Business Expansion Flashcards
Explain expanasion with example
Expansion is the growth of a business over time.
Ex: McDonald’s started out with one restaurant in 1955. Today, they have 36,000 restaurants worldwide.
Can be organic or inorganic growth
Explain organic growth
Organic Growth is natural, slow, expansion of the business.
Involves increasing the size of the existing business by increasing sales & reinvesting profits
Can be done by:Increasing Sales
Franchising
Explain increasing sales as a method or organic growth
Growth by selling more products and increasing its profits.
Achieved by better marketing and product improvements.
Business can try to increase sales domestically (in home country) or sell to other countries called exporting
Ex: Baileys - first launched in Ireland in 1974. Now is exported to 130 countries worldwide
Explain the four advantages of franchising
Little capital - original owner does not need money only good idea people will pay to copy. Franchisee pays
Economies of scale- big economy scale, buying supplies for large business enjoy large discount, reduced costs
Less supervision required- expansion without involvement in management of business. Franchisees runs day to day business looking after employees
Dedicated franchisees- franchisee is totally motivated to strive for success. Invest their own money so have a vested interest
Give two disadvantages of franchising
- Risk to Reputation- reputation and goodwill built up can be harmed. One franchisee makes mistake damages brand
- Loss of Control- loses control over day to day management. Little direct influence over employees hired or customer service
Explain inorganic growth and name three methods
Inorganic Growth involves increasing the size of the business by merging with or taking over another business
Three methods are: strategic alliance, merger and takeover.
Explain a strategic alliance
Two or more independent firms co-operate with each other on a particular business project
Firms remain separate but share skills and resources
Pool together their resources and expertise to make project a success
•Eg: ‘One World Alliance’ (airline alliance)- each airline benefits as they offer passengers greater choice of destinations to fly to.
Give three advantages to a strategic alliance
- Cost effective method of expansion
- More successful expansion
- Opens up new markets
Explain two disadvantages to a strategic alliance
- Disagreements - two parties may fall out if they feel one is getting less say than the other. smaller business may feel obscured by higher profile business
- Possible loss of customers- customers may be unhappy with alliance with restricted choice or unhappy with choice offered. Unwilling to buy ex: Airline alliance a consumer may not want to fly with a american airlines to the states but it is the only one British airways offers from alliance. Customer may look outside the alliance
Explain merger
Two companies voluntarily agree to join together permanently to form a single new legal entity
Neither has control over the other. Join for mutual benefit
More friendly than a Takeover
Eg: Avonmore+Waterford Foods=Glanbia plc.
Give another name for a merger
amalgamation
Give four advantages of a merger
- Economies of Scale
- Increased profits
- Synergy
- Quick access to new ideas and products
Explain two disadvantages of a merger
- Conflict-merging can lead to a clash of cultures as managers disagree over best methods to use because each is used to doing things their own way. Clashes can make the business less effective
- Reduces employee motivation- employees may become worried for job security, merger often leads to redundancies lowers productivity, motivation. Business may lose good workers who find better jobs elsewhere
Explain takeover
One company buys 51% or more shares in another company and They gain control of company.
