Chapter 4 Business Size, Growth And External Growth

Question 1

What factors need to be considered when making a judgement about the size of a business

Answer 1

1. Number of employees
2. Number of shops, factories or offices
3. Turnover or profit levels
4. Stock market value
5. Capital employed

Question 2

Number of employees

Answer 2

A business with fewer than 50 employees is considered as a small business, however a business with more than 250 employees is considered a large business

Question 3

Number of factories, shops or offices

Answer 3

The higher the number of factories, shops or offices a business has the more it is perceived as large

Question 4

Number of factories, shops or offices

Answer 4

The higher the number of factories, shops or offices a business has the more it is perceived as large

Question 5

Turnover and profit levels

Answer 5

A high turnover is associated with a large business, similarly the higher the profit level the larger the firm is likely to be

Question 6

Stock market value

Answer 6

The value of a public company can be calculated by share price x number of shares issued.
The higher the figure the larger the company is likely to be, however if the share price falls it reduces the value of the company this could be due to e.g. competition

Question 7

Capital employed

Answer 7

This is the total value of a businesses assets, if the figure is high it will assume the business is large.

Question 8

In the eu what is the way of determining the size of a business

Answer 8

1. Turnovers
2. Balance sheet total
3. Number of employees

Question 9

Eu definition of a micro business

Answer 9

Employees- more than 10
Turnover (M)- more than or equal to 2m
Balance sheet total (M)- more than or equal to 2m

Question 10

Eu definition of a small business

Answer 10

Employees- more than 50
Turnover (M)- more than or equal to 10m
Balance sheet total (M)- more than or equal to 10

Question 11

Eu definition of a medium sized business

Answer 11

Employees- more than 250
Turnover (M)- more than or equal to 50m
Balance sheet total (m)- more than or equal to 43m

Question 12

Why are eu definitions important

Answer 12

Due to one of the objectives of the eu regulation of businesses is that they are operating on a level playing field

Question 13

What are the factors affecting the size of a business

Answer 13

1. Market size
2. Nature of product
3. Personal preference
4. Ability to access resources for expansion

Question 14

Market size

Answer 14

When the market is small it is dominated by small businesses as larger firms do not believe they can gain economies of scale or level of sales to gain the desired level of profit. Consideration needs to be given as to whether the market is expanding, static or contracting

Question 15

Nature of the product

Answer 15

If a product is large and technologically complicated the firm will be larger due to the resources necessary and ready to upgrade it.

Question 16

Personal preference

Answer 16

Some may not be ambitious enough, there could be a loss of control, seen as if its worth it or not and risks that could be there

Question 17

Ability to access resources for expansion

Answer 17

Are the funds available

Question 18

Why would a business want to grow

Answer 18

1. The entrepreneur wants a greater challenge
2. The owners want a higher return on their investment

Question 19

Evaluate the impact and importance of the size of business to the stakeholders of a business

Answer 19

Employees
+greater job security
+and large firm with a specialist hr department ensuring compliance with legislation
-may be problems with effective co ordination and control that negatively impact upon the businesses operation and profitability
-issue of poor morale and motivation affecting productivity

Suppliers
+regular orders
+large orders
+security
-may be offered a take it or leave it approach
- over dependence on a large customer can cause problems if the large firm decides to change supplier

Community
+creation of jobs
+local multiplier effect boost economic activity
+ community initiatives from the large firm
-large business may drive the existing firms out of the market reducing choice and variety
- possible negative externalities such as pollution and congestion around business

Shareholder
+large firm may have some market power so may have a degree of control over prices therefore leading to higher profits, dividends and share prices
-can be organizationally inflexible
- if managers make the wrong decisions it can have a significant effect on the businesses profits, share price and dividends

Customers
+the business can develop new products
+economies of scale lower costs and prices
+businesses can be expected to treat customers well in order to maintain its image
-diseconomies of scale may raise costs which may be passed on in the form of higher prices
-customers may be swayed into buying products they don’t want through contact exposure to marketing

Question 20

What is organic growth

Answer 20

This is what’s achieved after increasing the firms sales.
- comes from selling more to existing customers or finding new customers
- if you can maintain a lot of this growth it shows managers are making the right decisions and actions

Question 21

What is a merger

Answer 21

This is where 2 companies join together to form a new larger business

Question 22

What is a acquisition

Answer 22

This is acquiring control of another company by buying its shares (takeover). If the takeover was successful the target company will continue to exist as an independent legal entity controlled by the acquirer

Question 23

What is a joint venture

Answer 23

This is a formal business arrangement between 2 or more businesses who commit to work together on a particular project.

Both parties invest money, time and effort into the project.

It is different from a merger as there is no change of ownership involved for either firm

It may only be existence for a particular project or it could be ongoing, it may result in the creation of a new business to implement the venture.

