18-Business Expansion

Question 1

Organic Growth

Answer 1

natural slow expansion

using profits to expand and repeating this over time

Question 2

Inorganic Growth

Answer 2

quick expansion

achieved by merging or taking over another business

Question 3

Organic Growth Strategies

Answer 3

1) Increase Sales e.g. Lucozade

2) Franchising e.g. Subway

Question 4

Franchise

Answer 4

Business arrangement where one person (franchisor) sells the right to use her business/idea to others (franchisee) and allows them to set up an exact replica of that business in return for a fee and share of profits.
Franchisor trains and supports and lays out strict rules.

Question 5

Advantages of franchising

Answer 5

Little capital required
Economies of scale
Less supervision required
Dedicated franchisee
Reduced risk
Training
Advertising

Question 6

Disadvantages of franchising

Answer 6

Risk to reputation e.g. food poisoning
Loss of control
Cost (franchisee)
Restrictions

Question 7

Inorganic growth strategies

Answer 7

Strategic alliance
Merger
Takeover

Question 8

Strategic Alliance

Answer 8

two seperate businesses make a deal to co-operate on a business project
Pool resources and expertise
Benefit from sharing costs
e.g. tesco and bord gais

Question 9

Advantages of strategic alliance

Answer 9

Cost effective-split costs e.g. IT system
More successful-knowledge and expertise
New Markets

Question 10

Disadvantages of Strategic Alliance

Answer 10

Disagreements
Lose customers-if not happy about one part of alliance e.g.BA switch customer to american airlines for second leg of flight that they cannot provide

Question 11

Merger

Answer 11

two seperate businesses voluntarily join together to form one new legal single entity that is beneficial to both.
Neither has control.
e.g.Metro Herald (biggest free newspaper in Dublin)

Question 12

Advantages of merger

Answer 12

Economies of scale:lower cost per unit
Increased profit:cut duplication of jobs e.g. two marketing directors not needed
Synergy:two better than one.Both benefit from each other.

Question 13

Disadvantages of merger

Answer 13

Conflict-clash of cultures,rules and policies,management

Reduce Motivation-staff worried about redundancies and less chance of promotion

Question 14

Takeover

Answer 14

One company takes control over another by buying 51% of its shares
e.g. 3 bought o2 for 780m
Hostile-board of directors recommend to shareholders not to sell e.g. aer lingus
Friendly-beneficial to both eg Whatsapp and Facebook 19m

Question 15

Advantages of Takeover

Answer 15

Economies of Scale
Increased Profits-3 announced closure of 42 stores to avoid duplicates
Quick access to new products-3 immediately had 26% of market

Question 16

Disadvantages of Takeover

Answer 16

Capital:costs a lot of money.Borrowing increases debt/equity ratio and risk of bankruptcy.

Question 17

Defensive reasons for expansion

Answer 17

Economies of Scale
Diversification e.g. Gillette bought Parker Pens
Protect supplies(Backward Vertical Integration)-Merge with company that supplies you
Protect distribution(Forward Vertical Integration) Merge with company that sells your product

Question 18

Offensive reasons for expansion

Answer 18

Eliminate competition e.g. Ryanair and Aer lingus
Asset stripping e.g. property developers buy hotel chains and build apartments
Acquire new products
Increase profits

Question 19

Psychological reasons for expansion

Answer 19

Ambition-build business into biggest in world e.g. Donald Trump
Challenge-diversify and try succeed in new market e.g. Richard Branson Virgin airlines and media

Question 20

How to finance business expansion

Answer 20

Equity capital-raising money by selling shares
Retained earnings-using profits
Grants
Debt capital-borrowing from investors/bank

Question 21

Importance of business expansion in Ireland

Answer 21

Job creation
Spin off effect:business needs more raw materials,increases sales for suppliers
Lower prices for consumers
Increased Tax Revenue