CH.
3
SIZE OF BUSINESS
CHAPTER OBJECTIVES
1. Identify several ways of measuring the size of businesses and evaluate each of them
2. Analyze the beneficial impact that small firms can have on the economy of a country
3. Analyze advantages and disadvantages of small and large businesses
4. Explain the difference between internal and external growth
OBJECTIVE 1
Identify several ways of measuring the size of businesses and evaluate each of
them
WHO’S THE LARGEST?
WHO WANTS TO KNOW? AND WHY?
• Business managers:
• Competition
• Performance of business relative to market
• Making decisions • Find out why for the following group
• Government: • Customer
• Determine the growth of the small and large • Shareholder
business • Employees
• To be able to support businesses
• Taxation
MEASURING BUSINESS SIZE
Who wants to know?
Government – give assistance to “small” firms
Investors – compare growth with competitors
Customers – may like bigger companies
There are various ways to measure size, which leads to different results
DIFFERENT MEASURES OF SIZE
• Number of employees - Simplest measure
• Sales turnover - Value of sales made over a time
period
• Market share - Sales of the business as a portion of
• Capital employed - Value of all long-term finance
total market sales
invested
Market share = (Total sales of business/total sales of
industry)*100 - it can be in terms of # of units
• Market capitalization - Value of a company’s issued
shares. Market cap. = current share price * number of
shares issued. Only for public limited companies
OTHER MEASURES OF SIZE
• Depends on industry
• Hotels - # of beds & guest rooms
• Retailers - # of stores or total floor sales space
• There is no “best” measure!
• Choose by what we need to know
• Use two different measures & compare
TASK 1
Now try and rank the companies that were used in the starter by size, using the criteria of
number of employees.
You nay need to complete some research to find the exact number of employees tshat
each organization has?
Where you close?
Why would Goggle not have as many employees as the others?
ACTIVITY 3.1
SALES SELLING
CAPITAL NO. OF
SUPERMARKET EMPLOYEES TURNOVER SPACE (SQ.
EMPLOYED ($M) OUTLETS
($M) METERS)
W 300 150 250 55,000 15
X 800 500 1200 300,000 20
Y 1200 700 1000 400,000 35
Z 1500 400 400 150,000 40
SIGNIFICANCE OF SMALL & MICRO-BUSINESSES
•Create many jobs
•Innovative entrepreneurs make new goods & services
•Variety in the market
•Create competition for large firms
•Supply specialist goods & services
•Small firms become large firms, increases economy
•May have lower costs = lower prices for customers
•Key benefits to a country’s economy of a thriving small-business sector
GOVERNMENT ASSISTANCE FOR SMALL BUSINESSES
• Reduce profits tax
• Loan guarantee: Give short- and long-term
• Support and advice from gov’t agencies
GOVERNMENT ASSISTANCE FOR SMALL BUSINESS
Other help for small firms
• Expertise in marketing, operations management, accounting, and staffing
• Raising both short- & long-term finance
• Avoiding market risks, from having limited products/services
• Finding business locations
ADVANTAGES OF SMALL & LARGE FIRMS
ADVANTAGES OF SMALL BUSINESS ADVANTAGES OF LARGE BUSINESS
• Can employ specialist professional managers
• Benefit from the cost reductions associated with
large scale production
• Managed & controlled by the owner(s)
• May be able to set low prices
• Adapt quickly to changing customer needs
• Have access to several different sources of finance
• Offer personal service to customers
• May be diversified in several markets and products
• Closer relationships with workers
(spreads the risk)
• Can afford research and development into new
products and processes
DISADVANTAGES OF SMALL & LARGE FIRMS
DISADVANTAGES OF SMALL DISADVANTAGES OF LARGE
BUSINESS BUSINESS
• May be difficult to manage
• Limited access to sources of finance • Potential cost increases due to large-scale
• Owner has a lot of responsibilities if they can’t afford production
to employee specialist managers • Slow decision making and poor communication due
• May not be diversified, so there are greater risks of to the structure of the large organization
negative impact of external change • May often suffer from divorce between ownership
and control that can lead to conflicting objectives
BUSINESS GROWTH
Advantages Disadvantages
Increased profits Loss of control
Increased market share
Increased economics of scale
Too many risks
Increased power & status of Heavy workloads
owners
INTERNAL/ORGANIC GROWTH
“Expansion of a business by means of opening new branches, shops or
factories (also known as organic growth)”
• Effects stakeholder groups (customers, workers, & competitors)
• Ideally financed from internal profits.
• Internal growth can be slow.
• Slow growth can avoid problems of inadequate capital and management
problems
INTERNAL/ORGANIC GROWTH
• Business growth can be achieved in a number of ways. These different forms of
growth can lead to various effects on stakeholder groups such as customers,
workers and competitors. The different forms of growth can be grouped into
organic (internal) growth and external growth, which involves mergers with and
takeovers of other businesses.
EXTERNAL GROWTH
• External growth is often referred to as integration, as it involves bringing together two or more
businesses. This form of growth can lead to rapid expansion, which might be vital in a
competitive and expanding market. However, it often leads to management problems. These are
caused by the need for different management systems to deal with bigger organisations. There
can also be conflict between the two teams of managers (Who will get the top jobs?) and conflicts
of culture and business ethics. The different forms of external growth – horizontal integration,
forward vertical integration, backward vertical integration and conglomerate integration
MERGER OR TAKEOVER MIGHT FAIL TO ACHIEVE OBJECTIVES
• The integrated businesses will be able to share research facilities and pool ideas that achieve better
results than the two separate businesses.
• The 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.
• Rationalisation of property and other assets will reduce duplication and costs.
GOING GLOBAL
• Going global effectively means that a business is going to grow internationally. This can be done through:
Organic Growth Mergers / Joint Ventures Takeovers
• Increasing sales and • A joint venture is a formal • Where one business buys
profits
agreement with another control (at least 51%) in
business another business
• Leading to more outlets/
employees
• A merger is the joining of • Microsoft’s takeover of
two businesses, often Skype
• Low risk, but growth is
under a new name
usually slow
Organic growth can be managed by the firm. However mergers and takeovers can provide additional challenges
PROBLEMS WITH MERGERS/TAKEOVERS
ADVICE FROM BUSINESS LEADERS OF
THE WORLD TO SMALL BUSINESSES
FAMILY BUSINESSES
CH. 3 VOCABULARY LOG
Capital employed – p. 42
Internal growth – p. 47
Market capitalization – p. 43
Market share – p. 43
Sales turnover – p. 42
