18-Business Expansion Flashcards
Organic Growth
natural slow expansion
using profits to expand and repeating this over time
Inorganic Growth
quick expansion
achieved by merging or taking over another business
Organic Growth Strategies
1) Increase Sales e.g. Lucozade
2) Franchising e.g. Subway
Franchise
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.
Advantages of franchising
Little capital required Economies of scale Less supervision required Dedicated franchisee Reduced risk Training Advertising
Disadvantages of franchising
Risk to reputation e.g. food poisoning
Loss of control
Cost (franchisee)
Restrictions
Inorganic growth strategies
Strategic alliance
Merger
Takeover
Strategic Alliance
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
Advantages of strategic alliance
Cost effective-split costs e.g. IT system
More successful-knowledge and expertise
New Markets
Disadvantages of Strategic Alliance
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
Merger
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)
Advantages of merger
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.
Disadvantages of merger
Conflict-clash of cultures,rules and policies,management
Reduce Motivation-staff worried about redundancies and less chance of promotion
Takeover
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
Advantages of Takeover
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
Disadvantages of Takeover
Capital:costs a lot of money.Borrowing increases debt/equity ratio and risk of bankruptcy.
Defensive reasons for expansion
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
Offensive reasons for expansion
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
Psychological reasons for expansion
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
How to finance business expansion
Equity capital-raising money by selling shares
Retained earnings-using profits
Grants
Debt capital-borrowing from investors/bank
Importance of business expansion in Ireland
Job creation
Spin off effect:business needs more raw materials,increases sales for suppliers
Lower prices for consumers
Increased Tax Revenue