Business that is bought becomes part of the acquiring company
Can be hostile where directors of target company recommend shareholders do not sell or friendly
Ex: Facebook’s takeover of Whatsapp & Instagram
Explain hostile takeover
a takeover opposed by shareholders
What is another word for a takeover
acquisition
Give advantages of a takeover
- Economies of Scale
- Increased profits
- Quick access to new ideas and products
Explain a disadvantage of a takeover
Capital required- costs a lot. If business borrows the moeny its debt equity ratio increases with higher risk of bankruptcy. Selling shares means ownership is reduced and as is control
What are three types of reason for business expansion
Defensive
Offensive
Psychological
Explain a what a defensive reason for business expansion is
Company expands to become stronger, richer and better able to fight back competition
Explain a what a offensive reason for business expansion is
A company may expand to become the biggest and the best in the industry
Explain a what a psychological reason for business expansion is
Reasons to do with personal ambition and motivation
Give four defensive reasons for expansion
Economies of scale
Diversification
Protect supply of raw material
To protect distribution
Give four offensive reasons for expansion
Reduce competition
Increase profits
Asset stripping
Acquire new products
Give two psychological reasons for expansion
Ambition
Challenge
Name four long term sources of finance for business expansion
Reserves / Retained Earnings
Share (Equity) Capital
Debentures - also known as Debt Capital
Grant
What are the factors to consider when choosing a finance option for business expansion
- Cost (Debt vs. Equity)
- Security
- Tax Implications
- Dilution of Ownership (Loss of Control)
What are the advantages of expansion in the short term
- New assets
- New products
- New markets
- New management
What are the disadvantages of expansion in the short term
- Job losses
- Cost increases, profits may fall
- Low staff morale due to uncertainty
What are the advantages of expansion in the long term
- Increased sales
- Economies of scale
- Increased profits
- Better chance of survival
What are the disadvantages of expansion in the long term
- Loss of consumer confidence
- More difficult to manage a large firm
- More difficult to control resources in a large firm
Explain the importance of expansion in the domestic market (in Ireland)
Jobs: are created and sustained, higher standard of living
Taxes revenue: bigger business make big profits so more corporation tax , Vat and PAYE. Can improved countries infrastructure
Supplies: Bigger business needs more raw materials. Spin off effect as helps Irish suppliers expand
Lower cost of living: Unit costs decrease because of economies of scale. Lower priced products
Exports: increase improving the balance of trade.
Importance of Irish companies expanding abroad
Exporting: Increase improving balance of payments. Makes Ireland richer brings money in
Currency: Brings foreign currency into Ireland. Can be used to pay for imports
Job creation: Increased sales abroad can create jobs here. Higher standard of living. ex: Baileys exporting hired people in factory to make products to satisfy international demand
International relations: Friendlier with countries we export to. as small country we depend on help.
Explain franchising as a method of organic growth
Original owner of business expands it by giving permission to other people to set up an identical copy of his business idea for a one off fee and an annual share of the profits.
Franchisor trains franchisees in all aspects of running the business and lays down strict rules to follow
Ex: Super macs expanded over Ireland through franchising
Explain cost effective expansion as an advantage of a strategic alliance with an example
Businesses involved split the cost of the venture
Business can sahre equipment and assets with each other
expand without having to provide all the money required
ex: Swatch and Mercedes Benz developed the smart car only each contributing half the capital needed
Explain more successful expansion as an advantage of a strategic alliance with an example
Alliance can brainstorm ideas to come up with best possible business ventures
Share their knowledge and expertise with each other
Ex; Swatch and Mercedes Benz smart ca alliance allowed engineers from both companies to produce best car possible
Explain new markets as an advantage of a strategic alliance with an example
Can open new markets to both businesses
Used to attract new customers increasing each business’s sales and profits
Ex: tesco and bord gáis. Tesco customers may switch from other providers to bord gais and can use club card vouchers to reduce energy bills. Similarly this enticed many bord gais consumers to shop at tesco to get vouchers
Explain economies of scale as an advantage of a merger
Bigger business grows lower unit costs become
Merged business buys ore supplies so gets bigger discount from suppliers
Costs are lowers so prices can be lowered for competitive advantage
Ex: Air-France-KLM gets its fuel much cheaper now.
Explain increased profit as an advantage of a merger
Two business cut out all duplication
New business does not need two of everything
While revenue increases costs decrease giving the merged business bigger profits
Ex: cut staff
Explain synergy as an advantage of a merger
Businesses do better as one than sum of their separate performances
ex: Shop selling take away coffee merged with shop selling pastry, better offering would attract customers
Explain quick access to products and ideas as an advantage of a merger
Saves business time developing new ideas and products and markets.
One business joining another gets access to that other businesses ideas, products, machines, and markets
Explain economies of scale as an advantage of a Takeover
Bigger business grows lower unit costs become
Merged business buys ore supplies so gets bigger discount from suppliers
Costs are lowers so prices can be lowered for competitive advantage
Explain increased profit as an advantage of a Takeover
Two business cut out all duplication
New business does not need two of everything
While revenue increases costs decrease giving the merged business bigger profits
ex: 3 takeover of O2- closure of shops where there were duplicates in the area
Explain quick access to new products and ideas as an advantage of a Takeover
Saves business time developing new ideas and products and markets.
