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“Choose a growth company and a mature company from the FTSE 100 companies or any other company of your choice. What are the similarities and differences the two in terms of their business/corporate strategies, their capital structure, sources of finance and dividend policies? Comment on the differences and similarities.”
Companies are created everyday just as how companies die every day as well. It’s a never-ending life cycle with businesses, just as there are for humans and other living and non-living things. The arrangement of the business life cycle stages reflects the difference of business growth and the flexibility of businesses to the competitive environment, according to Bulan and Yan (2009). A business life cycle is the development of a business and its stage over time and is usually divided into five (5) stages: launch, growth, shake-time, maturity, and decline (CFI Education, 2015).
Figure 1: Business Life Cycle
In the business life cycle of companies there are two main stages that this essay will compare and contrast. The two stages are the Growth and the Mature stages of the life cycle. In order to compare and contrast these two elements of the life cycle, two companies will be used. For the growth aspect the company that will be used for an example will be Porton Biopharma and for the mature aspect the company that will be used is Johnson and Johnson. Both companies’ business/corporate strategies, their capital structure, sources of finance and dividend policies will be discussed and compared.
In order to progress, it is important that two firms of the same industry were chosen. The industry that has been chosen is the Pharmaceutical industry. According to ‘The Pharma Industry’ (2019) the global pharmaceutical sales in 2010 topped 911 billion dollars, and that the research-based pharmaceutical industry is one of the few remaining leading high technology industries in Europe, amounting to 17% of European Union (EU) business in Research and Development investments, and about 3.5% of the total EU manufacturing value added. So, the pharmaceutical industry is thriving, that’s why this industry was chosen for this assignment. However, are the growth and mature companies in this industry thriving as well, or is that the mature companies have already saturated the sub-markets within the industry?
Johnson and Johnson is one of the largest American multinational manufacturing company. They ranked No. 37 on the 2018 ‘Fortune 500’ list of the largest United States corporations by total revenue. Johnson and Johnson have such a large diversification within their products. Their products range from medical devices, pharmaceutical and consumer packaged goods. This allows the company to serve assorted needs and preferences to customers and increase its overall revenue. In 2018, the company surpassed the pharmaceutical industry on the basis of its ‘return on equity’ producing a higher 21.57% relative to the peer average of 11.69% over the past year, according to the Simply Wall Street (2018).
Porton Biopharma (PBL) is a limited liability company that is based in the United Kingdom. The Company has around 300 staff and is based at Porton Down in Wiltshire, UK, co-located with Public Health England on the same campus (Porton Biopharma, 2018). The company is experienced in developing, manufacturing, and bringing life-saving biopharmaceutical therapeutics and vaccines to market. On the United Kingdom’s Government’s website, it stated that Porton Biopharma develops new vaccines, therapeutic proteins and enzyme products. It also manufactures its own licensed biopharmaceutical products to treat acute lymphoblastic leukaemia and the UK’s anthrax vaccine.
Firstly, what makes a firm a mature or a growth company isn’t necessarily the number of employers the business has or the actual size of the business. It is more or less by the turnover rate, which strategy the firm is mainly focus on whether it is financial or strategic, sources of funds (Capital Structure), dividend policy and more.
A mature company is at the stage of the life cycle where it grows at the rate of an economy at large. They tend to have numerous likewise well-established competitors, making price competition a significant factor in their ability to increase profits. According to Miller and Friesen (1984), in the business life cycle, when a business reaches the maturity stage, they are characterized by steadied sales levels and decreasing innovation levels because of the high level of competition. In the mature stage, simple things like starting administrative objectives and developing the structure of the company becomes more complex, stated by Adizes (2004). Additionally, not all mature companies are large co-operations. There are many small companies that have reached their growth quickly but just stayed as a small, mature firm, maybe for convenience.
Miller and Friesan (1984) stated that the growth stage of the business cycle is characterized by rapid growth of sales, product diversification and distinctive competences. This means that they would rely more on external findings to raise capital for investments. Growth companies create value by continuing to expand their earnings, free cash flow, and expanding on their research and development. Frielinghaus, Mostert, and Firer (2005) explained that marketing also plays a huge role with product ranges, making firms increasingly less sensitive to market changes. Thus, making growth companies being able to expand their earnings and continue to grow.
Johnson and Johnson (J&J) has five corporate strategies that they have listed on their website. The five strategies are diversification, which includes their products, SBU’s, and how widely spread they are throughout the whole world. Market Power, which is the economies of scope. This means that they manufacture different products simultaneously on their own, which is cost effective. Then there’s international strategy. They operate all of the world, selling products in over 200 different places. On their website they stated that 55 per cent of J&J’s annual revenue comes from non- United States markets. The other corporate strategy are divesting businesses, they sold their blood testing unit for 4.15 billion. The other strategy is Internal Development, they have business units and divisions that are just for innovation with the goal of creating an entrepreneurial culture. On the other hand, Porton Biopharma does not have as much strategies as J&J. On the Porton Biopharma LinkedIn’s profile, they stated that their strategy as a new company is to grow their existing business and product pipeline, which also includes building relationships across the industry. However just as J&J they have a small diverse group, they produce biologicals such as product characterization, process and analytical validation and stability for the market. Very similar to J&J they have the goal of creating new products. Though both of these company’s strategy plans are quite different because of their levels in the business cycle, it’s also a bit similar. Porton Biopharma can only do so much because of their size and how new they are while Johnson and Johnson have been in the business, so they already have a bunch of strategies arranged.
