Cambridge IGCSE Business (0264) syllabus reference: 1.3.1 to 1.3.4
Success criteria - by the end of this topic you can:
- describe the characteristics of successful entrepreneurs and the contents of a business plan
- explain why and how governments support start-ups
- measure business size and explain the problems of doing so
- explain internal and external growth, including horizontal and vertical integration
- explain why some businesses stay small, and why businesses succeed or fail
Entrepreneurs
Key terms
Entrepreneur - a person who organises, operates and takes the risk for a new business venture.
Business plan - a document that sets out the objectives of a new business and the details of how it will achieve them.
Characteristics of successful entrepreneurs: hard-working, risk-taking, creative/innovative, self-confident, independent, optimistic and a good communicator.
The business plan
Key elements: overview/summary, objectives, resources, market research, marketing, finance, people and operations.
- Helps the owner plan and think through problems before starting.
- Needed to obtain finance - banks and investors want to see how the money will be used and repaid.
- Sets objectives against which progress can be measured.
Government support for start-ups
- Why: new businesses create jobs, increase competition (lower prices, more choice), may grow into large firms that pay tax and export, and bring new ideas.
- How: grants, low-cost loans, advice, training schemes, low-cost premises in business parks.
Real-world example India's Startup India scheme and the Mudra loan scheme give small businesses access to finance and support.
Measuring business size
Methods of measuring size
| Method | Problem |
|---|
| Number of employees | A capital-intensive business may be large but employ few people |
| Value of sales / output | Depends on prices; varies between industries |
| Volume of sales / output | Cannot compare businesses making different products |
| Capital employed | A labour-intensive business may use little capital but still be large |
Exam tip
Profit is not a measure of business size - a small business can be very profitable and a large one can make a loss.
Why and how businesses grow
Why owners want growth: higher profits, economies of scale (lower average costs), higher market share, status, and less risk of takeover or failure.
Key terms
Internal (organic) growth - growth by expanding the existing business, e.g. new products, new markets, more branches.
External growth - growth by merging with or taking over another business.
Horizontal integration - merger or takeover of a business in the same industry at the same stage of production.
Vertical integration - merger or takeover of a business in the same industry at a different stage of production - backward (a supplier) or forward (a customer/retailer).
Internal vs external growth
| Advantages | Disadvantages |
|---|
| Internal: lower risk, keeps control and culture, can be financed from profits | Internal: slow |
| External: much faster growth, gains market share, customers and skills immediately | External: expensive; clash of cultures and management styles; may need large borrowing; possible job losses |
Real-world example Tata Steel's takeover of Corus (2007) was horizontal integration; Tata Motors' purchase of Jaguar Land Rover (2008) also joined two car makers. A tea company buying tea estates would be backward vertical integration.
Problems of growth: poor communication, weak coordination and control (diseconomies of scale), cash flow problems, clashes between management cultures.
Why some businesses stay small: owners want control and less stress; niche or local markets; personal services; lack of finance.
Why businesses succeed or fail
- Management skills and planning
- Availability of finance
- Suitability of the product and demand for it
- Changes in the economy (e.g. recession)
- Level of competition
Common mistakes
- Mixing up horizontal and vertical integration - check the stage of production.
- Using profit as a measure of size.
Analysis chains - use these to build 6 and 8-mark answers
- Takeover of a competitor [k] - larger market share [an] - economies of scale [an] - lower average costs and higher profit [an].
- Rapid growth [k] - more levels of management [an] - poor communication [an] - mistakes and higher average costs (diseconomies of scale) [an].
Check your understanding - exam-style practice
1. Outline two methods of measuring business size. [4]
2. Explain two reasons why a government supports business start-ups. [6]
3. Do you think internal growth is better than external growth for a small business? Justify your answer. [8]
Write your answers, then check them against these notes and the Exam Technique Sheet.