Page 36 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 1 Understanding business activity
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Profit is not an acceptable
measure of business size.
Number of employees
Large businesses need to produce a much greater output or provide their services
to a much larger market than smaller businesses. They will also have more
departments and managers. Therefore, larger businesses usually employ many more
employees than smaller businesses in the same industry, for example a local general
store and a large national supermarket.
However, this measure may be misleading. Two businesses can produce similar
levels of output, but if one business uses more machinery than the other then they
are likely to have far fewer employees.
Let’s look at the example of two drinks manufacturers. They both produce the
same level of output. However, one firm has invested in an automated production
process, but the other still uses more traditional methods of production. Th e fi rm
with automated production will require far fewer workers than the one that is using
traditional methods.
Market share
The larger the share of the total market the larger the business. However, this
measure can also be misleading. Look at the data for three firms shown in
Table 3.1. Firm A and Firm B are in the same industry. Firm C is in a diff erent
industry from A and B.
Firm A Firm B Firm C
Market share % 10 60 6
Total market value $000s 500 500 8,500
Table 3.1 Data for firms A, B and C
Firm B is larger than Firm A because its market share is six times bigger. However,
can we describe Firm B as a large business? The answer is yes if we use market share
as a measure. However, does this mean that Firm C with a market share of just 6%
is a small business? The answer lies not in the market share of each business, but in
the value of each firm’s share of the market:
So, if we work out Firm B’s share of the market:
60% of $500,000 = $300,000
and Firm C’s share of the market:
6% of $850,000 = $510,000
We can see that the value of Firm C’s market share is much higher than the value of
Firm B’s market share. Therefore, Firm C is larger than Firm B.
Limitations of methods of measuring business size
Although all of the above methods can be used to measure and compare the
size of businesses, you have seen that it is not quite as straightforward as it
first seems. Take care before drawing any conclusions about the size of a
business, because different measures can produce different results. Before
deciding on how to describe the size of a business it is a good idea to use more
than one measure.