Business Studies

Size of business
Chapter - 3
Comparing the Size of
Businesses
Businesses can vary greatly in terms of size. Who would find it
useful to compare the size of businesses?

• Investors – before deciding which business to put their

savings into.

• Governments – often there are different tax rates for small

and large businesses.

• Competitors – to compare their size and importance with

other firms.

• Workers – to have some idea of how many people they might

be working with.

• Banks – to see how important a loan to the business is

compared to its overall size.
Unit Price: 50 BDT Unit Price: 750, 000 BDT
100,000 Units Sold Every Month 5 Units Sold Every Month
 Comparing the
Size of Businesses
Business size can be measured in several ways. The most common
ways are:

• Number of employees – This method is easy to calculate and

compare with other businesses.
• Limitations – some firms use production methods which
employ very few people, but which produce high output
levels.

• Value of output – Calculating the value of output is a

common way of comparing business sizes in the same
industry – especially in manufacturing industries.

• Limitations – A high level of output does not mean that a

business is large when using the other methods of
measurement. A firm employing few people might produce
several very expensive computers each year.
Unit Price: 50 BDT Unit Price: 750, 000 BDT
100,000 Units Sold Every Month 5 Units Sold Every Month
 Comparing the Size
of Businesses
• Value of sales/ Revenue – This is often used when
comparing the size of retailing businesses – especially
retailers selling similar products.
• Limitations – It could be misleading to use this
measure when comparing the size of businesses that
sell very different products.

• Value of capital employed – This means the total

value of capital invested into the business.
• Limitations – This has a similar problem to that of the
‘number of employees’ measure. A company
employing many workers may use labor-intensive
methods of production. These use low output levels
and use little capital equipment.
Comparing the Size
of Businesses

• Market capitalization: This can be used for

businesses that have shares quoted on stock
exchange. This is only applicable for public
limited companies.
• = current share price X total number of shares
issued

• Market share: If a firm has a high market share, it

must be among leaders in the industry.
However, when the size of the total market is
small, a high market share will not indicate a very
large firm. Total sale of a business/total sales of
industry X 100
EU Classification of Business Size
Why government support
small businesses?
• Reduce unemployment – new businesses will
often create jobs to help reduce
unemployment.

• Increase competition – new businesses give

consumers more choice and compete with
already established businesses.

• Increase output – the economy benefits from

increased output of goods and services.

• Benefits society – entrepreneurs may create

social enterprises which offer benefits society
other than jobs and profit.
Why government support
small businesses?
• Can grow further – all large businesses were small
once! By supporting today’s new firms, the
government may be helping some firms that grow to
become very large and important in the future.

• Small firms may enjoy lower average costs. Costs may

be less as wages are lower as compared to large
organizations. Always remember, all great business
were small at one time.
 What Support do
Governments Often Give
to Start-up Businesses?
• Reduced rate of profits tax: This will allow a small company

to retain more profits

• Business idea and help – Organizing advice and support

sessions offered by experienced businesspeople.

• Premises – ‘Enterprise zones’, which provide low-cost

premises to start-up businesses.

• Loan guarantee scheme – Loans for small businesses at low

interest rates. Grants, if businesses start up in depressed

areas of high unemployment.

• Labor – Grants to small businesses to train employees and

help increase their productivity

• Research – Encouraging universities to make their research

facilities available to new business entrepreneurs.

 Hard Facts
The approximately 400 million SMEs are the backbone of economies
around the world. They are the main source of job creation globally,
accounting for over 95% of firms and 60%-70% of employment.

As of 2020, there were 31.7 million SMBs in the U.S (99.9% of all
businesses). Depending on the industry, a small business can have 250 to
1,500 employees. Out of the 31.7 million small businesses, 3.7 million are
microbusinesses with 1 to 9 employees.

The total number of SMEs in Bangladesh is estimated to be 79,00,000

establishments. Of them, 93.6 percent are small and 6.4 percent are
medium.
 Significance of Small
Businesses
• Many jobs are created by small firms and, even though each
one may not employ many staff , collectively 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. This helps to
create variety in the market and consumers will benefit from
greater choice.

• Small firms can create competition for larger businesses.

Without this competition, larger firms could exploit consumers
with high prices and poor service. The cost of air travel has
been reduced in recent years due to the establishment of many
small airlines competing with the large, established companies.
Significance of Small
Businesses
• Small firms often supply specialist goods and services to
important industries in a country. For example, the global
car industry is dominated by major manufacturers such as
Toyota, BMW and Ford. All of these large businesses
depend on small specialist suppliers of on-board
computers, high-quality audio equipment and headlights.
Very often, by being able to adapt quickly to the changing
needs of large firms, small businesses increase the
competitiveness of the larger organizations.

