CIE As Level Business | 1.3 Size of Business - Business and Its Environment

What are the ways to measure business size?

1. Size of *workforce*

2. Value of *capital employed*

3. Value of *business sales (revenue)*

4. Value of *output*

5. *Market capitalisation*

6. *Market share*

Formula of *sales revenue*

Price x quantity sold

Formula for *value of business output*

Price x quantity produced

Formula for *market capitalisation*

Share price x number of shares

Formula for *market share*

(Business Sales / Market Sales) x 100

What are the benefits & drawbacks of measuring business size by *size of workforce*?

Benefits:

✅ Easy to calculate

Drawbacks:

❌ Ignores capital intensive firms

What are the benefits & drawbacks of measuring business size by *value of output*?

Benefits:

✅ Common method of comparing firms in the same industry (esp manufacturing)

Drawbacks:

❌ Business may sell high value/ low volume goods

What are the benefits & drawbacks of measuring business size by *value of sales*?

Benefits:

✅ Common method when comparing retail (esp those selling similar stuff)

Drawbacks:

❌ Not good for firms selling different products

What are the benefits & drawbacks of measuring business size by *amount of capital employed*?

Benefits:

✅ Easy to calculate (just the total capital invested)

Drawbacks:

❌ Ignores labour intensive firms

❌ Sometimes value of capital can go up/ down making it difficult to calculate

What are the *advantages* of a small business?

- *Easy* to set up + require *little start-up capital*.

- *Managed* by *owners* who can *maintain control*.

- Owners likely to have *close working relationships* with workers —> encouraging loyalty.

What are the *disadvantages* of a small business?

- *Few sources of finance* may available (as lenders consider them a higher risk than larger firms).

- Owner takes on all *responsibility* for *decision-making* —> can lead to significant pressure.

- Little opportunity to achieve benefits of *economies of scale*

What are the *advantages* of a family-owned business?

- Often have a *long-term perspective* that prioritises sustainability over profit.

- *Strong cultures* rooted in family's traditions and beliefs —> loyalty + sense of belonging among employees.

- *High level of commitment* as their livelihoods are tied to the success of the business.

- They develop *close relationships with customers* + *suppliers* —> better reputation + flexibility.

What are the *weaknesses* of a family-owned business?

- *Conflicts* and *tensions* can arise within the family.

- May *lack professional management* as family members are promoted regardless of qualifications / experience.

- May *struggle to access external finance* to fund growth.

- Planning for *succession* can lead to conflicts.

What are the *benefits* of small businesses to an economy?

1. *Employment* — employ a large portion of the workforce in most economies.

2. *Economic growth*

3. *Lower prices* — small businesses usually have lower wage and administration costs, thus usually lower prices.

4. *Innovation and competition* — entrepreneurs bring new products and services to the market.

5. *Suppliers* — small businesses can be important suppliers to large firms.

Why do business grow?

1. *Rising customer demand* — when more people want a company's products, it can open new stores.

2. *Economies of scale* — as firms get bigger they spread fixed costs over more units.

3. *Entering new markets or products* — businesses can find extra sources of revenue by selling to new customers.

Internal (organic) growth

When a business grows internally, using its *own resources* to increase the scale of its operations and sales revenue.

What are the methods of *organic growth (internal)*?

- Gaining greater *market share*

- Product *diversification*

- Opening a *new store*

- *International* expansion

- Investing in *new technology* or production machinery.

What are the *advantages* of *organic growth*?

- Manageable *pace of growth*.

- *Less risky* as growth is financed by profits and there is industry expertise.

- Avoids *diseconomies of scale*.

- *Experienced management* that knows & understands every part of the business.

What are the *disadvantages* of *organic growth*?

- The pace of growth can be *slow and frustrating*.

- Not necessarily able to benefit from *economies of scale*.

- Access to *finance* may be limited.

External growth

Business expansion achieved by means of *merging with*, *taking over* or having a *joint venture* with *another business*, from either the same or a different industry.

What are the types of *integration* (external growth)?

1. Vertical integration (forwards & backwards)

2. Horizontal integration

3. Conglomerate integration

Forward vertical integration

A merger or takeover with a firm *further forward* in the supply chain.

(e.g. A dairy farmer merges with an ice cream manufacturer)

Backwards vertical integration

A merger / takeover with a firm further backwards in the supply chain.

(e.g. An ice cream retailer takes over an ice cream manufacturer)

Merger

Where two businesses join together

Takeover

Where one business buys more than 50% of another and becomes its controlling owner.

