Cambridge IGCSE0450

Enterprise, business growth and size

Business Studies 0450 Chapter Notes

What this chapter covers

Enterprise, business growth and size - Enterprise and entrepreneurshipEnterprise, business growth and size - The methods and problems of measuring business sizeEnterprise, business growth and size - Why some businesses grow and others remain smallEnterprise, business growth and size - Why some (new or established) businesses fail
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In this chapter

  1. 1Measuring the Size of a Business
  2. 2Why Businesses Aim to Grow
  3. 3How Businesses Grow: Internal and External
  4. 4The Problems of Business Growth
  5. 5Why Some Businesses Stay Small

1. Measuring the Size of a Business

To compare businesses, we need to measure their size. However, there is no single perfect measure. The four most common methods are: the number of employees, the value of capital employed, the value or volume of sales, and market share. The best measure often depends on the industry. A law firm might have many employees but little capital (labour-intensive), while a power plant has huge amounts of capital but few employees (capital-intensive). This is why using different measures can lead to different conclusions about which business is 'bigger'. For example, Wal-Mart employs more people than China National Petroleum, but the latter has far more capital invested. It is therefore useful to use a range of measures to get a full picture of a firm's size.

Market Share (%) = (Firm's Sales Revenue / Total Market Sales Revenue) x 100

Key term

Capital Employed: The total value of all long-term finance invested in the business, such as in machinery, buildings, and other assets.

Examiner insight

Examiners reward students who can explain *why* different measures of size can lead to different conclusions, often by using the concepts of capital-intensive and labour-intensive production.

Common pitfall

Assuming that the number of employees is always the best measure of size, without considering the industry context (e.g., a tech firm vs. a construction company).

Worked example 12 marks

In 2023, the UK fast-food market was worth £20 billion. Burger Queen had sales of £2.5 billion. Calculate Burger Queen's market share.

  1. 1

    Step 1: Identify the formula for market share. Market Share (%) = (Firm's Sales / Total Market Sales) x 100.

  2. 2

    Step 2: Substitute the given values into the formula. Market Share (%) = (£2.5 billion / £20 billion) x 100.

  3. 3

    Step 3: Calculate the result. £2.5 / £20 = 0.125. Then, 0.125 x 100 = 12.5%.

  4. 4

    Answer: Burger Queen's market share is 12.5%.

Worked example 24 marks

Explain why using the number of employees and capital employed might give different results when comparing the size of a software company and a car manufacturing plant.

  1. 1

    Point 1: A car manufacturing plant is capital-intensive. It requires massive investment in machinery, robots, and large factories (high capital employed). While it has many workers, the value of its capital is a dominant feature.

  2. 2

    Point 2: A software company is labour-intensive. Its main assets are its skilled employees (programmers, designers). It might have a large number of employees but requires relatively little capital equipment beyond office space and computers.

  3. 3

    Conclusion: Therefore, if measured by capital employed, the car plant would appear much larger. If measured by the number of employees, the difference might be less, or the software company could even appear larger, leading to different conclusions about their relative size.

Recap

  • Business size can be measured by employees, capital employed, sales, or market share.
  • No single measure of size is perfect for all situations.
  • Different measures can rank the same businesses in a different order of size.
  • Capital-intensive firms use more machinery than labour.
  • Labour-intensive firms use more labour than machinery.

Quick check

  1. List two methods used to measure the size of a business.2 marks
  2. What is the term for a business that relies more on machinery than people?1 mark

2. Why Businesses Aim to Grow

Most businesses are not content to stay the same size forever. Growth is a key objective for many private sector firms. The main reasons for seeking growth are to increase profits, gain a higher market share and dominate the market, and benefit from economies of scale. Economies of scale are cost advantages that arise from producing on a larger scale, which lower the average cost per unit. For example, a large firm can buy raw materials in bulk at a discount. Growth can also lead to greater security for the business through diversification (selling different products in different markets), which reduces risk. For managers and owners, running a larger, more prestigious company can bring increased status and higher salaries.

Key term

Economies of Scale: The cost advantages that a business gains as its output increases, leading to a fall in average costs per unit.

Fun fact

Amazon started as just an online bookstore in 1994. Its relentless focus on growth has made it one of the world's largest companies, selling almost everything imaginable and operating in cloud computing, streaming, and more.

