Size of business chapter 3

Question 1

why are business sizes measured (4 points)

Answer 1

government might wish to give assistance to small firms. investors may wish to compare the size and the rate of growth of the business with close competitors. customers may prefer larger business because of security of supply. some workers prefer a small business workplace

Question 2

problems with measuring business size (3 points)

Answer 2

A business might appear large by one measure but quite small by another. no internationally agreed definition of small, medium or large business. number of employees is often used to make that decision.

Question 3

Determining the size of business by Number of employees (2 points)

Answer 3

business employing many employees is likely to be large. Some businesses only need to employ a few people even though they have invested a lot of capital in the business and achieve high annual sales.

Question 4

Determining the size of business by revenue or sales turnover (3 points)

Answer 4

used especially when comparing businesses in the same industry. less effective when comparing businesses in different industries because some might be engaged in high value production and other might be in low value production. revenue is needed to calculate market share

Question 5

Determining the size of business by capital employed
(2 points)

Answer 5

Generally, the larger the business enterprise, the greater the amount of capital employed. Two firms in different industries employing the same number of workers may have very different capital equipment needs,

Question 6

what is capital employed (1 point)

Answer 6

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

Question 7

Determining the size of business by market capitalization (2 points)

Answer 7

only used for business that have share quoted on stock exchange. share price tend to change everyday, this form is not vey stable.

Question 8

market capitalization (1 point)

Answer 8

the total value of a company’s issued shares

Question 9

Determining the size of business by market share
(2 points)

Answer 9

if a firm has high market share, it must among the leaders of the industry and comparatively large. if size of market is small then a high market share will not indicate a very large firm.

Question 10

market share (2 points)

Answer 10

sale of the business as a proportion of total market sales. total sales of business/total sales of industry x 100

Question 11

other measure that can be used

Answer 11

It depends on the industry. the number of guest beds or guest rooms could be used to compare hotel businesses. the number of shops could be used for retailers.

Question 12

which form of measurement is the best (2 points)

Answer 12

there is no best measure. it depends on what needs to be established about the businesses being compared.

Question 13

what are small business (2 points)

Answer 13

identifiable within a country’s economy. employ few people and have relatively low annual revenue.

Question 14

economic benefits of small business (6 points)

Answer 14

they create employment.

often run by dynamic entrepreneurs with new ideas for consumer goods and services.

create competition for large businesses.

important suppliers to larger businesses.

great business were small at one time.

might have lower average costs than larger ones

Question 15

advantages of being a small business
(6 points)

Answer 15

can be managed and controlled by the owner(s).

often able to adapt quickly to meet changing customer needs.

offer personal service to customers to help build customer loyalty.

easy to know each worker.

if family-owned, the business culture is often informal, employees are well-motivated and family members perform multiple roles.

can usually be started up and operated with low capital investment

Question 16

disadvantages of being a small business (5 points)

Answer 16

may have limited access to sources of finance.

the owner has big responsibility and is usually unable to afford to employ specialist managers.

if the owner or important workers are absent/ill, other employees may not have the necessary skills to operate business.

may not be diversified, so there is a greater risk of external change having a negative impact.

few opportunities for economies of scale - average costs could be high

Question 17

family businesses (3 points)

Answer 17

more actively owned and managed by at least two members of the same family. family owned businesses are important in any economy especially industrializing economies. sometimes the family retains ownership of the business

Question 18

strength of family business (5 points)

Answer 18

family owners show dedication in seeing the business grow, prospers and passed to future generations.

family members work hard and re invest their profits.

family business increase quality of their output because of family name and reputation.

accumulated knowledge, experience and skills pass to next generation.

family members get involved in business from young age so their level of commitment can increase

Question 19

weaknesses of family businesses (4 points)

Answer 19

business can fail because of lack of skills and ability of later generations or splitting of management responsibilities.

lack of clear and formal business practices and procedures can cause inefficiencies and internal conflict when business grow larger.

reluctance to change systems and procedures, lack of innovation could be a consequence.

problems within the family might affect decisions.

Question 20

importance of small business in economy (4 points)

Answer 20

help generate economic growth in areas that have no large companies.

provides jobs.

most jobs in developing economies are provided by small businesses.

often innovative and can develop products and services which creates competition for existing companies

Question 21

role of small businesses in some industries (3 points)

Answer 21

specialist services such as research, technical support, repair and maintenance facilities, can be used by large companies. undertake functions that larger business wants to buy in rather than undertake itself. allows larger businesses to focus on their main or core activities and may reduce overall costs

Question 22

reasons for business growth (5 points)

Answer 22

increased profits.

increase market share.

increased economies of scale.

increased power and status of owners and directors.

reduced risk of being a takeover target

Question 23

organic growth (internal growth) (3 points)

Answer 23

expansion of a business by means of opening new branches, shops or factories. it can be slow. it can avoid excessively fast growth which lead to inadequate capital and management problems when bringing two businesses together

Question 24

external growth (3 points)

Answer 24

business expansion achieved by integrating with another business by either merger or takeover. leads to rapid expansion, important in competitive and expanding market. may lead to management problems, caused by the need for different management systems to deal with bigger organizations.

