Business Expansion Flashcards
Reasons for Expanding a Business
Psychological
Defensive
Aggressive
2 Psychological Reasons
- CHALLENGE- some entrepreneurs love the challenge of setting up their own business.
- AMBITION- some entrepreneurs want to have the biggest and best business in their particular industry.
Defensive Reasons
- ECONOMIES OF SCALE- businesses may wish to expand to drive down costs. A large production plant will reduce per unit cost of production.
- DIVERSIFICATION- involves firms entering new markets, spreading risks, creating new products or buying businesses in an unrelated market in order to reduce dependency on one product or market.
Aggressive Reasons
- ELIMINATION OF COMPETITION- a firm may buy out a competitor in order to enter a new market.
- TO INCREASE PROFITS- by expanding, they increase their talent, product range and sales, they reduce their costs, make better use of their resources and make more money.
- SYNERGY- this occurs when the sum of two or more firms joined together will be greater than the efforts of the firms operating separate.
2 Examples of Organic Growth
- INCREASE SALES- the business can grow if they make a profit from sales. This might be done by selling your product in its origin country and or selling abroad.
- FRANCHISING- the franchisor will expand their business by giving permission to other people to set up an identical copy of the business. In return the franchisor will look for a one off fee and their annual shares of the profit.
Advantages and Disadvantages of Franchising for the FRANCHISOR
ADVANTAGES:
limited capital required
economies of scale
less supervision required- the franchisor does not need to get involved in the managing of the new business.
Dedicated Franchisees
DISADVANTAGES:
risk to reputation
loss of control
Advantages and Disadvantages of Franchising for the Franchisee
ADVANTAGES:
franchise support (training)
Advertising
DISADVANTAGES:
cost- expensive to purchase a franchise
revenue- must pay a percentage to the franchisor
3 Examples of Inorganic Growth
- Strategic Alliance/ Joint Venture
- Mergers
- Acquisitions/ Takeovers
Explain Strategic Alliance
Where two separate and independent businesses make a deal to cooperate with on another on a particular business project. They combine their resources and expertise. There is no change in ownership, the remain separate. e.g. google and Hyundai worked together to make google maps in new cars
2 Advantages + 2 Disadvantages of Strategic Alliance
ADVANTAGES:
Success- increased likelihood of success as businesses share their knowledge, skills and resources.
New Markets- increased sales and profits for each business.
DISADVANTAGES:
Slow Decision Making- lots of different businesses involved.
Disagreement- between businesses regarding e.g. leadership and costs.
Explain Mergers
When two firms come together by mutual agreement to run their businesses as one. A merger is very like a takeover but they are usually a more friendly arrangement. Merging will allow a business to grow market share much quicker than growing organically as well as being more competitive in the market.
e.g. Walt Disney and 21st Century Fox
2 Advantages + 2 Disadvantages of Mergers
ADVANTAGES:
New Products- produce products faster because of combines business resources.
Increased Profits- larger customer base and low costs.
DISADVANTAGES:
Redundancies- duplication of jobs in both businesses can result in stall being made redundant.
Conflict- different business cultures can cause poor industrial relations.
Explain Acquisitions/ Takeovers
When one company takes over another by buying 51% of their shares. With our without consent from staff. The company with the majority shares is called there holding company and the company that has been acquired is called the subsidiary.
e.g. Google acquired Android
2 Advantages + 2 Disadvantages of Acquisitions/ Takeovers
ADVANTAGES:
Spreads Risk- by diversifying into new products or markets.
Economies of Scale- larger businesses buy in bulk
DISADVANTAGES:
Expensive- larger amounts of capital required to finance a takeover.
Industrial Relations- some staff are unhappy and redundancies can happen.
4 Headings for Implications of Business Expansion
Organisational Structure
Product Mix
Profitability
Employment
Short Term and Long Term Implications for Organisational Structure
SHORT TERM:
the firm may introduce a formal structure such as a functional structure. This outlines to chain of command and span of control in the firm.
LONG TERM:
the structure may need to be changes e.g. the functional structure may ned to be replaced with a geographical structure to support expansion into new markets
Short and Long Term Implications for Product Mix
SHORT TERM:
the firms product range will need to increase to suit the wider range of market segments.
LONG TERM:
different marketing mixes will have to be put in place for the wider range of products in the firms portfolio.
Short and Long Term Implications for Profitability
SHORT TERM:
profits will decrease due to increased expenditure on assets
LONG TERM:
sales and profits will increase as the firm establishes itself in the market and costs will be reduced by economies of scale
Short and Long Term Implications for Employment
SHORT TERM:
restructuring may lead to job losses as some roles are eliminated due to duplication
LONG TERM:
as a business establishes itself in the market the HR department will be able to recruit new employees as part of its staff training.
How to Finance Business Expansion
equity capital
retained earnings
grant
debt capital (loan)
sale and leaseback
venture capital
Advantages+ Disadvantages of Remaining Small
ADVANTAGES:
easier to manage
less stress
staff relations and communications are easier
better personal service
DISADVANTAGES:
costs tend to be higher as they are less likely to use mass production.
profits tend to be smaller
less opportunity for investing
small firms struggle more to compete with larger firms in the market
Importance of Business Expansion in Ireland (3)
- Tax being collected for the government to spend on improving infrastructure, repaying debt or offering grants.
- Lower unemployment and higher standard of living because expanded businesses higher new employees.
- Supply more products and in doing so they need raw materials which will boost the economy more.
Importance of Business Expansion Abroad (2)
- Creation of new jobs in Ireland because of increased sales.
- Exporting Improves our International Relations because we become familiar with each other and turn to each other when times are tough.
How is Business Expansion Regulates
Irish Law: CCPC
EU Law: under the European competition law the EU commission appoints a commissioner of competition.
