Ways of Funding Growth Flashcards
What are the 7 ways of funding growth?
Retained profits
Divestment
Deintegration
Asset stripping
De-merger
Management buy-out/buy-in
Outsourcing
What’s retained profits?
These are profits made by the business that aren’t given to shareholders. These are kept in the business to fund growth such as developing new products.
What’s divestment?
Selling off part of an organisation, such as a subsidiary company or one of the company’s brands. An organisation may divest because it wants to concentrate of other, more profitable areas of the business, focus on a specific target market or simply cash in on selling part of the organisation.
What’s deintegration?
This is when a business sells off part of the supply chain that it owns.
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 supplies 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’s asset stripping?
This is taking over another company with intent to sell off its assets for a profit.
What’s a de-merger?
A de-merger occurs when a single business splits into two or more separate components. The de-merged components are still owned by the same organisation as before; however, they are managed independently of each other.
What are the advantages of a de-merger?
Each new ‘component’ can concentrate on its own core activities and grow as a result.
Each new 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 the disadvantages of a de-merger?
Customers may be put off by the de-merger and abandon the business altogether.
There are significant financial costs involved, for example, in re-branding shop fronts, marketing campaigns to inform customers of the change, and so on.
What’s a management buy-in/buy-out?
A buy-out is when the management of a business buy the company they work for.
A buy-in is when the management of another business, usually a competitor, takes over the business.
What’s outsourcing?
Outsourcing 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.
What are the 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 the disadvantages of outsourcing?
The business will have less control over outsourced work quality may fall.
Communication between the businesses 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 could be more expensive than in-house as specialists and expertise come at a price.
