Expansion 1 by 28G69v


Expansion of a business

   Growth of a business
Two Methods of Expansion
   Organic Growth

   Inorganic Growth
    Organic Growth
   Natural growth within the business
   Does not involve outside firms
   Happens gradually over time
   Financed by Retained Earnings
   Eg. Using existing products
       or developing new products
      Organic Growth
   Using Existing Products

   Increase domestic sales: Cheap, low risk
   Export: Slower, research needed, risky
   Licencing/Franchising: Allow other firms to
    use or sell invention for a royalty(fee)
      Is a business arrangement whereby the
       franchiser sells the right to use his/her
       name & idea/product.

      The franchisee pays a fee and a
       percentage of profits.

      They must obey rules & conditions set
       down by the franchiser.
       Advantages of Franchising
   Quick and inexpensive way to expand.

   Receive up front fee & royalties.

   Benefit from national advertising &
    economies of scale.
      Disadvantages of Franchising
   If the franchisee is not competent it may
    affect the reputation of the franchise.
      Organic Growth
   Develop new products

   Market research & testing: Slow & expensive
   Develop USP:Com up with new ideas.
    Eg: washing powder, tablets, gel…
    Eg: nintendo, childrens games, adult games
      Inorganic Growth
   The business may have grown to full potential
   They may wish to expand more rapidly
   Financed by Reserves, Shares & Loans
   Eg. The business may take over/acquire, merge or
    form alliances with outside firms
   Is a takeover of another co.
   Where one co. buys 51% or more shares in another co.
   They gain control of co.
   Eg:Topaz takeover of statoil
   Adv: Quick
   Disadv: Expensive, may be bad feeling
   Hostile takeover: opposed by shareholders
   White knight: alternative buyer that sharholders agree to
   Two co.’s agree to come together to run
    their business as one
   More friendly than takeover
   Eg: Avonmore+Waterford Foods=Glanbia      plc.
   Adv: cheaper, quick, synergy (2+2=5)
   Disadv: confusion over control
       Strategic Alliance/Joint Venture
   Two or more firms co-operate to achieve a
    specific purpose
   Firms remain separate but share skills and
   Eg: PostBank (An Post +Fortis Bank)
   Adv: Cheap, quick, easily disbanded, mutual
    benefit, increased profit
   Types of Expansion
Horizontal integration/growth

 Firms in the same line of business and
 At the same stage of production
Eg. Statoil taking over jet petrol stations
      Topaz taking over statoil petrol stations
     Types of Expansion
   Vertical integration/growth

 Firms in the same line of business but
 At a different stage in the production
 Eg: Ford Motor Company
 Steel, glass, paper, manufacturin gcars
  warehousing, distribution, spare parts ……
Types of Expansion
Lateral Growth

   Firms in related business
   At same stage of production process

   Eg: Waterford Crystal + Wedgewood
    China + Waterford Wedgewood
Diversifying Growth

   Taking over or joining with firms of
    totally unrelated business

   Eg: British American Tobacco acquiring
Reasons for Expansoion
Economies of Scale
 A bigger firm produces more goods

 As more of a good is produced the cost
  per unit decreases
       Reasons for Expansion
Supply of Raw Materials
 Manufacturing firms take over suppliers of
  raw materials in order to guarantee
 Vertical Growth

   H. Ford – motor industry
   N. Rockerfeller – oil industry
    Reasons for Expansion
Reduce Competition

 Merging or taking over rival firms reduces
  the no, of competitors you have.
 Eg: Lloyds TSB taking over
         Halifax Bank of Scotland
Reasons for Expansion

 The sum of two parts working together
  is greater than that of two parts
  working separately
 Two heads work better than one
 2+2=5
Reasons for Expansion

   Moving into different locations
   Moving into different areas of business
   Not “putting all eggs in one basket”
   Will not suffer too much if one location
    or product fails
Finance for Expansion

         Long Term Sources

         Reserves
         Share (Equity) Capital
         Debentures
   Retained Earnings.
   The profit that is left over after shareholders receive
   Ploughing Back Profits.
   Adv: No security needed, no loss of control, no interest,
    no repayments.
   Disadv: Takes time to build up, low div, unhappy s/h, sell
    shares, reduce share price and value of co.
        Share Capital
   Sell part ownership of the business to acquire cash
   Co. can give shares instead of cash to the co. they are
    buying. (may be worth a lot of money)
   Equity – s/h = owners = risk takers
   Adv: No security needed, no interest, no repayments, decide
    on your own dividend, only paid back if co. winds up
   Dis adv: Loss of control, div not tax deductable, low div =
    s/h sell shares, share price drop, may be a takeover
   Long Term Loan
   Fixed interest
   Fixed repayment date
   Adv: Quick to obtain, no loss of control,
    interest is tax deductable.
   Disadv: Security is needed, interest must be
    paid, high gearing, s/h unhappy, sell shares…..
Implications of Expansion
   Advantges in the short term

   New   assets, equipment, buildings..
   New   products
   New   markets
   New   management
      Implications of Expansion
   Advantages in the long term

   Increased sales
   Economies of scale: decreased cost per unit
   Increased profits
   Better chance of survival
     Implications of Expansion
   Disadvantages in the short term

   Job losses
   Cost increases, profits may fall
   Low staff morale due to uncertainty..
      Implications of Expansion
   Disadvantages in the long term

   Personal touch is lost ,loss of consumer
   More difficult to manage a large firm
   More difficult to control costs, staff stock etc
    in a large firm
      Importance of expansion in the domestic
      market (Ireland)

   Jobs are created and sustained.
   Taxes revenue from corporation tax , Vat
    and PAYE increase.
   Survival is more likely in a large efficient
   Exports increase improving the balance of
       Importance of Irish companies expanding

   Profits are repatriated back to head office in
    Ireland, benefits Irish shareholders.
   Tax revenue from corporation tax is increased.
   Effeciency & quality are improved in order to
    compete on the world stage, benefits consumers.
   New technology & product ideas are introduced to
    Ireland form abroad.
     Irish Competition Law
 Enforced by the Competition Authority.
 They promote fair competition.

 They can approve or disapprove mergers &
 They monitor price fixing & below cost
       EU Competition Law
   EU Competition Policy
   Are rules to ensure fair competition in the EU.
   Cartels(firms that agree to fix prices) are illegal.
   Governments cannot subsidise firms that are in
    trouble (seen as unfair competition).
   EU can stop mergers & takeovers if…
   EU can fine co.’s that abuse their
     dominant position eg. Aerlingus.
Exam Questions
   Short            Long
   2007 Q 1         2006 Q 6 (b) imp for bus, 2 methods
   acquisition      2005 Q 5 (b) sof & reasons for exp
                     2000 Q2 (b) alliance v franchise
                     2000 Q 7 (a) reasons, sof
                     1999 Q 2 (a) alliance v franchise

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