Chapter 4 Business Size, Growth And External Growth

Question 1

What factors need to e taken into consideration when making a judgement about the size of a business

Answer 1

Number of employees- business with fewer than 50 employees is regarded as small and a business with more than 250 is large

Number of factories, shops or offices- the higher number a business has the more its perceived as large

Turnover and profit levels- turnover is the value of a businesses sales, the highest the profit level the larger the firm is likely to be

Stock market value- the value of a public company can be calculated by x current share price by the number of shares issued

Capital employed- the total value of a businesses assets. The location of the assets affect its value

Question 2

Eu definitions of business size

Answer 2

• number of employees
• turnover
• balance sheet total

Small- less than 50 employees, less than or equal to 10m turnover and less than or equal to 10m balance sheet total
Medium sized- less than 250 employees, less than or equal to 50m turnover and less than or equal to 43mm balance sheet total
Micro- less than 10 employees, less than or equal to 2m turnover and less than or equal to 2m balance sheet total

Question 3

Factors affecting the size of a business-

Answer 3

Market size- where the market is small is is often dominated by smaller businesses as larger firms don’t think they can gain economies of scale.

Nature of the product- if a product is large the firm will usually be ,larger because of the resources necessary to upgrade it.

Personal preference

Ability to access resources for expansion

Question 4

Why would a business want to grow

Answer 4

• the entrepreneur wants a greater challenge
• the owners want a higher return on their investment

Question 5

Advantages of employees

Answer 5

• greater job security
  -a large firm will have a specialist hr resources department which ensures compliance with legislation
• the business may recognize the trade union or have another method of employee participation to improve communication and productivity

Question 6

Disadvantages of employees

Answer 6

• there may be problems of effective coordination and control that negatively impact upon the businesses operation and profitability
• feeling remote for those who make decisions that affect them

Question 7

Advantages of suppliers

Answer 7

• regular orders
• large orders
• security

Question 8

Disadvantages of suppliers

Answer 8

• may be offered to take a take it or leave it approach to conditions and supply of payment
• over dependence on a large customers can cause problems if the large firm decides to change supplier

Question 9

Advantages of the local community

Answer 9

• creation of jobs
• local multiplier effect boosts economic activity

Question 10

Disadvantages of the local community

Answer 10

• possible negative externalities such as pollution or congestion around the business
  -a large business may drive the existing local firms out of the market meaning choice and variety is reduced

Question 11

Advantages of shareholders

Answer 11

-large firms can gain managerial economies of scales to improve performance
-the firm may have some market power so they have a degree of control over prices leading to higher profit, dividends and share prices

Question 12

Disadvantages of shareholders

Answer 12

-if managers make the wrong decisions, they can have an effect on the businesses, profits, and share price and dividends
-Large businesses can be organizationally in flexible and it can be hard to turn around a large business that’s failing it may be sometime before dividends rise.

Question 13

advantages of customers

Answer 13

-the business can develop new products
-Economies of scale, lower costs and prices
-the business can be expected to treat customers well to maintain its image

Question 14

Disadvantages of customers

Answer 14

-customers might be swayed into buying products they don’t want through contact exposure to marketing.
-diseconomies of scale may raise costs which will be passed on to higher prices

Question 15

What is organic growth?

Answer 15

This is what’s achieved by increasing the firms sales and it comes from selling more to existing customers finding new customers or both.

Question 16

What is a merger?

Answer 16

Where two companies join together to form a new larger business

Question 17

What is a joint venture?

Answer 17

It is a formal business arrangement between two or more businesses who commit to work together on a particular project. both parties invest money time and effort in the project. It is different from a merger because there’s no change of ownership involved for either firm. It will often result in the creation of a new business to implement the venture.

Question 18

Why would you undertake a joint venture?

Answer 18

-the capital cost of a particular project might be very high and be beyond the resources of a single business so this allows both parties to share the costs
-a single business may consider the venture too much of a risk
-Enables the businesses to share strengths and increase their competitive advantage
-it is an effective way of gaining access to markets or resources in another country

But it means drawing up a contract that specifies responsibilities and goals, which may be expensive due to the legal costs, but are crucial for avoiding disagreement in the future

Question 19

What is a strategic alliance?

Answer 19

It is similar to a joint venture. Alliance means cooperation is typically less involved and less permanent than a joint venture although the aim is similar where each party hopes that the benefits from the alliance will be greater than those that could be obtained from operating on its own. With this, there will not be the creation of a new company, and each party will clearly maintain its own identity.

E.g. codeshare flight

Question 20

Are joint ventures and strategic alliances beneficial for a businesses stakeholders

Answer 20

-it could fail on the expected stakeholder benefits fail to materialize E.G shrinking markets, inability to keep up with changes in customer needs or poor economic conditions
-the relative strengths of the parties when the contract or agreement is drawn up if one is more powerful than the other, it could demand conditions such as the division of profits
-the term of the agreement and the wording of any contract needs to be clear and the parties must be very specific about their rights and duties
-Depends on the integrity of of those working together and how problems that arise during the venture or alliance are resolved