What are the *advantages* of vertical integration?

- Reduced *cost of production* —> more *competitive*.

- Greater control over supply chain —> *reduced risk* (more trustworthy supply).

- The *quality* of raw materials *can be controlled* —> better brand image.

What are the *disadvantages* of vertical integration?

- *Diseconomies of scale* as costs increase (i.e. unnecessary duplication of management roles).

- *Culture clash* between firms merging.

- *Inefficiencies* due to limited experience in running new firm.

Horizontal Integration

A merger / takeover with a firm at the same stage of the production process.

What are the *advantages* of horizontal integration?

- Rapid increase of *market share*

- *Economies of scale* —> reductions in cost per unit.

- *Reduced competition*

- Gain new *knowledge / expertise*

What are the *disadvantages* of horizontal integration?

- *Diseconomies of scale* as costs increase (i.e. unnecessary duplication of management roles).

- *Culture clash* between firms merging.

Conglomerate integration

A merger / takeover between firms in entirely different industries.

What are the *advantages* of conglomerate integration?

- *Spreads risk* across industries

- Uses *surplus cash* and skills elsewhere.

- *Key expertise* can be shared with all parts of the business (i.e. financial management).

What are the *disadvantages* of conglomerate integration?

- Limited *management expertise* in unfamiliar sectors.

- *Research required* to understand trends and customer needs.

- Greater organisational *complexity*

What are the possible impacts of a merger / takeover on *employees*?

✅ More *job opportunities* if the business grows

✅ Possible access to *better training* and *resources*

❌ Possible *job losses* if the business tries to cut costs.

What are the possible impacts of a merger / takeover on *owners*?

✅ High offers for *shares* if successful

❌ *Fall in share prices* if takeover fails / performance drops

What are the possible impacts of a merger / takeover on *suppliers*?

✅ *Bigger orders* from bigger businesses

❌ New company may demand *lower prices* / switch to *new suppliers* to reduce costs.

What are the possible impacts of a merger / takeover on *customers*?

✅ *Lower prices* + more *product choice* + *improved services* as the business becomes more efficient.

❌ *Higher prices* or *fewer choices* due to less competition.

What are the possible impacts of a merger / takeover on *competitors*?

✅ If the new business faces problems after merging it may *open opportunities* for competitors.

❌ *Reduced competition* form smaller businesses (in general).

Why might a merger or takeover not achieve their objectives?

1. *CULTURES & SYSTEMS*

—> Employees may clash over *ways of working* / *IT systems* may be incompatible.

—> Managers may spend months fixing problems, *stalling new ideas*.

—> Lower staff morale.

2. *HEAVIER DEBT BURDEN*

—> Mergers often paid w/ borrowed money.

—> *Interest payments* use cash that could otherwise fund *research*, *marketing*, or *new factories*.

—> If *profits fall* they may have to *cut dividends*, *sell assets*, or *issue new shares*.

3. *REGULATION*

—> Competition watchdogs may delay mergers / block the deal entirely to *protect consumers*.

Joint Venture

When two businesses join together to form a separate business entity for a *limited period of time*.

What are the *advantages* of a joint venture?

1. *Shared costs & risks*

—> Cost of the new project is shared between two businesses.

2. *Access to new markets*

—> Local partner may have a better understanding of *local culture, laws and consumer preferences*.

3. *Shared expertise and skills*

—> Each business brings different strengths (e.g. technology, brand reputation, distribution networks).

4. *Access to resources and technology*

—> Firms gain access to *capital, machinery, patents, or advanced technology* they do not own.

5. *Economies of scale*

—> Joint purchasing + production can reduce *average costs*.

What are the *disadvantages* of a joint venture?

1. *Conflict between partners*

—> The two businesses may have *different objectives, cultures, or management styles*.

2. *Loss of control*

—> Decisions usually have to be *shared*.

3. *Profit sharing*

—> Profits must be *shared between partners*.

4. *Risk of losing confidential information*

—> Firms may need to share *trade secrets, technology, or business strategies*.

—> A partner could later become a competitor using this knowledge.

Strategic Alliance

An agreement between two organisations to commit resources to achieving a specific objective while remaining independent.

What's the difference between a joint venture and a strategic alliance?

A *joint venture* involves the creation of a new legal identity.

A *strategic alliance* is a cooperative arrangement — without the formation of a new legal entity.