Short Answer Questions 1
Explain why any one stakeholder group might want to compare the size of one business with another.
Governments will want to give assistance to smaller firms so identification is important.
Investors will want to compare size and rate of growth with close competitors
Consumers might prefer to deal with only large businesses due to greater supply security
Workers may prefer a smaller business workplace
Explain one reason why comparing the size of two businesses by the number of employees might give a misleading picture.
The problem with using number of employees is that some firms are capital intensive whilst others are labour intensive
Identify one way business size can be measured, other than by the number of employees.
Identify one method of business integration other than a merger.
Takeover.
Define the term ‘internal growth’.
Explain one reason why capital employed might not be the appropriate way to compare the size of two businesses.
Some businesses have many employees with low levels of capital equipment, so they are large businesses by the employee measure but small businesses by the capital employed measure.
Other businesses have a few highly skilled employees using capital equipment costing millions of dollars. It is difficult to compare the size of these businesses using capital employed.
Explain one way in which the market capitalisation measure of business size will be affected by a stock exchange crash + one example
This is the total value of a company’s issued shares. In a stock market crash, market capitalisation will decrease.
As a result of COVID-19, Apple’s market capitalisation declined by more than $142bn during one week in 2020.
Explain the term ‘integrate horizontally’ and 'integrate vertically'
Horizontal Integration: Integration with a business in the same industry and at the same stage of production.
Vertical Integration: Integration with a business in the same industry.
Explain the term ‘external growth’ and define 'backward vertical integration' and 'conglomerate integration'.
External Growth: Business expansion achieved by integrating with another business by either merger or takeover.
Backward vertical integration: Vertical integration with a supplier business.
Conglomerate integration: Integration with a business in a different industry.
State two disadvantages of horizontal integration.
1. Rationalisation may bring bad publicity and redundancies.
2. There may be customer opposition to less competition and less choice.
3. It may lead to a monopoly investigation if the combined business exceeds certain market share limits.
Analyse the effects on business stakeholders of horizontal integration.
1. Consumers now have less choice and may have to pay higher prices.
2. Workers may lose job security as a result of
rationalisation:
• Suppliers may have to offer lower prices to the
bigger integrated business.
• Shareholder impact depends on whether profit rises or not.
• Local communities may have job losses.
Analyse one benefit to your country’s economy that would result from the growth of the number of small firms. Mention two other measurements of business size.
Increase in economic activity and employment resulting in higher living standards, particularly as many small firms do not use very much capital to produce output but depend on more employees per unit of capital than larger businesses.
Number of employees
Revenue
Capital employed
Market capitalisation
Market share
Explain three benefits to Chai Wei’s business of it still being quite small.
It can be managed and controlled by the owner(s) with little risk of losing control.
It often needs to be able to adapt quickly to meet changing customer needs especially if owner deals directly with customers
Offer personal service which builds customer loyalty
Easy to know each worker so many people prefer smaller businesses.
If family owned: business culture is informal, employees well motivated and family members perform multiple roles.
Can usually be started up and operated with low capital investment.
Explain two likely disadvantages to ME of the business growing larger.
1. Diseconomies of scale with higher unit costs and therefore lower profit margins. This will reduce ME’s competitiveness in the market.
2. More employees and more locations are more difficult to manage. Growing businesses can have problems in coordinating the activities of employees and branches.
1. Workers may have more career opportunities.
2. There may be more job security because risks are spread across more than one industry.
3. Profits could rise to benefit shareholders.
Analyse one effect on business stakeholders of forward vertical integration.
1. Workers may have greater job security because the business has secure outlets.
2. There may be more varied career opportunities.
3. Consumers may resent the lack of competition in the retail outlet because of the withdrawal of competitor products:
• Shareholder impact depends on whether
profit rises or not.
State four disadvantages for a business of it being small.
1. may have limited access to sources of finance
2. the owner has to carry a large burden of responsibility and is usually unable to afford to employ specialist managers
3. if the owner or important workers are absent/ill, other employees may not have the necessary skills to operate the business
4. may not be diversified, so there is a greater risk of external change having a negative impact
5. few opportunities for economies of scale – average costs could be high
Analyse two possible advantages and possible disadvantages to the business if Chai Wei appoints his sons as managers.
Strengths:
Commitment: The family owners often show dedication in seeing the business grow, prosper and be passed on to future generations.
Reliability and pride: Because the family name and reputation are associated with the products, family businesses strive to increase the quality of their output and to maintain a good relationship with their stakeholders.