• All great businesses were small at one time. The Body Shop
began in one small rented store in 1976. Hewlett-Packard
started assembling electrical equipment in Packard’s
garage! The large firms of the future are the small firms of
today – and the smaller firms are encouraged to become
established and expand, the greater the chances that an
economy will benefit from large-scale organizations in the
future.
 Significance Of Small
Businesses

• Small firms may enjoy lower average costs

than larger ones and this benefit could be
passed on to the consumer too. Costs could
be lower because wage rates paid to staff
may be less than the salaries paid in large
organizations, or the sheer cost of the
administration and management structure of
bigger enterprises may increase their costs
dramatically.
 Advantages of small
businesses

• Can be managed and controlled by the owner(s)

• Often able to adapt quickly to meet changing

customer needs

• Offer personal services to customers

• Find it easier to know each worker, and many staff

prefer to work for a smaller, more ‘human’ business.
 Disadvantages of Small
Businesses
• May have limited access to short- and long-term sources of finance.
Also, suppliers may be reluctant to sell goods on credit if the
business has been operating for only a short time.

• Difficulty in finding suitable reasonable priced premises

• May find 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. many small firms produce just one type of good
or service – or at least a very limited range of them.

• Will not enjoy economies of scale and so the average cost may be
high.
 Advantages of Large
Businesses
• Can afford to employ specialist professional managers

• Benefit from the cost reductions associated with large-scale

production

• May be able to set low prices that other firms have to follow

• Have access to several different sources of finance

• May be diversified in several markets and products so that risks are

spread

• Are more likely to be able to afford research and development into

new products and processes.
 Disadvantages of Large
Businesses
• May be difficult to manage, especially if it is geographically spread

• May have potential cost increases associated with large scale

production

• May suffer from slow decision making and poor communication due
to the structure of the large organization

• May often suffer from a divorce between ownership and control

that can lead to conflicting objectives.
 Why do Owners Often
Want Their Businesses to
Grow?
• The possibility of higher profits for the owners

• More status and prestige for the owners and managers – higher
salaries are often paid to managers who control the bigger firms

• Lower average costs: Increased economies of scale

• Larger share of its market – the proportion of total market sales it

makes is greater. This gives a business more influence when
dealing with suppliers and distributors and consumers are often
attracted to the ‘big names’ in an industry.

• Reduced risk of takeover: a larger business may become too

large a target for a potential predatory company.
Family Business
Private Limited Companies
Strengths and Weaknesses of
Family Businesses
Family-owned businesses are those that are actively owned and managed by at
least two members of the same family. In many cases, the family that founded
the business retains complete ownership of it. Family-owned businesses are very
important in nearly all economies, especially newly industrialising ones. It is
estimated that 80% of all businesses in South Africa are family-owned and
-operated.

Many family businesses are small; for example, 65% of all small businesses in
Malaysia are family-owned and managed. However, not all family businesses are
small. In Asia, family businesses make up 50% of all public limited companies
(67% in India) and the founding families still retain a controlling interest (over
50% of the shares).
Strengths and Weaknesses of
Family Businesses
Strengths:
• Commitment
• Reliability and pride
• Knowledge continuity

Weaknesses

• Succession/continuity problem

• Informality

• Traditional
• Conflict
Buy Branches
Collaborate Internal Growth
Takeover
Merger
External Growth
 Internal (Organic) Growth
Business growth can be achieved in several ways.
Businesses can grow internally/ organically and externally.
An example of internal growth would be retailing business
opening more shops in towns and cities where it previously
had none.

Opening only a few branches is a slow growth. However, it

can avoid problems of excessively fast growth, which tends
to lead to inadequate capital (overtrading) and management
problems associated with bringing two businesses with
different attitudes and cultures.
 External Growth/
Integration
External growth is often referred to as integration, as it involves
bringing together two or more businesses. This form of growth
can lead to rapid expansion, which might be vital in a
competitive and expanding market.

However, it leads to management problems. These are caused

by the need for different management to deal with
management organisations. There can also be conflict between
the two teams of managers (who will get the jobs?) and
conflicts of business of culture and business ethics.
Garment Factory A Garment Factory B
Same Industry
Reducing the number
Same stage of
of competitors
production
Economies of scale
Exchange of ideas
How can a businesses
grow?
Internal growth : this growth is often paid for by profits from the
existing business. This type of growth is often slow but easier to
manage than external growth. For instance, a restaurant owner
could open other restaurants in other towns.

External growth – involving a takeover or a merger with another

business. There are three types of external growth.

Horizontal integration: when one firm merges with or takes

over another one in the same industry at the same stage of
production.
The Advantages/ Disadvantages of
Horizontal Integration
Advantages of Horizontal integration

• The merger reduces the number of competitors in the industry.

• There are opportunities for economies of scale.
• The combined business will have a bigger share of the total market
than either firm before integration.

• There may be increased power over suppliers to obtain lower prices.

Disadvantages of Horizontal integration

• Rationalization may bring bad publicity and redundancies.

• There may be customer opposition to less competition and less choice.

• It may lead to monopoly investigation if the combines business
exceeds certain market share limits
 The Impact of
Horizontal
Integration
• Consumers may have less choice and may have to pay
higher prices.