The 2 companies forming it don’t have to be in the same country

Question 24

Why undertake a joint venture

Answer 24

• the capital cost of a project might be very high and well beyond the resources of a single business so a joint venture allows booth parties to share the costs
• a single business may consider the venture too much of a risk
• it enables businesses to share strengths and increase their competitive advantage against others
• can be an effective way in gaining access to markets or resources in another country

Question 25

What is a strategic alliance

Answer 25

Allliance means cooperation.

It is less involved and less permanent than a joint venture

Each party hopes that the benefits from the alliance will be greater than those that could be obtained from operating on its own

Will one there will not be a creation of a new company and each company will clearly maintain its own identity

Question 26

Are joint ventures and strategic alliances beneficial for a business’s stakeholders

Answer 26

• the venture/alliance could fail and the expected stakeholder benefits fail to materials
• the relative strengths of the parties when the contract or agreement is drawn up, if one party is more powerful than the other it could demand conditions such as the division of profits
• the terms of the agreement and the wording of any contract need to be clear, the parties must be very specific about their rights and duties.

Question 27

Evaluate the impact and importance of a strategic alliance to a business and its stakeholders

Answer 27

Impact on business

Access to new markets and customers- it enables companies to enter new geographical markets or target new customer segments that may have been difficult to access independently

Cost efficiency and resources sharing- by pooling resources companies can share the cots of R and D, marketing or distribution leading to more efficient operations

Competitive advantage- businesses can assess propriety technologies, unique capabilities or exclusive distribution networks, it can provide a competitive edge over rivals who are not part of such alliances

Impact on stakeholders

Employees- may benefit from the increased stability and growth that comes from a successful alliance. May be opportunities for career development as the company expands. However they may face challenges.

Customers- they stand to gain from an alliance when it leads to improved products, services or customer experiences. However they may experience disruptions if alliance leads to changes in existing offerings or business practises

Communities and governments- communities may see positive effects from strategic alliances like job creation, improved infrastructure or social investments especially if the partnership involves local firms or addresses community specific needs. Governments might also welcome alliances which promote economic development, innovation and competitiveness

Question 28

Evaluate the impact and importance of a joint venture to a business and its stakeholders

Answer 28

Impact on business

Brand and reputation growth- by partnering with a well regarded company businesses can enhance their own creditability and reputation particularly in markets where their brand recognition is limited. This can help build trust amount customers and partners.

Innovation and competitive advantage- they foster collaboration between companies with complementary skills which can result in innovative products or services. It can also give businesses access to new intellectual property, proprietary technologies, or manufacturing capabilities that provide a competitor edge in the market place.

Cost sharing and economies of scale- it helps share the substantial costs associated with new product, development, infrastructure, marketing or regulatory compliance. This hearing of financial burdens makes high cost ventures more feasible and reduces the capital strain on individual partners. Economies of scale can be realized when businesses pool resources for production, distribution or marketing leading to lower per unit costs and higher overall efficiency.

Impact on stakeholders

Shareholders and investors
- enhanced value creation- shareholders can see benefits if it leads to market expansion, increased revenues and enhanced profitability. It can provide the parent company with access to growth opportunities that were previously out of reach
- risk reduction- investors often see joint ventures as a way to spread risks across multiple parters, especially in ventures requiring substantial capital or are located in unfamiliar markets

Employees
- growth and career development- employees might benefit from new opportunities as the joint venture opens up new areas of business, such as new markets or products. It can also lead to cross company, collaborations and rich skills set of employees, particularly in multi national ventures.
- Job security and uncertainty- in short term employees might face uncertainty if joint venture requires restructuring, cost cutting measures or a alignment of different corporate cultures, they may also be concerned about job, duplication or potential for layoffs due to the consolidation of operations

Customers
-Improve products or services- customers may experience better products or services as a result of the expertise and innovation brought by the joint venture
- increased value and lower prices- the economies of scar resulting from the joint venture, mainly to cost savings which can be passed onto customers through lower prices or enhance service offerings

Local communities
- Economic development- joint ventures can lead to job creation, infrastructure development, and increased tax revenue
- Environmental and social impact-depending on the nature of the joint venture, local governments and communities may also benefit from social initiatives, environmental sustainability practices, or community engagement that the venture brings
- Regulatory scrutiny- governments may closely monitor joint ventures, especially when they involve foreign companies or dominate certain markets to ensure compliance of local laws, regulations and antitrust policies.

Question 29

Are joint ventures and strategic alliances beneficial for a businesses stakeholders ?

Answer 29

Whether these impact in a positive manner will depend on several factors…
- the venture or alliance could fail and the expected stakeholder benefits may fail to materialize
- the strengths of the parties is drawn up however if one party is stronger than the other it could demand conditions such as the division of profits
- the terms of the agreement and the wording need to be clear and if it isn’t the expected benefits wont appear
- much depends on the integrity of those working together and how problems during the venture or alliance are resolved.