CRITERIA FOR MEASURING SIZE OF BUSINESS & STRENGTHS AND WEAKNESSES OF SMALL FIRMS VS LARGE FIRMS

List 4 criteria for measuring size and growth of businesses

1. Volume of Output

2. Size of labour force

3. Capital Employed

4. Market Capitalization

5. Market Share

What is the formula to calculate market share?

Total sales of firm/ Total industry sales x 100

Explain size and financial requirements as an advantage or disadvantage to small firms vs large firms

Some may prefer to start a small business as it does not require much start up capital. The advantage of this is that the firm is most likely to grow and so will its capital. Even if the firm does not grow the money and resources spent on creating the business would be far less than that of a larger business. However, it is much harder for smaller firms to access loans as financial institutions are hesitant as there may not be enough collateral or because of the perceived inability to pay back the loan. In this case larger firms have the advantage, as financial companies can easily cease something of the company that is worth the same or more than the loan.

Differentiate between economies and diseconomies of scale

Economies of scale refer to the reduction in per unit cost of production as a business grows, whereas diseconomies of scale refer to the increase in production cost per unit as the business gets too large.

Define internal economies of scale and list 5 types

The benefits that a firm chains directly from expanding its size.

These include:

• Purchasing Economies- Being able to buy in bulk and bargain better deals

• Managerial Economies- The ability to hire specialized individuals to operate the business.

• Technical Economies- The ability to take advantage of more efficient and effective machinery and even replacing a large labour force to reduce cost and increase output.

• Risk bearing Economies-

• Financial Economies- Social finance becomes easier.

• Marketing Economies-

Define external economies of scale and list 4 types

This refers to the benefits that all the firms in the industry receive from having a lower per unit cost of production as they all grow.

These include:

• Improvement in transport and communication links

• Training and Education

• Development of auxiliary services

• Cooperation among businesses

List 3 diseconomies of scale

1. Poor Communication

2. Demotivation

3. Lack of Control and Coordination

A business can grow both internally and externally. Differentiate between the two

Internal growth is where the business expands its operations without the involvement of other businesses. This way is longer and more difficult but provides a good foundation for development. A way in which a firm can grow internally is by increasing the sale of its products to a wider range of people.

External growth on the other hand is a faster way of expanding and takes place by merger, take over or joint venture.

Define merger, takeover and joint venture

A merger is where two or more business decide to join together to create one, new business.

A take over is where one company buys out or takes control of another.

A joint venture is where two or more businesses agree to pool their funds and resources together to carry out a specific task.

This process of merger and takeover is often referred to as what?

Integration

Briefly explain the four types of integration

Vertical Integration (forward and backward)- Businesses in the same industry but at various stages of production join together.

Horizontal Integration- Businesses at the same level of production join under one management.

Lateral Integration- Firms with similar but not competing products join. For example and computer manufacturer merges with a television maker.

Conglomerate Integration- Firms with unrelated products join together.

Explain management and control as an advantage or disadvantage to small firms vs large firms

For small firms managing and controlling its operations can be relatively easy, as many of the times it is the owners or usually the ones who run the business. The span of control of smaller businesses are small and easy to manage. However, it may be difficult as the owner or partners are the only workers making it difficult to manage everything efficiently. Larger firms have the advantage of specialized management. However firms can get so big that it is difficult to maintain control.

Explain lack of record keeping as an advantage or disadvantage to small firms vs large firms

some entrepreneurs do not keep proper records if any at all. This is particularly the case, but not limited to, where the entrepreneur is the sole worker and manager.

Explain working capital deficiencies as an advantage or disadvantage to small firms vs large firms

Working capital refers to the money needed to finance the day-to-day operations of a business. It is calculated by current assets - current liabilities. A firm that is having working capital deficiencies is not able to meet its daily financial needs sufficiently. This can be caused by having too much inventory, debtors payment period, and liability to creditors is too high.

Is it true that poor management skills and regulation and legislation can be advantage or disadvantage to small firms vs large firms?

Yes, true