Growth of business (03)

Question 1

SUMMARY

Answer 1

In summary, the following are covered in this topic:
1. There are different methods to measure the size of a business, and some criteria
include labour force, capitalisation, market share and output.
2. SMEs are important to the economy as they provide employment, create variety
and choice for consumers, provide competition to large businesses and offer
specialised goods and services.
3. Benefits enjoyed by SMEs include being adaptable to the changing preferences of
consumers, and the ability to offer customised services.
4. Some challenges faced by SMEs include limited access to finance, and the exposure
to high risks due to external environmental changes.
5. Businesses can grow either organically or externally.
6. A business can grow organically by setting up more branches, factories and shops.
7. A business can grow externally through joint ventures, strategic alliances, and
mergers and takeovers.
8. Large businesses are important as they help the economy through higher
compensation packages and higher tax revenues.
9. Large businesses enjoy benefits such as being better able to conduct research and
development, hire specialist managers, and diversify and spread risks.
10. Large businesses face challenges such as management difficulties and slow
decision-making.
11. Economies of scale refers to cost savings as a result of business becoming larger,
and can be internal and external. The different economies of scale include
purchasing, technical, financial, marketing and managerial economies.
12. Diseconomies of scale are management problems that cause average costs to
increase even though scale of operations increased.
Examples of management problems include communication problems, workforce
alienation and poor coordination.

Question 2

What is the criteria to measure the size of a business?

Answer 2

1) Labour force/size
2) Capitalisation
3) Market share
4) Output

Question 3

What is Capitalisation?

Answer 3

Capitalisation (AKA Market capitalisation) refers to the total value of a company’s issued shares.

Question 4

What is the formula for Capitalisation?

Answer 4

Capitalisation =
(Current share price x Total number of shares issued)

Question 5

Why would using Capitalisation not be as effective fro measuring business size?

Answer 5

A temporary but sharp decrease in share price might make the company appear smaller than what it should be

Question 6

What is Market Share?

Answer 6

Market share refers to the sales of a business as a proportion of total market sales.

Question 7

What is the formula for market share?

Answer 7

Market share = (Total sales of business)/(Total sales of industry * 100%)

Question 8

Note:

Answer 8

Market share is a relative measure, and a business wth high market share is deemed to be the market leader and hence comparatively large.

Question 9

Why would using Market share to identify business size not be effective?

Answer 9

For industries where the size of the total market is small, a high market share is not indicative of a large business

Question 10

What is Output?

Answer 10

Output refers to the volume of goods and services produced by a business.

It is most applicable for businesses in the manufacturing industry, such as factories and producers of consumer goods and durable.

Question 11

Why would using Output not be effective for measuring business size?

Answer 11

High output does not necessarily imply that a business is large if the business mass produces low-value items such as nails and screws

Question 12

How can a business be considered a Small and Medium-sized Enterprise (SME)?

Answer 12

1) Registered and operating in Singapore
2) Have minimum 30% local shareholding; AND
3) Annual sales turnover not more than S$100million; OR
4) Employment size not more than 200 workers

Question 13

How can SMEs benefit the economy?

Answer 13

1) Providing employment

2) Creating variety and choice for consumers

-SMEs are often started by young, dynamic and enterprising entrepreneurs, who will come up with innovative ideas for consumer goods and services. This helps create variety and consumers will benefit from the greater availability of choice.

3) Providing competition to large businesses

-SMEs in general, are often able to provide competition to large businesses in terms of
pricing and services. This is because SMEs tend to enjoy lower operating costs as
compared to large businesses, and can pass on these benefits to consumers in the form of lower prices.

4) Offering specialised/niche goods and services

Question 14

What are the benefits enjoyed by SMEs?

Answer 14

1) Adaptability to meet changing consumer preference
2) Ability to offer customised/personalised services

Question 15

How are SMEs adaptable enough to meet changing consumer preference?

Answer 15

SMEs have the ability to react quickly to any changes in consumer tastes and
preferences.

This is because in a SME, there is less restriction in the decision-making process, where the owner(s) do(es) not need to seek approval from anyone else if they see a new business opportunity.

Employees can also go directly to the bosses if they
have good ideas.

