Size of Business 1.3

Question 1

Define the term “Capital Employed”

Answer 1

The total value of all long-term finance invested into the business.

Question 2

Define the term “Market Capitalization”

Answer 2

The total value of a company’s issued shares.

Question 3

Define the term “Revenue”

Answer 3

The total value of sales made by a business over a given time period.

Question 4

Define the term “Market Share”

Answer 4

Sales of the business as a proportion of the total market sales.

Question 5

List 5 ways to measure the size of a business.

Answer 5

• Number of employees
• Revenue
• Capital Employed
• Market Capitalization
• Market Share

Question 6

List 3 Advantages of a Small Business

Answer 6

Answers may include :
- Can be managed and controlled by the owner(s)
- Often able to adapt quickly to meet changing customer needs
- Small businesses can offer personal services to customers
- Small businesses might find it easier to know each worker

Question 7

List 3 Disadvantages of a Small Business

Answer 7

• The small business may have limited access to sources of finance.
• Cannot benefit from economies of scale (EOS)
• Might not be able to employ specialist professional managers

Question 8

List 3 Advantages of a Large Business

Answer 8

Answers may include :
- Can afford to employ specialist professional managers.
- Benefit from the cost reduction by benefitting from economies of scale.
- Might be able to set low prices that other businesses cannot follow considering the average cost per unit is now lower. This allows the business to remain competitive in the market.
- The large business has access to several different sources of finance.
- May be in several markets so the risks are spread.

Question 9

List 3 Disadvantages of a Large Business

Answer 9

Answers may include :
- May be difficult to manage
- May have potential cost increases associated with diseconomies of scale
- May suffer from slow decision making and poor communication due to the large organizational structure.
- May often suffer from a divorce between ownership and control that can lead to conflicting objectives.

Question 10

List 5 reasons why a business would want to remain small.

Answer 10

1. Small market, so they might not have sufficient demand.
2. Lack of capital, which can make it difficult to expand.
3. Owner(s) may lack the skills and knowledge so this may lead to errors which will increase their wastage cost.
4. To maintain control.
5. Market domination, they may struggle to attract more customers.

Question 11

List 4 reasons why a business would want to expand.

Answer 11

1. To benefit from economies of scale which will decrease the business’s average cost per unit.
2. Improve brand image which will attract more customers leading to higher sales revenue.
3. Increase market share.
4. To spread risk.

Question 12

List 3 Strengths of a family business

Answer 12

1. Commitment
2. Reliability and pride
3. Knowledge continuity

Question 13

List 3 Weaknesses of a family business

Answer 13

Answers may include :
- Succession/continuity problems
- Informality
- Tradition
- Conflict

Question 14

Define the term “Internal Growth” / “Organic Growth”

Answer 14

Growth of a business through internal processes relying on its own resources without using external ones.

Question 15

Define the term “External Growth” / “Inorganic Growth”

Answer 15

External growth refers to the expansion of a business through alliances, mergers, takeovers, franchising, or a joint venture with other company’s.

Question 16

Define the term “Bankruptcy”

Answer 16

A legal procedure when a business is unable to repay outstanding debts/loands.

Question 17

Define the term “Horizontal Integration”

Answer 17

Taking over or merging with businesses in the same industry in the same stage of production.

Question 18

Define the term “Forward Vertical Integration”

Answer 18

Taking over or merging with the customers of a business.

Question 19

Define the term “Backwards Vertical Integration”

Answer 19

Taking over or merging with the suppliers of a business.

Question 20

Define the term “Conglomerate Integration”

Answer 20

Taking over or merging with a business in another industry.

Question 21

List 3 Advantages of Horizontal Integration

Answer 21

Answers may include :

• It eliminates one competitor and increases market share and power.
• There are potential economies of scale
• There is scope for rationalizing production, concentrating all output on one site as opposed to two.
• There may be increased power over suppliers to obtain lower prices.

Question 22

List 3 Disadvantages of Horizontal Integration.

Answer 22

1. Rationalization may bring bad publicity and redundancies.
2. There may be customer opposition to less competition and less choice.
3. It may lead to a monopoly investigation if the combined business exceeds certain market share limits.

Question 23

List 2 impacts of Horizontal Integration on shareholders

Answer 23

1. Consumers now have less choice and may have to pay higher prices.
2. Workers may lose job security as a result of rationalization :
   - Local communities may have job losses
   - Suppliers may have to offer lower prices to the bigger integrated business.

Question 24

List 2 Advantages of Forward Vertical Integration.

Answer 24

1. The business is now able to control the promotion and pricing of its own products.
2. It gives a secure outlet for the products of the business and may now exclude competitors’ products from retail outlets.

Question 25

List 2 Disadvantages of Forward Vertical Integration.

Answer 25

1. Consumers may suspect an attempt to act uncompetitively and react negatively.
2. The business may lack experience in this sector of the industry – a successful manufacturer does not necessarily make a good retailer.

Question 26

List 3 Impacts of Forward Vertical Integration on stakeholders.

Answer 26

1. Workers may have greater job security because the business has secure outlets.
2. There may be more varied career opportunities.
3. Consumers may resent the lack of competition in the retail outlet because of the withdrawal of competitor products:
   - Shareholder impact depends on whether profit rises or not.

Question 27

List 3 Advantages of Backwards Vertical Integration.

Answer 27

1. It gives control over quality, price and delivery times of supplies.
2. It encourages joint research and development into improved quality of components.
3. The business may now control supplies of materials to competitors.

Question 28

List 2 Disadvantages of Backwards Vertical Integration.

Answer 28

1. The business may lack experience of managing a supplying company – a successful steel producer will not necessarily make a
   good manager of a coal mine.
2. The supplying business may become complacent due to having a guaranteed customer

Question 29

List 3 Impacts of Backwards Vertical Integration on stakeholders.

Answer 29

Answers may include :

• Workers may have more career opportunities.
• Consumers may obtain improved quality and more innovative products.
• Control over supplies to competitors may limit competition and choice for consumers.
• Profit might rise to benefit shareholders.

Question 30

List 2 Advantages of Conglomerate integration.

Answer 30

1. it diversifies the business away from its original industry and markets.
2. This should spread risk and may take the business into a faster growing market.

Question 31

List 2 Disadvantages of Conglomerate Integration.

Answer 31

1. There may be lack of management experience in the acquired business sector.
2. There could be a lack of clear focus and direction now that the business is spread across more than one industry.

Question 32

List 3 Impacts of Conglomerate Integration on stakeholders.

Answer 32

1. Workers may have more career opportunities.
2. There may be more job security because risks are spread across more than one industry.
3. Profits could rise to benefit shareholders.

Question 33

What are the financial problems and possible of growth through mergers/takeovers.

Answer 33

P1. Takeovers can be very costly, stretching the financial resources of the business.
P2. Additional fixed capital and working capital will be required quickly.
P3. A merger/takeover could lead to negative cash flow and an increase in long-term borrowing and interest payments.

S1. Use internal sources of finance when possible, for example retained earnings.
S2. Raise finance from share issues.
S3. Offer shares, not cash, to pay for a takeover.

Question 34

What are the managerial problems and possible solutions of growth through mergers/takeovers.

Answer 34

P1. Existing management may be unable to cope with problems of controlling an operation which may have doubled in size overnight.
P2. There may be a lack of coordination between the divisions of an expanding business – a real problem for integrating businesses.
P3. The culture clash between the two management teams may be very great

S1. New management systems and structures are required: a policy of delegation and employee empowerment should reduce the pressure on senior managers.
S2. A decentralization policy could provide motivated managers with a clear local focus.
S3. A new management culture needs to be put in place rapidly.