Chapter 18: Business Expansion

Question 1

What is the aim of business expansion? Give an example.

Answer 1

Aim is to grow the business and increase profits over time. E.g. McDonald’s started as one restaurant but expanded to over 32,000 worldwide.

Question 2

Differentiate between organic and inorganic growth.

Answer 2

Organic Growth: is natural slow expansion by increasing sales and reinvesting profits.
Inorganic Growth: is quick expansion achieved by merging or taking over another business.

Question 3

Explain two organic growth strategies.

Answer 3

1. Increase sales: sell more products by improving marketing, quality of product and hence more profit available for reinvestment. E.g. Meteor
2. Franchising: Franchisor gives permission to franchisee to use their name, logo and business idea to set up and run an identical business in return for a one off fee or share of the profits. Franchisor trains and supports franchisee in running the business and lays out strict rules to follow. E.g. McDonalds, Subway

Question 4

Explain four advantages of franchising.

Answer 4

1. Little Capital Required: Franchisor does not to provide capital for expansion. Only Franchisee needs capital.
2. Economies of Scale: The more franchises, the greater the discounts for the Franchisor from suppliers. Lower costs = greater profits.
3. Less Supervision Required: Franchisor doesn’t have to control multiple shops.
4. Dedicated Franchisees: Franchisee is fully committed and motivated to be a success. Invest their own money.

Question 5

Explain two disadvantages of franchising.

Answer 5

1. Risk to Reputation: If franchisee does a poor job franchise loses reputation.
2. Loss of Control: No control over day to day running. No influence over employees hired or customer service.

Question 6

Explain Strategic Alliance (Joint Venture) with an example.

Answer 6

Two or more separate businesses co-operate on a business project. Pool their resources and expertise, benefit from sharing the costs but remain separate. Sharing expertise and skills allows them to brainstorm the best idea possible. E.g. Swatch and Mercedes Smart Car

Question 7

Explain three advantages of strategic alliance.

Answer 7

1. Cost effective: Split the costs and share assets to expand. Raise half the finance for expansion.
2. More Successful: Share knowledge and expertise to brainstorm better ideas more likely to succeed. E.g. Engineers and designers from both companies.
3. New Markets: Attract new customers and increase both companies sales and profits.

Question 8

Explain two disadvantages of strategic alliance.

Answer 8

1. Disagreements: Feel they are not getting a fair share of the publicity or profits.
2. Lose customers: Customers might not be happy with one part of the alliance and therefore refuse to buy the product.

Question 9

Define merger with an example.

Answer 9

Two separate business join together voluntarily to form one new single legal entity for mutual benefit. Neither business has control over the other. E.g. Metro Ireland and Herald AM merged to become Metro Herald.

Question 10

Explain the advantages of merger

Answer 10

1. Economies of Scale: Bigger businesses can produce products at a lower cost per unit. E.g. Air France-KLM gets discounts on fuel.
2. Increased Profits: Cut duplication of jobs and run a more efficient business, this cuts costs and increases profits. E.g. Redundancies
3. Synergy: Two business are better than one. Both business enjoy the benefits of the other. E.g. Air France-KLM can advertise more flights.

Question 11

Explain the two disadvantages of merger.

Answer 11

1. Conflict: Potential clash of cultures. Have to compromise on rules and policies. Managers may disagree as to what is the best solution wasting time.
2. Reduce Employee Motivation: Staff are worried during a merger as redundancies are inevitable. Also less chance of promotion in bigger company. Low motivation can lead to poor standard of work and staff turnover.

Question 12

Define takeover/acquisition.

Answer 12

One company takes control over another by buying 51% of its shares.
Acquired business becomes part of the acquiring business.
Takeover is ‘hostile’ if Board of Directors recommend to shareholders not to sell.
Takeover is ‘friendly’ if it benefits both sides.
E.g. Facebook took over WhatsApp

Question 13

Explain the advantages of a takeover.

