Ch3. Enterprise, business growth and size

Leroy has invested $500 of his own money in renting a market stall from which he is going to sell fruit and vegetables. Leroy will have several competitors at the local market. Leroy can be described as an entrepreneur because

• he has a unique business idea.

• his business is in the private sector.

• he has invested his own savings.

• he has the opportunity to make a profit.

Which of the following does not describe an entrepreneur?

• Someone who does not take risks.

• Someone who is self-motivated.

• Someone who is results driven.

• Someone who is innovative.

Which of the following is not an acceptable method for measuring business size?

• Capital employed

• Profit

• Number of employees

• Market share

Answer explanation

Profit is not an acceptable measure of business size because very small businesses might earn very high profits while very large businesses might earn very low profits. The other options are all acceptable measures of business size although they all have their limitations.

As a business grows, which of the following benefits is most likely to reduce average costs?

• Increased market share

• Increased profits

• Increased economies of scale

• Increased market control

Answer explanation

As a business grows, it may benefit from economies of scale that reduce average costs by enabling it to produce goods more efficiently. The other options are benefits of business growth but they do not directly reduce average costs.

Choose the correct word or phrase to complete the following paragraph. Lo-Cost and Just4U are two small supermarket chains in Country Z. The two companies, each through its board of directors, have agreed on a merger. This type of external growth is known as...

• Conglomerate integration

• Backward vertical integration

• Forward vertical integration

• Horizontal integration

Answer explanation

Horizontal integration occurs when two businesses in the same sector of business activity come together, i.e. merge. For backward and forward vertical integration to occur, the businesses must be in different sectors. For conglomerate integration to happen, the businesses must be in completely different industries.

Choose the correct words or phrases to complete the following sentence. Some businesses never grow because they do not have growth as one of their

...................., or because they lack .................... to finance growth plans.

• objectives / capital

• strategies / banks

• unique selling points / loans

• intentions / grants

Place the following four companies in order of size, from largest to smallest, based on the most appropriate measure of business size.

Company A has a market share of 12% and annual profit of $3m.

Company B has a market share of 8% and annual profit of $6.8m.

Company C has a market share of 14% and annual profit of $3.9m.

Company D has a market share of 21% and annual profit of $1.4m.

• A-B-C-D

• B-A-C-D

• D-C-A-B

• D-C-A-B

Answer explanation

Market share is an acceptable measure of business size, so the companies need to be put in order according to their % market share. Profit should not be used as a measure of business size, because some small businesses make a large profit, while some large businesses make only a small profit.

Match each term to its description:

Brings together two firms in the same industry but one is a customer of the other.

• Business plan

• Revenue

• Capital employed

• Economies of scale

• Forward vertical integration

Match each term to its description:

The value of all long-term finance invested in a business.

• Business plan

• Revenue

• Capital employed

• Economies of scale

• Forward vertical integration

Match each term to its description:

The amount a business earns from the sale of its products.

• Business plan

• Revenue

• Capital employed

• Economies of scale

• Forward vertical integration