The world of business relies on enterprising individuals willing to take risks. Understanding how firms start and grow – and how their size is measured – is essential for studying business behaviour.
Entrepreneurs and enterprise
An entrepreneur is someone who organises, operates and assumes the risk for a business venture. Key characteristics include creativity, resilience, the ability to spot opportunities, willingness to take calculated risks and determination to see a project through. Governments often encourage entrepreneurship because new businesses can create employment, innovate and drive economic growth. Support may include training programmes, financial assistance and advice centres.
Characteristics of successful entrepreneurs
- Innovation and creativity: they spot gaps in the market and develop new ideas, products or ways of doing business.
- Risk‑taking: entrepreneurs commit time and money despite uncertainty, accepting the possibility of failure.
- Resilience and determination: they persist in the face of setbacks and learn from mistakes.
- Self‑confidence and leadership: they inspire others, make decisions independently and are comfortable taking responsibility.
- Communication and networking skills: successful entrepreneurs build relationships with customers, suppliers and investors and can persuade others to support their vision.
Business planning
New businesses usually start by drawing up a business plan. This document outlines the business idea, objectives, marketing strategy, operations, financial forecasts and expected costs. A clear plan helps the entrepreneur to clarify their vision, identify potential problems and persuade lenders or investors to provide finance.
Measuring business size
There is no single way to measure how large a business is. Common indicators include:
- Number of employees – a labour‑intensive firm may have many workers but little capital.
- Sales turnover – the total value of sales revenue.
- Capital employed – the value of resources invested in the business.
- Market share – the proportion of total sales in the market that the business accounts for.
Each measure has limitations, so a combination is often used.
Why businesses grow
Many firms aim to expand to benefit from economies of scale (lower costs per unit), increased market power, risk spreading and greater prestige. Growth can be achieved internally (organic growth) by increasing output and sales, or externally (integration) by merging with or taking over another firm.
Reasons for business growth include:
- Economies of scale: larger operations can spread fixed costs over more units, lowering average costs.
- Increased market share: expansion gives greater influence over suppliers and customers.
- Risk spreading: operating in multiple markets or product lines reduces dependence on a single source of revenue.
- Greater profitability: higher sales volume can lead to higher total profits.
- Access to resources: bigger businesses can invest more in research, development and marketing.
The main types of integration are:
- Horizontal integration – merging with a competitor at the same stage of production.
- Vertical integration – acquiring a firm at a different stage of production. Backward vertical integration moves towards raw materials; forward vertical integration moves closer to the consumer.
- Conglomerate integration – combining with a firm in a completely different industry.
| Type of integration | Description | Potential advantages | Potential drawbacks |
|---|---|---|---|
| Horizontal | Combining with a competitor at the same stage of production. | Economies of scale, reduced competition, increased market share. | Risk of monopoly issues, integration difficulties, culture clash. |
| Vertical (backward) | Taking over a supplier. | Secures supply of inputs, reduces supply costs, blocks competitors. | High capital outlay, risk of inefficiency, may distract from core business. |
| Vertical (forward) | Taking over a distributor or retailer. | Better control of distribution, higher profit margins, improved market information. | Capital intensive, may alienate existing distribution partners. |
| Conglomerate | Merging with a business in a completely different industry. | Diversification of risk, access to new markets. | Lack of expertise, management complexity. |
Remaining small
Not all businesses choose to grow. Some stay small because the owner wishes to maintain control, markets are limited, personal service is important or because they operate in a niche market. Additionally, rapid expansion can lead to management problems and diseconomies of scale.
Why businesses fail
- Cash flow problems: insufficient working capital or poor credit control can leave a business unable to pay its bills.
- Lack of management skills: poor planning, decision making and leadership lead to mistakes and inefficiency.
- Over‑expansion: growing too quickly can strain resources and result in a loss of control.
- Inadequate marketing: failing to understand customer needs and competitor actions results in products that do not sell.
- Economic changes and competition: recessions, new entrants or shifts in consumer tastes can reduce demand.
- External shocks: events such as supply chain disruptions, natural disasters or pandemics may force closure.
Examples and applications
Entrepreneurs are found in all walks of life. J.K. Rowling created the Harry Potter brand from a single idea and built a multimillion‑dollar enterprise through books, films and merchandise. On a smaller scale, a local coffee shop owner may start with one outlet and, after establishing a reputation, open additional branches or franchise the brand. These examples show how innovation, risk‑taking and good management can turn an idea into a growing business.
Mergers and takeovers illustrate the different types of integration. For instance, a copper wire maker that merges with a copper mine is practising backward vertical integration because it secures its supply of raw materials. If the same wire maker later joins with an electrical appliance manufacturer, this is forward vertical integration as it moves closer to consumers. Conglomerate integration occurs when businesses in completely unrelated industries combine, such as a house‑building company merging with a clothing manufacturer. These strategies help firms reduce costs, control supply chains or diversify risk, but they also create challenges if the businesses have very different cultures.
