Chapter 4- Business size, growth and external growth Flashcards
What factors are taken into account when making a judgement about the size of a business?
- Number of employees
- Number of factories, shops or offices
- Turnover and profit levels
- Stock market value
- Capital employed
Number of employees
- It would be expected that a large business will employ a large number of employees
- May not be appropriate to judge by the number of employees as many factories are highly automated and capital-intensive so they produce a lot of output but don’t employ a large number of employees
Number of factories, shops or offices
- The higher the number of factories, shops or offices a business has the more it will be perceived as large
- It also depends whether the business has them in other countries
Turnover and profit levels
- A high turnover is associated with a large business
- It depends on the value of each product and how many of them are sold. E.g. a jeweller may only own one shop but has a high revenue due to the high value of the products sold
- The higher the profit level, the larger the firm is likely to be but it may be inaccurate if there having temporary trading difficulties
Turnover definition
- Value of a businesses sales
Stock market value
- The higher the figure the larger the company is likely to be
- A drawback of this is if the share price falls, the value of the company will be reduced
- Not accurate as if this occurs measurement of size of the business has become smaller even though it has no impact on the number of factories, machines or employees
- Method is misleading as share prices can change daily
How can the value of the company be calculated?
- By multiplying the current share price by the number of shares issued
Capital employed definition
- The total value of a business’s assets (factories, machinery, offices)
Capital employed
- If the figure is high, a business can be assumed as large
- But stock market valuation, prices of factories (e.g.) can rise or fall without any changes in the actual number owned
- Geographical location of assets also affects their value
EU definitions of size (chosen factors)
- Number of employees
- Turnover
- Balance sheet total
EU definitions of business size (employees)
Micro- <10
Small- <50
Medium-sized- <250
EU definitions of business size (turnover €m)
Micro- <2 (equal to)
Small- <10 (equal to)
Medium-sized- <50 (equal to)
EU definitions of business size (balance sheet total €m)
Micro- <2 (equal to)
Small- <10 (equal to)
Medium-sized- <43 (equal to)
What is one of the objectives of the EU’s regulation of businesses?
- That they are all operating on a level playing field
What are the factors affecting the size of a business?
- Market size
- Nature of the product
- Personal preference
- Ability to access resources for expansion
Market size
- Where the market is small it is often dominated by relatively small businesses
- This is because larger firms can’t gain economies of scale or level of sales to gain the desired level of profit
Nature of the product
- If a product is large and technologically complicated the firm will usually be larger because of the resources necessary to make and upgrade it
- Where a product is highly standardised it is usually made by a large business since it can gain economies of scale from manufacturing it
- A less standard product made and marketed with a personal touch will often be supplied by a smaller business
Personal preference
- An entrepreneur may not want to expand nationally or even regionally as they may not be ambitious
- Opening a new factory/office could mean a loss of control over the business
- There may be the consideration whether the time and trouble is worth it in terms of risk
Ability to access resources for expansion
- Are there funds available or not ?
- Would it prevent firms from expanding ?
E.g. credit crunch (reluctance to lend in the years following the 2008 crash)
What are the reasons a business would want to grow?
- Entrepreneur wants a greater challenge
- Opportunity to gain unit cost reductions through economies of scale
- Owners want a higher return on their investment
- Stronger business is better placed to fight any economic or competitive threats successfully
Advantages for employees in a large business
- Greater job security
- A large firm will have a specialist HR department which will ensure compliance with legislation
Disadvantages for employees in a large business
- Feeling remote from those who make the decisions that affect them
- Problems of effective coordination and control that negatively impact upon the business’s operation and profitability
Advantages for suppliers in a large business
- Regular orders
- Large orders
- Security
Disadvantages for suppliers in a large business
- May be offered a ‘take it or leave it approach’ to conditions of supply and payment
- Overdependance on a large customer can cause problems if the large firm decides to change supplier
Advantages for local community in a large business
- Creation of jobs
- Local ‘multiplier effect’ boosts economic activity
Disadvantages for local community in a large business
- Large business may drive the existing local firms out of the market so reducing choice and variety
- Possible negative externalities like pollution/congestion around the business
Advantages for shareholders in a large business
- Large firm may have some market power and so have a degree of control over prices- leading to higher profits, dividends and share prices
- Large firms can gain managerial economies of scale to improve performance
Disadvantages for shareholders in a large business
- If managers make the wrong decisions they can have a significant effect on the business’s profits and therefore share price and dividends
Advantages for customers in a large business
- Business can be expected to treat customers well in order to maintain its image
- Economies of scale lower costs and therefore prices
Disadvantages for customers in a large business
- Diseconomies of scale may raise costs which will be passed on in the form of higher prices
- Customers might be swayed into buying products they don’t want through contact exposure to marketing
Definition of organic growth?
- Achieved by increasing the firms sales
- It comes from selling more to existing customers, finding new customers or both
- If a business continuously achieves high levels of organic growth it indicates its managers are taking the right actions and are using the businesses resources efficiently
Definition of a merger
- Type of business growth strategy
- It’s where two companies join together to form a new larger business
Definition of an acquisition
- It’s where one company purchases another
- A takeover involves acquiring control of another company by buying it’s shares
- If the takeover is successful the target company will usually continue to exist as an independent legal entity controlled by the acquirer
Example of a takeover
Pfizer made a takeover bid for the UK company Astrazeneca but didn’t succeed
Joint venture definition
- 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 in the project
How is a joint venture different from a merger?
- There is no change in ownership involved for either firm but mergers combine ownership
- A joint venture may only be in existence for a particular project but a merger may be long term and permanent
Example of a joint venture
- virgin mobile India is a joint venture between tata teleservices and the virgin group
Reasons to undertake a joint venture
- The capital cost of a particular project might be very high and may be beyond the resources of a single business
- A single business may consider the venture too much of a risk
- Enables businesses to share strengths and increase their competitive advantage against others
- A joint venture is an effective way of gaining access to markets or resources in another country
What is a disadvantage of a joint venture?
- You have to draw up a contract that specifies responsibilities and goals which may be expensive
Strategic alliance definition
- Alliance means ‘cooperation’
- Typically 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
- There won’t be a creation of a new company and each party will maintain it’s own identity
What are the factors that depend if the growth impacts a businesses stakeholders in a positive or negative manner?
- Venture/ alliance could fail and the expected stakeholders benefits could fail to materialise
- If one party is more powerful than the other it could demand conditions such as the division of profits
- Terms of agreement and the wording of contract needs to be clear otherwise it will cause trouble
