Flashcards in Chapter 3 (size of a business) Deck (35):
5 methods of measuring a business size.
1. number of employee's
2. sales turnover
3. capital employed
4. market capitalisation
5. market share
2. sales turnover is?
Total value of sales made by a business in a given time period.
3. capital employed is?
the total value of all long-term finance invested in the business
4. market capitalisation is?
the total value of a company's issued shares
formulae = current share price x total number of shares issued
5. market share is?
sales of the business as a proportion of total market sales
formulae = total sales of business
total sales of industry x100
advantages of a Small business
1. can be managed & controlled by the owner
2. often able to adapt quickly to meet changing customer needs
3. offer personal service to customers
4. find it easier to know each other, and many staff prefer to work for smaller, more human business.
disadvantages of a Small business
1. may have limited access to sources of finance
2. may find the owner/s has to carry a large burden of the responsibility. (if unable to afford specialist managers)
3. may not be diversified, so there are greater risks of negative impact on external change
Advantages of a large business
1. can afford to employ specialist managers
2. may be able to set low prices that other firms have to follow
3. have access to several sources of finance
4. may be diversified in several markets and products so that risks are spread.
5. are more likely to be able to afford research and development into new products or processes.
disadvantages of a large business
1. may be difficult to managed, especially if geographically spread
2. may suffer from slow decision making and poor communication (due to the structure of a large business)
3. may often have conflicts of interest and objectives among members and partners.
internal growth is?
The expansion of a business by means of opening new branches, shops, or factories, (organic growth)
External growth is?
is expansion achieved from merging with or taking over another business. same industry or different.
4 types of integration
1. horizontal integration
2. vertical integration - forward
3. vertical integration - backward
4. conglomerate integration
horizontal integration is?
integration within the same industry and same at the same level of production.
vertical integration - forward is?
integration with a business in the same industry but a customer of the existing business
vertical integration - backward is?
integration with a business in the same industry but a supplier of the existing business
conglomerate integration is?
integration with a business in a different industry
advantages of horizontal integration
1. eliminates one competitor
2. benefits from economies of scale
3. increase power over suppliers
advantages of vertical integration - forward
1. business is now able to control the promotions and pricing of its won products
2. secures a secure outlet for the firms products - may now exclude competitors products
advantages of vertical integration - backward
1. gives control over quality, price delivery time or suppliers
2. encourages joint research and development into improved quality of suppliers
3. may now control supplies that go to competitors
advantages of conglomerate integration
1. diversifies the business away from its original industry and markets
2. this will spread the risk,
3. may take business into faster growing market
disadvantages of conglomerate integration
1. lack of management experience in the acquired business sector
2. there could be lack of clear focus and direction now that the business is spread across more than one industry.
disadvantages of horizontal integration
1. rationalisation may bring bad publicity
2. may lead to monopoly investigation if the combined business exceeds certain market share limits
disadvantages of vertical integration - forward
1. consumers may suspect uncompetitive activity and react negatively
2. lack of experience in this sector of the industry - successful manufacturer doesn't necessarily make a successful retailer.
disadvantages of vertical integration - backward
1. may lack experience of managing a supplier company
2. supplying business may become complacent(self satisfied, smug) due to having a guaranteed
what is the impact of vertical integration - backward on stakeholders?
1. possibility of greater career opportunities for workers
2. consumer may obtain improved quality and more innovative products
3. control over supplies to competitors may limit competition choice for consumer.
what is the impact of vertical integration - forward on stakeholders?
1. workers may have greater job security because the business has more secure outlets
2. there may be varied career opportunities
3. consumers may resent lack of competitions in the retail outlet because of the withdrawal of competitor products
what is the impact of horizontal integration on stakeholders?
1. consumer now have less choice
2. workers may lose job security as a result of rationalisation
what is the impact of conglomerate integration on stakeholders?
1. greater career opportunities for workers
2. more job security because risks are spread out across more than one industry
What is a merger?
an agreement by shareholders and managers of two businesses to bring both firms together under a common board of directors with shareholders in both businesses owing shares in the newly merged business
what is a takeover?
when a company buys over 50% or the shares of another company and becomes the controlling owner of it. also referred to as 'acquisition'
what is synergy?
literally means that 'the whole is greater that the sum of parts' so in integration it is often assumed that the new larger business will be more successful than the two, formerly separate, business were
reasons 1 larger company is better than 2 smaller companies
1. share research and facilities and pool ideas that will benefit both businesses.
2. economies of operating a larger scale of business, such as buying supplies in large quantities should cut costs
3. the new business will save on marketing and distribution costs by using the same sales outlets and sales team
potential finantial problems for a business from rapid growth
1. business expansion can be expensive
2. additional fixed capital and working capital required
3. takeovers can be particularly expensive
4. these factors could lead to negative cash flow and an increase in long term borrowing
possible strategies to deal with these problems:
- use international sources of finance when possible, eg retained profits
- when proposing a takeover, offer shares in the new business rather than cash offer to the shareholders of the target business
potential managerial problems for a business from rapid growth
1. existing management may be unable to cope with problems of controlling larger operations
2. there may be lack of coordination between the devisions of an expanding business - a real problem for integrating businesses
3. the original owner or boss of the business may find it difficult to adapt to being a leader and manager
possible strategies to deal with these problems:
- new management systems and structures may be required
- original owner may need to decide which areas of the business are most important and to remain heavily involved with them, and relax on the others