1.3 SIZE OF BUSINESS

• Ways to measure the size of a business

  • Numbers of employee
  • Sales turnover
  • Capital employed
  • Market capitalisation
  • Market share
• Number of Employees


  Simple and easy to understand, but a business employing many employees is not necessarily large
• Revenue (Sales Turnover)


  Total value of sales made by a business in a given time period, used mainly to compare businesses within the same industry
• Capital Employed


  The total value of all long-term finance invested in the business, but this can be problematic for some businesses
• Market Capitalisation


  The total value of a company's issued shares, but share prices change daily
• Market Share


  Sales of the business as a proportion of total market sales, measures who the leader is in the same industry
• No single measure is the best, measurement depends on the industry and what needs to be established about the businesses being compared
• Why it is important to define the size of firms

  Customers or investors want to deal with big firms, economic analysis, small firms can get special aids from the government
• Different industries and countries may have different definitions for small businesses
• Advantages of being a small firm

  • Can be managed and controlled by the owner
  • Can adapt to the changing needs of customers
  • Offer personalized service to customers
  • Easy to know each worker
  • Able to start and operate with low capital investment
• Disadvantages of being a small firm


  • Limited access to sources of finance
  • Owners often have large burden of responsibility
  • Limited product range and face higher risk of failure
  • Can not enjoy economies of scale
  • Have higher average cost per unit
• Family businesses


  Businesses that are actively owned and managed by at least two members of the same family
• Strengths of family businesses

  • Commitment
  • Reliability and pride
  • Knowledge continuity
• Weaknesses of family businesses

  • Succession/continuity problem
  • Informality
  • Tradition
  • Conflict
• Importance of small businesses in the economy


  Help generate economic growth, job creation, innovative
• Examples of niche markets


  • Pet hotels
  • Chinese herbal medicines
  • Ties.com
• Role of small businesses as part of the industry structure

  Act as a support for large businesses, such as component manufacturers, software specialists, meal providers
• Organic (Internal) Growth


  Expansion of a business by opening new branches, shops or factories
• External Growth


  Expansion achieved by means of merging with or taking over another business
• Types of Integration (merger or takeover)

  • Horizontal
  • Vertical forward
  • Vertical backward
  • Conglomerate
• Horizontal Integration


  • Eliminate one competitor, possible economies of scale, scope for rationalising production, increase power over suppliers
• Vertical Forward Integration


  • Able to control the promotion and pricing of own products, secure outlet for firm's product
• Vertical Backward Integration


  • Gives control over quality, price and delivery times of supplies, encourage joint R&D
• Conglomerate Integration


  • Diversifies the business away from its original industry and market, spread risk
• Synergy


  The whole is greater than the sum of parts, two firms integrated become more effective, efficient and profitable
• Synergy may not be achieved due to the integrated firm being too big to manage, incompatible management cultures, or too rapid growth
• Joint Ventures


  Two or more businesses agree to work closely together on a particular project and create a separate business division to do so
• Strategic Alliances


  Agreements between firms in which each agrees to commit resources to achieve an agreed set of objectives