Turnover / revenue
The value of sales made over a period. Useful when comparing businesses that sell similar products, but high revenue does not necessarily mean high profit.
Cambridge International AS & A Level Business · 9609 · AS Level
1.3 Size of Business
This topic explains how business size can be measured, why small and family businesses matter to an economy, and why businesses grow organically or through mergers, takeovers, joint ventures and strategic alliances.
Exam-focusedGrowth decisionsInstant-feedback questions
What you need to know
High-grade answers do more than identify whether a business is “small” or “large”. You should choose a suitable measure of size for the context, explain the contribution and limitations of small businesses, and evaluate whether a particular method of growth is appropriate for the business.
High-grade habit: avoid judging growth as automatically good. Link the method of growth to finance, speed, control, risk, market conditions, stakeholder effects and the ability of managers to integrate the enlarged organisation.
Subtopics
These follow the textbook table of contents. Select a subtopic to jump directly to it.
1.3.1
Measurements of business size
There is no single perfect measure of business size. The most useful measure depends on the industry, the purpose of the comparison and the information available.
Number of employees
Useful for comparing labour-based organisations. It can be misleading when one firm is highly automated and another is labour intensive.
Value of assets
The value of resources owned by the business, such as property, machinery and equipment. This can be useful in capital-intensive industries.
Market value
For companies with traded shares, the total market value of those shares can indicate size. Share prices can change quickly, so market value can also change without any immediate change in physical operations.
Other industry-specific measures may also be useful, such as the number of branches, stores, hotel rooms, aircraft or vehicles. Ownership matters too: a small outlet may belong to a very large parent company and therefore have access to much greater finance and expertise.
Market capitalisationThe market value of a company’s issued shares. A simple calculation is: number of shares × current share price.
Market value = Number of shares × Share price
Worked example: a company has 30,000 shares. The share price rises from $2.50 to $2.80.
Old market value = 30,000 × $2.50 = $75,000
New market value = 30,000 × $2.80 = $84,000
Percentage increase = ($9,000 ÷ $75,000) × 100 = 12%.
Important: profit is mainly a measure of performance or success, not business size. A small business can be highly profitable while a much larger business may make little profit or even a loss.
Choosing the right measure
| Context | Potentially useful measure | Why |
|---|---|---|
| Hospital or public service | Employees, capacity or users served | Revenue may be unsuitable if the service is provided free or subsidised. |
| Retail chain | Revenue, employees or number of outlets | Each reveals a different aspect of operating scale. |
| Manufacturer | Revenue, employees and asset value | Factories and machinery may make asset values especially relevant. |
| Quoted company | Market capitalisation | Shows the market value investors place on the company’s shares. |
Evaluation point: the strongest comparison often uses more than one measure. A technology business can have relatively few employees but extremely high revenue and market value.
1.3.2
Significance of small businesses
Small and medium-sized enterprises (SMEs) make up a large proportion of businesses in many economies. Their importance is not only their individual size, but their combined contribution to employment, innovation, competition and future growth.
Advantages and disadvantages of being small
Potential strengths
- Relatively easy to establish.
- Fast decisions because fewer layers of management are involved.
- Owners are often highly motivated because they receive the rewards of success.
- Communication can be direct and informal.
- Flexibility allows rapid responses to customer needs or market changes.
- Small firms can focus on specialist or niche markets.
Potential weaknesses
- Limited bargaining power with suppliers and large customers.
- Access to finance may be difficult or expensive.
- Owners and managers may lack experience in some functions.
- Small firms may be more vulnerable to cash-flow problems or loss of a major customer.
- They may lack the scale to spread fixed costs or fund major investment.
NicheA small, specialised segment of a market with particular customer needs.
Worked example: a whole market is worth $960,000 and a specialist niche is worth $60,000.
Niche share = ($60,000 ÷ $960,000) × 100 = 6.25% of the total market.
Why small businesses matter to an economy
Employment
Large numbers of small firms collectively create many jobs and can reduce unemployment.
Competition
New and small firms challenge established businesses, putting pressure on them to improve value, quality and service.
Innovation
Small firms can experiment quickly and are often sources of new products, technologies and business models.
Future growth
Some small firms become tomorrow’s larger businesses, creating additional output, jobs and tax revenue.
Small businesses can also support larger organisations by providing specialist services, components, software, consultancy or local knowledge. This allows large businesses to focus on their core activities while buying expertise from smaller suppliers.
Why governments may support small businesses
- Training and education: to improve entrepreneurial and management skills.
- Advice and support: to help owners with finance, planning, regulation and exporting.
- Access to finance: through grants, loan guarantees or programmes that reduce financing barriers.
- Lower regulatory burden: simplifying procedures can reduce the cost and time involved in operating a small firm.
Evaluation point: government support is more persuasive when linked to a market problem, such as banks being reluctant to lend to risky start-ups, or to wider benefits such as job creation and innovation.
Strengths and weaknesses of family businesses
Possible strengths
- Shared values and strong commitment to the business.
- Family members may support each other and accept lower short-term rewards.
- Owners may plan for the long term and future generations.
- Finance, contacts and expertise can come from several family members.
- Decision-making can be quick where trust is high.
Possible weaknesses
- Emotions can influence decisions that should be based on business evidence.
- Family loyalty may keep unsuitable people in important roles.
- Disagreements can damage both business and family relationships.
- Succession can be difficult when leadership passes to the next generation.
- Reluctance to employ outsiders can limit access to specialist expertise.
