Chapter 3: Size of business

Question 1

Ways of measuring business size

Answer 1

Number of employees, revenue, capital employed, market capitalisation, market share.

Question 2

Revenue

Answer 2

Total value of sales = selling price x quantity sold

Question 3

Capital employed

Answer 3

The total value of all long-term finance invested in the business

Question 4

Market capitalisation

Answer 4

Total value of a companies issued shares

Question 5

Market share

Answer 5

total sales of business divided by total sales of industry x100

Question 6

Importance of small businesses

Answer 6

Employment
Often run by dynamic entrepreneurs with new ideas
Create competition
Can be important suppliers
May have lower average costs than larger ones

Question 7

Advantages of small businesses

Answer 7

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

Question 8

Disadvantages of small businesses

Answer 8

Limited sources of finance
A large burden of responsibility on the owner
May not be diversified
Few opportunities for economies of scale

Question 9

Strengths of a family business

Answer 9

Commitment
Reliability and pride
Knowledge continuity

Question 10

Weaknesses of a family business

Answer 10

Continuity problems
Informality
Tradition
Family conflict affects business decisions

Question 11

Organic growth

Answer 11

Expansion of a business by means of opening new branches, shops etc.

Question 12

External growth

Answer 12

Expansion by means of a merger or takeover

Question 13

Merger

Answer 13

Agreement between two businesses to come together as a combined business.

Question 14

Takeover

Answer 14

When a company buys more than 50% of another company and becomes the owner

Question 15

Horizontal integration

Answer 15

Integration between two businesses in the same industry, at the same stage of production

Question 16

Vertical integration

Answer 16

Integration between two businesses in the same industry

Question 17

Forward vertical integration

Answer 17

Vertical integration with a customer business

Question 18

Backward vertical integration

Answer 18

Vertical integration with a supplier business

Question 19

Conglomerate integration

Answer 19

Integration with a business in a different industry

Question 20

Synergy

Answer 20

When two businesses combine, they should make more collectively than they did separately.

Question 21

Strategic alliance

Answer 21

Agreement between two businesses to commit resources to achieve an objective while remaining independent. (In a joint venture)

Question 22

What are the disadvantages of some measurement of business size.

Answer 22

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.

Question 23

What are examples of other measurements of business size

Answer 23

Number of rooms or beds- Used for hotels

Number of shops- Used retailers

Number of units sold- Used for businesses in the same industry.

Question 24

Why would a business want to achieve growth?

Answer 24

Increase market share
Increase market power
Increase profitability
Benefit from economies of scale.

Question 25

What is synergy?

Answer 25

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.

Question 26

What are some problems with takeovers and mergers from the business p.o.v

Answer 26

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.

Question 27

What are some problems of a take over from managers P.O.V

Answer 27

Existing Managent may be unable to cope with problems of controlling an operation that has doubled in size