Ch 3 Size of a business Flashcards
What are the different methods of measuring the business’ size?
- Number of employees
- Sales turnover
- Capital employed
- Market capitalisation
- Market share
Define sales turnover
Total value of sales made by a business in a given time period
Define capital employed
Total value of all long term finance invested in the business
Define market capitalisation
Total value of a company’s issued shares
= current share price x number of shares issued
Define market share
- Sales of the business as a proportion of total market sales
- (total sales of business/ total sales of industry) x 100
Advantages of using number of employees
- The simplest measure
- Easy to understand
- Can make comparisons with other businesses
Disadvantages of using number of employees
Automation => not accurate
Advantages of using sales turnover
- Compare firms within the industry
- Easy to understand
Disadvantages of capital employed
Cannot compare between firms of different industries due to different equipment needs
Disadvantages of market capitalisation
Share prices tend to fluctuate => this form of measure is not stable/accurate
Advantages of using market share
- Easy to calculate
- Compare firms within the industry
- Easy to understand and analyse
Disadvantages of using market share
- Can’t compare firms of different industries
- Market can be a niche market
Advantages of small businesses
- Can be managed or controlled
- Able to adapt quickly to meet changing customers needs
- Offer personal services to customers
- More interactive with employees => motivated workforce
Disadvantages of small businesses
- Limited access to sources of finance
- Owners have to carry a large burden of responsibility because can’t afford managers
- Not diversified -> greater risks of negative impact of external change
- Greater risks of being taken over
Weaknesses of family businesses
- Unqualified family members in jobs
- Family issues get in the way
- Family rivalries
- Keeping control is prioritised over business expansion
- Lack of management development
Strengths of family businesses
- Often play multiple roles => flexible
- Employees are committed, loyal
- Shared values and belief => quick decision making
- Family shared aims => strong sense of vision and ambition
Importance of small business and role in the economy
- Job creation: collectively small business sector employs a very significant proportion of the working pop.
- Sparks innovation: they tend to foster environments that appeal to individuals with the talent to invent new products/improve the way things are done. They are also often run by dynamic entrepreneurs with new ideas for consumer goods and services => adds dynamism to the econ => make nation’s business sector more competitive
What are the 2 types of growth?
External and Internal
Define internal growth
Expansion of business by means of opening branches, shops or factories (reinvesting its profit)
Define external growth
Business expansion is achieved by means of merging or taking over another business, from either the same or a different industry
What are the 5 types of external growth?
- Horizontal integration
- Vertical integration forward
- Vertical integration backward
- Conglomerate integration
- Takeover
Define horizontal integration
Integration with firms in the same industry and at the same stage of production
Define vertical integration forward
Integration with a business in the same industry but a customer of the existing business
Define vertical integration backward
Integration with a business in the same industry but a supplier of the existing business
Define conglomerate integration
Integration with a business in a different industry
Advantages of internal growth
- Avoid problems of excessively fast growth, which tends to lead to inadequate capital (overtrading), and management problems associated with the different attitudes and cultures when 2 businesses are together
- Constant, safe growth
Disadvantages of internal growth
- Slow growth => not competitive enough => risks of being taken over or wiped out
- If they have no profits => nothing to reinvest => can’t grow
Advantages of horizontal integration
- Eliminates one competitor
- Possible economies of scale
- Increased power over suppliers
- Scope for rationalising
Disadvantages of horizontal integration
May lead to monopoly if the combined business exceeds certain market share limits
Advantages of vertical integration forward
- Business now able to control the promotion and pricing of its own product
- May now exclude competitor’s product
Disadvantages of vertical integration forward
- Lack of competition means the consumers have less choice => prices are higher => may react negatively
- Lack of experience in this sector of the industry - a successful manufacturer does not necessarily make a good retailer
Advantages of vertical integration backward
- Business may now control supplies of materials to competitors
- Encourages joint research and development into improved quality of supplies of components
Disadvantages of vertical integration backward
- Supplying business may become complacent due to having guaranteed customer
- May lack experience managing a supplying company
Advantages of conglomerate integration
- Diversifies the business away from its original industry and markets
- Spread risk and may take the business into a faster growing market
Disadvantages of conglomerate integration
- Lack of management experience in the acquired business sector
- Could be a lack of focus and direction now that the business is spread across more than one industry
Disadvantages of external growth (in general)
- Management issues
- Conflicts of culture and business ethics
- Excessive growth => inadequate capital
