Chapter 17: Business Expansion

Question 1

Economies of Scale

Answer 1

Benefits that arise in a business as it becomes larger and more efficient

Question 2

Methods of business expansion

Answer 2

Organic methods: existing/new products

Inorganic methods: merge/acquire another business

Question 3

Organic methods

Answer 3

Increasing sales domestically 
Exporting
Licensing
Franchising
Diversification

Question 4

Inorganic methods

Answer 4

Strategic alliances (joint ventures)
Acquisitions/takeovers
Mergers

Question 5

Licensing

Answer 5

Allowing other firms to use or sell an invention or design in return for payment or a loyalty fee

Question 6

Franchising

Answer 6

Renting a complete business idea, including the name, logo and products to someone else

Question 7

Diversification

Answer 7

Increasing the range of products or services offered by the business

Question 8

Strategic alliances

Joint ventures

Answer 8

When two or more firms agree to co-operate in the establishment of a product or business together

Question 9

Mergers

Answer 9

When the managers and shareholders of two companies of roughly equal sizes agree to voluntarily join together to form a single firm

Question 10

Acquisitions/takeovers

Answer 10

When one firm buys more than 50% of the voting shares of another firm and gains majority control

Question 11

Subsidiaries

Answer 11

Companies where another company owns 50% or moreover their shares

Question 12

Reasons for expanding a business

Answer 12

Defensive “have to” reasons

Aggressive “want to” reasons

Question 13

Defensive “have to “reasons

Answer 13

Reduce costs
Reduce risk
Eliminate opposition
Survive economic shock
Protect raw material supplies
Protect labour supplies

Question 14

Aggressive “want to “reasons

Answer 14

Increase profits
Acquire new products
Empire building - the largest building in the area
New challenges

Question 15

Sources of finance for business expansion

Answer 15

Grants
Debentures (long-term loan)
Equity
Sale and leaseback
Retained earnings

Question 16

Grants

Answer 16

No loss of ownership or control
No dividends, interest or repayments
Local enterprise office, Enterprise Ireland, IDA Ireland, the EU

Question 17

Equity

Answer 17

Finance provided by the owners of a business

Question 18

Retained earnings

Answer 18

Profits retained in the business to finance future developments

Question 19

Debentures

Answer 19

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

Question 20

Sale and Leaseback

Answer 20

A contract to raise cash by selling a piece of property and simultaneously leasing it back on a long-term lease

Question 21

Implications of Expansion for a Business

Answer 21

• 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

Question 22

Advantages of staying small

Answer 22

Easier to manage and keep control
Less stress
Staff relations and communications are easier
Team spirit and motivation 
Better personal service

Question 23

Disadvantages of staying small

Answer 23

Higher costs - no mass production
Smaller profits
Less opportunity for investing in the business
Struggle more to compete against large firms