2.1 Growing the business Flashcards
(39 cards)
Internal growth (organic) Methods
-Gaining a greater market share
-Product diversification
-Opening a new store
-International expansion (new markets)
-Investing in new technology/production machinery
Advantages and disadvantages of internal growth
+
-The pace of growth is manageable
-Less risky as growth is financed by profits and there is existing business expertise in the industry
-The management knows & understands every part of the business
-
-The pace of growth can be slow and frustrating
-Not necessarily able to benefit from lower unit costs (e.g. bulk purchasing discounts from suppliers) as larger firms would be able to
-Access to finance may be limited
External growth (organic) Methods
-A merger occurs when two or more companies combine to form a new company. The original companies cease to exist and their assets and liabilities are transferred to the newly created entity
-A takeover occurs when one company purchases another company, often against its will. The acquiring company buys a controlling stake in the target company’s shares (>50%) and gains control of its operations
Advantages and disadvantages of external growth
+
-competition can be reduced
-market share can be increased very quickly overnight
-
-it can be expensive to takeover/merge with another business
-managers may lack the experience to deal with the other businesses
Becoming a PLC reason
-When a business is growing rapidly it may require a significant amount of capital to fund its expansion
-To secure this funding, it may choose to transition from a private limited company (LTD) to a public limited company (PLC)
PLC advantages
-Significant amounts of capital can be raised very quickly which is often a more cost effective way to raise capital than borrowing money from banks or other lenders
-The company will have a board of directors made up of individuals from outside of the company management, and representatives from major shareholders which can extend the decision-making process and bring in additional expertise and perspectives that can help the company grow and expand
-Becoming a PLC can raise a company’s public profile and increase its visibility with customers, suppliers, and potential investors and this increased visibility can help the company attract new business and grow its customer base
PLC disadvantages
-Selling shares to the public means that it will have many shareholders who will have a say in how the company is run
-With publicly traded shares, a hostile takeover by a competitor is always a risk
-Setting up a public limited company can be expensive, including
Fees for legal and accounting advice
The costs associated with the initial public offering (IPO)
Internal sources of finance
Retained profits
Selling of assets
The owner’s savings
Retained profits + and -
+
-cheap, quick and convenient, and there is easy access to the money
–
-once the money is gone, it is not available for any future unforeseen problems the business might face
Selling assets + and -
+
-convenient, can create space for more profitable uses, and can be quick
-
-the business might not get the full market value of the assets or even sell them at all
-the business might also need the assets in the future
Owner’s savings + and -
+
-cheap, quick and convenient
-
-the owner might not have enough savings or may need the cash for personal use
External sources of finance
Loan capital
Share capital - money raised when business becomes PLC
Stock market flotation - money raised when a business becomes a PLC by offering shares to the public to buy
Loan capital + and -
+
-regular repayments are made over a period of time
-
-sometimes it can take a while for a loan to be approved and the business may not even qualify for a loan
-interest is applied, so this can be an expensive option
Share capital + and -
+
-does not have to be repaid and no interest is applied
-a business can choose to whom it offers shares
-
-profits made by the business are paid to shareholders (these payments are also known as dividends), so control of the business gets diluted
Stock market flotation + and -
+
-this option can raise large amounts of capital as it is easy for the public to buy shares through a stockbroker or bank
-the shares don’t have to be repaid and no interest is applied
-the business can also gain recognition through this method
-
-it can be complicated and expensive and there is the possibility of losing control, as anyone can buy shares
-the profits are paid to shareholders and the business records are made public
-there is also the risk that some investors will only buy shares to make a quick profit by selling them when the share price increases
Why do business aim and objectives change
Market conditions
Technology
Performance
Legislation
Internal reasons
Market conditions
Market conditions such as competition, demand, and changing consumer price sensitivity can have a significant impact on a business’s aims and objectives
Technology
Instore to e-commerce for more cost effective way to reach customers
Performance
If a business is not meeting its sales goals in on area, it may change its objectives to try an improve its financial performance
In some cases this may involve retrenchment (moving out of existing markets)
Legislation
A company may need to shift its focus to comply with new regulations or capitalise on new opportunities created by changes in legislation
Internal reasons
Change in management or culture
How business objectives and aims evolve
Focus on survival or growth
Entering or exiting markets
Growing or reducing the workforce
Increasing or decreasing product range
Focus on survival or growth
A startup may aim to break even, as a company becomes more established it will expand into new markets or invest in new products
Entering or exiting markets
A company can do this inorder to expand their customer base or diversify their products and if the current market isn’t profitable they will exit it
