MUST KNOW!!!

• One of the goals of growth is to improve profitability. Profitability is a measure of how efficiently a company generates profit relative to its revenue or investment
• Retrenchment

  • Involves a business scaling down its operations as it evolves and can involve:
  • Reducing the size of the workforce
  • Closing less profit outlets
  • Exiting existing markets
  • retrenchment can help a business to reduce costs and is particularly relevant for businesses who’s objective is to survive
• Organic growth

  • Organic growth is growth that is driven by internal expansion using reinvested profits or loans
  • Organic growth (internal) is usually generated by
  • Gaining a greater market share
  • Product diversification
  • Opening a new store
  • International expansion (new markets)
  • Investing in new technology/production machinery
• Product diversification

  • Product diversification 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 
• Growing organically

  Firms will often grow organically to the point where they are in a financial position to integrate (merge or buy) with others
• Advantages of internal (organic) growth

  • The pace of growth is manageable
  • 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
• Disadvantages of internal (organic) growth e

  • 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
  • Access to finance may be limited
• External (inorganic) growth

  • Firms will often grow organically to the point where they are in a financial position to integrate (merge or takeover) with others
  • Integration in the form of mergers or takeovers results in rapid business growth and is referred to as external or  inorganic growth
  • A merger occurs when two or more companies combine to form a new company
  • The original companies cease to exist and their assets and liabilities are transferred to the newly created entity
  • A takeover occurs when one company purchases another company, often against its will
  • The acquiring company buys a controlling stake in the target company's shares (>50%) and gains control of its operations
• What is one reason companies pursue mergers and takeovers?

  To expand into new markets
• Why might a company acquire another company for strategic fit?

  To diversify product offerings or gain technology
• How do larger companies achieve lower unit costs?

  Through bulk purchase discounts and better loan rates
• What are synergies in the context of mergers?

  Benefits from combining two or more companies
• Why might a company pursue a takeover to eliminate competition?

  To increase its market share
• Which company purchased WhatsApp in 2014?

  Meta, the parent company of Facebook
• How can mergers and takeovers create value for shareholders?

  By increasing profits, dividends, and stock prices
• What are the main reasons for mergers or takeovers?

  • Strategic fit: Expand markets, diversify products, access technology
  • Lower unit costs: Achieved through bulk discounts and better loan rates
  • Synergies: Increased revenue, cost savings, improved offerings
  • Elimination of competition: Increases market share
  • Shareholder value: Higher profits, dividends, and stock prices