9.1a - Growth and Retrenchment Flashcards
Why would a business wish to grow?
- Reach break-even quicker
- Meet demand
- Economies of scale
- Higher profits
Organic growth definition
When a firm grows using its own resources
How is organic growth paid for?
- Retained profit
- Borrowing
- Issues shares
Examples of organic growth:
- Expanding capacity
- Wider range of products
- Extending premises
- Buying new premises
Advantages of organic growth over external growth:
- Maintain current management style and culture
- Less risky
- Easier to control how much the business grows
- Less disruptive
Disadvantages of organic growth over external growth:
- Can take a long time
- Miss out on more ambitious growth if only grow internally
- If market itself isn’t growing business is restricted to increasing market share or finding a new market
External growth definition
Growth through the joining of two or more businesses
Retrenchment definition
A reduction of business operations
How can a business retrench?
- Reduce product portfolio
- Reduce staff numbers
- Delayering
- Close branches
Why would a business retrench?
- Bad economic conditions
- To reduce costs
- To stop selling ‘dogs’ or products in decline stage
- To come out of a dying or saturated market
Disadvantages of retrenchment:
- Remaining employees will lack motivation
- Damage relationship with suppliers if they stop selling their products
- Upset customers who used to buy the products they no longer sell
- Government may be concerned about impact on economy
What are the alternative approaches to retrenchment?
- Bought out by another company
- Management buy-out
- Go from an LTD to PLC or PLC to LTD
Management buy-out definition
When managers of a business buy shares to take full or part control
Why would a management buy-out occur?
- Business may be in administration
- Business may be retrenching and selling off struggling parts
Advantages of management buy-outs:
- Managers more motivated
- No owner-manager conflict
- Profits can stay in the business
