The Significance of Small Businesses (Cambridge (CIE) A Level Business)

Revision Note

Written by: Lisa Eades

Methods of Measuring Business Size

A range of stakeholders have an interest in understanding business size
- Some suppliers prefer to deal with larger businesses as they are seen as less risky than small businesses
- Governments can determine which businesses may need support to grow
- Investors may want to compare businesses to determine which offers the best return
In some sectors, specific variables are used to measure business size
- Hotels and guesthouses measure the number of rooms or beds
- Restaurants measure the number of 'covers' they can cater for
- Retailers measure the number of outlets they operate
- Logistics businesses measure the number of vehicles they employ

Ways to Measure Business Size

Method	Explanation	Evaluation
Size of the workforce	A measure of how many workers are in the business Small and medium-sized businesses (SMEs) employ less than 250 workers Large businesses have 250 or more workers	The method of production can influence this metric Large capital-intensive businesses employ few workers Smaller labour intensive businesses have many employees Different workers' contracts make this measure unreliable Some firms hire many part-time workers, while others have fewer full-time workers Short-term, zero hours or agency worker contracts may not be included
Value of capital employed	A measure of all the capital (money, equipment, and buildings) invested in a business at a specific time	It is difficult to compare businesses with labour-intensive and capital-intensive production methods European manufacturing businesses tend to have high levels of capital, such as robots, compared to firms in countries such as Vietnam and Indonesia Property values differ across the world and between regions E.g. The value of property in Singapore is significantly greater than property in mainland China
Value of business sales	The total sales revenue achieved during a trading period It is calculated using the formula Price x Quantity sold	Businesses sell very different products Comparing a market stall selling sweets with a retailer of luxury handbags would be unrealistic, as their prices and volumes sold are very different Selling prices vary between markets Businesses may sell products to customers in low-income markets at a lower price than in a higher-income market
Value of business output	The financial worth of goods produced, even though they may not all be sold It is calculated using the formula Total costs x Quantity	High value output can be produced by businesses with very few employees or with limited capital employed E.g. A bespoke jewellery maker may produce only a few expensive items each year The value of output does not measure how successful a business has been at selling goods produced If goods are left unsold, they are a poor measure of business size
Market capitalisation	The value of a company's issued shares It is calculated using the formula Share price x Number of shares	Share prices fluctuate so market capitalisation is a relatively unstable method of measuring business size Sharp increases in share price can make it appear that a relatively small business has grown very quickly A rapid decrease in the share price may make a business appear smaller whilst employing the same number of employees
Market share	The portion of a market controlled by a particular company, brand or product It is calculated using the formula (Business Sales ÷ Market Sales) x 100	In some cases, a large business may maintain a presence in a market dominated by smaller rivals to spread risk E.g. Dunlop continues to manufacture and sell sportwear in a market dominated by brands such as Nike and Adidas

Examiner Tips and Tricks

Profit is not a measure of business size, though it can be used to measure business success.

A business with many employees may make a loss whilst a business with just one employee may make a profit. This does not mean that the business with one employee is the larger of the two.

Evaluating Small Businesses

In the European Union (EU) small businesses are classified as those employing 50 or fewer workers
- In 2022, small businesses were responsible for approximately 49 percent of employment in the EU's economy
- Italy, France, Spain and Germany had the highest number of small businesses in the trade bloc, concentrated in the retail sector

Reasons why Small Firms Succeed

Personalised Service	Agile	Operate in Nice Markets
They offer a personalised service and focus on building excellent relationships with customers	By remaining small, they are able to respond quickly to changing customer needs/preferences	They provide a product that is in a niche market - a relatively small market with potential for high profits

Operating as a small business has a number of advantages:
1. They are easy to set up and, in many cases, require little start-up capital
2. They are managed by their owners, who maintain control of the business and determine its strategic direction
3. Owners are likely to have close working relationships with workers, encouraging loyalty
However, remaining as a small business can have some disadvantages:
1. Few sources of finance may be available, as owners are keen to retain full control and lenders consider them higher risk than larger firms
2. The business owner typically takes on all of the responsibility for decision-making, which can put them under significant pressure
3. There is little opportunity to achieve benefits of economies of scale