Knowledge continuity: Families in business make it a priority to pass their accumulated knowledge, experience and skills to the next generation.
Weaknesses:
Succession/continuity problem: Many family businesses fail to be sustainable in the long term.
Informality: Because most families run their businesses themselves, there is usually little interest in setting clear and formal business practices and procedures.
Tradition: There is quite often a reluctance to change systems and procedures, with family members preferring to continue to operate the business as it was run historically.
Conflict: Problems within the family may reflect on the management of the business and make effective decisions less likely.
Analyse two roles of small businesses such as ME in the washing machine industry.
Small businesses provide supplies to the industry. As they specialise, they may be able to produce more efficiently than the washing machine manufacturers. This will reduce the cost of components. ME provides this benefit and has used its expertise to produce better-quality components with the potential to give greater satisfaction to customers.
Washing machine manufacturers can focus on their core activities to meet customer expectations more effectively
What is the impact of backward vertical integration on stakeholders?
1. Workers may have more career opportunities.
2. Consumers may obtain improved quality and more innovative products.
3. Control over supplies to competitors may limit
competition and choice for consumers.
4. Profit might rise to benefit shareholders.
Analyse and explain one potential strength and weakness for the business if the owner, who is retiring, encourages their children to continue owning and managing the business.
Strengths:
Commitment: The family owners often show dedication in seeing the business grow, prosper and be passed on to future generations.
Reliability and pride: Because the family name and reputation are associated with the products, family businesses strive to increase the quality of their output and to maintain a good relationship with their stakeholders.
Knowledge continuity: Families in business make it a priority to pass their accumulated knowledge, experience and skills to the next generation.
Weaknesses:
Succession/continuity problem: Many family businesses fail to be sustainable in the long term.
Informality: Because most families run their businesses themselves, there is usually little interest in setting clear and formal business practices and procedures.
Tradition: There is quite often a reluctance to change systems and procedures, with family members preferring to continue to operate the business as it was run historically.
Conflict: Problems within the family may reflect on the management of the business and make effective decisions less likely.
Explain to a manager one difference between organic and external growth.
Organic Growth: expansion of a business by means of opening new branches, shops or factories (all known as internal growth)
Organic growth is internal growth so would involve increasing the size of the existing factory or building a new factory.
External Growth: business expansion achieved by integrating with another business by either merger or takeover.
External growth is through merger or takeover. For example, one computer manufacturer might merge with another.
Evaluate the likely impact on stakeholders (owners (2), employees, suppliers, customers) if Chai Wei’s business takes over another restaurant business.
Chai Wei and family (owners)
1. External growth will result in increased sales and potentially greater profit which goes to the family.
2. Time and effort to ensure that the restaurants meet the standards set by Chai Wei. If they do not, there is a danger that the reputation of all the restaurants is damaged, decreasing sales.
Employees
1. Adapting to possible change in management style.
2. Possible rationalisation of the enlarged business resulting in job losses. If Chai Wei gives management roles to his family, other managers’ jobs may be at risk.
Suppliers
1. Increase in demand for the local specialist suppliers. However, the existing suppliers of the restaurants taken over may lose sales.
Customers
1. Reduced contact with the restaurant owner resulting in less responsiveness to customer demands.
2. Chai Wei charges low prices so this will benefit customers of the taken-over restaurants.
3. Economies of scale are possible. This could enable even lower prices for meals. However, cost savings may not be passed on to customers.
Evaluate the impact on stakeholders (customers, employees and local community) of Danny’s decision to merge ME with another business.
Customers
1. Greater innovation from ME and therefore better components for the manufacturers of washing machines. This will improve the quality of output and therefore increase sales to consumers.
Employees
1. Job security for existing employees as ME will produce improved components and demand may increase.
2. New jobs for electrical engineers.
3. As the owner of the other business is planning on retiring, this could have resulted in job losses without ME’s decision to merge.
Local community
1. Merger will provide new jobs
Name 3 Financial and 2 Managerial problems of growth through takeovers/mergers.
Financial
1. Takeovers can be very costly, stretching the financial resources of the business.
2. Additional fixed capital and working capital will be required quickly.
3. A merger/takeover could lead to negative cash flow and an increase in long-term borrowing and interest payments.
Managerial
1. Existing management may be unable to cope with problems of controlling an operation which may have doubled in size overnight.
2. There may be a lack of coordination between the divisions of an expanding business – a real problem for integrating businesses.
3. The culture clash between the two management teams may be very great.