Methods of Measuring Business Size
Turnover The sales revenue or turnover of a business could be used to measure size. For example, BP, the UK oil company, is a very large business. Its turnover in 2008 was $361 billion.
The number of employees A business with thousands of employees may be considered large. For example, Ford the US car giant, employed over 280,000 people in 2008.
The amount of capital employed Capital employed is the amount of money invested in a business. The more money invested, the larger the business.
Market share It could be argued that a business with a 43% market share, is larger than one that has a 9% market share in the same industry. Coca- Cola, for example sells over 50% of all cola drinks worldwide.
Problems with Measuring Size
In practice, measuring the size of a business may not be easy.
A highly automated chemical plant may only employ 45 people, but have a turnover of €50 million. According to the number of employees, the European Union (EU) would class it as a small business.
However, according to the level of turnover it could be classed as a large business.
A business with a turnover of €56 million may have capital employed of just €32 million. Therefore, according to turnover it is large, but the size of its capital employed suggests that it is medium-sized!
Methods of Growth
Once a firm is established in a market it is common for owners to grow the business. How might a company grow?
Internal growth is when a firm expands without involving other businesses. Organic growth means that the firm expands by selling more of its existing products. This could be done by selling to a wider market. Internal growth is often a slow process.
External growth is a faster method of growth. This can be by acquisition or takeover of other businesses or by merging with them. A takeover is when one company buys control of another. A merger usually means that two companies have agreed to join together and create a new company.
Reasons Why Businesses Grow
Survival In some industries firms may not survive if they remain small. Staying small might mean that costs are too high. They may not be able to compete with larger rivals. Also, small firms may be taken over by a larger firm.
Gain economies of scale As firms grow in size they will enjoy economies of scale. This means that unit costs will fall and profits will improve. This is explained in Chapter 36.
Increase future profits By growing and selling larger volumes, a firm will hope to raise profits in the future.
Increasemarketshare Larger firms may be able to dominate the market. For example, they might be able to raise prices or control part of the market. Some staff may enjoy the status and power associated with a
high market share. For example, it could be argued that Richard Branson enjoys the publicity that goes with leading a large company such as Virgin.
Reduce risk Risk can be reduced through diversification. Branching into new markets and new products means that if one product fails, success in others can keep the company going. For example, Stagecoach, the UK coach business, branched out into the provision of rail services when British Rail was privatised.
Problems Connected with Growth
Problems connected with growth
• Diseconomies of scale If a business grows too big, unit costs may start to rise. This may be caused by diseconomies of scale. For example, there may be communication problems as the organisation grows. To overcome this problem a business should plan carefully before growing rapidly.
• Resistance from shareholders Businesses owned by shareholders may be forced to use profits to increase dividend payments rather than fund growth. To avoid such resistance the backing of shareholders is needed, by promising higher dividends in the future when the company has grown, for example.
• Lack of expertise Businesses that diversify in to new areas may lack expertise. For example, a Chinese computer manufacturer may not have the skills required to manufacture cars. To overcome this problem, a business could recruit people who have expertise in the new areas. Alternatively, it could retain key staff when taking over a company in a new line of business.
• Lack of funds A business needs funds to grow. For example, a business will need money to pay for an acquisition. If funds cannot be raised, growth may be prevented.