Chapter 17: Business Expansion Flashcards
Economies of Scale
Benefits that arise in a business as it becomes larger and more efficient
Methods of business expansion
Organic methods: existing/new products
Inorganic methods: merge/acquire another business
Organic methods
Increasing sales domestically Exporting Licensing Franchising Diversification
Inorganic methods
Strategic alliances (joint ventures)
Acquisitions/takeovers
Mergers
Licensing
Allowing other firms to use or sell an invention or design in return for payment or a loyalty fee
Franchising
Renting a complete business idea, including the name, logo and products to someone else
Diversification
Increasing the range of products or services offered by the business
Strategic alliances
Joint ventures
When two or more firms agree to co-operate in the establishment of a product or business together
Mergers
When the managers and shareholders of two companies of roughly equal sizes agree to voluntarily join together to form a single firm
Acquisitions/takeovers
When one firm buys more than 50% of the voting shares of another firm and gains majority control
Subsidiaries
Companies where another company owns 50% or moreover their shares
Reasons for expanding a business
Defensive “have to” reasons
Aggressive “want to” reasons
Defensive “have to “reasons
Reduce costs Reduce risk Eliminate opposition Survive economic shock Protect raw material supplies Protect labour supplies
Aggressive “want to “reasons
Increase profits
Acquire new products
Empire building - the largest building in the area
New challenges
Sources of finance for business expansion
Grants Debentures (long-term loan) Equity Sale and leaseback Retained earnings
Grants
No loss of ownership or control
No dividends, interest or repayments
Local enterprise office, Enterprise Ireland, IDA Ireland, the EU
Equity
Finance provided by the owners of a business
Retained earnings
Profits retained in the business to finance future developments
Debentures
Long-term fixed interest loans secured on a valuable asset, such as premises
No loss of ownership or control
Tax deductible repayments
Security usually required
Sale and Leaseback
A contract to raise cash by selling a piece of property and simultaneously leasing it back on a long-term lease
Implications of Expansion for a Business
• Short term, profits may fall because of cost of production
Long term, economies of scale
• Recruit and retain more staff
• Wider range of products, spend more on market research, more complex marketing
• New ownership -> partner or shareholders, original owners may become unhappy
Advantages of staying small
Easier to manage and keep control Less stress Staff relations and communications are easier Team spirit and motivation Better personal service
Disadvantages of staying small
Higher costs - no mass production
Smaller profits
Less opportunity for investing in the business
Struggle more to compete against large firms
