Reasons for growth
Growth is a common objective for business. Larger firms have the following advantages:
- They may benefit from economies of scale
- They may be able to exert more power over their markets
- They are safer from takeover bids
- They have more status
Businesses can choose to grow internally by selling more of their products or externally by acquiring / merging with another firm. Internal growth is slower
Financing growth
- Business growth needs financing
- Finance can come from internal and external sources
Internal
- Internal sources come from within the firm
- e.g. Retained profits, Sale of assets
External
- External sources come from outside the firm, these are more expensive as the business has to pay interest
- e.g. Overdrafts, Mortgages, Loans, Share issue
Growth & Cash Flow
- Growth is expensive and may lead to short term cash flow problems
- If cash flow problems are identified in the cash flow forecast businesses need to avoid them, to do this they could arrange a loan, reduce credit terms for customers or increase credit terms to their suppliers
- Overtrading can occur if a business expands too rapidly and fails to manage its cash flow resulting in liquidity problems
Management Reorganisation
- There may be adjustment problems for staff
- When two firms merge employees roles may change which can impact their morale, motivation and performance
- As firms grow in size many entrepreneurs find the transition from boss to manager difficult as they have to remove themselves from doing the jobs to delegating and leading the company
Change in management structure / hierarchy
- When firms grow their organisational structure often changes
- As a small firm grows the management structure develops more layers in the hierarchy creating longer chains of command
- When two businesses merge layers are often removed in the hierarchy leading to redundancies to reduce costs and increase efficiency
Risk of loss of direction and control
- As businesses get bigger it gets more difficult for managers to stay in control
- To stay in control managers often introduce procedures like appraisals, budgeting and management by objectives
- These procedures provide direction for the entire business and help with coordination problems
- Managers need to ensure that communication is clear and open within the business
From LTD to PLC
- When firms grow they often change ownership from a LTD to a PLC
- Public limited companies offer the benefit of raising more finance by selling shares to members of the public
- By becoming a PLC a firm does not guarantee that they will be able to sell shares to the public
- Flotation is the process where an LTD becomes a PLC
Advantages
- Can raise more finance
- More media attention
Disadvantages
- Increased regulation e.g. have to publish accounts
- No restrictions on share ownership
- Share price open to fluctuations
- Managers may loss control of the business
From National to International
Advantages
- Provides new market opportunities
- Can increase profitability
Disadvantages
- Exchange rate fluctuations
- Have to cope with different laws and regulations
- Need to conduct expensive market research to familiarise yourself with consumer behaviour / market conditions
Expansion Internationally
This usually occurs in a number of stages:
- Firms export their products abroad
- Firms appoint an overseas agent
- Firms join up with local producers and give / sell licences to them to sell their products
- Firms set up their own operations abroad
Retrenchment
This is where businesses reduce their size. Firms may deliberately do this when:
- They are suffering from diseconomies of scale
- They have lost focus
Retrenchment may be forced on firms when:
- Competitive nature of the market changes
- Social trends change
- New product development
- Economic changes
Changes in Ownership
Takeovers
- Takeovers are where one firm gains control of another firm
- The amount a firm pays to takeover another firm is dependent on its perceived value
- Attacker firms often pay a premium to shareholders in order to secure their shares
- Bids can be hostile or welcome
- Hostile bids have a greater degree of risk
Mergers
Mergers occur when at least two firms join together to form one organisation. Mergers and takeovers can take the following forms:
- Horizontal – firms join together who are at the same stage in the production process
- Vertical – firms join together who are at different stages in the production process
- Conglomerate – firms in different markets join together
Why do Firms Merge?
- Mergers and takeovers are ways for businesses to grow
- Firms decide to merge / take over due to synergy
- Synergy is where the performance of the new firm is greater than the performance of the separate firms
- Synergy is created by shared resources, ideas and skills
Management Buyouts
- Where managers in a business take it over by buying a controlling interest in its shares
- Managers may do this as they think they can turn the business around, or if shareholders lose interest in a particular part of the business
- Manager often need to borrow money to finance
- MBOs MBOs are risky however if successful they allow managers to reap plenty of rewards