Worked example 14 marks

Explain two reasons why the owners of a successful restaurant chain might want to continue expanding the business.

  1. 1

    Reason 1: To increase profit. By opening more restaurants, the business can serve more customers and generate higher total sales revenue. If they manage costs effectively, this increase in revenue will lead to a significant increase in overall profit for the owners.

  2. 2

    Reason 2: To benefit from economies of scale. As the chain grows, it can buy ingredients, kitchen equipment, and advertising in bulk, negotiating lower prices from suppliers. This reduces the average cost of running each restaurant, making the entire business more profitable.

Recap

  • The main motive for growth is often to increase long-term profitability.
  • Growth can increase a firm's market share and brand recognition.
  • Larger businesses can benefit from economies of scale, which reduce average costs.
  • Growth through diversification into new markets or products can reduce business risk.
  • Managers may be motivated by the increased salary and status that comes with running a larger firm.

Quick check

  1. State one reason why a business might want to grow.1 mark
  2. What is meant by the term 'economies of scale'?2 marks

3. How Businesses Grow: Internal and External

A business can grow in two main ways: internally or externally. Internal growth (also called organic growth) is when a firm expands using its own resources. This involves using retained profits or loans to open more branches, develop new products, or expand into new markets. It is generally a slower but less risky method of growth. External growth is much faster and involves combining with other businesses. This can happen through a merger or a takeover. A merger is when two or more firms agree to join together to form one larger business. A takeover (or acquisition) is when one business buys a controlling interest in another, which can happen with or without the agreement of the target company's management.

Key term

Takeover: When one business buys a controlling interest in another business, which can be agreed (a friendly takeover) or without agreement (a hostile takeover).

Examiner insight

Students who can provide a clear, real-world example of a merger or takeover often score higher marks for showing application.

Common pitfall

Confusing a merger (two firms joining as equals, e.g., Glaxo Wellcome and SmithKline Beecham to form GSK) with a takeover (one firm buying another, e.g., Facebook buying Instagram).

Worked example 13 marks

Explain one method of internal growth a coffee shop chain could use.

  1. 1

    Method: Opening new branches. The coffee shop chain could use its profits or obtain a bank loan to identify new locations in towns or cities where it does not currently operate.

  2. 2

    Explanation: By opening a new store, it can attract a new set of customers, increasing its total sales and market presence. This is 'internal' because the company is expanding its own operations, rather than buying another company.

Worked example 24 marks

Distinguish between a merger and a takeover.

  1. 1

    Merger: A merger is an agreement where two, often similarly-sized, companies join together to form a single new business. It is a voluntary and cooperative process between the firms.

  2. 2

    Takeover: A takeover is when one company purchases a majority stake (more than 50%) in another company, thereby gaining control. This can be 'friendly' if the management agrees, or 'hostile' if it is against their wishes.

  3. 3

    Key Difference: The main difference is agreement and control; a merger is a mutual joining of equals, whereas a takeover involves one business buying and controlling another.

Recap

  • Internal growth means expanding the business using its own resources.
  • Internal growth is often slow and steady.
  • External growth involves combining with other firms through mergers or takeovers.
  • External growth can achieve rapid expansion.
  • A merger is an agreement to join, while a takeover is a purchase of another firm.

Quick check

  1. What is another name for internal growth?1 mark
  2. Name the two types of external growth.2 marks

4. The Problems of Business Growth

While growth is often desirable, growing too large or too quickly can create significant problems. These are known as diseconomies of scale, where the average cost per unit actually starts to rise as the firm gets bigger. The main causes of diseconomies of scale are:

  1. Poor Communication: In a huge organisation, messages can be distorted or delayed as they pass through many layers of management, leading to mistakes and inefficiency.
  2. Lack of Control: It becomes harder for senior managers to monitor performance and control the actions of thousands of employees, which can lead to a drop in quality or productivity.
  3. Low Morale: Workers in a giant firm can feel like a small cog in a large machine, leading to a lack of motivation and a feeling of alienation. This can reduce productivity and increase staff turnover. These problems can cause costs to rise and profits to fall.

