Enterprise, Business Growth and Measurement of Size

Question 1

Why do stakeholders want to know the size of a business?

Answer 1

1. Banks and other financial institutions may want to know if a business will be able to repay it’s loans.
2. Shareholders and investors may base their decisions on the size of a business, large businesses are generally more secure but some investors may prefer to invest in a business that is likely to grow.
3. Businesses may want to know the size and strength of their competitors.
4. Employees may feel that their jobs are safer and that there are more prospects for a job promotion in a larger company.

Question 2

How is a business’s size typically measured?

Answer 2

The size of a business is typically measured by:

1. The output of goods and services.
2. Sales value or revenue of a company.
3. Number of employees.
4. Capital employed (the amount of capital or money invested into the business by it’s owners from their resources or loans).

Question 3

What are the problems with using output to measure the size of firms?

Answer 3

Using output to compare two firms in the same industry is a reasonable method to measure the size of a business, but problems may arise if one of the two firms produces a more valuable product. For example, a luxury car maker cannot be compared to a car maker making cheap family cars.

Question 4

What is the problem with using sales value/revenue to measure the size of a firm?

Answer 4

A small business may produce few high value products whereas a large business may produce a larger number of low value products.

Question 5

What are the problems with measuring a business by the number of it’s employees employed?

Answer 5

Some businesses are labour intensive whereas some businesses are capital intensive. Also, one business could have a more efficient and productive workforce therefore needing less labour.

Question 6

Why can’t the amount of profit a business makes be used to determine its size?

Answer 6

Using profit to measure a business’s size is usually inaccurate as the skills of management and workers, the efficiency of production and the ability of the business to keep costs low all influence the amount of profit a business makes.

Question 7

What are the two ways in which a business can grow?

Answer 7

A business can grow through internal or external growth.

Question 8

What is internal growth?

Answer 8

Internal growth/organic growth is where a business uses it’s own resources to expand.

Question 9

What is the main disadvantage of internal growth?

Answer 9

It is typically a slow process, things like the development of new products may take years of research and development before they can be marketed.

Question 10

What is external growth?

Answer 10

External growth involves merging or taking over another business.

Question 11

What is a takeover/acquisition?

Answer 11

Where a company buys another company and gains control over it.

Question 12

What is a merger?

Answer 12

Where two companies join together by a mutual agreement. They can form a new business or keep their separate identities.

Question 13

What is a horizontal merger?

Answer 13

Where two companies in the same stage of production of the same good join together.

Question 14

What is a vertical merger?

Answer 14

Where two companies in a different stage of production for the same good join together.

Question 15

What is a lateral merger?

Answer 15

Where two companies producing similar goods and are not in direct competition to each other join together.

Question 16

What is a conglomerate/diversifying merger?

Answer 16

Where two companies who produce different and unrelated goods join together. For example, a farm equipment manufacturer merges with a soft drink firm.

Question 17

Why do businesses grow?

Answer 17

1. To increase sales or market share.
2. Be a result of increased growth in the market leading to increased sales and production.
3. To gain economies of scale.
4. For greater profits.

Question 18

What are economies of scale?

Answer 18

Economies of scale are the advantages that businesses obtain by expanding/growing and increasing production.

Question 19

What are technical economies of scale?

Answer 19

Where businesses can:

1. Afford expensive machinery and technology in increase production.
2. This equipment can be operated for longer periods of time.

Question 20

What are managerial economies of scale?

Answer 20

Where:

1. Increased production is unlikely to have a major effect on the effectiveness of managers or require an increase in their number.
2. Larger firms can employ better and specialist managers and other staff to increase the efficiency of the business.

Question 21

What are trading economies of scale?

Answer 21

Where:

1. Larger firms get discounts from buying in bulk.

Question 22

What are financial economies of scale?

Answer 22

1. Large firms have access to more sources of finance and often at lower interest rates.

Question 23

What are diseconomies of scale?

Answer 23

The disadvantages businesses can get from expanding or growing to large.

Question 24

What are the problems with using capital employed as a method of measuring a business’s size.

Answer 24

Some firms may be more labour-intensive while others may be capital-intensive. Also, a smaller business may be highly capital-intensive compared to a larger, less capital-intensive business.

Question 25

What are some of the characteristics of successful entrepreneurs?

Answer 25

1. Innovative
2. Self-motivated and determined
3. Risk-takers
4. Hard-working
5. Confident

Question 26

What are some advantages of being an entrepreneur?

Answer 26

1. They are independent, this means that they can do what they want instead of following orders.
2. They can pursue what interests them.
3. They have the chance to make a high amount of profits.

Question 27

What are some disadvantages of being an entrepreneur?

Answer 27

1. There is the risk of their business failing and the owner losing money if they had unlimited liability.
2. Entrepreneurs have a high level of responsibility to make business decisions and manage employees which can put pressure on them and create stress.
3. Entrepreneurs usually need to work long hours with few or no holidays to ensure that their business succeeds and does not fail.

Question 28

What is a business plan?

