Size of Business Flashcards
Ways to measure a business
-Number of employees
-Revenue/Sales turnover
-Capital employed
-Market capitalisation
-Market share
Market capitalisation
Total value of a company’s issued shares.
current share price X total number of shares issued
Benefits and Limitations of small businesses
Benefits
-Little risk of losing control
-Often able to adapt to changing customer needs
-Better relationships with workers
-Can startup with very little capital investment
Limitations
-Limited sources of finance
-Owner has a large burden of responsibility if there are no specialist managers
-If the owner or important employees are absent, other employees may not have the skills to operate the business
-Fewer opportunities for economies fo scale
Benefits and Limitations of Family Business
Benefits
-Commitment
-Reliability and pride
-Knowledge continuity
Limitations
-Succession/Continuity problem
-Informality
-Tradition
-Conflict
Importance of small businesses in the economy
-Help in economic growth
-Create employment
-Often innovative and can develop new products and services that create competition to big firms
Reasons business want to grow
-Increases profits
-Increases market share
-Increased economies of scale
-Increase power and status
-Reduced risk of takeover
Organic and External growth
Organic growth- when a business expands through its existing operations.
External growth- business expansion by taking over or merger with another business.
Merger and Takeover
Merger- when two business agree to combine their business and make a one new business.
Takeover- or acquisition is when a company buys more than 50% of another company’s shares and becomes the controlling owner.
Horizontal Integration
Benefits and Limitations
Horizontal integration- when a business integrates with another business in the same stage of production and same industry.
Benefits
-Eliminates one competitor from the market
-Increased power over suppliers
Limitations
-Rationalisation may bring bad publicity
-It may lead to a monopoly
Forward Vertical Integration
Benefits and Limitations
Forward Vertical Integration- vertical integration with a customer business.
Benefits
-The business can control pricing and promotion
-It gives a secure outlet for products and removes competitors products from retail outlets
Limitations
-Consumers may suspect an attempt to act uncompetitively and react negatively
-Business may lack experience of managing a retail
Vertical Integration
When a business integrates with another business in the same industry but different stage of production.
Backward Vertical Integration
Benefits and Limitations
Backward Vertical Integration- vertical integration with a supplier business.
Benefits
-Gives control of quality, price and delivery times
-Gives control over supply to competitors
Limitations
-Business may lack experience of managing a supply company
-Supplying business may not be efficient due to guaranteed customer
Conglomerate Integration
Benefits and Limitations
Conglomerate Integration- when a business integrates with another business in different sector entirely
Benefits
-Diversifies the business
-Spread of risk may take the business into a faster growing market
Limitations
-Lack of management experience
-Lack of focus and direction now that the business is more spread across
Objectives for Integrations
-Integrated business share ideas and facilities
-Economies of scale
-Business can save on marketing and distribution costs
-Rationalisation will reduce costs
Reasons why Integration Objectives Fail
-Diseconomies of scale
-Different management and culture leads to conflict
-There may be very little benefit of combined research or marketing and distribution
-If rate of growth is too rapid, it would be harder to manage
Problems with Integrations
-Takeovers can be costly
-Additional capital fixed and working capital is needed
-The existing management may be unable to control operations
Ways to Overcome Problems with Integration
-Use of internal sources of finance when possible
-Raise finance from issue of shares
-New management systems and structures
Synergy
Means that ‘the whole is greater than sum of parts’, it is often assumed that new business will be more successful than separate businesses.
Strategic alliance
An agreement between two organisations to commit resources to achieving a specific objective while remaining independent.