One business joining another gets access to that other businesses ideas, products, machines, and markets
Adidas took over rebok to secure a stronger presence in the US market
Explain economies of scale with an example as a defensive reason for expansion
Bigger business grows lower unit costs become
Merged business buys ore supplies so gets bigger discount from suppliers
Costs are lowers so prices can be lowered for competitive advantage
Ex: Dunnes stores get larger discount from suppliers than a local corner shop
Explain diversification with an example as a defensive reason for expansion
Business may expand to defend itself against a downturn in its market.
Takes over or merges in totally unrelated area.
If one company goes through bad patch other companies can keep the business going.
Ex: Gillette diversified buying Parker pens, spreading risk of doing business across different sectors
Explain to protect supplies with an example as a defensive reason for expansion
Business expands to ensure it has supply of good quality, reasonably priced raw materials.
May merge or takeover company it buys materials or products from. - Backward vertical integration
Ex: Ice cream manufacturer buys milk from a dairy. If dairy increases the price company may make an offer to take over the dairy
Explain to protect distribution with an example as a defensive reason for expansion
Business expands to defend against competitors
Ensures its products are on sale in key markets and business may merge or take over company that sells its products on to consumers, in this way it guarantees market for product- forward vertical integration
Ex: When 3 took over O2 it closed a lot of stores to avoid duplication.
Explain eliminate competition with example as an offensive reason for expansion
Business may expand by taking over a competitor
Does this to get rid of competitor and maintain dominance over the market
Ex: ryanair tried to take over aer lingus several times
Explain asset stripping with example as an offensive reason for expansion
Entrepreneur may take over business as he sees opportunity to make money using business assets better or selling them off to make profit.
No intention of running a company.
Ex: property developer may take over city centre hotel chain not to run it but for land it sits on
Explain acquiring new products with example as an offensive reason for expansion
Expands to save a business a lot of time developing new ideas, products and markets
It acquires that business ideas, products, machines, staff and markets.
Ex: Adidas took over reebok for €3.1 billion. They did this to get a stronger presence in the US market
Explain increase profits with example as an offensive reason for expansion
More shops a business has, the more money it makes
Dunnes stores makes more profit than a local sole trader shop
Explain ambition as a psychological reason for expansion with example
Business people want to build their business into the biggest
They are “empire builders”and want fame,sense of achievement that comes form growing the biggest businesses
Ex: Donald Trump who has a major property entertainment and gambling business in the US
Explain challenge as a psychological reason for expansion with example
Business people enjoy challenge of growing the business
Get a thrill from starting business from scratch to see if they can make it a success
Ex:Sir Richard Branson of Virgin enjoys challenge of setting up different businesses
What type of finance is used for business expansion
Long term finance because expansion is the long term growth of the business
Explain equity capital as a long term source of finance suitable for business expansion
Selling shares in business to investors
Entrepreneurs gives them part ownership of his business and for each share they buy they get a vote and a dividend
Ex: Facebook bought whatsapp with mainly equity
Explain retained earnings as a long term source of finance suitable for business expansion
Profits the businesses has saved over years
Business hasn’t borrowed so no interest to repay and no worries of going bankrupt when expanding
Ex: Ryanair used some retained earnings to buy a large amount of shares in Aer Lingus
Explain grant as a long term source of finance suitable for business expansion
Money government gives the business to help pay for things it needs to expand such as buildings, machinery
Permanent source of finance, not repaid Provided that the business obeys all conditions of grant
Explain debt capital as a long term source of finance suitable for business expansion
Entrepreneur raises money borrowing from investors Ex:bank. Long term loan for company- debenture
Must pay interest on loan every year and repay loan in full on a agreed date in the future
Business must putassets up as security if loan is not repaid invesotr can take the assets
Ex: IAG bowwored €1.4billion from banks to buy Aer Lingus
Compare debt capital with equity capital in terms of risk of going bankrupt
Business mainly financed by equity has few loans and has little interest to pay and few repayments to make
Less chance of bankruptcy if bad patch occurs
Business mainly financed by debt has lots of loans and lots of interest and repayments every year.
