Before deciding which objective Hall Ltd should adopt, it is essential to analyse the nature of its business and the product it is selling. It must then be decided if Hall Ltd should expand to become a PLC in order to achieve one or both of the above mentioned methods of increasing its profitability.
A Public Limited Company is one where the shares of the company can be bought and sold in the exchange on which the company is listed. Any individual from the general population can buy shares in a PLC and become a stakeholder of the business. These individuals are not involved in the day to day affairs of running the company. This is the job of the board of directors, who are usually elected by a majority vote among share holders. If their performance is not satisfactory, they may be ousted by share holders, depending on what percentage of the company is owned by the shareholders. Therefore there are several advantages and disadvantages which have to be considered when a company such as Hall Ltd decides to become a PLC.
One main advantage of becoming a PLC is the large inflow of capital that the company receives once it becomes listed. Hall Ltd can use this increase in capital to purchase the raw materials which are required to manufacture turntables in bulk. The result of doing this is that their suppliers would sell them these raw materials at a discounted price and provide more attractive credit facilities, due to the large quantity of items purchased. This in turn would reduce the average cost price per unit for Hall Ltd, and they would achieve economies of scale.
The reduction in the cost of manufacturing turntables would also mean that Hall Ltd can now lower its selling price, and this would increase the demand for its turntables, and would in turn help it to achieve a high inventory turnover, where it would be selling large amounts of turntables at a normal profit, and would eventually make it more profitable through becoming a PLC.
However, competitors of Hall Ltd may adopt this same approach to get an effective inventory turnover and make their prices competitive with that of Hall Ltd’s. This may then put Hall Ltd in its retrospective position and it then defeats the purpose of becoming a PLC.
Another benefit that Hall Ltd stands to gain as a PLC is that its standing in the market would be enhanced among customers, suppliers and lenders. They would find it easier to raise finance as PLCs are seen to be a less risky investment as compared to private limited companies. They would then be able to have a lesser rate of interest charged when borrowing funds, and this would also be beneficial in its campaign to expand.
When contemplating to become a PLC, it is crucial for Hall Ltd to decide if the nature of its business and product is attractive enough and whether it has the potential for long term growth in order to convince investors to put money into the company when it is initially listed.
Businesses are generally divided into two broad categories. They are either a price competitive business or a business with a durably competitive advantage. Businesses which are price competitive tend to compete solely on price, as there would be many other businesses which provide the same type of product and hence they compete for customers. They best fit into a market which is in perfect competition or monopolistic competition. A company with a durably competitive advantage is one that offers consumers a unique selling point. This usually comes in the form of a strong brand name or an effective logistical or distribution system, which sets them apart from the rest of their competitors. Examples of this type of businesses are Nike, Coca-Cola and McDonalds. Such businesses would have a good prospect of earning abnormal profits in the long term, and they would usually feature in a monopoly market where only one firm dominates the market, or an oligopoly, where there are a few firms that tend to dominate the market.
Having considered the two main models that various businesses can assume, it can be said that Hall Ltd is a price competitive company. There are many companies in the market which produce turntables for hi-fi systems, and therefore its success depends heavily on the selling price of its product. Secondly, there is a whole range of substitute products for hi-fi systems that have become available due to the advancement of technology. Some examples are mp3 players and laptops which can play high quality music. These factors would tend to affect the demand for hi-fi systems which in turn would affect the sales of turntables for Hall Ltd, as turntables are a complement product of hi-fi systems.
As shown in the earlier calculations, the price elasticity of demand for Hall Ltd turntables is 1.25, which is relatively high, further reinforcing the fact that Hall Ltd is a price competitive business and that it is selling a good that is not essential but merely just for leisure. It would not do well during a turbulent economic climate such as a recession.
The repercussions of these facts would not be advantageous to Hall Ltd as it may not be successful in luring individuals or institutional investors to put money into its business when it lists as the product it sells is too price competitive and does not have the potential for long term growth due to the abundance of substitute products that are available. This would then hamper their ambitions of expanding.
However, as Hall Ltd is a manufacturer of ‘top of the range’ turntables for hi-fi systems, it indicates that their turntables are of a substantial quality. They may use this to their advantage and convince potential investors that the capital raised from listing as a PLC can be used to invest in marketing and advertising to establish a powerful brand name. This may overcome a fundamental barrier that is preventing them from achieving better profitability, which is the price competitiveness. Manufacturers of hi-fi systems may then associate the brand name of Hall Ltd to high quality turntables and may be willing to pay the price dictated by Hall Ltd even though it would be more than its competitors. It would gain a durable competitive advantage and become more profitable as a result of this.
It must still be kept in mind that the success of this approach would very much depend on the management of Hall Ltd and how they pitch their strategy to investors, and also the fact that the success of the sales of turntables still heavily relies on the sales performance of hi-fi systems.
The time factor must also be taken into account for this approach to be successful. It would take a considerable amount of time for a brand name to be developed and for a brand to become popular and hence would not have any effect on revenue of the company in the near future. This would conflict with the objectives of stock market investors who are looking for short term returns on their investments based on the financial performance of the company. Obviously, a brand cannot be developed over night to enhance the financial performance of the company, and this may put pressure on the management to then concentrate on goals to enhance the profitability of the firm in the short term and ignore the long term goal of brand development for a durable competitive advantage. This would not help Hall Ltd to achieve increased profitability and thus defeats the purpose of expanding to become a PLC in the first place.
Depending on the size of Hall Ltd, the costs involved in the process of floatation may be substantial due to the large amount of fees needed to pay for professionals such as solicitors and accountants, and various other legislative costs that may be incurred.
There would also be a requirement to constantly publish and update the financial status of the company for the general public to see if Hall Ltd becomes a PLC. This would mean that there would be greater administrative costs involved and its competitors would have access to information that could be sensitive and important.
Therefore the management of Hall Ltd must be convinced that the benefits of becoming a PLC should outweigh and compensate for over and above the costs involved in the process of floating the company on the stock exchange and also the costs that may occur after the company has been listed.
In conclusion, although Hall Ltd may possibly gain a high inventory turnover or a high profit margin through economies of scale and branding from the capital gained by becoming a PLC, the nature of the market it is in and the product it sells, will not make it very successful as a listed company. A fundamental reason for this is because it sells turntables, which is price competitive and it also does not have a durably competitive advantage as it heavily relies on the successful sales of hi-fi systems in order to be profitable. Also, the costs incurred for floatation seem to outweigh the advantages that can be gained from listing and thus the idea of expanding to become a PLC is not worth pursuing. Hall Ltd should seek an alternative way of expanding through diversifying the range of products it sells instead.
