Presentation on theme: "LESSON 3 :SIZE OF BUSINESS"— Presentation transcript:
1LESSON 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.
2Different measures of size 1.Number of employeesSimplest measure, easy to understand, not always as it seems that more employees mean larger business.2.Sales turnoverTotal value of sales made by a business in a given time. Effective when comparing firms in same industry.3.Capital employedIt is the total value of long term finance invested in the business.cont…
3Different measures of size 4.Market capitalisationThe total value of company`s issued shares.Market capitalisation=current share price * total number of shares issues5.Market shareTotal value of sales made by a business in a given time. Effective when comparing firms in same industry.Formula: Total sales of business______________________ * 100total sales of industry6.Other measures depend on industry
4Which 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.
5The significance of small and micro businesses Employ few peopleLow turnoverVery small businesses known as micro enterprises.Jobs are created by them even though they employ less staffRun by dynamic entrepreneurs with ideas of consumer goods and services so variety is created and more consumer choice.
6The 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.
7Government assistance to small businesses Reduced rate of taxLoan guarantee schemeInformation ,advice and supportIn deprived cities gov finance the establishment of small workshops rented to small firms at reasonable rents.Other helpExpertise is givenHelp in raising short and long term financeHelp in marketing risks if consumer taste and demand changes.Help in finding suitable priced premises.
8Business Growth Reasons of Growth Increased profit Increased market shareIncreased economies of scaleReduced risk of being a take over target.Increased power and status of the owners and directors.
9Internal GrowthIt is the expansion of by means of opening new branches, shops or factories.
10External growthInvolves much greater sums of money and takes place through the use of mergers and takeovers (often known as growth through amalgamation, or simply integration).
11REASONS OF GROWTHRegardless 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
12External GrowthMergers – 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
13TYPES OF MERGERSHorizontal. 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.
14Forward 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.
15Conglomerate. 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.
16SynergyThe 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
17Advantage of integration Share research facilitiesEconomies of scaleSave on marketing and distribution costsIncreased efficiencyIncreased profitability
18Joint 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
19Problems with rapid growth Extra expensesExtra responsibilities and workloadsDiseconomies of scaleDivorce of ownership and control.