Chapter 3 - Size of business Flashcards
Problems with measuring business size
- NO international agreed definition on what is small medium or large businesses - number of employees is used to make distinction
How to measure business size
- Number of employees
- Sales Turnover/Revenue
- Capital Employed
- Market Capitalisation = Current share price x total number of shares issued
- Market Share = Total sales of business / total sales of industry X 100
Significance of small and micro
businesses
-Job Creation
-Market Variety and Choice
-Competition to larger firms
-Specialists goods
-Economy benefits from large scale org in future
-Consumers benefit from lower costs
Advantages of small businesses
- can be managed and controlled by owner
- can adapt quickly to meet changing customer needs
- easy to know each worker = build relationships = many prefer small businesses = not busy/chaotic = feel valued
- can be started up/operated with little capital
- if family owned = culture is informal = motivated employees (reputation and ride of family at risk) = family members are dedicated and can do multiple roles
Disadvantages of small businesses
- Limited source of finance
- owner has to carry a large burden of responsibility and is usually unable to afford to employ specialist managers
- if owner or important workers are absent/ill, other employees may lack those skills to operate business = inefficiency = poor customer service
- may not be diversified = greater risk of external change having an negative impact
- few opportunities for economies of scale - average costs could be high
Pro family business
-Commitment = family is dedicated to see business grow, prosper and be passed onto future generation = family has incentive to work harder and re-invest parts of their profits
-Reliability and pride = family name + reputation are on the line, as products are associated with family name
-Knowledge continuity = Family pass their knowledge to younger gen. Many family members become involved at young age = increases commitment = gain skills and tools to run business
Con family business
- Succession/Continuity problem =
- Informality (taking money for personal use) = can result in inefficiencies and internal conflict
- Tradition = reluctant to change old successful practices = lack of innovation (failure to adapt in new market different from the old market old gen ran it in)
- Conflict = problems with family will reflect in management of the business = poor decisions
Small businesses importance in the economy
- generate economic growth
- 90% employers (Job creation)
- Develop new products = creating competition for existing companies
Small businesses importance/role in industry
- Provide specialist services like research, technical support and maintenance
- To undertake functions that the larger business want to buy rather than undertake itself like recruitment and training
Why Businesses Grow?
Profit
Market Share
Economies of Scale
Power and Status
Not being taken over
External ways to grow in a business
Synergy:
Whole is greater that the sum of parts
larger business will be more successful than two separate business
Merger:
Shareholders and managers of two businesses bring businesses together under one board of directors
Takeover:
When a company buys 50% of the shares of another company and become the controlling owner of it - acquisition (hostile or friendly)
Types of integration
-Conglomerate = 2 companies that are unrelated
-Vertical backward = secondary»_space; primary
-Vertical Forward = primary»_space; secondary
-Horizontal = primary»_space; primary
Horizontal integration Advantages
- eliminates 1 competitor an increases market share
- potential economies of scale
- can concentrate all output on 1 site opposed to 2
- increased power over suppliers to obtain lower prices
Horizontal integration Disadvantages
- Rationalization can bring bad publicity
- Customers may be opposed to less competition»_space; less choice
- may lead to a monopoly»_space; lead to a investigation if the combined market share exceeds the limit
Horizontal integration - Impact on stakeholders
- Consumers have less choice and may have to pay higher prices
- Workers may lose job security as result of rationalization:
- Suppliers may have to offer lower prices to bigger integrated businesses
- shareholder impact depends on if profit rises or not
- local communities may have job losses
Conglomerate Advantages
- It diversifies the business away from its original industry/market»_space; Spreads risk»_space; may lead business in a faster growing market
Conglomerate Disadvantages
- Lack of management experience in the acquired business sector
- Lack of business focus and direction due to the spread across the industry
Conglomerate impact on stakeholders
- Workers may have more career opportunities
- Increased job security because risks are spread across more than one country
- Profits could rise to benefit shareholders
Advantages of Forward Vertical
- Business has control over promotion and price of its own products
- Gives secure outlet for the business and may now exclude competitors products from retail outlets
Disadvantages of Forward Vertical
- Consumers may suspect an attempt to act uncompetitively = negative response
- lack of experience
impacts of Forward Vertical on shareholders
- secure outlets = job security
- more career opportunities
- Consumers may hate lack of competition due to withdraw of competitors products
- Shareholder impact is determined by the rise/fall of profit
Advantages of Backwards Vertical
- Control over the quality, price and delivery times of supplies
- Encourages research and development into improved quality products
- Business has power over supplies of competitors
Disadvantages of Backwards Vertical
- lack experience
- supply business will become self-satisfied(complacent) = no innovation, no market response to changes, hinders growth and competitiveness
impact on shareholder of Backwards Vertical
- Career opp for workers
- customers may obtain quality/ innovative products
- control over supplies to a competitor = limit competition/choice for consumers
- Profits may rise = Happy shareholders
Synergy and integration - why it occur
- Share research facilities and can pool ideas
- Economies of scale
- New business can save on marketing and distribution costs
-Reduce duplication and cost
Synergy and integration - why it won’t occur
- Too big to manage and control effectively
- Too little mutual benefit different markets
- Business and management culture
Synergy and integration Benefits
- Pulling financial resources
- Sharing expertise that they might not have individually
- Gaining access to markets
Synergy and integration Drawbacks
- Culture clash
- Communication challenges
- Employees resistant to change
Problems of growth through mergers/takeovers
Financial
- Expensive
- Additional fixed and working capital is needed quickly
- May lead to negative cashflow and increase in long term borrowing/interest payments
Managerial
- Existing managers may be unable to cope with the problems of controlling a operation that could have doubled over night/short notice
- Lack of coordination between divisions
- Culture clash between 2 management teams
Possible strategies to overcome problems of growth through mergers/takeovers
Financial
-Use of internal finance
- Raise finance from share issues
- Offer shares instead of cash as payment for takeover
Managerial
-Create new management systems and structures»_space; a policy of delegation and employee empowerment can reduce pressure on senior managers
- A decentralised policy can provide motivated managers with clear local focus
- A new management culture should be implemented quickly
