Business size and growth

Welcome to Business Size and Growth!

In this chapter, we are going to explore how we measure the size of a business and the different ways businesses can get bigger. Understanding this is vital because "growth" is a major objective for most companies, but how they grow—and how we track that progress—can change everything. Don't worry if some of the terms seem a bit technical; we'll break them down together using simple examples!

1.4.1 Measuring Business Size

Just like you might measure your own growth by height or weight, we measure businesses using different "yardsticks." There isn't just one "correct" way to measure a business; it usually depends on what type of industry they are in.

Common Ways to Measure Size:

• Revenue: The total value of sales made in a set time period. (Think: The total money in the till at the end of the day).
• Output: The total number of products produced. (Example: A car factory making 500 cars a week).
• Number of Outlets: How many shops or branches the business has. (Example: McDonald’s has thousands of outlets).
• Number of Employees: The size of the workforce. (A business with 10,000 workers is clearly "larger" than a local cafe with 3).
• Market Share: The percentage of total market sales held by one business.
• Number of Customers: How many people actually buy from the business.
• Market Capitalisation: The total value of a company’s issued shares.
• Capital Employed: The total value of all assets used by the business (factories, machines, etc.).
• Area/Space: Often used for retailers; measuring the square footage of their selling space.

The Maths Bit (Don't panic!):

To calculate Market Share, use this formula:
\( \text{Market Share} = \left( \frac{\text{Sales of one business}}{\text{Total sales in the entire market}} \right) \times 100 \)

To calculate Market Capitalisation (only for public limited companies):
\( \text{Market Cap} = \text{Current share price} \times \text{Total number of shares issued} \)

Quick Review: Why use different measures?
A software company might have very few employees but massive revenue. A farm might have a huge area but low output. You must choose the measure that fits the context!

Common Mistake to Avoid: Never use Profit to measure size! A massive company (like an airline) can have huge revenue and thousands of employees but actually make a loss. Profit measures success, not size.

Key Takeaway: Business size is relative. We use different metrics like revenue, employees, and market share depending on the industry to get the full picture.

1.4.2 Business Growth

Why grow? Most businesses want to increase profit, gain market power over competitors, or benefit from economies of scale (where things get cheaper the more you make). There are two main ways to grow: Internal and External.

1. Internal (Organic) Growth

This is when a business grows from within, using its own resources. Think of it like a tree growing naturally from a seed.

Ways to grow internally:

• Increasing Output: Just making more stuff to sell!
• Gaining New Customers: Using marketing to find new people to buy the product.
• Developing New Products: Creating something new to sell to existing customers.
• Increasing Market Share: Taking customers away from competitors.
• Franchising: Letting other people pay to open branches of your business (like Subway or KFC).

The Impact: Internal growth is usually slow and steady. It’s less risky than buying other companies, but it might take a long time to see big results.

2. External (Inorganic) Growth

This is growth achieved by joining with other businesses. This is like a gardener buying a fully-grown plant and putting it in their garden—it's much faster!

Methods of External Growth:

• Mergers: Two businesses agree to join together to form one new company.
• Takeovers: One business buys out another (sometimes against their will!).

Types of Integration (The "Direction" of Growth):

When businesses merge or take over others, they can do it in different ways:

• Horizontal Integration: Joining with a competitor at the same stage of production. (Example: Two supermarkets joining together).
• Vertical Backward Integration: Joining with a supplier. (Example: A bakery buys a flour mill).
• Vertical Forward Integration: Joining with a customer or outlet. (Example: A brewery buys a chain of pubs).
• Diversification: Joining with a business in a completely different industry. (Example: A clothing brand buying a hotel chain).

Memory Aid - The "Vertical" Trick:
Imagine the Supply Chain as a ladder:
Top: Customers (Shop)
Middle: Manufacturer (Factory)
Bottom: Suppliers (Farm)
If you go UP toward the shop, it's Forward. If you go DOWN toward the farm, it's Backward!

Did you know? Diversification is often called "spreading the risk." If one industry struggles (like travel during a pandemic), the business might survive because its other industry (like home delivery) is doing well.

Suitability of Growth Methods

Which one should a business choose?
- Internal growth is best if the business wants to keep total control and avoid the "culture clashes" that happen when two companies merge.
- External growth is best if the business needs to grow fast or wants to remove a competitor quickly.

Quick Review Box:
Internal = Slow, safe, controlled.
External = Fast, expensive, risky (culture clashes!).

Key Takeaway: Growth can be organic (internal) or inorganic (external). Vertical and horizontal integration are ways to grow externally by moving along or across the supply chain.

Final Summary for Chapter 1.4

Don't worry if you find the different types of integration tricky at first—most students do! Just remember to ask yourself: "Are these businesses doing the same thing (Horizontal) or are they different steps in the process (Vertical)?"

Top Tips for Success:
1. Always check the units when calculating market share.
2. If an exam question asks about "suitability," talk about risk versus speed.
3. Use the car industry as your go-to example: A car maker buying a tyre company is Vertical Backward; a car maker buying another car maker is Horizontal!