Ways of Funding Growth Flashcards
What are all the ways of funding growth?
- Retained profits
- Divestment
- Deintegration
- Asset Stripping
- De-merger
- Management buy-out/buy-in
- Outsourcing
What are retained profits?
There are profits made by the business that aren’t given to shareholders. They are kept in the business to fund growth, such as developing new products.
What is Divestment?
Divestment is selling off part of an organisation, such as a subsidiary company or one of the company’s brands.
An organisation may divest because it wishes to concentrate on other, more profitable areas of the business, focus on specific target market or simply cash in on selling part of the organisation.
What is Deintegration?
This is when a business sells off parts of the supply chain that it owns. It occurs when a business has become vertically integrated with either its suppliers or customer and eventually realises that it would be better off as separate business.
What are advantages of Deintegration?
- The business can focus on core activities, for example if it is a manufacturer it can focus on making rather than farming or selling.
- There is increased choice in the ‘vertical chain’ as the business can now look for suppliers or customers outside its organisation.
What are disadvantages of Deintegration?
- The business will now have to pay marked-up prices for supplies.
- Competitors could acquire deintegrated components and take control of the supply chain.
What is Asset Stripping?
This is taking over another company with intent to sell of its assets for a profit.
What are De-Mergers?
a de-merger occurs when a single business splits into two or more separate components.
The de-merger components are still owned by the same organisation as before; however, they are managed independently of each other.
What are advantages of De-Mergers?
- Each new ‘component’ can concentrate on its own core activities and grow as a result.
- Each ne component has the best chance to operate efficiently.
- De-merged components can be divested which can meet competition regulations, set by the EU.
What are disadvantages of De-Merger?
- Customers may be put off by the de-merger and abandon the businesses altogether.
- there are significant financial cost involved, for example in re-branding shop fronts, marketing campaigns to inform customers of the change, and so on.
What is Management buy-out?
Buy-out is when the management of a business buy the company they work for.
What is Management buy-in?
A buy-in is when the management of another business, usually competitors, takes over the business.
What is outsourcing?
Outsourcing is also known as contracting-out, is when an organisation arranges for another organisation to carry out certain activities for it, instead of doing it itself.
A business could outsource its administration, IT work, printing, legal services, marketing or accountancy.
What are advantages of outsourcing?
- Outsourcing allows the business to concentrate on doing what it is good at, rather than getting bogged down with additional services.
- Less labour and equipment is required for outsourced activities, for example, outsourcing printing saves on printers and reprographics staff.
- There should be high-quality work from the outsourced business as it should have greater expertise and specialist equipment.
- The outsourced business may provide the service cheaper than an in-house department could as it can benefit from economies of scale, doing the same work for many other businesses.
- The business is able to use the service when it is required, so saving costs on idle staff and machinery.
What are disadvantages of outsourcing?
- The business will have less control over outsourced work so quality may fall.
- Communication between the business needs to be very clear to make sure exact specifications are met.
- The business may have to share sensitive information with the outsourced business that could get into the hands of competitors.
- Outsourcing can be more expensive than in-house as specialists and expertise come at a price.
