Size of Business Ch 3
Problems from attempting to measure business size
There are many different ways to measure business size (large with one method and small with another)
There's no agreed upon definition of big or small when it comes to measuring business (subjective)
How to measure business size
Capital employed
Market capitalization
Revenue (sales turnover)
Market share
Number of Employees
market share = (total share of business/total sales of industry) x 100
market capitalisation = current share price × total number of shares issued
Revenue is the total amount of money received from sales
Used to compare business size from businesses in the same industry
The larger the business enterprise, the greater the value of capital needed for long-term investment
Value of all assets used by a company to generate earning
the total value of all a company's shares of stock
the percentage of an industry, or a market's total sales, that is earned by a particular company over a specified time period
how to measure size of a hotel?
capital employed
how to measure size of a mall?
how to measure office building (skyscraper)
Revenue
capital employed
Significance of small businesses
Which method is the best?
None of them!
It just depends on what needs to be measured
If absolute size is being measured then 2 or more of the criteria should be measured
Family businesses
Definition: businesses that employ relatively few people and has a relatively low revenue
Economic benefits
Dynamic new ideas: variety in consumer choice (can even change a whole industry)
Competition: Without them large businesses could just give consumers high prices and poor service as they have no other alternative
Important suppliers (to large businesses): they supply the specialist goods
Employment: collectively small firms employ most of the working sector
They can become big businesses: the economy will benefit from large scale new organizations in the future
Lower average cost: Cost benefit passed down to costumers
Advantages
Personal services offered
Personally know workers
Adapt quickly
Workers are more motivated and work different roles
Small risk of losing control
Can be started with low capital
Disadvantages
Important workers ill = business cannot operate
Not diversified (external risks have great effect)
Cannot specialize
No economies of sale (high average cost)
Limited financing
Businesses that are owned and managed by at least two members in the same family
Strengths
Reliability and pride - family name associated with the product so they try to maintain good relationships with their stakeholders
Knowledge continuity - Usually it's passed on to the next generation
Commitment - family wants the business to grow so they work hard
Weaknesses
Informality - Can lead to inefficiencies and later conflicts
Tradition - Reluctance to change systems or procedures
Succession/continuity problem - Lack of skill of later generations
Conflict - Family problems can start affecting the performance of a businesss
Importance in economic
80% of new jobs in developing countries are created by small businesses
Innovative (create new product and service)
Most of the working population re employed by small businesses
Generate economic growth (especially in places with no larger companies)
Role in some industries
Can specialize in things and fill in gaps in the market like perhaps offer specialized IT services because they are more flexible and can adapt to the changes of costumers and their wants
Can do the tasks that bigger businesses would want to avoid like employer training which could lead to decreased average costs for the larger business
Business growth
Why they want to
Increased economies of sale - Bigger businesses get to benefit from things like buying in bulk
Increased power and status for owners and directors - Bigger b businesses that are better known have very powerful CEO's and managers
Increased market share - If the business is bigger and sells more they will have a larger market share and be better known
Increased profit - bigger businesses sometimes make more revenue so sometimes they make more profit
Reduced risk of takeover - larger business may be too big of a target for takeover companies
Organic growth
A fast food restaurant could open more locations with the money they retained from their profits
It is the growth of a business through internal processes
DEFINE!
Merger
Takeover
External growth
Conglomerate integration
The growth of a company using external resources and capabilities rather than from internal business activity
A brand merges with another brand to make an even bigger brand
When two separate businesses combine into a new legal entity
When google and android merged
When a company buys out another
Exxon taking over Mobil
Two businesses merging, however those businesses partake in things that are completely different from the other
Like how Yamaha has pianos but also motorcycles, because they merged
Vertical integration
Horizontal integration
Forward vertical integration
Backward vertical integration
When a business merges with a mother business from a different production stage
backwards and forwards vertical integration
When a business joins with another business at the stage of the supply chain
An ice cream shop merges with another ice cream shop and becomes an even bigger ice cream shop
When a business merges or takeover a business further up in the supply chain
A vehicle manufacturer buys a car retailing business
When a business merges or takeover a business lower down in the supply chain
A vehicle manufacturer purchases a vehicle parts manufacturer
Horizon tal integration
Disadvantage
Impact
Advantage
Economies of scale (potential)
Concentrating output on one site instead of two
Eliminates one competitor
Increased power over suppliers (low prices)
May bring bad publicity and redundancy
Costumer opposition
Monopoly
Consumers have less choice (may have to pay more)
Less job security
Suppliers have to offer lower prices
Shareholder's impact depends on whether profits rise or not
Local community job losses
Forward vertical integration
Advantage
Control of promotion and pricing
Secure outlet for business (may exclude competitor's product)
Disadvantage
Consumers react negatively
Business lack experience in this sector
Impact
Greater job security
Varied career opportunities
Consumer resents lack of competition
Shareholder's impact depends on whether profits rise
Backward vertical integration
Advantage
Control of quality, price and delivery times
Encourages joint research and development to improve quality of supplies
Business control supplies of materials to competitors
Disadvantage
Business lacks experience managing this sector
Fully satisfied with the guaranteed costumer (doesn't try)
Impact
More career opportunities
Improved quality and more innovative products (consumer)
Control of supplies may limit choice for consumers
Profits may rise and benefit shareholders
Conglomerate integration
Advantages
Diversifies business
Spreads risk (could enter fast growing market)
Disadvantages
Lag of management experience in different sectors
Lack of focus and direction (because of spread)
Impact
Workers have more career opportunities
More job security
Profits could rise and benefit shareholders
Merger/talkerover (how it will achieve its objectives)
Econom ies of scale can lower the average cost per unit
Marketing and distribution cost can go down if because both of them can use the same sales outlet and teams
The business will not only be able to share buildings and equipments, but also ideas that may result in better results for the business than if they did it alone
If they share their stuff and equipment it can make it so that there's less duplicates
Merger/talkerover (how it won't achieve its objectives)
The bigger business may be too big to control effectively (diseconomies of scale)
They may have different cultures and styles of management that could result in fights and disagreements and make things less efficient
If the businesses make very different products then there might be little benefit from being able to combine their research
Rate of growth may be too hard for directors to manage well
Problems of growth from takeovers/mergers
Finance
Managerial
Problems
Solutions
Problems
Solutions
More fixed and working capital needed ASAP
Can result in negative cash flow and increased long term borrowing and interest
Takeovers can cost a lot (stretches the businesses' money)
Raise money from selling shares
Offer shares not cash to pay for takeover
Use internal sources of finance
Existing management unable to cope with the double in size overnight
Culture clash
Lack of coordination
Desentralization policy
New management culture
New management system, structure and policies
Strategic alliances
Two companies banning together and making a deal that benefits each other while still being its own business
the difference between joint venture
joint venture is when you open a new business together and work on that business
in strategic alliance you don't open a new business together you just help each other out in different aspects