2.1 Growing the Business Flashcards
Reasons why Businesses grow
- Owners/Shareholders/Managers desire to run a large business & continually seek to grow it
- Owners/shareholders desire higher levels of market share and profitability
- The desire for stronger market power (monopoly) over its customers and suppliers
- Desire to reduce costs by benefitting from lower unit costs as output increases e.g suppliers offer bulk order discounts
- Growth provides opportunities for product diversification
- Larger firms often have easier access to finance
Internal (Organic) Business Growth
- Organic growth is growth that is driven by internal expansion using reinvested profits or loans
- Organic growth (internal) is usually generated by
- Gaining a greater market share
- Product diversification
- Opening a new store
- International expansion (new markets)
- Investing in new technology/production machinery
ADVANTAGES - The pace of growth is manageable
- Less risky as growth is financed by profits and there is existing business expertise in the industry
- The management knows & understands every part of the business
DISADVANTAGES - The pace of growth can be slow and frustrating
- Not necessarily able to benefit from lower unit costs (e.g. bulk purchasing discounts from suppliers) as larger firms would be able to
- Access to finance may be limited
Product diversification
- opens up new revenue streams for a business
- Firms may spend money on research and development, or innovation to existing products to help create a new revenue stream
External (inorganic) growth
- Firms will often grow organically to the point where they are in a financial position to integrate (merge or takeover) with others
- Integration in the form of mergers or takeovers results in rapid business growth and is referred to as external or inorganic growth
- A merger occurs when two or more companies combine to form a new company
- The original companies cease to exist and their assets and liabilities are transferred to the newly created entity
- A takeover occurs when one company purchases another company, often against its will
- The acquiring company buys a controlling stake in the target company’s shares (>50%) and gains control of its operations
ADVANTAGES - The rapid increase of market share
- Reductions in the cost per unit due to receiving more beneficial terms for bulk purchases
- Reduces competition
- Existing knowledge of the industry means the merger is more likely to be successful
- The firm may gain new knowledge or expertise
DISADVANTAGES - Unit costs may increase for example due to unnecessary duplication of management roles
- There can be a culture clash between the two firms that have merged
Advantages of Becoming a Public Limited Company (PLC)
Access to Capital
Significant amounts of capital can be raised very quickly
This is often a more cost effective way to raise capital than borrowing money from banks or other lenders
Shared Risks
The risks associated with ownership are spread among a larger group of shareholders
This reduces the financial risk to any individual
Extended Decision-making
bring in additional expertise and perspectives that can help the company grow and expand
Greater Public Profile
This increased visibility can help the company attract new business and grow its customer base
Disadvantages of Becoming a Public Limited Company
Increased Regulation
The business is required to adhere to a range of legal and financial regulations which can be costly and time consuming to comply with. They include:
Completing regular financial reports
Maintaining accurate accounting records
Holding annual general meetings
Loss of Control
Selling shares to the public means that it will have many shareholders who will have a say in how the company is run
Costly to Set Up
Setting up a public limited company can be expensive, including
Fees for legal and accounting advice
The costs associated with the initial public offering (IPO)
Market Pressure
PLCs are expected to deliver consistent growth and profits to their shareholders
This can pressure on the management team to prioritise short-term financial performance
Risk of Hostile Takeover
With publicly traded shares, a hostile takeover by a competitor is always a risk
Internal Sources of Finance
ADVANTAGES:
often free (e.g. it does not involve the payment of interest or charges)
does not involve third parties who may want to influence business decisions
organised very quickly and without significant paperwork
DISADVANTAGES
Internal finance may not be sufficient
There is a significant opportunity cost involved in the use of internal finance, e.g. once retained profit has been used, it is not available for other purposes