Key term

Diseconomies of Scale: Factors that cause average costs to rise as a business increases its scale of production, often due to management and communication problems.

Examiner insight

Examiners are impressed when students can explain *how* a specific problem, like poor communication, leads to a tangible negative outcome, such as rising costs or falling quality.

Common pitfall

Simply stating 'diseconomies of scale' as a problem without explaining *what* it is or giving a specific example like poor communication or slower decision-making.

Worked example 14 marks

Explain two problems a business might experience from expanding too quickly.

  1. 1

    Problem 1: Poor communication. As a business rapidly hires more staff and opens new departments or locations, it becomes much harder to ensure that information is shared effectively. This can lead to different parts of the business working towards different goals, causing expensive mistakes and delays.

  2. 2

    Problem 2: A fall in employee morale. Rapid growth can lead to existing employees feeling overlooked and new employees being poorly integrated. Original company culture can be lost, and workers may feel less valued, leading to lower motivation, reduced productivity, and potentially higher staff turnover.

Recap

  • Growing too large can lead to diseconomies of scale, causing average costs to rise.
  • Poor communication is a major problem in large, complex organisations.
  • Senior managers may lose control and find it difficult to coordinate a very large business.
  • Employee motivation and morale can fall in a huge firm.
  • These problems can ultimately lead to lower efficiency and reduced profits.

Quick check

  1. What is the term for the problems that cause average costs to rise in a large business?1 mark
  2. Identify one specific cause of diseconomies of scale.1 mark

5. Why Some Businesses Stay Small

Not every business wants to become a global giant. Many successful firms remain small, either by choice or due to circumstances. An owner may choose to stay small to maintain personal contact with customers and staff, keep control over all decisions, and avoid the high levels of stress and risk associated with running a large corporation. For some, a satisfactory level of profit is enough. The size of the market itself can also be a limiting factor; a village hairdresser has a limited local market and cannot grow indefinitely. Some businesses serve a niche market, which is a small, specialised segment of a larger market. These markets are often too small to attract large firms. Finally, a lack of finance can prevent a small business from being able to afford the new premises and equipment needed for expansion.

Key term

Niche Market: A small, specialised segment of a larger market for a particular product or service.

Fun fact

Many of the world's most exclusive luxury brands, like bespoke tailors on Savile Row in London or specialist watchmakers in Switzerland, are very small businesses by choice to maintain quality and exclusivity.

Worked example 14 marks

Explain two reasons why an entrepreneur might decide to keep their business small.

  1. 1

    Reason 1: To maintain control. By keeping the business small, the owner can be involved in all key decisions and ensure the business is run exactly as they wish. They avoid having to delegate important tasks or answer to shareholders, retaining full autonomy.

  2. 2

    Reason 2: To serve a niche market. The business might produce a highly specialised product with a small number of customers. For example, a company making custom parts for vintage cars. The market is too small to support large-scale production, so staying small is essential for the business model to work.

Recap

  • Some owners prefer to keep their business small to maintain control and reduce stress.
  • The size of the market can limit the potential for growth.
  • Businesses serving small, specialised niche markets may not be able to grow large.
  • A lack of access to finance can be a major barrier to expansion.
  • Staying small can allow for closer relationships with customers and employees.

Quick check

  1. Give one reason why a business owner might choose to stay small.1 mark
  2. What is a small, specialised market called?1 mark

End-of-chapter exercise

Test yourself on the whole chapter. Work through these before moving on.

  1. Define 'capital employed'.2 marks
  2. Explain two ways a business can grow externally.4 marks
  3. A business has sales of $5 million in a total market worth $80 million. Calculate its market share.2 marks
  4. Explain two problems a business might face if it grows too quickly.4 marks
  5. Distinguish between a capital-intensive business and a labour-intensive business. Use an example for each in your answer.4 marks
  6. Analyse two reasons why a business owner might choose to keep their business small rather than expand.6 marks
  7. Company A has 500 employees and $10m in sales revenue. Company B has 100 employees and $12m in sales revenue. Discuss which company is 'larger'.6 marks
  8. Explain two reasons why a business might want to achieve economies of scale.4 marks
  9. Explain the difference between internal growth and external growth.4 marks
  10. Evaluate whether growth is always the most important objective for a business.8 marks

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