Chapter 3- Size of Business
Learning Objective: Looking at Business Size - The Right Way? (Ch. 3.1)
What do you call a small business?
What would you consider to be a medium-sized business?
How about a large business?
One of the simplest ways to measure and compare business size is by the Number of Employees each business has - is that accurate though?
Have a look at this quick video! AUDI employs very few people in their car-manufacturing plant. Does it mean this is a small business?
Measuring business size by looking at the number of employees is simple but it can be misleading!
How about measuring business size by looking at How Much Revenue a firm makes within a period of time?
Maybe...
If you are comparing firms within the same industry - then yes - revenue can be a good measure for comparison.
Comparing firms in different industries in terms of revenue can be troublesome:
Which company is larger? A car manufacturer with a revenue of USD 1 million a month or a cosmetics shop with the same amount of revenue?
We can always try to measure business size by looking at their Capital Employed - the value of all the assets used by a company to generate earnings:
Similarly to revenue, capital employed is an useful measure when comparing firms within the same industry but not across industries. Which is larger: a phone manufacturer with USD 1 billion in capital employed or a crops producer with the same amount of investment?
You might think to yourself then: why don't we just use Market Capitalization to measure business size?
Market Capitalization is the total value of the company's issued shares. In other words, it shows how much the company is valued at. There are a few problems of using this measure, though:
You can only use this measure to measure the size of public limited companies;
It is not a stable measure of size since share prices go up and down constantly.
Should we look at Market Share then?
Not really! Market Share is a relative measure of success. A large market share in a small market (industry) doesn't mean a company is large.
Think of the bikini industry in Mongolia! Probably a very small market with very few players.
Let's say one shop called BIKINIS MONGOLIA owns 75% of the total market share in the country!
Does this number make BIKINIS MONGOLIA a larger business than EMART which only owns 15% of the total market share in the supermarket industry?
Let's just use Profit as the the business size measure. End of story! Wrong!
Profit is indeed a great measure of business performance! It is not, however, a very wise way to measure and compare business size.
Different businesses in different industries have different cost structures and therefore comparing them would not be ideal.
The profitability of an airline business is around 3% to 5%. On the other hand, the profitability of beverages manufacturing business can be higher than 65%!
Should we just say that there is no best measure of business size then? As a matter of fact, yes!
A business size can vary depending on the measure used for evaluation;
Different countries have different official definitions and metrics for business size categories - micro, small, medium, and large businesses mean different things in different places.
It is also important to consider that some industry-specific measures can be used to assess business size within an industry, for example:
The size of a hotel can be measured by the number of rooms or number of beds it has;
Retail businesses can be measured by the number of existing shops or floor-sales-space.
Although tough to do, measuring business size has its degree of importance:
It assists on internal decision-making;
It aids investors' decisions on where to put their money in;
It is important for governments to know which businesses should be included in small businesses assistance programs;
It is also important for customers as they make a purchase decision - the size, reputation, and stability of a business can influence on consumers' decisions.
To-Do-List
Exam-Style Questions (Q2, Q3, Q4)
Essay Question Q1.a.
Chapter 3- Size of Business
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