Question 25

merger (2 points)

Answer 25

agreement by owners and managers of two businesses to bring them together in a new combined business. This is often referred to as a friendly merger.

Question 26

takeover

Answer 26

when a company buys more than 50% of the shares of another company and becomes its controlling owner. It can be called an acquisition.

Question 27

horizontal integration

Answer 27

integration with a business in the same industry and at the same stage of production.

Question 28

vertical integration

Answer 28

integration with a business in the same industry.

Question 29

forward vertical integration

Answer 29

vertical integration with a customer business.

Question 30

backward vertical integration

Answer 30

vertical integration with a supplier business.

Question 31

conglomerate integration

Answer 31

integration with a business in a different industry.

Question 32

advantages of horizontal integration (4 points)

Answer 32

eliminates one competitor and increases market share and power.

There are potential economies of scale.

There is scope for concentrating all output on one site as opposed to two.

There may be increased power over suppliers to obtain lower prices.

Question 33

advantages of forward vertical integration

Answer 33

The business is now able to control the promotion and pricing of its own products.

Question 34

advantages of backward vertical integration (3 points)

Answer 34

It gives control over quality, price and delivery times of supplies.

It encourages joint r&d into improved quality of components.

The business may now control supplies of materials to competitors.

Question 35

disadvantages of horizontal integration (3 points)

Answer 35

Rationalization may bring bad publicity and redundancies.

There may be customer opposition to less competition and less choice.

may lead to a monopoly investigation if the combined business exceeds certain market share limits.

Question 36

disadvantages of forward vertical integration (2 points)

Answer 36

Consumers may suspect an attempt to act uncompetitively and react negatively.

The business may lack experience in this sector of the industry - a successful manufacturer does not necessarily make a good retailer.

Question 37

disadvantages of backward vertical integration (2 points)

Answer 37

The business may lack experience in this sector of the industry - a successful steel producer will not necessarily make a good manager of a coal mine.

The supplying business may become complacent due to having a guaranteed customer.

Question 38

impact on stakeholders of horizontal integration (5 points)

Answer 38

Consumers now have less choice and may have to pay higher prices.

Workers may lose job security as a result of rationalization

Suppliers may have to offer lower prices to the bigger integrated business,

Shareholder impact depends on whether profit rises or not.

Local communities may have job losses.

Question 39

impact on stakeholders of forward vertical integration
(4 points)

Answer 39

Workers may have greater job security because the business has secure outlets.

There may be more varied career opportunities.

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 40

impact on stakeholders of backward vertical integration
(4 points)

Answer 40

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 41

advantages of conglomerate integration (2 points)

Answer 41

It diversifies the business away from its original industry and markets.

This should spread risk and may take the business into a faster growing market.

Question 42

disadvantages of conglomerate integration (2 points)

Answer 42

There may be lack of management experience in the acquired business sector.

There could be a lack of clear focus and direction now that the business is spread across more than one industry.

Question 43

impact on shareholders conglomerate integration

Answer 43

Workers may have more career opportunities.

There may be more job security because risks are spread across more than one industry.

Profits could rise to benefit shareholders.

Question 44

why might the objectives of mergers and takeovers be achieved (4 points)

Answer 44

The integrated businesses will be able to share research facilities and pool ideas that achieve better results. economies of operating a larger scale of business, such as buying supplies in large quantities, should cut average costs and increase efficiency. The larger combined business can save on marketing costs and distribution costs by using the same sales outlets and sales teams. Rationalization of property and other assets will reduce duplication and costs.

Question 45

why might the objectives of mergers and takeovers be unsuccessful

Answer 45

The integrated firm is too big to manage and control effectively, this is a diseconomy of scale. A different business and management culture, two sets of managers and workers may find it very difficult to work effectively and cooperatively together. There may be little benefit from combined research departments or marketing/distribution facilities if the original businesses produced different products. The rate of growth is too rapid for the directors to manage effectively.

Question 46

synergy

Answer 46

literally means that ‘the whole is greater than the sum of parts’- it is often assumed that the new business will be more successful than the original separate businesses.

Question 47

financial problems of sudden growth through mergers/takeovers

Answer 47

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

Question 48

possible strategies to overcome finance problems of sudden growth through mergers/takeovers

Answer 48

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

Question 49

managerial problems of sudden growth through mergers/takeovers

Answer 49

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

Question 50

possible strategies to overcome managerial problems of sudden growth through mergers/takeovers

Answer 50

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

Question 51

strategic alliances

Answer 51

agreement between two organizations to commit resources to achieving a specific objective while remaining independent. does not involve complete integration or changes in ownership. once the objective is reached the strategic alliance is often ended6