paper 2 Flashcards
(45 cards)
1
Q
what happens in an external (inorganic) growth business
A
- Firms will often grow organically to the point where they are in a financial position to integrate (merge or take over) with others
2
Q
what is a merger
A
- occurs when two or more companies combine to form new company
- Instead of one company taking over the other, both original companies are shut down.
- A completely new company is created.
- This new company takes ownership of everything the old companies owned and takes responsibility for everything they owed (like debts)
3
Q
what is a takeover
A
- occurs when one company purchases another company, other against its will
- No new company is created.
- The target company keeps its name and structure, but it’s now under the control of the buyer.
- The buyer can now make major decisions for the target company.
4
Q
inorganic growth usually takes place when two firms merge in one of two ways
A
- vertical integration ( forwards and backwards):
- forward involves a merger or takeover with a firm further forward in the supply chain
- backward vertical action involves a merger/ takeover with a firm further backward in the supply chain
5
Q
what are advantages of external growth- vertical integration
A
- reduces cost of production
- forward integration adds additional profit as the profits from the next stage of production
- greater control over the supply chain which reduces risk as access to raw materials are more certain so the quality of raw materials can be controlled
6
Q
what are the disadvantage of external growth- vertical integration
A
- There can be a culture clash between the two firms that have merged
- Possibly little expertise in running the new firm results in inefficiencies
7
Q
what are advantages of external growth - horizontal integration
A
- Reductions in the cost per unit due to receiving more beneficial terms for bulk purchases
- Reduces competition
- Existing knowledge of the industry means the merger is more likely to be successful
8
Q
what are disadvantages of external growth - horizontal integration
A
- Unit costs may increase for example due to unnecessary duplication of management roles
- There can be a culture clash between the two firms that have merged
9
Q
what is a reason for a merger/ takeover
A
- Shareholder value:
Mergers and takeovers can also be used to create value for shareholders. By combining companies, shareholders can benefit from increased profits, dividends and higher stock prices - Elimination of competition:
Takeovers are often used to eliminate competition and the acquiring company increases its market share
10
Q
what is internal (organic) growth
A
- This is where a Business Grows because of increased Output and Sales.
- Its called Organic Growth Because the business is Organically Doing it.
11
Q
Reasons why businesses grow
(make the answer into a whole answer)
A
-owners/Shareholders/Managers desire to run a large business & continually seek to grow it
- desire higher levels of market share and profitability
- he desire for stronger market power (monopoly) over its customers and suppliers
12
Q
what is Retrenchment
A
- Retrenchment can help a business to reduce costs and is particularly relevant for businesses whose objective is to survive
13
Q
benefit of product diversification to an internal growth
A
- opens up new revenue streams for a business
- Firms may spend money on research and development, or innovation to existing products to help create a new revenue stream
14
Q
advantage of inorganic growth
A
- 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
15
Q
disadvantage of internal growth
A
- 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
16
Q
what is a public limited company
A
- 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)
17
Q
Advantages of becoming a public limited company
A
- access to capital: Significant amounts of capital can be raised very quickly
This is often a more cost effective way to raise capital than borrowing money from banks or other lenders
18
Q
disadvantage of PLC
A
- loss of control: Selling shares to the public means that it will have many shareholders who will have a say in how the company is run
The business’s founders may find that decisions are made by a board of directors, or a CEO whom they appoint
19
Q
what is Internal sources of finance
A
- Internal finance comes from the owner’s capital, retained profit, or the sale of assets
20
Q
types of internal source of finance
A
- retained profit
- sale asset
21
Q
what is retained profit
A
- The profit that has been generated in previous years and not distributed to owners is reinvested back into the business
- This is a cheap source of finance, as it does not involve borrowing and associated interest payments
22
Q
what is sale of assets
A
- Selling business assets which are no longer required (e.g. machinery, land, buildings) generates a source of finance
- A sale and leaseback arrangement may be made if a business wants to continue to use an asset but needs cash
- A business can also generate additional finance internally by managing its cash flow more effectively
