Ch 17 - Growth & restructuring of companies Flashcards
Motives for growth
1) increased profitability
2) increased security
3) increased motivation for managers & employees
By increasing its output and sales, a business can: (increased profitability)
> benefit from economies of scale (lower average costs, obtaining better credit terms from suppliers, by investing in machinery and techniques that improve productivity)
increase its market share and hence its market power
expand into new & growing markets
A larger business: (increased security)
> can defend itself against an unwelcome takeover bid
can overcome barriers to entry in new markets
can benefit from risk diversification by expanding the product range, especially if the present market seems saturated.
is a greater threat to a potential rival
might face lower transaction costs
might face less uncertainty &/ is in a better position to cope with uncertainty
will obtain more business as it is seen by customers to be a more reliable and secure source of supplies.
A larger business: (increased motivation for managers & employees)
- provide an environment of increased power, prestige & salary
- offer decreased employment risk for managers
- result in improved staff morale
- often attract more able, more ambitious and more productive staff
Explain the relationship between profit & growth
Profits fund a large proportion of new investment so, in order to grow, the co. needs profits. Undertaking a growth strategy can be very expensive for the company.
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In the ST, as well as the investment in PPE, there’ll be additional expenses such as advertising & training costs, which could reduce annual profit
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In the LT, as new investment brings results in the form of higher revenue & lower costs, annual profit should increase.
Give the reasons that a firm’s plans for growth can be constrained.
i) Difficulties in raising finance
ii) Fears of a fall in the share price
iii) Lack of managerial experience & expertise
iv) Limited time to prepare the workforce incl. management
v) Government policy on monopoly power & mergers
What are the 2 methods of achieving growth?
1) Internal growth
2) External growth
Internal growth might be preferred by forms that wish to:
- retain control
- avoid the disruptive influence of alien business cultures or practices
- avoid the risk of dealing with firms that lack integrity
- avoid unnecessary government intervention
External growth might offer:
- an easier & quicker method of growth, especially if the company wishes to extend geographically
- the opportunity to share the financial burden and the risk of a project
- the opportunity of a good use of spare cash for a mature company
Internal growth occurs when a business expands its own operations rather than by operating with other business, this can be achieved in 3 ways. What are the ways?
i) HORIZONTAL EXPANSION: by increasing production of g+s at the same stage of the production process
ii) VERTICAL EXPANSION: developing new operations at a different stage in the production process
iii) DIVERSIFICATION: moving into completely different markets
External growth occurs when a firms merges with, takes over or works jointly with another firm/s. Integration occurs in which 3 forms?
i) HORIZONTAL INTEGRATION: involves 2/more firms at the same stage of the production process in the same industry and aims to increase the size of business (e.g 2 car manufacturers)
ii) VERTICAL INTEGRATION: involves 2/more firms at different stages of the production process in the same industry and aims to strengthen the supply chain.
iii) CONGLOMERATE INTEGRATION: involves 2/more firms in completely different industries (e.g a car manufacturer & hotel chain)
What are the main motives for divesting?
i) a business unit not earning a sufficient ROE
ii) a potential buyer valuing a business more highly than the current owner
iii) a change in strategy (e.g in focus of business areas or locations)
iv) trading in some countries becoming unprofitable or difficult for political reasons