Example: a successful family retailer may benefit from trust and long-term commitment, but growth could expose succession problems if several family members expect to lead the business.
High-grade judgement: “family business” is not automatically an advantage or disadvantage. The effect depends on governance, the quality of family members’ skills, willingness to use outside expertise and how succession is managed.
1.3.3
Business growth
Growth is a common objective because it can increase sales, market presence, bargaining power and the value of the business. It can also give owners a sense of achievement. However, growth can raise costs, increase complexity and create new risks.
Internal (organic) growthExpansion using the business’s own activities, such as increasing sales, developing new products or entering new markets.
External growthExpansion by joining with, acquiring or collaborating closely with another business.
Internal / organic growth
A business can grow organically by increasing sales of existing products, developing new products, opening additional outlets or entering new geographical markets.
Why businesses may prefer organic growth
- Owners can retain greater control.
- Growth can be paced according to available finance and management capacity.
- The existing culture is easier to preserve.
- There is no need to integrate a separate organisation.
Possible limitations
- Growth may be slow.
- Competitors may enter an attractive market first.
- Finance and management capacity can limit expansion.
- Building a new customer base or distribution network takes time.
Example: a café could grow organically by opening a second branch using retained profit. This is slower than buying an existing chain, but the owner has more control over the concept and culture.
External growth: mergers and takeovers
A merger occurs when businesses agree to combine. A takeover occurs when one business acquires control of another, usually by obtaining a majority of its shares. A takeover may be friendly if the target’s management supports it, or hostile if the target’s management resists.
MergerBusinesses mutually agree to combine
↔IntegrationBusinesses become more closely combined
→TakeoverOne business gains control of another
Types of integration
| Type | Meaning | Likely motive | Example |
|---|---|---|---|
| Horizontal | Joining with a business at the same stage of the same industry. | Increase market share, reduce competition and gain economies of scale. | One supermarket chain acquires another supermarket chain. |
| Backward vertical | Joining with a supplier at an earlier stage of production. | Increase control over inputs, quality, supply reliability and costs. | A coffee retailer buys a coffee-growing business. |
| Forward vertical | Joining with a business closer to the final customer. | Gain control over distribution, retailing or customer access. | A manufacturer acquires a retail chain. |
| Conglomerate diversification | Joining with a business in a different industry. | Spread risk across different markets. | A food producer acquires a media business. |
Why external growth can be attractive
- Speed: an established operation, workforce and customer base can be acquired immediately.
- Market access: the business may enter a new region or market more quickly.
- Economies of scale: a larger combined organisation may reduce average costs.
- Market power: a bigger business may negotiate more strongly with suppliers and customers.
- Resources and expertise: the buyer may gain technology, brands, patents, skills or distribution systems.
Why mergers and takeovers may fail to achieve objectives
- The purchase and reorganisation can be expensive.
- Different organisational cultures and management styles may clash.
- Duplicated roles may lead to redundancies and lower morale.
- The enlarged business may become harder to communicate with and coordinate.
- Expected economies of scale or sales growth may not appear.
- Managers may overpay for the target business.
Evaluation point: the strategic fit matters more than size alone. A takeover that gives access to valuable technology or a new market may justify the integration risk; a poorly matched acquisition can destroy value even if it makes the business larger.
Effects of integration on stakeholders
| Stakeholder | Possible benefit | Possible cost / risk |
|---|---|---|
| Investors | Higher future profits, dividends or share value if the deal succeeds. | Acquisition costs and poor integration may reduce returns. |
| Managers and employees | A larger organisation may create career opportunities. | Duplicated jobs may be removed and culture clashes may reduce morale. |
| Suppliers | A successful larger customer may order more. | The enlarged business may use greater bargaining power to demand lower prices. |
| Customers | Wider product ranges or better distribution may result. | Less competition could eventually reduce choice or raise prices. |
Joint ventures and strategic alliances
A joint venture allows businesses to work together on a specific activity, usually through a separately organised venture, while the parent businesses remain separate. A strategic alliance is co-operation between independent businesses without fully merging their operations.
Potential benefits
- Share finance, skills, technology and risk.
- Gain local knowledge and contacts when entering a foreign market.
- Combine complementary expertise.
- Avoid the full cost and complexity of a merger.
Potential problems
- Disagreement over objectives or decision-making.
- Conflict over each partner’s contribution and profit share.
- Different cultures and working practices may reduce effectiveness.
- Partners may learn from each other and later become stronger competitors.
Example: an overseas manufacturer may form a joint venture with a local distributor. The manufacturer contributes its product and technology, while the local partner contributes market knowledge, contacts and distribution.
Exam comparison: a joint venture can give some of the speed and shared expertise of external growth without fully combining two organisations, but success still depends on trust, clear objectives and agreement over control and rewards.
1.3 revision checklist
Identify and assess different measures of business size.
Explain why profit is not a direct measure of business size.
Calculate market capitalisation and percentage change.
Assess advantages and disadvantages of small businesses.
Explain the contribution of SMEs to an economy.
Explain why governments may support small businesses.
Assess strengths and weaknesses of family businesses.
Distinguish internal and external growth.
Distinguish mergers and takeovers.
Explain horizontal, forward vertical, backward vertical and conglomerate integration.
Assess why mergers and takeovers may succeed or fail.
Assess stakeholder effects of integration.
Explain joint ventures and strategic alliances.
Choose and justify a suitable growth method in context.
Questions open in a pop-up. Each answer is marked immediately, with an explanation so you know why it is correct or incorrect.