Business size

Business Measurement
In the world around us there are some businesses which are small and some are big. But how do we
categorize these businesses as big or small. We can consider the following factors:
 The number of employees: but business which use more machinery and technology i.e. capital
intensive may have few employees but they still might be big. Example Microsoft has less employees
but still it the biggest business on earth.
 The amount of capital invested: A business which might not use a lot of investment in machinery but
and involves less investment may still be big. Take the example of software companies and consultancy
firms like McKenzie & Co.
 The sales turnover: A business may be going through a bad phase and may not have huge sales does it
make the business small?
 Market capitalisation: markets are very volatile and share prices change every day does it alter the
size of the business every day?
 Market share: a business may not be a market leader but still may be huge whereas if the market is
itself very small, a major market share won’t make a business big.
So while deciding the size of business as big or small a combination of factors needs to be considered.
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 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.
 Increase future profits - By growing and selling larger volumes, a firm will hope to raise profits in
the future.
  Increase market share - 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.
Importance of small businesses to the economy
1. Community Involvement

 Small business owners are an important part of the communities in which they live and work. Thus,
they tend to recognize how their decisions impact their neighbors.
 In addition, local small business entrepreneurs tend to be involved in the community. For instance,
they may sponsor local Little League teams, donate to the city’s homeless shelter, join the chamber
of commerce, participate in community charity events, or contribute to a local non-profit
organization.
 It’s also not unheard of for successful business owners to guest lecture at the local community
college, technical institute, or small business center.

2. Increasing the Tax Base

 When local residents shop at small businesses within their communities, their tax dollars stay within
the local economy, helping to improve their community as a result.
 Likewise, local small businesses tend to buy locally as well, pumping more of the profits from their
economic activity back into the community than their chain store counterparts, sparking economic
development.

3. Local Jobs

 Small businesses are job creators, and most of those jobs are local jobs. Rather than having to
commute to another city, employees work closer to home. Supporting local businesses also helps
your fellow community members who work at them.
 When a community has a vibrant commercial center, it also creates ample opportunities for these
workers to shop at other local small businesses. They grab lunch or dinner from local restaurants, run
errands on their break, and grab drinks from local bars. This keeps money local and further creates a
tight-knit community vibe.

4. Entrepreneurship

 Small businesses are the product of the business owner’s entrepreneurial spirit. By starting a small
business, the business owner is taking charge of his or her future.
 Entrepreneurship fuels a country’s economic innovation and prosperity and serves as a key means for
families to move out of low-wage jobs and into the middle class.
 As an effort to further invest in local job creation, some communities have gone so far as to create a
small business development center that teaches entrepreneurial skills to the local population.
  There may even be special arrangements with a community bank set up to provide, would-be
entrepreneurs with a small business loan to get their operation up and running.
 The goal with all these initiatives is to inspire entrepreneurship and encourage continued small
business development in the local community.

5. Innovation and Competition

 Small businesses need to stand out from the crowd to survive. They must serve a legitimate need in
the community and do it better than their competitors.
 Having multiple small businesses all striving to be unique, innovative, and better can result in a
healthy marketplace and well-served customers.

6. Less Infrastructure and Low Maintenance

 Compared to shopping malls and chain stores, local shops tend to require fewer public services and
less infrastructure.
 A new music store owner may require a business license and occupancy permit, the process of
opening a shop is much less demanding on the city planning department than building a new
department store would be.

7. Diverse, Locally Made Products and Services

 One-of-a-kind and locally made products can attract customers to a community, bolstering tourism
and contributing to the local vibe.
 Locally made goods are also attractive to residents who want to minimize their carbon footprints,
support local businesses, and keep their tax dollars close to home.

Key reasons why firms may choose to remain small.

 Lifestyle choice of the owner(s) - maintaining a sense of control over work-life balance.
 Desire to keep overhead (fixed) costs to a minimum
 Avoiding the costs involved in meeting regulatory burdens associated with bigger businesses.
 Maintaining quality control over the good or service provided
 Keep a high level of flexibility an adaptability to respond to changing market conditions.

