Business Management case study -Business Growth with answers

( a)  Define the term private limited company [ 2 marks]                              Private limited company is relatively a small business owned by family members whose shares are cannot be bought by or sold to general public. It is an incorporated association whose members have limited liability.

TBT is a private limited company where   all shares are held by Roger and his family.

( b) Identify and explain two benefits of setting objectives for an organisation like ‘The Boss Tech’  [ 4 marks]

Business objectives are the specific and measurable results companies hope to achieve as their organization grows.  Setting objectives ( SMART objectives) for business organisations will help them focus on what they want to achieve and how they want to achieve it. It will also help them with decision-making processes in the future as well as assessing the current situation of the organisation.

With reference to The Boss Technology two benefits are:

To decide appropriate business strategy

Since TBT’s objective is to grow and increase its national market share by 10 %, the management has to decide how to  achieve this in growing  but  highly competitive  market for engineering equipment.

To achieve this stated objective, TBT is considering two options like franchising the TBT’s brand and  the second one is  ‘Go Public’. Both these options have their own   costs and benefits. As per the stimulus, despite being profitable, TBT lacks internal capital, hence  Roger family can  decide  appropriate   growth strategy to  achieve  national market share by 10 %  in the coming two years.

To motivate the workforce of TBT.

Setting objectives is important for any  organisation. It helps the team members of  TBT to focus on what they need to do and how they are going to do it. Without objectives, there is no way to measure success or failure.

Once the employees of TBT are aware of  the target to achieve, ( 10 %   national market share), the employees can align their individual objectives with the organisation’s ( TBT) goal to see how their work contributes towards achieving organizational goals and helps them understand how they fit into the bigger picture of TBT. (this also helps to fulfil employee’s motivation – Daniel Pink’s theory – Purpose) It also helps managers assess employee performance more effectively as it gives specific targets against which they can benchmark performance.

In the absence of well-defined objectives, employees will not be able to know when the project is  to complete and will spend a lot of time working on something with no end in sight. This can lead to frustration, burnout and general unhappiness among the team members.

Response can also include:

• To attract stakeholders
• To provide a sense of direction
• To coordinate activities

• To evaluate performance

( c) Identify and explain one internal and one external factor that might impact TBT’s growth. [4 marks]

Businesses work in an environment which consists of internal factors and external factors. With reference to TBT,  one internal factor that is impacting is  lack of sufficient internal capital ( weakness). Since TBT’s objective is to grow and increase its market share by 10 %, this needs financial support.

To achieve the given objective, two growth options are being considered; set up a franchising operation and ‘go public’. Both  options  need  initial finance, hence this  internal weakness will definitely affect TBT’s growth negatively.

All businesses are affected in some way by their competitors, and this may have an impact on the decisions businesses make.

With reference to TBT,  one external factor  affecting business growth is   growing competition in engineering equipment market. Though TBTs is currently profitable, growing competition slowly will erode TBT’s sales revenue and profit margin.

Competition in business decreases an individual company’s market share and shrinks the available customer base, especially if demand is limited. A competitive market can also force TBT to lower prices to stay competitive, decreasing profit margins for each sale or service. 

Due to competition, stock may pile up (equipment) leading to capital tied up, resulting in  insufficient funds for  day to  business expenses ( revenue expenditure).

(d)  Evaluate the two growth options being considered by TBT and recommend which of them is most suitable for  the company [ 10 marks]

Business growth is the process of increasing the total revenue and profit of a business. In other words, it is the process of increasing the size, scale, and strength of a company.

Businesses need to grow in order to survive in this ever-changing world. As they grow, they can become more efficient and sustainable. The benefits of business growth are numerous and include an increased valuation, increased brand awareness, increased customer base, increased revenue and profits, improved operational efficiency and less risk exposure to outside factors such as economic downturns or natural disasters.

Currently, TBT is considering two options; ‘franchising’ operations and ‘go public’.  Both options are considered as external growth strategies.

A business franchise is a legal agreement in which a franchiser (the owner of the business) sells the right to use their brand and methods to a franchisee (someone who eventually will own and operate the franchised store). Franchising business operations bring TBT numerous benefits:

Rapid expansion and greater national presence. This growth option helps TBT to expand garden furniture business rapidly and also establish  its presence nationally. Since  its objective is to grow its national market share by 10 % in  the coming two years, this is a great  business opportunity.

However, franchising the business model, TBT might lose control over the operations and hence   there may be uniformity in service and quality.  As per the stimulus, TBT has a very good reputation for quality and service.  Any lapse on the part of franchisee, will lead to brand erosion of TBT, consequently reduced customer satisfaction and  profit margin.

Franchising business model is relatively inexpensive growth option for TBT. TBT can save on set up or capital cost. Despite being profitable, TBT lacks internal capital, this helps Roger family expand TBT’s business operations without depending on external finance (business loan) which attracts   interest expense.

However, though this helps TBT to save on initial set up cost, TBT has to incur ‘policing’ costs as well as training and consultancy cost.  These are recurring (revenue expenditure) costs eventually reduce profit.

The second growth option being considered is ‘Go public’. Go public typically means when a company undertakes its initial public offering, or IPO, by selling shares of stock to the public, usually to raise additional capital. This is transitioning from private to public limited company.

 The first benefit of going public  for TBT is, this flotation raises $ 10m million to fund new stores, since TBT lacks sufficient internal capital which can help TBT to achieve   objective of growing and increasing national market share by 10 % on its own.

However, going public always has the risk of  loss of control and vulnerable to takeover.  Since   all shares are owned by Roger family, business decision control is in the hand of TBT. It is important for TBT to maintain reputation for quality and service.

Another benefit   for TBT is increased public awareness. With financial strength and fame, TBT will be able to reach wider market and customer base. As the competition is growing, reaching wider market is important for TBT. This would also help them to achieve business objectives. Going public also help TBT to tap different talent for better decision making.

 However,  going public  creates conflict of interest and   dispute among shareholders. Shareholders might have different  objectives like profit, dividend, this might conflict with TBT’s current objectives (rapid growth and increase market share by 10 %)

Given the above advantages and disadvantages of both growth options, franchising allows TBT to open 50  new stores, this would be a huge growth option (it is in line with TBT’s current  objective)  without investing heavily (  lack of sufficient internal capital) but   the second option ‘Going public’ enables TBT to raise $ 10 million and open 25 stores, but going public is  time consuming and expensive process. Franchising  also allows TBT to meet  interest  of both individual  as well as group stakeholders better than  going public.

 Finally, taking into account various parameters such as short term versus long term objectives of TBT, impact on stakeholders interest, availability of financial and human resources, driving and constraining forces, organisation’s priorities, and mission  and vision statement, franchising would be the best growth option for TBT over going public.