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Flashcards in 3. Size of business Deck (38):

What are the different methods of measuring the business' size?

- Number of employees
- Sales turnover
- Capital employed
- Market capitalisation
- Market share


Define sales turnover

Total value of sales made by a business in a given time period


Define capital employed

Total value of all long term finance invested in the business


Define market capitalisation

Total value of a company's issued shares
= current share price x number of shares issued


Define market share

- Sales of the business as a proportion of total market sales
- (total sales of business/ total sales of industry) x 100


Advantages of using number of employees

- The simplest measure
- Easy to understand
- Can make comparisons with other businesses


Disadvantages of using number of employees

Automation => not accurate


Advantages of using sales turnover

- Compare firms within the industry
- Easy to understand


Disadvantages of using sales turnover

- Some industries engage in high value production (jewels) and low value production (clothes) => no comparisons
- Products may not be of high quality


Disadvantages of capital employed

Cannot compare between firms of different industries due to different equipment needs


Disadvantages of market capitalisation

Share prices tend to fluctuate => this form of measure is not stable/accurate


Advantages of using market share

- Easy to calculate
- Compare firms within the industry
- Easy to understand and analyse


Disadvantages of using market share

- Can't compare firms of different industries
- Market can be a niche market


Advantages of small businesses

- Can be managed or controlled
- Able to adapt quickly to meet changing customers needs
- Offer personal services to customers
- More interactive with employees => motivated workforce


Disadvantages of small businesses

- Limited access to sources of finance
- Owners have to carry a large burden of responsibility because can't afford managers
- Not diversified -> greater risks of negative impact of external change
- Greater risks of being taken over


Weaknesses of family businesses

- Unqualified family members in jobs
- Family issues get in the way
- Family rivalries
- Keeping control is prioritised over business expansion
- Lack of management development


Strengths of family businesses

- Often play multiple roles => flexible
- Employees are committed, loyal
- Shared values and belief => quick decision making
- Family shared aims => strong sense of vision and ambition


Importance of small business and role in the economy

- Job creation: collectively small business sector employs a very significant proportion of the working pop.
- Sparks innovation: they tend to foster environments that appeal to individuals with the talent to invent new products/improve the way things are done. They are also often run by dynamic entrepreneurs with new ideas for consumer goods and services => adds dynamism to the econ => make nation's business sector more competitive


Role of small businesses as a part of the industry structure

- Small firms create competition for larger firms => larger firms have to improve service and lower price => cannot exploit consumers with high prices => costs of product within the country decrease
- Smaller firms often supply specialist goods and services to important industries or larger firms


What are the 2 types of growth?

External and Internal


Define internal growth

Expansion of business by means of opening branches, shops or factories (reinvesting its profit)


Define external growth

Business expansion is achieved by means of merging or taking over another business, from either the same or a different industry


What are the 5 types of external growth?

- Horizontal integration
- Vertical integration forward
- Vertical integration backward
- Conglomerate integration
- Takeover


Define horizontal integration

Integration with firms in the same industry and at the same stage of production


Define vertical integration forward

Integration with a business in the same industry but a customer of the existing business


Define vertical integration backward

Integration with a business in the same industry but a supplier of the existing business


Define conglomerate integration

Integration with a business in a different industry


Advantages of internal growth

- Avoid problems of excessively fast growth, which tends to lead to inadequate capital (overtrading), and management problems associated with the different attitudes and cultures when 2 businesses are together
- Constant, safe growth


Disadvantages of internal growth

- Slow growth => not competitive enough => risks of being taken over or wiped out
- If they have no profits => nothing to reinvest => can't grow


Advantages of horizontal integration

- Eliminates one competitor
- Possible economies of scale
- Increased power over suppliers
- Scope for rationalising


Disadvantages of horizontal integration

May lead to monopoly if the combined business exceeds certain market share limits


Advantages of vertical integration forward

- Business now able to control the promotion and pricing of its own product
- May now exclude competitor's product


Disadvantages of vertical integration forward

- Lack of competition means the consumers have less choice => prices are higher => may react negatively
- Lack of experience in this sector of the industry - a successful manufacturer does not necessarily make a good retailer


Advantages of vertical integration backward

- Business may now control supplies of materials to competitors
- Encourages joint research and development into improved quality of supplies of components


Disadvantages of vertical integration backward

- Supplying business may become complacent due to having guaranteed customer
- May lack experience managing a supplying company


Advantages of conglomerate integration

- Diversifies the business away from its original industry and markets
- Spread risk and may take the business into a faster growing market


Disadvantages of conglomerate integration

- Lack of management experience in the acquired business sector
- Could be a lack of focus and direction now that the business is spread across more than one industry


Disadvantages of external growth (in general)

- Management issues
- Conflicts of culture and business ethics
- Excessive growth => inadequate capital