Size Structure

Size Structure PowerPoint PPT Presentation

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Internal Growth vs. External Growth. Internal growth involves growth through expanding market share and producing more goods and servicesExternal growth is growth by acquisition (merger or takeover). External Growth. A merger occurs when two companies voluntarily come together, resulting in a new

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Size Structure

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1. Size Structure Organizational Growth

2. Internal Growth vs. External Growth Internal growth involves growth through expanding market share and producing more goods and services External growth is growth by acquisition (merger or takeover)

3. External Growth A merger occurs when two companies voluntarily come together, resulting in a new legal identity A takeover is where one company makes an offer of acquisition to the shareholders of another (takeovers can be hostile)

4. Types of Mergers Horizontal merger is a combination between firms at the same stage in the production process (example: Daimler-Benz and Chrysler) Vertical mergers involve firms at different stages of the production process

5. Horizontal Mergers Many large companies achieve their size this way Merged firms may benefit from economies of scale and increased market share In some cases these mergers are used to react to competitors

6. Vertical Mergers Vertical mergers can run backward toward the beginning of the production process or forward to the end Backward integration allows control of raw materials, and may restrict competitor access Forward integration allows control of the outlet for the finished product Economies of scale may be achieved

7. Advantages of External Growth Fast Acquiring firm has access to an established management team If the shares of the acquiring company have high value compared to the shares of the acquired company, additional cash may not be needed Purchasing existing assets may be cheaper than building new production facilities

8. Disadvantages of External Growth Many takeovers and mergers fail, due to conflicts in management, corporate culture, and overspending on purchase price

9. Finance for Growth

10. Internal Sources Reinvestment of profits There is an opportunity cost for use of those funds, therefore, financing through reinvestment of profits should be judged on rate of return, just like any other source of financing

11. External Sources Banks Capital Markets Money Markets Government Trade Credit

12. Bank Financing Short- and medium-term financing through loans and overdrafts Loans include lines of credit

13. Capital Markets Primary markets-the buying and selling of new stocks and shares Secondary markets-buying and selling of existing stocks and shares

14. Types of Shares Preference shares Ordinary shares Debentures

15. Preference Shares Represents ownership in the company Carry a fixed dividend Holders have a preference over other shareholders in the payment of dividends and on liquidation No voting rights

16. Ordinary Shares (Equity) Represents ownership in the company No fixed dividend (Dividends are declared and paid upon decision of management to do so) More risky than preference shares for the holder Holders are last in line upon liquidation Holders have voting rights

17. Debentures Debentures are bonds given in exchange for a loan to the company Company agrees to repay the borrowed amount at some date in the future (maturity date), and to make annual payments of interest until maturity (coupon payments) Debenture holders will be paid interest before dividends are paid to shareholders Debenture holders are NOT owners, but they are Creditors of the company This is a form of debt financing

18. New Issue of Shares(IPO) Company will employ an investment bank to advise on number of shares to issue, price, and other matters Investment bank, acting as underwriter, will attempt to secure commitments for the stock from institutional investors prior to the sale date IPOs are expensive

19. Limits to Growth Excessive debt financing Dysfunctional management structure Stale or declining product market Government policies

20. Small Firms vs. Multinationals

21. Small Firms What is a “small” firm? Size of the firm may be based on number of employees or amount of revenues To promote uniformity in Europe, the EU proposed members use “less than 250 employees” as the definition of small to medium sized enterprises (SME) Under this definition, a large percentage of manufacturing firms and service firms in the UK are small firms

22. Reasons for Growth in Small Firm Sector Changing pattern of industry Changes in consumer spending habits Flexible specialization and growth of subcontracting Reorganization and job reduction Government policy Growth in self-employment

23. Advantages of a Small Firm Clearly defined small markets Specialist, quality and non-standardized products Geographically localized markets Development of new ideas

24. Networking Subcontracting Networking Virtual organization Joint ventures Consortia

25. Subcontracting Current trend is an increase in subcontracting, where firms delegate a part of the production process to another firm, or delegate business services Examples, subcontracting out accounting or HR functions to specialist firms Reduces costs for large firms and creates a larger market for small firms

26. Networking Networking-relationships that exist between organizations and people within the organizations Two basic types: 1) Where firms are members of a network, but the network has a different name from individual firms 2) Where firms are part of a network of independent firms, but the network does not have a separate identity

27. Virtual Organization Virtual organization-a network-based structure built on partnerships where a small core operating company outsources most of its processes Advantages are increased flexibility, efficiency, and responsiveness to changing market conditions Also minimizes costs

28. Consortia A consortium will include contractors, suppliers, bankers and other groups who have expertise and resources to carry out a large product Example: Eurofighter

29. Multinationals Very large companies with central control but operations in many countries Growth of multinationals is directly related to more relaxed exchange controls and improved communication

30. Advantages of Multinationals MNEs can locate their activities where it best suits them MNEs can cross-subsidize operations, meaning profit from one market can support operations in another MNEs can avoid tax in some countries by negotiating tax breaks or using transfer pricing MNEs can take advantages of subsidies and tax breaks offered by governments

31. Effects of MNEs on Local Economy Labor market Balance of payments (inflows of investment, but outflows of dividends and profits) Flow of goods Exploitation of developing countries?

32. Globalization Globalization – the process of integration of markets and production world-wide Two main reasons: 1) Decline in barriers to trade and investment 2) Rapid advancement in communication and IT technology

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