Chapter 4 - Business size, growth and external growth

Number of factors considered when making a judgement about size of a business:

1. Number of employees - generally in the Uk if a business has fewer than 50 it is small and a
business with more than 250 is large
2. Number of factories, shops or of ces - higher the number it will be perceived as ‘large’.
3. Turnover and pro t levels - not necessarily a direct correlation between size and level of
pro t made (example: jeweller)
4. Stock market value - higher the gure, larger the company, share prices change daily so this
method to estimating the size could be misleading
5. Capital employed - this is total value of a business’s assets. Geographical location may affect
value of assets, stock market valuations, prices and valuations can rise and fall

EU de nitions of business size

• Standardised way of determining size

of a business

Business size: the EU has a

standardised way of measuring sized
based on the number of employees,
turnover or balance sheet value

Factors affecting the size of a business

1. Market size - small market often dominated by small businesses. This is due to larger firm not
thinking they can gain economies of scale and/or level of sales to gain desired level of profit. Is
the market expanding, static or contracting?
2. Nature of product - if a product is large/complicated the firm will usually be larger due to the
resources. Highly standardised, usually made by large business due to gaining economies of
scale. A less standard product can be marketed with ‘a personal touch’ supplied by small
business
3. Personal preference - entrepreneur may not want to expand nationally. Opening a new factory
or office could mean a loss of control, consideration of time and trouble devoted to expansion
4. Ability to access resources for expansion - are funds available?

External growth: the growth of a business

Reasons for wanting to grow:

• Entrepreneur wants a greater challenge

• The owners want a higher return on their investment
• Bigger, stronger business placed to fight any economic or competitive threats successfully
• Opportunity to gain unit cost reductions through economies of scale
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The effect of a business’s size on its stakeholders

Organic growth: achieved by increasing the firms sales. This comes from selling more to existing
customers, finding new customers. If a business constantly achieves a high level of organic growth
this indicates managers are taking the right actions.

Mergers and acquisitions: a merger is where two companies join together to form a new larger
business. A takeover involves acquiring control of another company by buying its shares. A
takeover can go smoothly however it may be regarded as ‘hostile’.

Joint ventures: this is a formal business arrangement between two or more businesses who
commit to work together on a particular project. No change of ownership involved.

Why undertake a joint venture?

• Capital cost of a project might be very high and beyond the resources of a single business,
allows both parties to share cost burden

 • Single business may consider the venture too much risk

• Enables businesses to share strengths and increase competitive advantage against others
• It can be an effective way of gaining access to markets or resources in another country

Strategic alliance: similar to a JV but in this context ‘alliance’ means co-operation rather than a
partnership. It is typically less involved and less permanent than a JV. Both parties maintain their
own identity.

Are JV and SA beneficial for stakeholders? (whether the impact is positive depends on several
factors)
• The venture or alliance could fail and the expected stakeholder benefits fail to materialise - e.g.
shrinking markets, changing customer needs, poor economic conditions
• Relative strengths of the parties when agreement is drawn up - one party more powerful could
demand division of profits which is more advantageous
• The terms of the agreement and wording of any contract need to be clear; parties must be very
specific about their rights and duties
• Depends on the integrity of those work together and how problems are resolved
• Even if both parties are evenly matched and work together, whether all stakeholders benefit
depends on whether it adopts the ‘stakeholder approach’