9.1a Growth and Retrenchment

Question 1

Reasons a business would wish to grow:

Answer 1

• Meet the growth in demand
• More profit
• Economies of scale

Question 2

What are the two types of growth?

Answer 2

Organic growth or external growth

Question 3

What is organic growth also known as?

Answer 3

Internal growth

Question 4

When does organic growth occur?

Answer 4

When a firm grows using its own resources

Question 5

How is organic growth paid for?

Answer 5

• Retained profit
• Borrowing from banks
• Attracting new investment

Question 6

What can you look at to work out how a business has funded growth?

Answer 6

The gearing ratio

Question 7

Ways in which organic growth can happen:

Answer 7

• Expanding capacity
• Wider range of products
• Buying new premises

Question 8

When does external growth occur?

Answer 8

When two or more businesses join together either through a merger or a takeover

Question 9

What is another work for a takeover?

Answer 9

Acquisition

Question 10

Retrenchment definition

Answer 10

A reduction of a businesses operations meaning the business is not as big as it was before

Question 11

Ways in which retrenchment can happen:

Answer 11

• Reducing product portfolio
• Reducing staff numbers
• Closing brances

Question 12

Reasons a business might retrench:

Answer 12

• Bad economic conditions
• Reduce costs
• To stop selling products in decline stage

Question 13

Issues of retrenchment:

Answer 13

• Remaining employees will lack motivation
• Damage relationship with suppliers if they stop selling their products
• Upset customers who can no longer buy the products

Question 14

Alternative approaches to retrenchment:

Answer 14

• Being bought out by another company
• Management buy-out
• Go from a LTD to PLC or PLC to LTD

Question 15

What does a management buy-out involve?

Answer 15

The managers of a business buying shares in a business to take full or part control

Question 16

Where does the finance for MBO’s come from?

Answer 16

• Managers personal funds
• Bank loans
• Sell shares to employees

Question 17

Rewards for MBO’s:

Answer 17

• Managers more motivated
• No owner-manager conflict
• Profits can stay in the business

Question 18

Reasons for MBO’s:

Answer 18

• Business may be in administration/receivership

- Business may be retrenching and selling off struggling parts

Question 19

Risks of MBO’s:

Answer 19

• Possible personal losses to managers
• Little access to additional capital
• Possibility of redundancies

Question 20

Benefits of going from LTD to PLC:

Answer 20

• Larger pool of potential owners and capital

- Higher profile

Question 21

Drawbacks of going from LTD to PLC:

Answer 21

• Answerable to shareholders and their interests
• PLC shareholders tend to be in it for short-term profits
• Lose some control
• More open to being taken over

Question 22

Benefits of going from PLC to LTD:

Answer 22

• More privacy

- No pressure of varying share prices

Question 23

Drawbacks of going from PLC to LTD:

Answer 23

Long and expensive process of buying out all existing shareholders

Question 24

Advantages of organic growth over external growth:

Answer 24

• Maintain current management style and culture
• Less risk
• Can control how much business grows
• Less disruptive

Question 25

Disadvantages of organic growth over external growth:

Answer 25

• Can take a long time
• Miss out on more ambitious growth if only grow internally
• If market itself isn’t growing it is restricted to increasing market share or finding a new market

Question 26

Disadvantages of becoming a larger business:

Answer 26

• Can suffer from diseconomies of scale if not managed properly
• Difficult to manage cash flow - lots of investment costs
• Risk of overtrading