Answer 28

A written statement about how a business will be organised, what it wants to achieve, and how this will be done.

Question 29

How do governments support business start-ups?

Answer 29

1. By offering grants which do not have to be paid back.
2. By offering low interest loans. Banks are normally reluctant to lend to new business start-ups.
3. By offering tax incentives. This includes things like a lower rate of GST or a lower corporation tax (tax on profits). They may also offer tax refunds.
4. Low cost or rent-free premises in an industrial park (not likely in New Zealand).
5. Free or low cost advice and training for new business start-ups.

Question 30

Why do governments help new business start-ups sometimes?

Answer 30

1. To reduce unemployment - new businesses provide jobs and training.
2. To encourage social enterprise - this is because social enterprises are beneficial to society.
3. To increase competition - more businesses provide more choice, better prices and increase quality usually.
4. To increase economic growth - new businesses increase total output in an economy and increase incomes and overall spending.
5. To create new markets - new businesses can be innovative and improve existing products and produce new products.

Question 31

What is a business plan important?

Answer 31

1. It provides something that can be used to measure a businesses performance.
2. It helps to test the financial viability of an idea.
3. It can be used to support an application to investors and lenders.
4. It can help to clarify ideas and identify flaws and gaps in information. It can also help to identify what could potentially go wrong business.

Question 32

What should a business plan cover?

Answer 32

1. The aims and objectives of a business.
2. A description of the goods and services a business will offer.
3. It should asses the market potential of a good or service.
4. It should plan how and where production will be organised.
5. It should outline the financial plan and projections of the business.
6. It should identify how much capital will be needed.

Question 33

What are the stages of production?

Answer 33

There are three stages of production the primary, secondary and tertiary stages of production.

Question 34

What are some diseconomies of scale?

Answer 34

1. Size - a business that grows too large may become difficult to control and manage.
2. Bureaucracy - large organisations tend to develop rigid administrations leading to inflexibility and inefficiency.
3. Employees part of large businesses may find it difficult to identify and feel part of an organisation leading to a drop in motivation and productivity.
4. Decision making is often slow in large organisations as they have long communication channels.
5. Overtrading - a business may not have enough working capital to fund the level of planned production.

Question 35

How can growing firms which need large quantities of materials and components avoid shortages?

Answer 35

1. By expanding more slowly.
2. By integrating with a major supplier.
3. By buying in bulk from several suppliers and storing supplies.

Question 36

How can growing firms improve management?

Answer 36

Managing a large business can be difficult, especially if the firm has several locations. Businesses can improve this by:

1. Improving communications, for example they could try to do this by using new technologies like video conferencing.
2. Businesses with several locations can allow local managers to have more day-to-day control.

Question 37

How can growing firms with automated production methods causing boredom and demotivation among its workforce avoid this problem?

Answer 37

1. Through job rotation to give workers more variety.

2. By offering performance related pay or bonuses.

Question 38

How can a growing business’s owners avoid having to sell part of their ownership?

Answer 38

1. By expanding more slowly.

2. By expanding only when profits are high enough to finance further growth.

Question 39

Why do some businesses remain small?

Answer 39

1. The size of the market they are in is small.
2. Access to finance is limited.
3. New technology has reduced the scale of production needed.
4. Profit satisficing.

Question 40

Why will a small market cause some businesses to choose to remain small?

Answer 40

If the size of a market that a firm operates in is small there would be no point in expanding. They may also offer a personalised service which would be hard to provide as a larger business.

Question 41

Why do some businesses remain small because of profit satisficing?

Answer 41

Running a large business can be stressful and time consuming. Some business owners would rather stay small with their current level of profit.

Question 42

Why do some firms expand?

Answer 42

1. Owners and managers are more likely to earn higher incomes.
2. Workers are more likely to have more secure jobs and a higher level of pay.
3. By expanding business can reduce average costs, these are economies of scale.
4. A large firm can produce a wider range of products, this is called diversification. This means that if the demand for one product falls, it will affect the business less.
5. A large firm can typically increase sales and market share.

Question 43

Why are businesses likely to fail?

Answer 43

1. Owners lack the skills and experience needed.
2. Owners may not have done enough research and planning.
3. There is a lack of finance and banks may be unwilling to lend.
4. The business was set up in the wrong location.

Question 44

Why do large and well established businesses fail?

Answer 44

1. There is poor management, poor managers may take over from good managers. A good manager may make some poor decisions.
2. There is poor financial control, a business that is unable to control costs may spend more than it earns from sales. It will eventually have to close down and sell its assets to repay debts.
3. Changes in the external business environment.

Question 45

What are examples of changes in the external business environment?

Answer 45

1. A downturn in the economy (a recession).
2. A change in consumer tastes.
3. Increase in competition.
4. Loss of a major customer.

Question 46

Why is an unprofitable business not necessarily a failing business?

Answer 46

1. It may operate at a loss while starting up and revenue may increase once the firm attempts to increase sales.
2. It may be spending large amounts of money on advertising and promotions in order to increase sales.
3. It may be operating on losses during an economic downturn.