Business size and growth

• Number of employees — simple, but flatters labour-intensive businesses and understates highly automated ones.
• Revenue (sales turnover) — comparable within an industry, but a supermarket’s revenue dwarfs a jeweller’s of similar importance.
• Capital employed — the long-term finance invested; favours capital-intensive industries.
• Market share — size relative to rivals, meaningless across industries.
• Market capitalisation — share price × number of shares; only for public limited companies, and moves with the stock market.

The examinable point is appropriateness: no single measure works for every business, so the right one depends on the industry and the purpose of the comparison. Using two measures together is the strongest answer.

Advantages of being small: flexibility and quick decisions, personal service and close customer relationships, low overheads, motivated owners, and the ability to serve niche markets too small for large firms. Disadvantages: no economies of scale, so higher unit costs; difficulty raising finance; reliance on a few people and customers; limited specialist expertise.

Family businesses add strengths — commitment, trust, a long-term view, shared values — and weaknesses: conflict between family and business decisions, succession problems, and promotion by family rather than merit.

Small businesses matter to the economy: they create jobs, start most new ideas, supply large firms, keep markets competitive and grow into the large businesses of the future.

Growing from within — more products, new branches, new markets, financed largely from retained profit. It is lower risk, keeps control and culture intact, and avoids the cost and disruption of combining two organisations. It is also slow, limited by the business’s own profits, and may be too late to seize an opportunity a competitor is about to take.

A merger joins two businesses by agreement into one. A takeover (acquisition) is one business buying a controlling stake in another. A friendly takeover is supported by the target’s board; a hostile takeover is made against its wishes, usually by buying shares directly from its shareholders.

External growth is fast and buys market share, brands, skills or technology at once; it is expensive, often financed by debt, and brings the integration problems below.

A merger affects every stakeholder differently: shareholders hope for higher profit; employees fear duplicated jobs being cut; customers may gain from scale or lose from less competition; suppliers may gain a bigger customer or be replaced. Questions that ask for the impact on one stakeholder want that stakeholder followed through, not a list.

The reasons a merger may achieve its objectives: economies of scale, cross-selling to each other’s customers, combined expertise, removal of a competitor. The reasons many do not:

• Paying too much — the price assumed savings that never arrive.
• Culture clash between two ways of working, damaging motivation.
• Diseconomies of scale — coordination and communication problems in a larger business.
• Loss of key staff and customers during the uncertainty.
• Management distracted from running the business by integrating it.

A balanced 12-mark answer weighs the expected synergies against these, and lands on what the outcome depends on — usually how well the two cultures are integrated.

A joint venture creates a new business owned by two or more partners for a shared project; a strategic alliance is an agreement to cooperate without creating a new business. Both share costs, risks and expertise and give access to new markets — at the price of shared control and profit, and the risk of the partners’ aims diverging.

On the 36 AS papers Quanta holds, 19 question parts test size of business, on 16 of the papers (10 on Paper 1, 9 on Paper 2). The command words they open with:

• Evaluate × 8
• Analyse × 4
• Identify × 3
• Explain × 2
• Define × 2

By tariff — each size has its own technique:

• 3 × 1-mark, 2 × 2-mark, 2 × 3-markShort-answer questions (2, 3 and 5 marks) →
• 4 × 8-mark8-mark 'analyse' questions →
• 8 × 12-mark12-mark 'evaluate' questions →

Terms candidates have been asked to define or explain on this topic:

takeover · hostile takeover

1. 1.Merger and takeover used as the same thing

   A merger is by agreement into one business; a takeover is one business buying control of another.

2. 2.Backward and forward vertical integration reversed

   Backward is towards suppliers (the raw materials); forward is towards customers.

3. 3.Assuming bigger is always better

   Growth brings diseconomies of scale and loses the flexibility and personal service that may be the business’s whole advantage. Weigh both.

4. 4.Number of employees recommended for every business

   Choose the measure that suits the industry, and say why the others would mislead.