Chapter 3: Size of business Flashcards
Ways of measuring business size
Number of employees, revenue, capital employed, market capitalisation, market share.
Revenue
Total value of sales = selling price x quantity sold
Capital employed
The total value of all long-term finance invested in the business
Market capitalisation
Total value of a companies issued shares
Market share
total sales of business divided by total sales of industry x100
Importance of small businesses
Employment
Often run by dynamic entrepreneurs with new ideas
Create competition
Can be important suppliers
May have lower average costs than larger ones
Advantages of small businesses
Small risk of losing control
Quicker to adapt to changes in customer needs
Offering of personal services
Easy to know each worker
Can usually be started with low-capital investment
Disadvantages of small businesses
Limited sources of finance
A large burden of responsibility on the owner
May not be diversified
Few opportunities for economies of scale
Strengths of a family business
Commitment
Reliability and pride
Knowledge continuity
Weaknesses of a family business
Continuity problems
Informality
Tradition
Family conflict affects business decisions
Organic growth
Expansion of a business by means of opening new branches, shops etc.
External growth
Expansion by means of a merger or takeover
Merger
Agreement between two businesses to come together as a combined business.
Takeover
When a company buys more than 50% of another company and becomes the owner
Horizontal integration
Integration between two businesses in the same industry, at the same stage of production
Vertical integration
Integration between two businesses in the same industry
Forward vertical integration
Vertical integration with a customer business
Backward vertical integration
Vertical integration with a supplier business
Conglomerate integration
Integration with a business in a different industry
Synergy
When two businesses combine, they should make more collectively than they did separately.
Strategic alliance
Agreement between two businesses to commit resources to achieve an objective while remaining independent. (In a joint venture)
What are the disadvantages of some measurement of business size.
Number of employees- Some businesses are more capital intensive
Revenue- Only accurate when making a comparison between two businesses in the same industry. Some businesses may be involved in more high value production .
Capital employed- Some businesses are more labour intensive while others have different capital needs. We can not compare the capital needs of a manufacturing business to a hairdresser.
Market Capitalization- Only works for public limited companies.
Market share- Relative measure, a business can have a high market share in a low market.
What are examples of other measurements of business size
Number of rooms or beds- Used for hotels
Number of shops- Used retailers
Number of units sold- Used for businesses in the same industry.
Why would a business want to achieve growth?
Increase market share
Increase market power
Increase profitability
Benefit from economies of scale.
What is synergy?
This is the belief that the whole is greater than the sum of parts. It is assumed that the new business will be more successful than the two separate businesses.
What are some problems with takeovers and mergers from the business p.o.v
Costly, stretching out the businesses financial resources.
The business can solve this by using internal sources of finance such as retained profits
Additional working capital is required quickly’
The business can solve this by rising finance from shares.
What are some problems of a take over from managers P.O.V
Existing Managent may be unable to cope with problems of controlling an operation that has doubled in size
