Enterprise, business growth and size.
Comparing the size of businesses
Businesses vary in size, and there are some ways to measure them. For some people, this information could be very useful:
Ways of measuring the size of a business:
You cannot measure a businesses size by its profit, because profit depends on too many factors not just the size of the firm.
Business Growth
All owners want their businesses to expand. They reap these benefits:
Types of expansion:
Types of Mergers (and main benefits):
- Horizontal Merger: merging with a business in the same business sector.
- Vertical merger:
Forward vertical merger:
Backward vertical merger:
Conglomerate merger:
Why some businesses stay small:
There are some reasons why some businesses stay small. They are:
Businesses vary in size, and there are some ways to measure them. For some people, this information could be very useful:
- Investors - how safe it is to invest in businesses
- Government - tax
- Competitors - compare their firm with other firms
- Workers - job security, how many people they will be working with
- Banks - can they get a loan back from a business.
Ways of measuring the size of a business:
- Number of employees. Does not work on capital intensive firms that use machinery.
- Value of output. Does not take into account people employed. Does not take into account sales revenue.
- Value of sales. Does not take into account people employed.
- Capital employed. Does not work on labour intensive firms. High capital but low output means low effiency.
You cannot measure a businesses size by its profit, because profit depends on too many factors not just the size of the firm.
Business Growth
All owners want their businesses to expand. They reap these benefits:
- Higher profits
- More status, power and salary for managers
- Low average costs (economies of scale)
- Higher market share
Types of expansion:
- Internal Growth: Organic growth. Growth paid for by owners capital or retained profits.
- External Growth: Growth by taking over or merging with another business.
Types of Mergers (and main benefits):
- Horizontal Merger: merging with a business in the same business sector.
- Reduces no. of competitors in industry
- Economies of scale
- Increase market share
- Vertical merger:
Forward vertical merger:
- Assured outlet for products
- Profit made by retailer is absorbed by manufacturer
- Prevent retailer from selling products of other businesses
- Market research on customers transfered directly to the manufacturer
Backward vertical merger:
- Constant supply of raw materials
- Profit from primary sector business is absorbed by manufacturer
- Prevent supplier from supplying other businesses
- Controlled cost of raw materials
Conglomerate merger:
- Spreads risks
- Transfer of new ideas from one section of the business to another
Why some businesses stay small:
There are some reasons why some businesses stay small. They are:
- Type of industry the business is in: Industries offering personal service or specialized products. They cannot grow bigger because they will lose the personal service demanded by customers. E.g. hairdressers, cleaning, convenience store, etc.
- Market size: If the size of the market a business is selling to is too small, the business cannot expand. E.g. luxury cars (Lamborghini), expensive fashion clothing, etc.
- Owners objectives: Owners might want to keep a personal touch with staff and customers. They do not want the increased stress and worry of running a bigger business.