impact for firms with a change in size

1. Impact on Firms of a change in size

2. Content
• Reasons for growth
• Financing growth:
– Internal
– External
• Growth and cash flow
• Management reorganization
– Change in roles
– Change in business structure
– Loss of direction and control
• Problems of transition in size:
– From LTD to PLC
– From national to international
– Retrenchment
• Changes in ownership

3. 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

4. Types of growth
• Businesses can choose to grow internally by selling
more of their products or externally by acquiring /
merging with another firm
• Internal growth is slower

5. Financing Growth
• Business growth needs financing
• Finance can come from internal and external
sources
• Internal sources come from within the firm
• External sources come from outside the firm, these
are more expensive as the business has to pay
interest

6. Sources of Finance
• Internal:
– Retained profits
– Sale of assets
• External:
– Overdrafts
– Mortgages
– Loans
– Share issue

7. Growth and 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

8. Management Reorganisation During
Growth
• 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

9. 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

10. 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

11. Problems of transition in Size
• There can be many problems associated with
business growth

12. 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

13. Advantages and Disadvantages of
changing from a LTD to 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

14. From national to international – advantages
and disadvantages
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

15. 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

16. 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

17. Changes to 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

18. 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

19. 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

20. 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

21. Summary
• Businesses can grow internally or externally
• Businesses grow to reap the benefits of an increased size including: economies of scale, protection from
takeovers and increase in status
• Growth can be financed from internal sources such as retained profits and external sources such as
loans and overdrafts
• When businesses grow they often experience short term cash flow problems which they need to plan for
• A consequence of growth is management reorganisation this can include a change in role for managers,
a change in structure as more layers are added to the hierarchy and a potential loss of direction and
control
• As firms grow many of them change from a LTD to a PLC to increase finance and their profile, this may
also lead to a loss of control of the business and means that detailed reports have to be published
• When firms grow internationally they can increase market opportunities and profits however they may
face problems in the host country with exchange rates, new laws and regulations and a lack of market
and consumer knowledge
• Retrenchment occurs when businesses reduce the size of their operations this may be their decision due
to diseconomies of scale or may be forced upon them due to external factors
• Takeovers are where one company gains control of another
• Mergers are where two or more companies join together
• Management buyouts are where the managers of a business buy shares in the business so they have a
controlling amount