Chapter 4- Business size, growth and external growth

Question 1

What factors are taken into account when making a judgement about the size of a business?

Answer 1

• Number of employees
• Number of factories, shops or offices
• Turnover and profit levels
• Stock market value
• Capital employed

Question 2

Number of employees

Answer 2

• It would be expected that a large business will employ a large number of employees
• May not be appropriate to judge by the number of employees as many factories are highly automated and capital-intensive so they produce a lot of output but don’t employ a large number of employees

Question 3

Number of factories, shops or offices

Answer 3

• The higher the number of factories, shops or offices a business has the more it will be perceived as large
• It also depends whether the business has them in other countries

Question 4

Turnover and profit levels

Answer 4

• A high turnover is associated with a large business
• It depends on the value of each product and how many of them are sold. E.g. a jeweller may only own one shop but has a high revenue due to the high value of the products sold
• The higher the profit level, the larger the firm is likely to be but it may be inaccurate if there having temporary trading difficulties

Question 5

Turnover definition

Answer 5

• Value of a businesses sales

Question 6

Stock market value

Answer 6

• The higher the figure the larger the company is likely to be
• A drawback of this is if the share price falls, the value of the company will be reduced
• Not accurate as if this occurs measurement of size of the business has become smaller even though it has no impact on the number of factories, machines or employees
• Method is misleading as share prices can change daily

Question 7

How can the value of the company be calculated?

Answer 7

• By multiplying the current share price by the number of shares issued

Question 8

Capital employed definition

Answer 8

• The total value of a business’s assets (factories, machinery, offices)

Question 9

Capital employed

Answer 9

• If the figure is high, a business can be assumed as large
• But stock market valuation, prices of factories (e.g.) can rise or fall without any changes in the actual number owned
• Geographical location of assets also affects their value

Question 10

EU definitions of size (chosen factors)

Answer 10

• Number of employees
• Turnover
• Balance sheet total

Question 11

EU definitions of business size (employees)

Answer 11

Micro- <10
Small- <50
Medium-sized- <250

Question 12

EU definitions of business size (turnover €m)

Answer 12

Micro- <2 (equal to)
Small- <10 (equal to)
Medium-sized- <50 (equal to)

Question 13

EU definitions of business size (balance sheet total €m)

Answer 13

Micro- <2 (equal to)
Small- <10 (equal to)
Medium-sized- <43 (equal to)

Question 14

What is one of the objectives of the EU’s regulation of businesses?

Answer 14

• That they are all operating on a level playing field

Question 15

What are the factors affecting the size of a business?

Answer 15

• Market size
• Nature of the product
• Personal preference
• Ability to access resources for expansion

Question 16

Market size

Answer 16

• Where the market is small it is often dominated by relatively small businesses
• This is because larger firms can’t gain economies of scale or level of sales to gain the desired level of profit

Question 17

Nature of the product

Answer 17

• If a product is large and technologically complicated the firm will usually be larger because of the resources necessary to make and upgrade it
• Where a product is highly standardised it is usually made by a large business since it can gain economies of scale from manufacturing it
• A less standard product made and marketed with a personal touch will often be supplied by a smaller business

Question 18

Personal preference

Answer 18

• An entrepreneur may not want to expand nationally or even regionally as they may not be ambitious
• Opening a new factory/office could mean a loss of control over the business
• There may be the consideration whether the time and trouble is worth it in terms of risk

Question 19

Ability to access resources for expansion

Answer 19

• Are there funds available or not ?
• Would it prevent firms from expanding ?
  E.g. credit crunch (reluctance to lend in the years following the 2008 crash)

Question 20

What are the reasons a business would want to grow?

