Chapter 3 Section 2:Business Growth & Expansion

1. Business Growth through Reinvestment

• Businesses use an income statement (usually quarterly-3 months) to determine how much capital they can reinvest in the company.

• This capital comes from profits.

• Businesses reinvest by purchasing more of the factors of production.

Estimating Cash Flows

• Businesses find their net income by subtracting all of its expenses (taxes, rent, loan payments, utilities, wages, salaries, resources, & depreciation) from its revenues.

• Depreciation, or general wear & tear on capital goods, us a non-cash charge.

• Net income + non-cash charges = cash flow, or the actual amount of money a business has for reinvestment.

Reinvesting Cash Flow

• Reinvestment is decided by the sole proprietor, all partners, or the board of directors of the company.

• Business can produce more products or provide more services when reinvestment happens.

• A business remains profitable if reinvested cash flow is bigger than depreciation.

2. Growth through Mergers

• When businesses merge, one of the businesses gives up it identity.

Reasons for Businesses Merging!

1. Need money to grow that the first business cannot generate on its own.

Reasons for Businesses Merging!

1.Need money to grow that the first business cannot generate on its own.

2. Efficiency

3. To acquire new product lines or technology.

4. To catch up or eliminate a rival business.

5. To lose corporate identity.

Merger – Business Needs Money• Small electronics company who has invented a new style of MP3

player needs to capitalize on its invention as soon as possible before competitors come up with the same innovation, but they lack money to make enough of the new players to get them to the market in time.

• Instead, it merges with Microsoft because:

1) Microsoft is looking to break into the MP3 business; and 2) Microsoft has the capital (money & production capabilities) to get the new player to market)

Mergers - Efficiency• Businesses merge to eliminate up

management.

• Businesses merge to double the number of stores.

• Business doubles to produce more goods at a lower price.

Mergers – Add new product lines

• A business wants to produce a comparable product to a product of another business, but it would be more cost effective to merger with the other business.

Costs less to buy Sanus Corporation than develop technology independently.

Apple likes Sanus Corporation’s new phone operating system

Add technology to Iphone

Mergers – To Eliminate Competition

• Some mergers take place for one business to rapidly catch up with a competitor or to eliminate a competitor.Royal Caribbean Cruise Lines buys Celebrity Cruise to become second biggest cruise line behind Carnival.

AT & T attempts to purchase T-Mobile to eliminate competition.

Merger – To eliminate a corporate identity.

• Businesses merger to change name associated with a negative connotation.

Valujet mergers with Air Tran to get rid of the Valujet name after a government investigation of a plane crash in 1997 killing 110 people showed massive mechanical negligence.

Types of Mergers

• Horizontal merger – two or more firms that produce the same type of product or service.

Types of Mergers

• Vertical Merger – firms merging that are in different steps of the manufacturing process of a product.

eBay buys PayPal to use as billing service to cut down on steps needed to buy products.

Conglomerates

• A conglomerate is a firm that has at least four businesses, each making unrelated products, none of which are responsible for a majority of its sales.

• Ex: RJR Nabisco

Diversification!

Multinational Corporations

• A corporation that has manufacturing or service operations in a number of different countries.

•Multinationals pay taxes in many countries, but capitalize on cheaper labor.

•Countries welcome multinationals as a way for a developing country to get new technology and employment opportunities.

•Sometimes, multinationals are accused of siphoning off resources and underpaying.

Chapter 3: Section 3

Other Organizations

Nonprofit Organizations

• Businesses that operate in businesslike way to promote the collective interests of its members rather than to seek financial gain for its owners.

•Churches

•Schools

•Hospitals

•Welfare Groups

Their economic performance is sometimes hard to judge because the value of their products is hard to measure.

Cooperatives (Co-ops)

• A voluntary association of people formed to carry on some kind of economic activity that will benefit its members.

Consumer Cooperatives – buys bulk amount of goods such as food or clothes on behalf of its members.

Service Cooperatives – provides services such as insurance, credit, babysitting instead of products.

Producer Cooperatives – helps members promote or sell their products.

Labor, Professional, & Business Organizations

• Labor Unions – an organization of workers formed to represent its members in various employment matters.

• Professional Association – a

group of people in a specialized

occupation that works to improve

the working conditions, skill level,

& public perception of the profession

Business Organizations

• Chamber of Commerce – Organization that promotes the welfare of its members and the community.

Chamber of Commerce helps business by:

•Promoting the city for new business

•Neighborhood cleanups sponsored by local firms

•Lobbying for governments for lower business taxes

•Educational opportunities for small business owners.

Role of Government

• Some government organization provide goods & services directly to the public.

• Ex.: Tennessee Valley Authority, FDIC, Postal Service

• Government also regulates business and industry to indirectly protect citizens and competition.

• Ex.: Laws governing pollution, utility regulation.