With bad patch lenders still want their money so can get judge to close business and use proceeds to pay what they are owed. High chance of bankruptcy
Compare debt capital with equity capital in terms of repayments
Equity is permanent source of finance. Does not have to repay capital to shareholders until business is closed
Loan capital business must repay the loan in full on a date in the future
Compare debt capital with equity capital in terms of interest
Business does not have to pay dividends if no profit is made. Directors of business decide how much dividend is paid out
Debt capital interest must be paid regardless of whether profit is made or not
Compare debt capital with equity capital in terms of security needed
Equity finance means business does not not provide security and there is no risk of losing their assets
For debt capital security is needed to obtain finance. Business risks losing assets if they cannot repay loan
Compare debt capital with equity capital in terms of tax bill
Dividends paid to investors are not tax deductible. Business cannot take dividend from its taxable profits so they do not save on tax with equity finance
Interest paid on a loan is tax deductible and is taken from taxable profits. Business pays less tax with debt finance
Compare debt capital with equity capital in terms of giving away shares
Equity finance reduces ownership over business. Owners must give shares to the investors in order to obtain the equity finance
Loan capital does not affect ownership over business
Explain cost as a factor when choosing finance for expansion
Should shop around for cheapest source helping lower costs and increase profits
Ex: Equity vs debt capital
Equity- dividends do not have to be paid if no profit is made
Debt- interest has to be repaid regardless
Explain security as a factor when choosing finance for expansion
Manager must take into account fact the source of finance requires collateral, business risks losing assets
Ex: Equity vs debt capital
Equity- no security required, no risk
Debt- collateral needed risks losing assets like buildings
Explain tax implications as a factor when choosing finance for expansion
Manager must see if business will get tax deduction for repayments on source of finance
This would reduce cost of finance
EX: interest on loan is tax deductible and will lower business tax bill
Dividends on equity shares will not
Explain ownership as a factor when choosing finance for expansion
Manager must look at each source of finance if owner has to give away shares
Business owners must balance desire for money with their control over business
This will reduce their control over business
Ex: Loan capital does not involve giving away shares
Equity capital does
Explain the short term and long term implications for the products of a business after expansion
ST:bigger business have bigger range of products
LT:Bigger business has more money to spend on market research and product development. Bigger range of products
Explain the short term and long term implications for the management and organisation structure of a business after expansion
ST:May need new organisation structure. businesses merge so duplication is not needed ex: two CEOS
LT: Bigger business grows harder it is for one person to manage and so more delegation is needed. May need to switch to geographic structure to cope with expansion abroad/ product structure with new ranges
Explain the short term and long term implications for the finance of a business after expansion
ST:Business will have to raise finance to pay for expansion involving selling shares or borrowing
LT: Bigger business has better credit rating and more collateral so it is easier to get loans. Also easier to find investor for equity finance- want to put money in
Explain the short term and long term implications for the supplies of a business after expansion
ST & LT:Bigger business gets quantity discounts buying in bulk. Also get quicker delivery and better service because they buy so much
Explain the short term and long term implications for the profits of a business after expansion
ST:Costs involved in expansion may lead to decrease in profits ex: Paying for new business, redundancies packages)
LT:Economies of scale should lead to increased profits
Explain the short term and long term implications for the employees of a business after expansion
ST:May be worried for job cuts. Lower employee morale and motivation ex: When 3 took over O2 shut down stores where areas had duplicates
LT: Successful big businesses provide better pay, job security and increased promotion prospects for employees
Explain the short term and long term implications for the customers of a business after expansion
ST:Customers enjoy bigger range of products at lower prices with big business due to economies of scale
LT: Customers enjoy more products and lower prices but they may be turned off by the impersonal service offered by big businesses
Explain the short term and long term implications for the share price of a business after expansion
ST:share price should increase as investors want shares in big companies and will pay more for them
LT:Bigger businesses make big profits and share price should increase as investors will pay more to buy shares in profitable business
