LESSON 3 :SIZE OF BUSINESS There are different ways to measure the size of business. A firm may appear to be large by one measure but small by another. They is no agreed definition of what a small, medium or large business is.

Different measures of size 1.Number of employees Simplest measure, easy to understand, not always as it seems that more employees mean larger business. 2.Sales turnover Total value of sales made by a business in a given time. Effective when comparing firms in same industry. 3.Capital employed It is the total value of long term finance invested in the business. cont…

Different measures of size 4.Market capitalisation The total value of company`s issued shares. Market capitalisation=current share price * total number of shares issues 5.Market share Total value of sales made by a business in a given time. Effective when comparing firms in same industry. Formula: Total sales of business ______________________ * 100 total sales of industry 6.Other measures depend on industry

Which form of measurement is best There is no best measure. Depends on the firms being compared. Depend on if we are interested in absolute size or comparative size with in one industry. For absolute measure test the firms on two of the above criteria.

The significance of small and micro businesses Employ few people Low turnover Very small businesses known as micro enterprises. Jobs are created by them even though they employ less staff Run by dynamic entrepreneurs with ideas of consumer goods and services so variety is created and more consumer choice.

The significance of small and micro businesses Supply specialist goods and services to industries. Competition for large firms to stop consumer exploitation. All great businesses were small at one time. Enjoy lower average costs this benefit is passed to consumers.

Government assistance to small businesses Reduced rate of tax Loan guarantee scheme Information ,advice and support In deprived cities gov finance the establishment of small workshops rented to small firms at reasonable rents. Other help Expertise is given Help in raising short and long term finance Help in marketing risks if consumer taste and demand changes. Help in finding suitable priced premises.

Business Growth Reasons of Growth Increased profit Increased market share Increased economies of scale Reduced risk of being a take over target. Increased power and status of the owners and directors.

Internal Growth It is the expansion of by means of opening new branches, shops or factories.

External growth Involves much greater sums of money and takes place through the use of mergers and takeovers (often known as growth through amalgamation, or simply integration).

REASONS OF GROWTH Regardless of the method of growth, there are several reasons why firms wish to grow: To achieve economies of scale and see the average cost of production decline. To achieve a greater market share. To satisfy the ego of the businessman. To achieve security through becoming more diversified. To survive in an increasingly competitive market. Mergers and Take-Overs

External Growth Mergers – agreed amalgamation or joining between two firms. A merger occurs where two firms combine, with the consent of both groups of shareholders and Directors. Takeover – takeover (also known as an acquisition) refers to a situation where over 50% of the shares in another company have been purchased - therefore giving the predator full control of the newly acquired company. Both mergers and takeovers are referred to as growth through amalgamation, or simply as integration

TYPES OF MERGERS Horizontal. This occurs when two firms in the same industry join together who produce the same product and are at the same stage of the production process (e.g. the Nestle takeover of Rowntree). The new, larger business is likely to be more powerful, have a larger market share, and achieve higher sales revenue and profits. However, the new business may become complacent and inefficient and find that it suffers from diseconomies of scale and / or falling profits. Vertical. This occurs when two firms combine who are in the same industry, but at a different stage of the production process.

Forward vertical integration Forward vertical integration. Occurs where a company merges with, or takes-over, another company which is closer to the retail stage (i.e. nearer to the consumer). An example of this would be a car manufacturer taking-over a range of car showrooms. It is often the result of a desire to secure an adequate number of market outlets and to raise their standard. Backward vertical integration. Occurs where a company merges with, or takes-over, another company which is closer to the source of the raw material (e.g. a car manufacturer taking-over a supplier of car components). It is often the result of a company being able to exercise much greater control over the quantity and quality of it supplies, as well as securing its supplies at a lower cost.

Conglomerate. This occurs where two firms merge which are in different industries and produce different goods -it is pure diversification. The major advantage to the new, larger firm is that it has diversified its product range and spread its risks.

Synergy The underlying motive for most mergers and takeovers is to achieve synergy. This is often called the "2+2=5 Effect", since the end result will hopefully be more than what the two firms put in to the venture

Advantage of integration Share research facilities Economies of scale Save on marketing and distribution costs Increased efficiency Increased profitability

Joint Ventures And Strategic Alliances Strategic alliance between firms on agreed resources and objectives. They may have variety of stake holders --with a university --with a supplier --with a competitor

Problems with rapid growth Extra expenses Extra responsibilities and workloads Diseconomies of scale Divorce of ownership and control.