1.3 Size of Business

Measurement of Business Size

Different Methods of Measuring the Size of the Business

Problems of measuring the size of the business:

• There are several different ways of measuring and comparing business size and they often give different comparative results
  • A firm might appear large by one measure but quite small by another
• There is no internationally agreed definition of what a small, medium or large business

Different Measures of Size:

• Number of Employees
  • Easy to understand
    • Obvious that a shop run by just the owner or their family is small and a firm employing many staff is likely to be large
  • Does not consider business that needs to employ only a few people due to expensive capital equipment
• Revenue: total value of sales made by a business in a given time period
  • Often used as a measure of size, especially when comparing firms in the same industry
  • Less effective when comparing firms in different industries:
    • Some might be engaged in ‘high-value’ production and others might be in ‘low-value’ production
  • Measure is needed to calculate market share
• Capital Employed: the total value of all long-term finance invested in the business
  • The larger the business enterprise, the greater the value of capital needed for long-term investment
  • Comparisons between firms in different industries may give a misleading picture
    • Two firms employing the same number of staff may have very different capital equipment needs
• Market Capitalisation: the total value of a company’s issued shares
  • Can be used only for businesses that have shares quoted on the stock exchange (public limited companies)
  • Calculated by the formula:

• As share prices tend to change every day, this form of comparison is not a very stable one
• Market Share: sales of the business as a proportion of total market sales
  • If a firm has a high market share, it must be among the leaders in the industry and comparatively large
    • However, when the size of the total market is small, a high market share will not indicate a very large firm
  • Calculated by the formula:

Significance of Small Businesses

Advantages and Disadvantages of Small Businesses

Advantages	Disadvantages
– Can be managed and controlled by the owner(s) – Often able to adapt quickly to meet changing customer needs – Offer personal service to customers – Find it easier to know each worker, and many staff prefer to work for a smaller, more ‘human’ businessIf family-owned, the business culture is often informal, employees well-motivated and family members perform multiple roles	– May have limited access to sources of finance – The owner/s has/have to carry a large burden of responsibility if unable to afford to employ specialist managers – May not be diversified, so there are greater risks of negative impact of external change – Few opportunities for economies of scale

Strengths and Weaknesses of Family-Owned Businesses

Strengths

Weaknesses

(1) Commitment: – Family owners show dedication in seeing the business grow, prosper and get passed on to future generations – Have the incentive to work harder and reinvest part of their profits into the business to allow it to grow in the long term (2) Reliability and Pride: – Name and reputation associated with their products therefore striving to increase the quality of their output and maintain a good relationship with their stakeholders (3) Knowledge Continuity: – Considered a priority to pass accumulated knowledge, experience and skills to next generation -Increases level of commitment and provide the necessary tools to run the family business

(1) Succession / Continuity Problem: – High rate of failure among family businesses can be explained by lack of skills and ability of later generations – Also, splitting of management responsibilities between several family members to give them all a role in it (2) Informality: – Less interest in setting clear and formal business practices and procedures – Can lead to inefficiencies and internal conflicts (3) Traditional: – A reluctance to change systems and procedures, continuing to operate as it was historically run – Leads to lack of innovation (4) Conflict: – Problems within the family may reflect on management of the business and make effective decisions less likely

The Importance of Small Businesses and Their Role in the Economy

• Many jobs are created by small firms
  • The small-business sector employs a very significant proportion of the working population in most countries
• Small businesses are often run by dynamic entrepreneurs, with new ideas for consumer goods and services
  • Helps create variety in the market and consumers will benefit from greater choice
• The large firms of the future are the small firms of today
  • As more smaller firms are encouraged to become established and expand, the greater the chances that an economy will benefit from large-scale organisations in the future
• Small firms may enjoy lower average costs than larger ones and this benefit could be passed on to the consumer
  • Costs could be lower because wage rates paid to staff may be less than the salaries paid in large organisations

The Role of Small Businesses as Part of the Industry Structure in Some Industries

• Small firms can create competition for larger businesses
  • Without competition, larger firms could exploit consumers with high prices and poor services
  • Example: the cost of air travel has been reduced due to the establishment of small airlines competing with large, established companies
• Small firms often supply specialist goods and services to important industries in a country
  • By being able to adapt quickly to the changing needs of large firms, small businesses increase the competitiveness of the larger organisations
  • Example: the global car industry is dominated by major manufacturers that depend on small specialist suppliers of (for example) on-board computers, high-quality audio equipment and headlights

Internal Growth

Why and How a Business Might Grow Internally

Internal Growth: expansion of a business by means of opening new branches, shops or factories (also known as organic growth)

• Reasons why owners and directors of companies seek growth for their business:
  • Increased profits
    • Expanding the business and achieving higher sales, making the business more profitable
  • Increased market share
    • Gives a business a higher market profile and greater bargaining power with both suppliers and retailers
  • Increased economies of scale
  • Increased power and status of the owners and directors
    • Example: opportunities to gain publicity or influence government policy will increase if the business is large and well known
  • Reduced risk of being a takeover target
    • A larger business may become too large a target for a potential ‘predator’ company
• Example of internal growth: retailing business opening more shops in towns and cities where previously it had none
  • Growth can be considered slow; only a few branches or shops opening each year
  • Can avoid problems of excessively fast growth – tends to lead to inadequate capital and management problems associated with bringing two businesses together that often have different attitudes and cultures

Reference: Stimpson, P., Farquharson, A., & Stimpson, P. (2015). Cambridge international As and A level business coursebook. Cambridge: Cambridge University Press.