning, tax and marketing | Does not solve a lack of finance |
| Training schemes | Builds the owner's and employees' skills | Takes time the owner may not have |
Measuring the size of a business
There is no single correct measure, which is the point of the topic.
| Method | How it works | Weakness |
|---|---|---|
| Number of people employed | Count the workforce | An automated factory employs few people and is huge |
| Value of output or sales | The money value of what it sells | A seller of few expensive items looks large beside a seller of many cheap ones |
| Volume of output or sales | The number of units produced or sold | Useless for comparing businesses making different products |
| Capital employed | The long-term finance invested in the business | Capital-intensive businesses look large beside service businesses |
Profit is not a method of measuring business size. The 0264 syllabus states this outright. Profit measures performance in a period, and a large business can make a loss while a small one has a good year, so it says nothing reliable about scale. Writing it in a list of measures throws the mark away.
Two measures can rank the same businesses in opposite orders. Business A employs 400 people and has sales of $6m; business B employs 40 people and has sales of $9m.
By employees, A is larger: 400 against 40. By sales value, B is larger by 9 - 6 = $3m.
Neither is wrong, and that is the problem when measuring business size: the measure chosen decides the answer, businesses in different industries are not comparable on one measure, and part-time staff counted as whole employees distort a headcount. Name the measure you use and say why it suits this business.
Why some businesses grow
Owners want growth for higher sales and profit, a larger market share, greater status, economies of scale that cut the average cost per unit, and the safety of spreading risk across more products or countries.
Internal growth, or organic growth, means expanding the business's own operations: more outlets, new products, new markets. It is slower, but paid for gradually, and the owners keep control.
External growth means joining with another business. A merger is two businesses agreeing to combine. A takeover is one business buying control of another, and can happen without the other side wanting it.
| Type of integration | What joins | Main gain |
|---|---|---|
| Horizontal | Two businesses at the same stage of one industry, such as two bakeries | Removes a competitor, raises market share, allows economies of scale |
| Vertical, backward | A business joins with its supplier | Secures supplies and controls their cost and quality |
| Vertical, forward | A business joins with its customer or retailer | Secures outlets and captures the retail profit |
| Internal growth | External growth | |
|---|---|---|
| Speed | Slow | Immediate |
| Cost | Spread over time | Large sum needed at once |
| Risk | Lower, and easier to reverse | Higher, and hard to undo |
| Control | Owners keep it | Diluted if shares are issued to pay for the deal |
| Problems | Growth may be too slow to keep up with rivals | Working practices and cultures clash, and staff may be made redundant |
Growth creates its own problems, and a good (d) answer says so. Costs rise before the extra revenue arrives, so cash runs short. Communication slows as layers appear between owner and shop floor, which is where diseconomies of scale start, and quality control slips. Growing fast on borrowed money leaves repayments that cannot be met if demand dips.
Why some businesses stay small
Not every small business failed to grow; some chose not to. The market may itself be small, as with a village shop or a specialised repair service. The owner may want to keep personal control, or cannot raise the finance growth needs. Small size also brings quick decisions, flexibility and personal service a chain cannot match.
Why some businesses succeed and others fail
The same list explains both directions, which is why 0264 asks the question this way round.
| Factor | Succeeds when | Fails when |
|---|---|---|
| Management skills | The owner can plan, cost and lead | Decisions are guesses, finances untracked |
| Availability of finance | Enough working capital for the slow months | Cash runs out even while sales grow |
| Suitability of the product | It matches what the researched market wants | It is what the owner liked, not what customers buy |
| Demand for the product | Demand is steady or rising | Tastes move on and the product is not changed |
| Changes in the economy | Rising incomes in a boom lift sales | A recession cuts non-essential spending |
| Level of competition | It has something rivals lack | A larger rival undercuts it on price |
Most failures are a combination, so name the cause that mattered most here and say why. Poor management is often the underlying one, because it is bad management that fails to notice the falling demand or the missing cash.
Common mistakes
- Listing profit as a method of measuring business size. It is not one, and 0264 says so directly.
- Giving one measure of size as the correct one. Say which measure and why it fits this business.
- Confusing a merger with a takeover. A merger is agreed; a takeover is one business buying another.
- Getting vertical integration backwards. Backward goes to the supplier, forward goes to the customer.
- Treating growth as automatically good. Cash shortages, weaker communication and lost control are on syllabus.
- Saying a business stayed small because it failed. Many owners choose to stay small.
- Listing entrepreneur characteristics as bare adjectives with nothing attached.
- Explaining failure with one cause when the stem gives you two or three.
What the syllabus asks for on this topicSyllabus points
Syllabus points
- Describe the characteristics of successful entrepreneurs.
- State the purpose and key elements of a business plan, and why having one is important.
- Explain why and how governments support business start-ups.
- Describe the methods of measuring business size and the problems of measuring it.
- Explain why owners may want to grow a business.
- Explain internal and external growth, including mergers, takeovers, horizontal and vertical integration.
- Explain the advantages and disadvantages of methods of growth, and the problems of growth.
- Explain why some businesses remain small, and why some succeed while others fail.
Related CIE 0264 Business topics
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