Workers may lose job security as a result of ratonalisation:

• Suppliers may have to offer lower prices to the bigger

integrated business.

• Shareholder impact depends on whether profit rises

or not.

• Local communities may have job losses.

 Garment Factory A

Outlet: Set prices,

Control, Fixed place
to sell,
Independence

Clothing Store
Forward Vertical
Integration
How can a
• Forward Vertical integration: when a firm integrates with
businesses another firm which is at a later stage of production.
grow?
 The Advantages/ Disadvantages
of Forward Vertical Integration

Advantages of Forward Vertical Integration

• The merger gives an assured outlet for their product and may now exclude
competitors’ products from retail outlets.
• The business is now able to control the promotion and pricing of its own
products
• Information about consumer needs and preferences can now be obtained
directly by the manufacturer.

Disadvantages of Forward Vertical Integration

• Consumers may suspect an attempt to act uncompetitively and react
negatively.
• The business may lack experience in this sector of the industry – a successful
manufacturer does not necessarily make a good retailer.
 The Impact of Forward
Vertical Integration
• Workers may have greater job security because the
business has secure outlets.
• There may be more varied career opportunities.
• Consumers may resent the lack of competition in the
retail outlet because of the withdrawal of competitor
products.
• Shareholder impact depends on whether profit rises
or not.
Garment Factory A
Textile Factory
Backward Vertical
Integration
Quality, Reliable
Suppliers, Design
How can a
businesses Backward Vertical integration: when a firm integrates
with another firm at an earlier stage of production.
grow?
 The Advantages/ Disadvantages of
Backward Vertical Integration
Advantages of Backward Vertical Integration
• It gives control over quality, price and delivery times of supplies.
• It encourages joint research and development into improved quality of
components.
• The business may now control supplies of materials to competitors.

Disadvantages of Backward Vertical Integration

• The business may lack experience of managing a supplying company – a
successful steel producer will not necessarily make a good manager of a
coal mine.
• The supplying business may become complacent due to having a
guaranteed customer.
 The Impact of Backward Vertical
Integration

• Workers may have more career more

opportunities.

• Consumers may obtain improved quality and

more innovative products.

• Control over supplies to competitors may limit

competition and choice for consumers.
• Profit might rise to benefit shareholders.
How can Conglomerate Integration: when one firm merges with
Business or takes over a firm in a completely different industry.

Grow? This is also known as diversification.

 The Advantages of
Conglomerate
Integration
• The business now has activities in more than one industry. This means
that the business has diversified from its original industry, markets, and
activities. This will spread the risks taken by the business. For instance,
suppose that a newspaper business took over a social networking
company. If sales of newspaper fell due to changing consumer
demand, sales from advertising n social network sites could be rising at
the same time due to increased interest in this form of communication.

• There might be a transfer of ideas between the different sections of the

business even though they operate in different industries. For example,
an insurance firm buying an advertising agency could benefit from
better promotion of its insurance activities as a result of the agency’s
new ideas.
 The Disadvantages/
Impact of Integration
Disadvantages:
• There may be lack of management experience in the
acquired business sector.
• There could be a lack of clear focus and direction now
that the business is spread across more than one
industry.
Impact:
• Workers may have more career opportunities.
• There may be more job security becasue risks are
spread across more than one industry.
• Profits could rise to benefit shareholders.
50 percent or more Takeover
Equal shares Merger
 Why Merger or Takeover is
a Good Decision?
• The integrated business will be able to share research facilities and pool
ideas that achieve better results than the two separate businesses.

• The economies of operating a larger scale of business, such as buying

supplies in large quantities, should cut average costs and increase efficiency.

• The new business can save on marketing and distribution costs by using the
same sales outlets and sales teams.

• Rationalization of property and other assets will reduce duplication and

costs.
Why might a Merger or Takeover
Fail to Achieve Objectives?
In practice, many mergers and takeovers fail to gain true synergy, and shareholders are
often left wondering what the purpose of the integration really was. Many examples of
business integration have not increased shareholder ‘value’ for the following reasons:

• The integrated firm is too big to manage and control effectively – this is a ‘diseconomy
of scale’.

• There may be little mutual benefit from shared research facilities or marketing and
distribution systems if the firms have products in different markets.

• The business and management culture for example, the approach each company takes
to environmental issues – may be so different that the two sets of managers and
workers may find it very difficult to work effectively and cooperatively together.
 Strategic
Alliances
A strategic alliance is a form of external
growth that does not involve complete
integration or changes in ownership. Instead,
it keeps the parties to the agreement
independent.

Definition: agreement between two

organisation to commit resources to achieve a
specific objective while remaining
independent.
 Examples of
Strategic Alliances
• A university, providing finance to
provide new specialist training courses
that will increase the supply of suitable
trained employees for the business.
• A supplier, to design and produce
components and materials that will be
used in a new range of products. This
may help to reduce the total
development time for getting the new
products to market, thereby gaining
competitive advantage.