Benefits of being a small firm.

1. Concentrate on niche markets.

 Small niche markets may have less competition and therefore be more profitable.
 Moving into a mass market may make competition more intense.
 Niche markets such as handmade products can have a more price inelastic demand; therefore, firms
can charge a bigger markup on the marginal cost of production. This enables the firm to be more
profitable, despite lower volume.
2. Small can be a selling point.
 In some goods like clothes, there could be an advantage to small firms selling top end clothes
ranges. A big firm like Primark and M&S may be able to sell clothes cheaper, but, small firms can
target the customer who wants an exclusive deal – somebody who wants to stand out from the
 crowd. Some people prefer a local small coffee shop, rather than visiting a ‘bland’ multinational like
Starbucks.
3. Local profile
 Small local firms can take advantage of their local knowledge and local profile. Consumers gain
utility from supporting ‘local small businesses.
4. Economies of scale are limited in some industries.
 In the car industry, there are a small number of relatively big firms as economies of scale are very
significant.
 But, in some industries like coffee shops, economies of scale are relatively insignificant. There may
be dis-economies of scale in expanding production. Therefore, it is not a competitive disadvantage
to retain low output.
5. Different business objectives.
 Not all firms aim at profit maximisation and increasing market share.
 Some owners may prefer a business that is manageable and easy to retain control.
 Expansion may involve listing on the stock exchange which makes you liable to shareholders.
 If people work in small firms, they may get more joy because they feel in control and have a
close connection with customers.
 Owners may create a business that is also a hobby. Therefore, they would prefer to keep the firm
small and avoid spending their time on management and paperwork.
6. Tax advantages
 In the UK there is a VAT threshold of £83,000. Once firms increase turnover above this, they are
liable to paying VAT and filing in VAT returns. This can be a disincentive for a firm to grow.
 Also, as firms grow and employ more workers, it leads to national insurance contributions. For
some small business owners, the cost and time of filing tax returns can be as cumbersome as the
tax.
7. Avoid principal-agent problem.
 In a large firm, owners have to delegate control to managers and workers who may not share the
same motivation and goals of maximising interests of the firms.
 Managers and workers may engage in profit-satisficing – do enough to keep owners happy but
then maximise other objectives, such as sales maximisation.

Disadvantages of small firms

1. Less efficient than big firms. Big firms can benefit from economies of scale in production and sell at
lower cost.
2. Lack of resources. Small firms do not have resources to invest in research and development and bring to
market
3. Small firms may lack access to supply chains and retail outlets. For example, big supermarkets may
not want to deal with small suppliers.
4. Lack brand awareness. Consumers may prefer to use a well-known brand as they can be sure of the
quality and not worry about getting an unexpected experience.

FAMILY BUSINESSES
A family business is a commercial organization in which decision-making is influenced by multiple
generations of a family, related by blood or marriage or adoption, who has both the ability to influence
the vision of the business and the willingness to use this ability to pursue distinctive goals.
Advantages of family businesses