Answer 20

• Entrepreneur wants a greater challenge
• Opportunity to gain unit cost reductions through economies of scale
• Owners want a higher return on their investment
• Stronger business is better placed to fight any economic or competitive threats successfully

Question 21

Advantages for employees in a large business

Answer 21

• Greater job security
• A large firm will have a specialist HR department which will ensure compliance with legislation

Question 22

Disadvantages for employees in a large business

Answer 22

• Feeling remote from those who make the decisions that affect them
• Problems of effective coordination and control that negatively impact upon the business’s operation and profitability

Question 23

Advantages for suppliers in a large business

Answer 23

• Regular orders
• Large orders
• Security

Question 24

Disadvantages for suppliers in a large business

Answer 24

• May be offered a ‘take it or leave it approach’ to conditions of supply and payment
• Overdependance on a large customer can cause problems if the large firm decides to change supplier

Question 25

Advantages for local community in a large business

Answer 25

- Creation of jobs - Local ‘multiplier effect’ boosts economic activity

Question 26

Disadvantages for local community in a large business

Answer 26

- Large business may drive the existing local firms out of the market so reducing choice and variety - Possible negative externalities like pollution/congestion around the business

Question 27

Advantages for shareholders in a large business

Answer 27

- Large firm may have some market power and so have a degree of control over prices- leading to higher profits, dividends and share prices - Large firms can gain managerial economies of scale to improve performance

Question 28

Disadvantages for shareholders in a large business

Answer 28

- If managers make the wrong decisions they can have a significant effect on the business’s profits and therefore share price and dividends

Question 29

Advantages for customers in a large business

Answer 29

- Business can be expected to treat customers well in order to maintain its image - Economies of scale lower costs and therefore prices

Question 30

Disadvantages for customers in a large business

Answer 30

- Diseconomies of scale may raise costs which will be passed on in the form of higher prices - Customers might be swayed into buying products they don’t want through contact exposure to marketing

Question 31

Definition of organic growth?

Answer 31

- Achieved by increasing the firms sales - It comes from selling more to existing customers, finding new customers or both - If a business continuously achieves high levels of organic growth it indicates its managers are taking the right actions and are using the businesses resources efficiently

Question 32

Definition of a merger

Answer 32

- Type of business growth strategy - It’s where two companies join together to form a new larger business

Question 33

Definition of an acquisition

Answer 33

- It’s where one company purchases another - A takeover involves acquiring control of another company by buying it’s shares - If the takeover is successful the target company will usually continue to exist as an independent legal entity controlled by the acquirer

Question 34

Example of a takeover

Answer 34

Pfizer made a takeover bid for the UK company Astrazeneca but didn’t succeed

Question 35

Joint venture definition

Answer 35

- A formal business arrangement between 2 or more businesses who commit to work together on a particular project - Both parties invest money, time and effort in the project

Question 36

How is a joint venture different from a merger?

Answer 36

- There is no change in ownership involved for either firm but mergers combine ownership - A joint venture may only be in existence for a particular project but a merger may be long term and permanent

Question 37

Example of a joint venture

Answer 37

- virgin mobile India is a joint venture between tata teleservices and the virgin group

Question 38

Reasons to undertake a joint venture

Answer 38

- The capital cost of a particular project might be very high and may be beyond the resources of a single business - A single business may consider the venture too much of a risk - Enables businesses to share strengths and increase their competitive advantage against others - A joint venture is an effective way of gaining access to markets or resources in another country

Question 39

What is a disadvantage of a joint venture?

Answer 39

- You have to draw up a contract that specifies responsibilities and goals which may be expensive

Question 40

Strategic alliance definition

Answer 40

- Alliance means ‘cooperation’ - Typically less involved and less permanent than a joint venture - Each party hopes that the benefits from the alliance will be greater than those that could be obtained from operating on its own - There won’t be a creation of a new company and each party will maintain it’s own identity

Question 41

What are the factors that depend if the growth impacts a businesses stakeholders in a positive or negative manner?

Answer 41

- Venture/ alliance could fail and the expected stakeholders benefits could fail to materialise - If one party is more powerful than the other it could demand conditions such as the division of profits - Terms of agreement and the wording of contract needs to be clear otherwise it will cause trouble