Question 16

How are SMEs able to offer customised/personalised services?

Answer 16

Examples include hair salons, manicure and pedicure shops,
as well as tailors which tend to be run as SMEs.

This is because these products are usually provided one-to-one and are highly customised to customers’ preference.

Customers would also usually require personal attention.

Question 17

What are the challenges faced by SMEs?

Answer 17

1) Limited access to sources of funds
2) Higher risks to changes in external environment?

Question 18

Why would SMEs have limited access to sources of funds?

Answer 18

The legal structure of SMEs is usually either sole proprietorship, partnership or a private limited company.

Hence, SMEs would usually face difficulty in raising funds as
the main source of capital financing would come from the savings of owner(s).

Banks and financial institutions are also less likely to approve loans as SMEs have few assets to offer as collaterals or security.

Suppliers are also less willing to sell goods on credit if the business is not established.

Question 19

Why would SMEs have higher risks to changes in external environment?

Answer 19

SMEs tend to provide a limited range of products and generally lack competitiveness.

This leaves them vulnerable and expose them to higher risks should there be changes in the external environment.

e.g. with technological developments,
businesses dealing with developing photographs from films, selling cassettes and Compact-Discs, and those selling textiles have been rendered obsolete; as consumers
have moved on to digital prints, digital music and buying off-the-rack clothes respectively.

Question 20

What are the two forms in which businesses can grow?

Answer 20

1) Organic growth
2) External growth

Question 21

What is Organic growth?

Answer 21

Organic growth (AKA internal growth) refers to a business expanding by means of opening more new branches, shops or factories.

Question 22

Note:

Answer 22

Organic growth can be a slow and tedious process, as the business would need to accumulate enough retained earnings to have sufficient funds to expand and open new
branches.

However, organic growth would ensure the business avoids problems
caused by excessive fast growth, which may lead to it facing liquidity or cash flow problems.

Also, through organic growth, the management of the business do not need to resolve issues related to different attitudes or cultures; problems that often arise for businesses that grow through mergers and takeovers.

Question 23

What is External growth?

Answer 23

External growth refers to achieving expansion of business by means of merging with or taking over another business, either from the same or a different industry.

Question 24

What are the other forms of External growth?

Answer 24

1) Joint Ventures
2) Strategic Alliances

Question 25

What is a Joint Venture?

Answer 25

Joint ventures refer to two or more businesses agreeing to work closely together on a particular project, and create a separate business division to do so.

Question 26

Why would businesses agree on a joint venture?

Answer 26

1) Share costs and risks 2) Leveraging on each other's strengths 3) Market leaders in different countries

Question 27

What are Strategic Alliances?

Answer 27

Strategic alliances are agreements between businesses in which each agrees to commit resources to achieve an agreed set of objectives.

Question 28

What are the different parties a strategic alliance can be formed with?

Answer 28

1) Universities -A business could provide funding to a university to support a degree programme or training course. In return, the business will benefit from an increased supply of suitable candidates to be employed by the business. 2) Suppliers -The business could work together with a supplier to design and produce component parts and materials that can be used in a range of products. This may help to reduce the total time required for developing and getting the new products ready to be used, hence allowing both parties to gain a competitive edge. 3) Competitors A business might form a strategic alliance with a competitor to reduce the risk of entering a market neither business has operations in. Businesses must ensure that strategic alliances with competitors must not be seen as anti-competitive or contravene the laws of the country the new market is in.

Question 29

What are Mergers and takeovers?

Answer 29

Mergers and takeovers refer to two businesses coming together as one, but in very different circumstances.

Question 30

What is a Merger?

Answer 30

A merger is an agreement by shareholders and managers of two businesses to bring both companies together under a common board of directors with shareholders in both businesses owning shares in the newly merged business.

Question 31

What is a Takeover?

Answer 31

A Takeover (AKA an acquisition) is when a business buys more than 50% of the shares of another business, and becomes the controlling owner of that business

Question 32

Why would a business wish to merge with or take over another business?

Answer 32

Because of perceived benefits that a larger business is more efficient and profitable due to the following reasons: 1) Sharing of research facilities 2) Economies of scale 3) Cost savings

Question 33

Why would a newly merged business suffer?

