Businesses come in all sizes. Some are small, owned and run by just one person, while at the other end of scale are giant companies, familiar to us all, which operate all over the world, businesses grow in different ways, and for different reasons.
The size of firms
Individual businesses vary considerably in size. They can be classified as large or small according to various objectives measures and this may be of importance to various stakeholders. Banks and others financial institutions want to know how secure a loan is likely to be; shareholders and investors may base their investment decisions on the size of a business; businesses need to know the size and strength of their competitors; government need to know the effect of different businesses on employment and the company.
The main methods of measuring the size of a business are by:- Output of goods and services
- Turnover
- Profit
- Number of employees
- Capital employed
- Number of outlets
Units of production could be used to compare the size of firms in the same industry, but care is necessary. Two fast food restaurants each serving 1,000 meals a day might be considered the same size, but two firms each producing 1,000 motor cars cannot be compared on the same basis if one produces luxury limousines while the other produces family saloons.
How do firms grow?
Some industries are dominated by large firms. Most businesses begin small, however, and grow over a long period of time. Growth may be internal or external.
Internal growth
Some businesses grow because their market grows, and they are able to maintain their share or the market. Other businesses try to develop new markets for their products, perhaps internationally.
New products, especially in the field of information technology, can generate increased sales for a business. Thus the development of computers, software and mobile phones has given rise to the growth of major businesses such as IBM, Microsoft and Vodaphone.
But often internal growth is a slow process with markets growing only slowly if at all. New product may involve many years of research, development and testing before they can be marketed. Aggressive companies may want to increase the scope of their activities more quickly. This has led to the expansion of the process of external growth.
External growth
External growth involves a merger with another business or a takeover of that business. A takeover is where one company gains control of another. A merger is where two companies join together by mutual agreement – sometimes establishing e new distinct business, sometimes retaining their separate identities.
Horizontal mergers occur where the two companies are engaged in the same stage of production of the same good. The merger of two bakers or two motor vehicle assemblers would be examples of horizontal mergers.
Vertical mergers occur between two companies engaged in different stages of the production of the same good. A producer of dairy products such as milk and cheese might take over a farm in order to safeguard its supply or raw materials.
Lateral mergers involve two companies producing related goods that do not compete directly with each other. The common link may be at one end of the process only. Supermarkets and hardware stores operate in different markets, but a lateral merger between them might lead to some cost cutting.
Conglomerate, or diversifying, mergers occur where the products of the companies involved are unrelated. The acquisition of a cosmetics or potato crisp manufacturer by a tobacco company constitutes a diversifying merger. Such mergers may be defensive, in anticipation of a decline in the acquiring company’s main market.
Multinational businesses
A multinational company is a business with operations in countries other than that in which it is based. We have already met Daewoo; other well-known examples are BP, Microsoft and Nike.
The annual sales of some multinationals are larger than the total output of many individual countries. These companies have considerable influence in the countries in which they operate. In developing countries the establishment of a multinational may well cause more problems than it solves.
Other things being equal, most firms would prefer to expand in their domestic market rather than abroad. Limits to the size of the home market, however, mean extra sales can eventually be achieved only by selling abroad. There are often obstacle, such as trade restrictions and import taxes, placed in the way of exporting goods from one country to another, however, and companies may seek the alternative route of actually producing goods abroad and avoiding the need to export.
Sometimes a business may establish factories overseas for other reasons. The availability of raw materials or cheap labour may attract the multinational. Government, anxious to attract investment, may offer tax advantages or other incentives.
Some of the main effect of the development of multinationals are: employment will increase in the host country – this may, however, be at the expense of employment or potential employment in the home country; multinationals transfer technology from one country to another, facilitating economic progress; the level of economic activity should increase in the host country.
But not all the consequence of the multinationals are beneficial:Multinational business will do what is best for the company, not for the country they are operating in, switching production between countries according to need, regardless of the effect on the economy of the country or unemployment.
Multinationals may take advantage of their situation to minimize their taxation. Multinationals located in developing countries may be able to dictate to governments anxious not to jeopardize investment and employment by the multinational.
The establishment of a multinationals company in a country may harm domestic businesses; some smaller businesses may even fail in the face of strong competition.
As multinationals grow even larger and spread even wider, governments increasingly have to consider their policies in relation to them so that their possible disadvantages do not outweigh their benefits.
How do small firms survive?
We saw earlier that there is no satisfactory single measure of the size of businesses. Different criteria are used in different industries.
The difficulty can be understood if we consider just two areas; oil refining and taxi services. Whatever method is used to measure the size of businesses in these industries – turnover, capital or employees – we can be sure that the smallest firm in the oil refining industry is far bigger than the largest firm in the taxi industry. This is why different measures have to be employed.
Whatever measures are used, however, and despite the fact that the biggest firms continue to increase in size, there is large and growing small firms sector which is vital to the economy of countries throughout the world. Small firms are especially active in the service sector, where they have the largest share of the market.
There are several reasons why small firms continue to thrive. Many people value independence. They may also make a greater contribution to the economy of a country by running their own large number of small businesses could expand but do not as their owners want to retain control and do not want the anxiety that a larger organization would bring.
Market that are small and geographically dispersed, even throughout the world, are best served by small firms that can concentrate on the needs of the smaller market. Large firms tend not to be interested in producing custom-made goods. A large construction firm that specializes in building motorways or power stations will not waste resources on building an extension to your home, which is the type of job ideally suited to a small builder.
Small firms also frequently provide an important service to large firms by providing them with components. This enables the larger firm to concentrate on its main tasks.
Small firms can be more creative. Managers and owners of small businesses are closer to their customers than the top management of large firms. They may be able to identify the significance of and need for new developments more quickly. Decisions can be taken quickly, without the need for a large bureaucracy. Small businesses are more flexible, and perhaps more responsive to the changing needs their customers.
In many countries, assistance is available to people considering starting their own business. Various grants, subsidies or tax concessions ensure that activity in the small firms sector is maintained. A government‘s main reason for providing such support may be the hope of reducing unemployment. Most new jobs are created in small businesses.
Each year a large proportion of small businesses fail. Others succeed and grow, while more are established for the first time. In any event, there seems to be end to the flow of people prepared to start their own businesses.
Summary
• The size of a business can be measured in term of output of goods and services, turnover, profit, number of employees, capital employed, or number of outlets.
• Businesses may grow internally or externally.• Externally growth involves mergers or takeovers.
• Multinationals operate in more than one country.
• Many multinationals have significant influence over the governments and economies of the countries in which they operate.
• Despite the trend towards larger businesses and multinationals, many businesses remain small.
Glossary
Takeover: one company gaining control of another
Merger: two companies joining together by mutual agreement.
Multinational: a business operating in more than one country.
Resource: Chris J. Nuttall, IGCSE Business Studies, Cambridge University 2002
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