They can negotiate extended payment terms with supplier
23
Q
advantage of internal finance
A
- It does not involve third parties who may want to influence business decisions
- Internal finance can usually be organised very quickly and without significant paperwork
- Businesses that may fail credit checks (necessary for a bank loan)
24
Q
disadvantage of internal finance
A
- There is a significant opportunity cost involved in the use of internal finance, e.g. once retained profit has been used, it is not available for other purposes
- Internal finance may not be sufficient to meet the needs of the business
25
what is external source of finance
- External finance is sourced from outside of the business
26
how is shared capital used in Ltd
- Share capital for private limited companies (Ltd) is usually sourced by selling shares to family and friends, or private venture capitalists
27
how is shared capital used in PLC
usually sourced by listing share on an initial public offering and selling them to investors through a stock exchange
28
External sources of finance available to businesses
- bank loans
- share capital
29
Why business aims and objectives evolve
- As a business grows in size and evolves, its objectives can change
- These objectives are often influenced by various internal and external factors
- These changes are often necessary to ensure that the business remains competitive, profitable, and compliant with regulations
30
Factors that cause business objectives to evolve
- technology
- performance
- legislation
- internal reason
31
how does market condition evolve objectives
- Market conditions such as competition, demand, and changing consumer price sensitivity can have a significant impact on a business's aims and objectives
32
how does technology evolve objectives
- A business may shift its focus from traditional brick-and-mortar retail to online retail as technology allows for a more cost-effective way to reach customers
33
How business aims and objectives evolve
- Refocus from survival to growth:
A start-up may initially aim to survive by breaking even and becoming profitable
- Increasing or decreasing product range:
A company may choose to increase its product range to expand its customer base or to stay competitive in the market
34
Imports and exports
- Businesses that trade internationally import and export goods/services
-Imports are goods and services bought by people and businesses in one country from another country
- Exports are goods and services sold by domestic businesses to people or businesses in other countries
35
benefit of export
- Exports generate extra sales revenue for businesses selling their goods abroad
36
Exports generate extra sales revenue for businesses selling their goods abroad
- Costs of production:
Businesses want to keep costs of production low, as this can help them increase their profit margin or allow them to sell at a lower price to gain a competitive advantage
37
what is a Multinational corporations
- A multinational corporation (MNC) is a business that is registered in one country but has manufacturing operations/outlets in different countries
38
advantage of MNC
- A multinational corporation (MNC) is a business that is registered in one country but has manufacturing operations/outlets in different countries
39
disadvantage of MNC
- MNCs may cause damage to local habitats/environment during production process
40
what are tariffs
- A tariff is a tax placed on imported goods from other countries
- A tariff increases the price of imported goods which helps to shift demand for that product/service from foreign businesses to domestic businesses
41
disadvantage of tariffs
- Increases the cost of imported raw materials which may affect businesses who use these goods for production, leading to higher prices for consumers
- Reduces competition for domestic firms who may become more inefficient and produce poor quality products for their customers
42
what are trade blocs
- A trading bloc is a group of countries that form an agreement to reduce or eliminate protectionist measures between each other
- Three of the largest trading blocs include The European Union (EU), The Association of Southeast Asian Nations (ASEAN), and The North American Free Trade Agreement (NAFTA)
43
The impact of trade blocs on business activity
- Businesses outside the trading bloc will face higher costs from protectionist measures such as tariffs and trying to meet legal requirements inside the trading bloc
- This will make them less competitive when trying to sell goods to member countries within the bloc
44
Benefits for businesses inside a bloc
- Access to more markets
- External tariff walls
An external tariff wall is a tax applied to imported goods from outside the bloc
- Infrastructure support
45
drawbacks inside a bloc
- Increased competition
There is increased competition for businesses within the trade bloc which may be more of an issue for small businesses as they have less resources available with which to compete
Businesses with monopoly power can increase their monopoly by eliminating competitors in other countries within the bloc