The capital structure is how a firm finance its general operations and growth by using categories of sources of funds. A company’s capital structure can be a mixture of long-term debt, short-term debt, common equity, including internal funding and preferred equity. Adizes (2004) stated that the business life cycle is mostly relevant to their financing decisions and characteristics in various life cycles stages are important for financial decisions. In financial management, there are numerous of capital structure theory which refers to a systematic approach to financing a firm through several mixes of equities and liabilities. Additionally, debt-to-equity is was to measure capital structure.
Johnson and Johnson debt to equity ratio, ( long term debt divided by the shareholder’s equity) on March 31st, 2019 is 0.46 specified by Macro Trends a global stock website. Johnson and Johnson equity to debt ratio is really low compared to Porton Biopharma’s which is 30.17 according to the Wall Street Journal. J&J ratio is probably low because mature companies need less debt to finance growth as its revenues are stable. J&J also generate cash flows, which can be used to finance their future and current projects. On the other hand, Porton Biopharma ratio is so high because growth companies borrow money to grow faster, growing through debt. However, this isn’t really decent method because the revenue of Porton Biopharma and other growth firms are unstable, unpredictable. We do not know what’s going to happen once a company starts. So, high debt isn’t a great idea.
There are two ways in which a firm can raise money. Those ways are debt or equity. The difference between both debt and equity is often made in terms of bonds and shares, it’s masses lie in the nature of the cash flow claims of each financing type. Dickinson (2011) explained that the main benefit of the cash flow is that it reflects complete financial information rather than being a single indicator of a firm specific characteristics. For example, in the early stages of learning about business, students are taught that you can tell how successful a business is by its age, size, number of employees etc. However, Dickinson, proposed that you can tell by the firm’s cash flow and that it is better associated with the purposeful form of the company.
Johnson and Johnson have several sources of finance to help maintain their huge corporation. In their 2018 Income Statement and Balance Sheet, their sources of finance are listed with the amount they gain from each of them.
Figure 2: Johnson and Johnson Balance Sheet 2018
Figure 2 is the 2018 Balance Sheet for Johnson and Johnson. Their sources of finance are from Accounts Payable which was 7.5m and Retained Earnings which was 106.2m. Another source of finance for J&J, that was stated in the Corporation Strategy section was divesting business. On their website they stated that in 2014 J&J sold off its blood-testing unit called Ortha-Clinical Diagnostics for 4.15 billion to the private equity firm Caryle Group. Divesting business gains a lot of money for a business if the business isn’t receiving much income from it at first. Unlike J&J that has shareholders that can contribute unlimited and other sources of finance, Porton Biopharma is a limited company which means that the shareholder’s responsibility for financial liability is limited. Company directors are not responsible for business debts. A private firm can’t go to equity markets to raise finance so main sources would be to do internal funds and external would be loans. There isn’t much information about their sources of finance, but it would be assumed that they either have a loan or a government grant. Additionally, a growth company tends to have very profitable reinvestment opportunities for its own retained earnings. However, an online source called Global Base Data, stated that the working capital for Porton Biopharma is about 6.7m in 2017. The difference between both of these companies is that Porton is a limited private company, they can’t much money from shareholders as J&J does.
A firm’s dividend policy provides a huge insight into its relationship with shareholders and can help them to understand management’s strategy for enhancing stakeholder value. According to the firm life cycle theory of dividends, a young firm faces a relatively large investment opportunity set but is not profitable to be able to meet all its financing though internally- generated cash. Wang, Huang, Wang (2010) stated that a dividend policy should not affect the value of a company because the dividend policy has no influence on investment decisions. So, investment and dividend payment may compete with one another for company funds.
Johnson and Johnson is a huge corporation, which attracts big investors who seeks a reliable investment in the stock market. On January 2nd, 2019, J&J accounted that its Board of Directors has declared a cash dividend for the first quarter on 2019 of 0.90$ per share of the company’s common stock. On the other hand, Porton Biopharma dividends per share is non-existent because it is a private limited liability company. Porton Biopharma dividend share is quite disappointing compared to Johnson and Johnson but that specifically isn’t a bad thing. Investors who invest into growth companies are not worries about dividend growth, that growing companies are facing because the main focus is on growing sales and trying to be ahead of competitors to maintain on top of the industry. Additionally, growth companies such as Porton Biopharma, hardly ever pay dividends sometimes none.
In conclusion, the business cycles contain two phases of a business. The growth and mature stage. The growth stage generates significant cash flows or earnings, which increase at significantly faster rates than the overall economy. As for the mature company have passed the stage of rapid growth and tend to grow at the same rate as the overall economy. Mature and growth companies have many differences when it comes to their strategy, capital structure, sources of funds, and dividends policy. However, I do believe, and it is proven that a growth company can be just as big and successful like Johnson and Johnson, a mature company. For example, Amazon is a growth company and it’s just as big regarding its size, turnover, total revenue as Johnson and Johnson. So, the pharmaceutical industry is not saturated with the already mature companies because the smaller companies such as Porton Biopharma is thriving. From the research that was conducted, they are slowly but surely growing.
Figure 1: Business Life Cycle
Source: Corporate Finance Institute Education. (2015)
Figure 2: Johnson and Johnson Balance Sheet 2018
Source: Yahoo Finance (2018)
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