Chapter 3: Size Of Business Flashcards
How do you measure business size?
By the:
-Number of employees
- Sales turnover (the total value of sales made in a certain time period)
- capital employed (total value of long term finance that’s invested)
- market capitalisation (total value of company’s issued shares)
- market share (total sale in business/ industry x 100%)
Why might comparing size of 2 firms by number of employees give a misleading picture?
A large well known company may use computer manufacturing in order to make their products.
Therefore may have only a few employees
Whereas a small firm may require a number of employees, even though in sales revenue it’s incoherent to larger firms
What does market capitalisation mean? And how can it be affected by a stock exchange crash?
Market capitalisation is re total value of the company’s issued shares
(Current share price x total no. Of shares sold)
Affected by crash by:
If there is a temporary drop in share prices, the market capitalisation may appear smaller for that firm than it usually is. (May put off investors/business owners)
List 5 benefits to the economy that would result from growth of smaller firms.
Many jobs will be created, as labour is a fundamental need for a new business.
They can create competition for larger firms+ lead to a reduction in cost so more consumers pay!
They often supply specialist goods and services to consumers and important industries.
Small firms are run by dynamic entrepreneurs, with new ideas for consumer goods and services- creates variety in the market.
They enjoy lower average costs than larger firms (better economies of scale)
Identify the problems small firms face?
- may not be diversified, therefore if there are any external changes in the economy then the firm is at greater risk of bad results.
- limited access to sources of finance, due to possible high rent
- large amount of pressure is placed on the owners- as the small firm cannot afford specialist/ professional managers.
- cannot afford research and development into new products + processes (relating to the limited finance)
Difference between Internal and External growth?
INTERNAL- expansion of a firm by opening new branches/ factories or shops.
EXTERNAL- expansion by merging or taking over another firm from the
Same/Different industry
Name 2 Advs and Disadvs
if a firm decides to expand by using retained profits to purchase small shops?
ADVS:
- It’s already in it’s supposed market
- They don’t have to build anymore stores
DISADVS:
- can be expensive the purchasing of shops
- disagreements with previous owners/managers
Explain the difference between vertical forward + backward integration?
VERTICAL FORWARD: when a firm merges/takes over with another one from the SAME industry in a DIFFERENT stage of production
(E.g- gaining ownership and power over the firms retailers/distributors
Vertical BACKWARD: when a firm merges or takes over a firm in the same industry, gaining ownership over it’s suppliers- vital in maintaining a competitive advantage.
What is Horizontal Integration and Diversification?
Horizontal integration is when a firm takes over/merges with another company in the SAME industry at the SAME stage of production.
Conglomerate/Diversification- is when a firm takes over/ merges with another firm in a different market and industry
Advantages + disadvantages of Merging/ Integration
ADS:
Eliminates one competitor
Possible economies of scale (a cost advantage gained when the avg cost of production decreases as the unit scale of operation increases)
Increased power over suppliers
Allows rationalisation (concentrating all output into one site rather than 2) this may lead to a better quality product.
DISADVS:
- Rationalisation may generate bad publicity
- integration may lead to a monopoly investigation, if the merge exceeds certain market share limits
- workers feel less secure + consumers have less choice
Identify 2 stakeholder groups that would be affected by the merge?
Consumers- they have less choice
Workers- may lose job security due to rationalisation, where a company increases it’s efficiency- leading to an expansion/reduction in company size.
Advantages and Disadvs for conglomerate investigation?
Ads:
- diversifies the business away from it’s original market/industry.
- this helps the firm to spread it’s risks and it may take it unit a faster growing market.
Disadvs:
- lack of management experience in the new business sector
- there could be a lacking of a clear focus and direction now it’s diversified.
-impact on stakeholders: greater career opportunities and more job security since risks are spread.
Vertical forward advs vs Disadvs?
Retailers&distributors
Ads:
-business is now able to control the pricing of products
-competitions products are excluded
as the business can secure an outlet of it’s products.
-workers have greater job security
Disadvs:
- lack of experience in this industry
- consumers will resent the lack of competition.
Ads and Disadvs of Vertical Backward?
Suppliers
Ads:
-gives control over the quality and price of products.
-controls suppliers of materials to competitors- limits competition!
Consumers get better quality products
Disadv
- May lack experience
- limits choice for consumers
Examine 3 reasons a small firm might decide not to expand?
- Avid taking too may risks
- preventing an overload of work
- owners wanting to maintain full control, not looking to merge
List 3 stakeholder groups that might compare business sizes?
Stakeholders, such as:
Business owners: compare themselves to others (in forms of management)
Such as market share
Customers: due to economic of scale, the customer can see if the firm is bigger, then cheaper prices can be offered.
Investors: caution whether to invest- based on sales revenue and profitability!
How financially successful the business is, as they intent to invest in order to earn more money for themselves
How do you measure business size?
By the:
-Number of employees
- Sales turnover (the total value of sales made in a certain time period)
- capital employed (total value of long term finance that’s invested)
- market capitalisation (total value of company’s issued shares)
- market share (total sale in business/ industry x 100%)
Why might comparing size of 2 firms by number of employees give a misleading picture?
A large well known company may use computer manufacturing in order to make their products.
Therefore may have only a few employees
Whereas a small firm may require a number of employees, even though in sales revenue it’s incoherent to larger firms
What does market capitalisation mean? And how can it be affected by a stock exchange crash?
Market capitalisation is re total value of the company’s issued shares
(Current share price x total no. Of shares sold)
Affected by crash by:
If there is a temporary drop in share prices, the market capitalisation may appear smaller for that firm than it usually is. (May put off investors/business owners)