Answer 13

1. Economies of Scale.
2. Increased Profits: Cut out duplication. Cut costs. Increase Profits.
3. Quick access to new products: Save time developing or establishing a new product or service. Own ideas, assets, products of other business etc. E.g. Adidas bought Reebok to enter US market.

Question 14

What is the one disadvantage of a takeover?

Answer 14

1. Capital Required: Costs a lot of Money to buy another company. Borrowing more money increases debt/equity ratio and increases the risk of bankruptcy. Selling more shares to raise capital can lead to a loss of control.

Question 15

Explain the (defensive) reasons for expansion.

Answer 15

1. Economies of Scale
2. Diversification: A company can diversify its portfolio. Does business in a completely unrelated area to its core business. Protects against a downturn in the core business. E.g. Gillette bought Parker pens.
3. Protect Supplies: Merge with company that supplies you. Get supplies and raw materials at better price. Called backward vertical integration.
4. Protect Distribution: Forward Vertical Integration. Merge with a company that sells your product. Ensures product is sold better than rivals.

Question 16

Explain the (offensive) reasons for expansion.

Answer 16

1. Eliminate competition: takeover the competition and become the dominant business. E.g. Ryanair tried to buy Aer Lingus
2. Asset Stripping: Get control over its assets. Use the assets better to make more profit or sell the assets. E.g. Property developer buying houses for their land.
3. Acquire New Products: Save time on developing a new product. Gain access to their ideas and products. E.g. Adidas, Reebok
4. Increase Profits: Bigger the business, better margins, bigger profits.

Question 17

Explain the (psychological) reasons for expansion.

Answer 17

1. Ambition: Personal ambition to be biggest business in the world. They want fame and success. E.g. Donald Trump
2. Challenge: Entrepreneur enjoys the challenge of growing a business and diversifying to try succeed in a new market. E.g. Richard Branson.

Question 18

Explain five reasons why expanding a business is important for the Irish economy.

Answer 18

1. Bigger business leads to more jobs. Increased tax revenue for governments and better services for consumer.
2. Bigger business leads to bigger profits, More tax for government.
3. Spin-off effect
4. Economies of scale may mean lower price for customers
5. Exporting goods helps Balance of Payments

Question 19

What is the implications of business expansion on share price in the short term and in the long term?

Answer 19

Short Term: Goes up, investors want to be a part of new exciting company.
Long Term: Share price goes up as investors want shares in successful companies.

Question 20

What is the implications of business expansion on products in the short term and in the long term?

Answer 20

Short Term: Bigger range of products instantly.
Long Term: Merged business had more R &D potential and combined expertise and ideas.

Question 21

What is the implications of business expansion on management in the short term and in the long term?

Answer 21

Short Term: New organisational structure only one CEO.
Long Term: Bigger business increased delegation.

Question 22

What is the implications of business expansion on finances in the short term and in the long term?

Answer 22

Short Term: Raise Finance for expansion.
Long Term: Better credit rating and access to more investors.

Question 23

What is the implications of business expansion on supplies in the short term and in the long term?

Answer 23

Short Term: Economies of Scale
Long Term: Economies of Scale

Question 24

What is the implications of business expansion on profits in the short term and in the long term?

Answer 24

Short Term: Decreased profits due to expansion.
Long Term: Economies of Scale and Synergy leads to increase profits.

Question 25

What is the implications of business expansion on employees in the short term and in the long term?

Answer 25

Short Term: Worries about redundancies.
Long Term: Big business pay more.

Question 26

What is the implications of business expansion on customers in the short term and in the long term?

Answer 26

Short Term: More and better products at better prices.
Long Term: More and better products at better prices.

Question 27

Importance of Irish Companies expanding abroad (4).

Answer 27

Exporting: Increase Balance of Payments. Makes Ireland richer.
Currency: Brings in foreign currency which can be used to pay for imports.
Job Creation: Increased sales abroad can create jobs here. Higher standard of living.
International Relations: Friendlier with countries we export to. As a small country vital.