Getting started

Most businesses are small in size. They may be owned by one person and
employ no other people. They are likely to supply a local market and
make just enough prot to keep the owner happy. On the other hand,
some businesses are very large. They may be owned jointly by many
shareholders. They may employ thousands of people and make billions
of dollars prot. Look at the two examples below.
Sandeep Stores
Sandeep Stores is a corner shop located in Delhi. It sells spices and
dried fruits and has been run by the Sandeep family for over 70 years.
Over 95% of the Indian retail market is made up of small, family run
businesses like this one. Dilip Sandeep understands local tastes and
makes sure that he can meet the needs of the local market. In 2008 the
shop made a prot of $12,000.
Tata Group
Tata Group is the largest business in India. It is involved in the
production of steel, motor cars, chemicals, electricity and watches.
It also provides a range of services such as telecommunications, IT
consultancy, hotels and hospitality. The company employs more than
350,000 people and has operations in over 80 different countries. In
2008, Tata had a turnover of $62.5 billion and made a prot of $5.4
billion (see Figure 3.2).
(a) What evidence is there to
suggest that Tata group is a
large business?
(b) What evidence is there to
suggest that Sandeep Stores
is a small business?
(c) To what extent has Tata
Group grown since 1992?
What is business activity?
9
Figure 3.1
Spices for sale in a shop in India.
Figure 3.2 Tata Group turnover 19922008
Year
1 crore Rs 10,000,000
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1992 1994 1996 1998 2000 2002 2004 2006 2008
50000
100000
150000
200000
250000
300000
Business size and growth
Chapter 3
10
Methods of measuring business size
What is the difference between a large business and a small business?
When does a small business become large? How might size be
measured?
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.
EU denitions of size
The EU classies the size of rms according
to turnover, the number of employees and
the capital employed. The denitions are
summarised in Figure 3.3.
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!
Small Medium-sized Large
Turnover , e10m e10m to e50m . e50m
No. of employees , 50 50 to 249 . 249
Capital employed , e10m e10m to e43m . e43m
Figure 3.3 The size of rms as dened by the EU
In 2008 Ergon Energy, the
Australian energy company, had
capital employed of AUS$2,523.8
million. In contrast, Kresta
Holdings, the Australian window
and soft furnishings company, had
capital employed of AUS$20.48
million. Clearly, Ergon is the
largest business.
DID YOU KNOW?
Casio Computer Co. Ltd is based in Japan and makes electronic goods. It is best known for its calculators,
audio equipment, cameras, musical instruments, and watches. In 1957 Casio released the worlds rst electric
calculator. The company employs over 13,000 people and had a turnover of 623 billion (4.8 billion) in 2008.
Casio also made a prot of 3.946 billion (30.64 million) in the same year.
(a) Using evidence from the case determine whether Casio is a small, medium or large business.
QUESTION 1
11
Business size and growth
Methods of growth
Once a rm is established in a market it is common for owners to grow
the business. How might a company grow?
Internal growth is when a rm expands without involving other businesses.
Organic growth means that the rm 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 rms 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 rms may be taken over by a
larger rm.
Gain economies of scale As rms grow in size they will enjoy
economies of scale. This means that unit costs will fall and prots will
improve. This is explained in Chapter 36.
Increase future prots By growing and selling larger volumes, a rm
will hope to raise prots in the future.
Increase market share Larger rms 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 diversication. 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.
In June 2009, Xstrata approached fellow mining group Anglo American to discuss a possible 41 billion merger.
In a statement conrming the approach, Xstrata described a deal between the two companies as highly
compelling. The Anglo-Swiss company said it had already identied substantial savings from combining the
businesses. Analysts believe that combining the two businesses would save 400 million. The merged company
would also have a wider product range and access to more international markets.
Source: adapted from www.guardian.co.uk
(a) Using this case as an example, explain what is meant by external growth.
(b) Explain two reasons why growth in this case is likely to benet the companies.
QUESTION 2
12
(a) What evidence is there to suggest that Sainsbury
is a large business? (2 marks)
(b) Calculate the percentage growth in Sainsburys
turnover between 2005 and 2009. (2 marks)
(c) Much of Sainsburys growth has been organic.
What does this mean? (2 marks)
(d) Outline two possible reasons why Sainsbury
has grown. (4 marks)
(e) Discuss two problems that Sainsbury might
encounter when growing and how it might
overcome them. (10 marks)
Chapter review Sainsbury
Sainsbury began as a small dairy shop in London in
1869. Today it is one of the UKs largest supermarket
chains with a turnover of 20,383 million in 2009 (see
Figure 3.4). The company, owned by shareholders,
now employs over 150,000 people, serves over 18
million customers a week and has a market share of
around 16%. Its large stores offer 30,000 products
including a range of non-food products and services.
Sainsbury also has an internet-based home delivery
shopping service that is available to 88% of UK
households.
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2005 2006 2007 2008
Year
2009
10000
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16364
17 317
18518
19287
20383
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 (see Chapter 36). 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 prots 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 into 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.
Figure 3.4
Sainsburys turnover 20052009
Merger the joining together of
two businesses, usually to create
a third new company.
Internal growth expansion
that doesnt involve other
businesses.
Organic growth growth in
current activities without joining
or buying another business.
Takeover or acquisition the
purchase of one business by
another.
Key terms