Strengths & Weaknesses of Family Businesses

Many businesses are owned by more than one member of the same family
Some family businesses have traded for a very long time
- Berenberg Bank was founded in 1590 and is one of the few remaining independently owned banks in Germany
- Akerblads is a hotel in Tällberg, Sweden that is currently run by members of the 21st generation of the family after which it is named
- The Neame family remains in control of Shepherd Neame, Britain’s oldest brewery, which was founded in 1664
In some countries, family-owned businesses make up a significant proportion of enterprises
- Globally, 90% of businesses are family-owned, contributing significantly to GDP and employing many millions of workers
  - In India more than 79% of GDP is generated by family-owned businesses
  - Its largest example is Reliance Industries, founded in 1973 and run by the Ambani family

Diagram: GDP Contribution of Family Businesses

In countries such as India, Mexico and Canada, family businesses make a significant contribution to GDP

Family businesses have a range of significant strengths and weaknesses

Strengths & Weaknesses of Family-owned Businesses

Strengths	Weaknesses
They often have a long-term perspective that prioritises business sustainability over profit This is likely to preserve the business for future generations They have strong cultures, rooted in the family's ethos and traditions This can encourage loyalty and a sense of belonging among employees Family owners demonstrate a high level of commitment to the business Their personal reputation and livelihoods are tied to the success of the enterprise They develop close relationships with customers and build long-lasting links with suppliers This is likely to lead to an excellent reputation for customer service and high levels of flexibility	Conflicts and tensions can arise within the family Disputes over business decisions and roles within the company can disrupt business operations They may lack professional management Family members are often promoted to leadership positions regardless of qualifications or experience, resulting in poor decision-making They may struggle to access external finance to fund growth Family owners are often reluctant to dilute family ownership by selling new shares to raise finance Planning for succession can be complex and emotional in family-owned businesses Choosing the next leader and the fair distribution of shares among family members can cause conflict

Strengths

Weaknesses

They often have a long-term perspective that prioritises business sustainability over profit
- This is likely to preserve the business for future generations
They have strong cultures, rooted in the family's ethos and traditions
- This can encourage loyalty and a sense of belonging among employees
Family owners demonstrate a high level of commitment to the business
- Their personal reputation and livelihoods are tied to the success of the enterprise
They develop close relationships with customers and build long-lasting links with suppliers
- This is likely to lead to an excellent reputation for customer service and high levels of flexibility

Conflicts and tensions can arise within the family
- Disputes over business decisions and roles within the company can disrupt business operations
They may lack professional management
- Family members are often promoted to leadership positions regardless of qualifications or experience, resulting in poor decision-making
They may struggle to access external finance to fund growth
- Family owners are often reluctant to dilute family ownership by selling new shares to raise finance
Planning for succession can be complex and emotional in family-owned businesses
- Choosing the next leader and the fair distribution of shares among family members can cause conflict

The Role of Small Businesses in the Economy

Small businesses bring a range of benefits to an economy

Diagram: Benefits of Small Businesses to an Economy

Small businesses create employment, increase competition and encourage innovation within an economy

Employment

Small businesses employ a large proportion of the workforce in most economies
- They account for 60 to 70 per cent of jobs in most OECD countries, with a particularly large share in Italy and Japan
- In developing economies, small businesses create around 80% of new jobs

Economic Growth

Growth in countries or regions with few large businesses is fuelled by small and growing businesses
- UK government policies, including enterprise zones, encourage small businesses to set up in areas of industrial decline, such as South Wales and the North East

Lower Prices

Small businesses often have lower wage and administration costs than large businesses
- This may lead to lower prices for customers

Innovation & Competition

Small businesses are often set up and run by creative entrepreneurs, whose ideas and problem-solving abilities bring new products and services to the market
- This increases choice for customers and creates competition for larger firms

Suppliers

Small businesses can be important suppliers to large firms, offering innovative components, flexibility and adaptability, which can help them develop a strong unique selling point
- E.g. Mark Levison supplies tailored audio equipment to luxury car manufacturer Lexus

The Role of Small Businesses in Different Industrial Sectors

Small businesses are particularly important in some industries
In the USA, small businesses make up a large proportion of firms operating in
- Accommodation and food services, including hotels, restaurants and catering
- Beauty and hairdressing services
- EdTech, including online tuition and learning platforms
- Retail, including small scale shops and online stores
- Construction, including builders and services such as plumbers and electricians
Some industries, such as power generation and shipping, are dominated by larger businesses
- Significant barriers to entry such as the level of capital investment or technical expertise, exclude small businesses
- However, small businesses often provide tertiary functions for large businesses, such as accounting, property maintenance and market research

Last updated: 11 October 2024

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