Chapter 3

• Entrepreneur


  A person who organises, operates and takes the risk for a new business venture
• Benefits of being an entrepreneur

  • Independence
  • Put own ideas into practice
  • May become famous
  • May be profitable and income might be higher than working somewhere else
  • Able to use personal interest and skills
• Disadvantages of being an entrepreneur

  • Risk – if there is poor planning
  • Capital – have to use own money into business
  • Lack of knowledge and experience
  • Opportunity cost – lost income from nor working elsewhere
• Characteristics of successful entrepreneurs

  • Hardworking
  • Risk taker
  • Creative
  • Optimistic
  • Self confident
  • Innovative
  • Independent
  • Effective communicator
• Business plan


  A document containing the business objectives and the important details about the operations, finance and owners of the new business
• Contents/sections of a Business plan

  • Description of Business
  • Products/services
  • The market
  • Business location and how products will reach consumers
  • Organisation structure and management
  • Financial information
• Who would find it useful to compare the size of businesses

  • Investors – to determine the risk of investment and expected return
  • Governments – Tax rates varies from SME to large enterprises
  • Banks – to determine the ability to repay its loan
  • Competitors – to assess the risk it faces from other businesses
  • Workers – may take pride on a size of business
• How can businesses be measured

  • Through the Number of employees
  • Through the Value of Output
  • Through the Value of Sales
  • Through the amount of capital employed
• Labour intensive


  Firms employ more labour than capital
• Capital intensive


  Firms employ more capital than labour
• Labour intensive firms employ more workers compared to capital intensive firms
• The firms may be employing more part time worker which can inflate the business's size
• Value of output


  The same as the value of the goods that you manufacture
• Value of output measure is mostly used to compare businesses in the same industry, especially in the manufacturing industry
• A firm may produce a few number of very expensive products, example could be from the automotive industry where you have luxury brands that produce very small units but their values are really high compared to the other cheaper value cars
• Value of sales


  This measure is most commonly used in the retailing businesses, specially those that sells similar goods
• Value of sales could be a misleading measure when used as an indicator for businesses that sells different products, for example a gaming Shop and a pharmaceutical shop - you might have a small business where you sell less units of a product but they might have an extreme value. That could inflate the size of the business essentially
• Value of capital employed

  The total value of capital invested in the business
• Businesses using capital intensive methods of production could provide misleading pictures when you compare 2 business sizes, normally a capital intensive business will look larger than labour intensive business
• Why do owners seek business Growth

  • To attain higher profits
  • To gather higher prestige – Brand Name increases
  • To lower the average costs – the large scale business have advantage of lower prices
  • To achieve a larger share of its market – you attend to the need of more customers
• How can businesses grow

  • By Internal Growth
  • By External Growth
• Internal Growth


  When a business expands its own operations rather than relying on takeovers or mergers
• External Growth


  When a business gets involved in either a takeover or a merger with another business
• Merger


  A new business being formed by the combination of two previously separate businesses
• Mergers


  • GSK
  • EE (by merger of T-Mobile and Orange)
  • Dixons Carphone (formed by Dixons plc and Carphone Warehouse plc)
• Takeover


  One business taking control of another business, no need to create a new business
• Takeovers


  • Microsoft took over LinkedIn in 2016
• Forms of External Growth

  • Horizontal – one firm merges or takes over another firm at the same stage of production
  • Vertical – one firm merges with or takes over another firm in the same industry but at different stages of production
  • Conglomerate – When one firm merges with or takes over a firm in a completely different industry
• Internal Growth


  • Costa coffee has performed exceptionally well in the recent years and become the UK's largest coffee shop chain
  • Lego business has never made any acquisition, it has grown internally by focusing on new product development and innovations, tripling its revenues globally since 2007
• Horizontal Integration


  When firms come together at the same stage in the same industry
• Backward Vertical Integration


  When a firm buys another firm in the same industry but further back in the supply chain
• Backward Vertical Integration


  • Oil and Gas industry where a gas company can buy an oil extracting company
  • A food retailer might buy a food producer
• Forward Vertical Integration


  When firms buy another firm in the same industry but forward in the supply chain, in other words closer to the final consumer
• Forward Vertical Integration


  • Brewing companies owning pubs and wine bars
• Conglomerate


  Merger of 2 or more firms from unrelated fields, to drive business diversification
• Franchise


  A franchisor grants a licence to another business (the "franchisee") to allow it to trade using the brand or business format