1. Common values
 Family members likely to share the same ethos and beliefs on how things should be done. This will
give you an extra sense of purpose and pride - and a competitive edge for your business.
2. Strong commitment
 Building a lasting family enterprise means you're more likely to put in the extra hours and effort
needed to make it a success, that you need to take a more flexible approach to your working hours.
3. Loyalty
 Strong personal bonds mean you and family members are likely to stick together in hard times and
show the determination needed for business success.
4. Stability
 Knowing you're building for future generations encourages the long-term thinking needed for
growth and success - though it can also produce a potentially damaging inability to react to change.
5. Decreased costs
 Family members may be more willing to make financial sacrifices for the sake of the business.
 For example, accepting lower pay than they would get elsewhere to help the business in the longer
term, or deferring wages during a cashflow crisis.
 You may also find you don't need employers' liability insurance if you only employ close family
members.
Challenges facing family businesses.
1. Family problems. Physical, emotional, and financial problems among family members can greatly
impact the day-to-day operation of the business.
2. Informal culture and structure. For many businesses, having a laid-back culture is a positive.
However, the informal structure and culture found in many family businesses can equate to a lack of
documentation, policies, and defined strategy and goals.
3. Pressure to hire family members. It can be difficult to resist the pressure that comes along with
requests from family members who want to join the business. This becomes especially complicated if
they lack the basic skills and experience needed for the position.
4. Lack of training. The informal culture found in many family businesses can result in a lax approach to
training new employees, whether they are family members or not.
5. High turnover of non-family employees. Non-family employees may feel that greater opportunities
exist within the business for those who are a part of the family and may grow tired of the culture.
6. Lack of an external view. While family members may not always have the same opinions, they often
have similar upbringing and life experiences which may lead to a uniform view of the business.
Businesses need to have external views of their company and their competition in order to thrive.
7. Who will take over the business? It is important for family businesses to plan ahead for business
succession. Many family-owned businesses do not have a plan in place and this can be a source of heated
debate and intense family politics when the time arises to select new leadership.
8. No exit plan. Family businesses often lack a defined strategy for what will happen if an owner wants to
retire, sell the business, or transfer responsibility. This goes hand in hand with succession plan issues. All
businesses need a plan for the future.
Causes and Types of Change
Change in business can be caused by a variety of internal and/or external factors. The types of change vary
too, with a useful distinction being made between incremental change, step change and disruptive change.

CAUSES OF CHANGE
The causes of change in business can be categorised into internal and external:
INTERNAL CAUSES OF CHANGE
This is change caused by decisions taken by the business itself. These can include:
Restructuring: when a business is in financial difficulties it may choose (or have) to undergo a process of
"restructuring". This usually involves changes to the capital structure of the business to reduce the amount of
debt, as well as reductions in the scale and scope of the business' activities (e.g. closing down business units)
Delayering: this involves removing one or more layers from the organisational hierarchy - the aim of which
is usually to reduce costs and improve decision-making and communication through a flatter organisational
structure.
New leadership: the arrival of new leadership is often followed by a change in business strategy and
subsequent changes to the products and markets in which a business operates and how it competes. An
attempt to change the organisational culture is also frequently a feature of change instigated by new
leadership.
EXTERNAL CAUSES OF CHANGE
These causes of change are linked to changes in the external environment facing all businesses or businesses
in specific markets and/or locations. Examples include:
Social trends / attitudes: for example the growing resistance by consumers to businesses using single-use
plastic in products and packaging
Economic conditions: for example the economic uncertainty created by Brexit or the growth
of protectionism in developed economies
Laws / regulations: for example changes to minimum pay requirements (National Living Wage), data
protection (GDPR-General Data Protection Regulation) and restrictions on advertising & selling.
Technological advances: a significant source of external change, particularly through the creation of new
business models (e.g. streaming) to challenge existing, established business models.
TYPES OF CHANGE
The types of change in business can be categorised into:
INCREMENTAL CHANGE
 These are the many small changes that businesses make day-to-day as management respond to
opportunities and threats.
 They usually involve relatively little, if any, resistance to the changes made.
STEP CHANGE
 These are the more dramatic or radical changes which management make. They are often triggered
through the arrival of new senior leadership and/or when it is recognised that the business is suffering
from strategic drift.
 Step change are substantial - they often involve significant alteration in the business' activities and
require a well-organised change management process to enable them to be made successfully.

DISRUPTIVE CHANGE
 Disruptive change is a form of step change that arises from changes in the external environment.
 Disruptive change impacts the market as a whole, challenging the established “business model” (i.e.
how products and services are sold)
 Rapid improvements in technology have been a leading driver of disruptive change since
technological innovation provides new ways of delivering goods and services as well as reducing
barriers to market entry.