Answer 33

1) Diseconomies of scale 2) Culture issues

Question 34

What is considered a large business?

Answer 34

If its annual sales turnover exceeds $100 million or if it employs more than 200 workers

Question 35

How can Large businesses benefit the economy?

Answer 35

1) Higher compensation packages 2) Higher tax revenues

Question 36

How do large businesses offer higher compensation packages?

Answer 36

Large businesses can afford to offer employees higher salaries and better benefit packages. Similar to the earlier point on job creation by SMEs, the higher salaries offered by large businesses would result in a virtuous cycle leading to greater demand for goods and services and employment opportunities, thereby improving the economy.

Question 37

What are the benefits enjoyed by large businesses?

Answer 37

1) Ability to conduct research and development 2) Ability to hire specialist managers 3) Economies of scale 4) Ability to diversify and spread risks

Question 38

What are the challenges faced by large businesses?

Answer 38

1) Management difficulties 2) Diseconomies of scale 3) Slow decision-making

Question 39

Why would there be management difficulties in larger businesses?

Answer 39

A large business might be difficult to manage, especially if they have operations in different parts of the world. This is because different countries have different cultures and business practices, hence it might be difficult for the Head Office of the business to manage the business using a uniform policy or practice; or have common communication and motivation methods. The employment laws may also differ between countries, hence affecting the terms and references to employment policies.

Question 40

Why would there be slow decision-making in larger businesses?

Answer 40

In a large business, the structure tends to contain many hierarchies and can be tall as a result. Hence, any suggestions or ideas provided by lower-rung employees might require multiple levels of clearance before it reaches the top management. Thus, decision-making would be slower in a large business as compared to a SME. Communication is likely to suffer as a result as well, as information might be filtered at each level of clearance. It must be noted that bureaucracy is still comparatively worse at public sector organisations than large businesses.

Question 41

What is Economies of Scale?

Answer 41

Economies of scale refers to the reduction in the average cost of production for a business as a result of an increase in the scale of operations.

Question 42

What is Internal Economies of Scale?

Answer 42

Internal economies of scale is created when a business grows organically, from within.

Question 43

What is External economies of scale?

Answer 43

External economies of scale is created when a business obtains cost savings as a result of growth in the size of the industry. All businesses in the same industry will benefit from external economies of scale, regardless of size of business

Question 44

What are the different economies of scale?

Answer 44

1) Purchasing economies 2) Technical economies 3) Financial economies 4) Marketing economies 5) Managerial economies

Question 45

What are Purchasing economies?

Answer 45

Commonly known as bulk-purchasing economies, suppliers often provide substantial discounts for orders of large quantities. Suppliers incur lower costs to process and deliver one large order instead of several smaller ones.

Question 46

What are Technical economies?

Answer 46

Large businesses are better able to afford the latest and most-advanced technological equipment, such as computer systems, which are often very expensive. Such high expenditure can only be supported when output is high, as the costs when divided by high output will result in a lower per unit cost.

Question 47

What are Financial economies?

Answer 47

Banks and financial institutions are likely to prefer approving loans to large businesses instead of SMEs, as large businesses are more established and have a wider product range. Banks and financial institutions are then more likely to charge them lower interest rates compared to SMEs due to lower risks, and large businesses having more assets which could be used as collaterals/securities in their loan applications.

Question 48

What are Marketing economies?

Answer 48

Marketing expenditure, such as advertisements and promotional campaigns, would increase as a business grows larger, but these would spread across higher level of sales or branches as well.

Question 49

What are Managerial economies?

Answer 49

SMEs typically are able to afford to hire general managers to perform a range of management functions. Large businesses however, can afford to hire functional managers who can perform their roles more efficiently than general managers. This is because they are trained and equipped with specialised skillsets, and hence less likely to make mistakes in their job.

Question 50

What is Diseconomies of scale?

Answer 50

Diseconomies of scale are factors that result in average costs of production to increase, even though the scale of operations has increased. Diseconomies of scale typically relates to management problems associated with trying to control and direct a business with thousands of workers, at times with multiple departments and operations in different countries.

Question 51

What are different causes of management problems?

Answer 51

1) Communication problems 2) Alienation of workforce 3) Poor coordination