2.1 Growing The Business Flashcards
(21 cards)
3 types of integration
Horizontal
Vertical
Coonglomerate
What is horizontal integration
À business joins ànother business at the same stage (I.e Costa joining Starbucks)
3 types of integration
Horizontal
Vertical
Conglomerate
Horizontal integration
À business joins a business at the same stage of production (Costa joining Starbucks)
Vertical integration
The companies are at different stages of production (joins with its suppliers - backward vertical - or it’s distributors - forward)
Conglomerate integration
A business joins a business in a different market
Benefits of external growth
Reduced competition and increased market share
Transfer of knowledge, skills or tech
Larger businesses may be able to raise money easily
Possible cost savings (I.e outlets in same space)
Opportunity to diversify - enter new markets
Risk is spread if products are different to core products
Drawbacks of external growth
If grows too quick or too large it may become inefficient
Resentment + clashes of culture
Possible redundancies
Cost savings may not be easy to achieve quickly
Firm making takeover may not have enough knowledge of the other
Public sector
A government body / organisation whose purpose is to deliver a service for no profit (NHS)
Stages of an IPO
Hire an investment bank (underwriter) - negotiate a deal + amount of money to be raised
Firm commitment - underwriter buys entire issue and sells to public (any unsold left to underwriter)
Best efforts deal - underwriter will sell what is possible but excess left to business
What is an IPO
Initial Public Offerings - a private company sells it shares on the stock exchange making it public
Public Limited Company pros
Limited liability
Can raise large sums of finance via the stock exchange - no interest or repayment
Stable form of structure (it exists even when shareholders change)
Firm is more prestigious
Public Limited Company cons
Unhappy shareholders
Flotation on stock market is costly
Greater administrative costs
Finance can be limited by the stock exchange
Public can see company info and accounts
Risk of takeover
Why does a large business need finance
To fund expansion
Replace worn assets
Improve efficiency
Fund new product development
Types of finance available for a growing business
Retained profit
Bank loan
Share capital
Sale of assests
Stock market Flotation
Benefits of selling assests
No finance has to be paid
Doesn’t dilute ownership
Cons of selling assets
Unlikely to be long-term source
Decreases value of business
Unlikely to sell for amount it paid for (depreciation)
What is a bank overdraft
À short-term source of finance - allows the business to withdraw funds from it’s accounts that aren’t there up to an agreed limit
Pros and cons of bank overdraft
Flexible - take money out at any time
Interest only paid on amount borrowed
CONS:
Repayble to the bank at any time
Usually have high levels of interest (expensive)
What is flotation
When a private business offers its shares on the stock exchange for the first time
Pros and cons of share capital
No interest
Capital doesn’t have to be repaid
Large sums can be raised
CONS:
Possible loss of control
Shareholder’s expectations of dividends
Costly and time consuming
