Size Structure

Organizational Growth

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)


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)


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


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


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

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

Disadvantages of External Growth



Many takeovers and mergers fail, due to conflicts in management, corporate culture, and overspending on purchase price

Finance for Growth

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


External Sources
Banks  Capital Markets  Money Markets  Government  Trade Credit


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


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


Types of Shares
Preference shares  Ordinary shares  Debentures


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


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


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

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


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


Small Firms vs. Multinationals

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

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


Advantages of a Small Firm

Clearly defined small markets  Specialist, quality and non-standardized products  Geographically localized markets  Development of new ideas


Networking
Subcontracting  Networking  Virtual organization  Joint ventures  Consortia


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


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

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


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


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


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

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?


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