Chapter 22 - Business Expansion Flashcards by Cathy Mulvany

What are the 3 types of reasons for expanding?

Psychological
Defensive
Offensive

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What are the psychological reasons for expansion?

Challenge - entrepreneurs love the challenge of setting up a business
Ambition - they want the best, biggest business

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What is empire building?

An attempt to increase the size of a firms staff and assets. They want to dominate the market

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What are defensive reasons for expansion?

Reducing costs - benefits from economies of scale
Diversification - produce more products
Protecting supplies - protects quality and quantity by buying up other chains in the manufacturing process
Protecting channels of distribution

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What is diversification?

When a business widens the range of goods and services it sells or enters into new markets

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What is backward integration?

A business expands back into the supply chain e.g. coffee company buys coffee bean farm

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What is a forward vertical integration?

A business expands forward and into the markets for its product e.g. coffee company sets up coffee shops

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What are offensive reasons for expansion?

Increased profits
Acquire new products - buys business that already have the products
Asset stripping - buying a company to gain certain assets
Eliminating competition

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What are methods of organic growth?

Growing sales - increasing sales of existing product, creating new product
Licensing
Franchising

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What are the advantages and disadvantages of increasing sales on an existing product?

Lower costs
Product knowledge
Difficulty financing
Slow sales

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What are the advantages and disadvantages of developing a new product?

High profits
Consumers are more willing to buy from a company they know
High costs
High failure rate (lack of consumer awareness)

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What are the advantages and disadvantages of licensing?

Low cost
Continuous income
Quality control (poor quality damages the firms reputation)
Loss of control

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What is licensing?

A business (licensor) agrees to allow another firm (licensee) to use its design and products in return for royalty payment (payment for use of the design)

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What is a franchise?

A business allows another business to use its name, logos, and business ideas in return for a fee and a percentage of its profits

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What are the advantages and disadvantages for franchising for the franchiser?

Low capital costs (money comes from franchisee)
Rapid expansion (as capital is already there)
Franchise cancellation (franchiser can cancel the contract if the rules are not adhered to)
Economies of scale
Loss of control
Risk of ruining the business reputation
High costs for franchising training
Regular monitoring is required to ensure quality standards are met

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What are the advantages and disadvantages of franchising for the franchisee?

Franchise support
Advertising (taken care of because of already existing awareness for the brand)
Less risk
Cost is high
revenue (must pay franchiser percentage of profits)
Rules must be adhered to

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What are 3 types of inorganic growth?

Strategic alliance/joint venture
Merger
Takeover/acquisition

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What is a strategic alliance/joint venture?

Two or more businesses join together to achieve a common goal, they co operate and share resources to achieve the goal, usually temporary

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What are the advantages and disadvantages of a strategic alliance?

Increased rate of success
New markets are opened up to the business
Slow decision making
Disagreements (costs and leadership)

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What is a merger?

Two or more business join together for their mutual benefit, businesses join to form a legal entity

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What is horizontal integration?

Two competing companies join together e.g. Disney and Pixar

What is conglomerate integration?

A merger between businesses that are in different industries e.g. Amazon and Whole Foods supermarkets

What are the advantages and disadvantages of a merger?

Economies of scale
New products
Increased profits
Many redundancies
Conflict between the two businesses staff
Slow decision making because of lack of trust

What is a takeover?

One business owns at least 51% of another business, the acquiring firm absorbs the other

What is a hostile takeover?

One firm acquires another even though management oppose the acquisition

What is a holding company?

The business that owns majority shareholding in an acquisition

What is a subsidiary company?

The business that is acquired in a takeover

What are the advantages and disadvantages of a takeover?

1. Spreads risk of failure through the other company 2. Economies of scale 3. New products 1. Expensive 2. Staff redundancies because of too many staff 3. Industrial relations

Give 6 examples of long term finance available for expansion.

``` Equity capital Retained earnings Grant Debt capital Sale and leaseback Venture capital ```

How can a private limited company obtain equity capital?

Inviting existing shareholders to purchase shares in the business

How can a public limited company obtain equity capital?

Selling more shares on the stock market

How can a partnership obtain more equity capital?

Inviting new partners into the business

How can a sole trader obtain equity capital?

Entrepreneur invests more money into the business

How can a business obtain a grant?

Local enterprise office - given to local firms that wish to expand Enterprise Ireland - issued to domestic businesses that want to expand into foreign markets IDA Ireland - given to foreign business to operate in Ireland European Union - provides grants

Contrast debt capital and equity capital in terms of control.

Debt capital - doesn’t lead to a loss of control | Equity capital - diluted the owners control of the business because shareholders have a say

Contrast debt capital and equity capital in terms of repayments.

Debt capital - fixed interest repayments must be made on a debenture regardless of profitability. Equity capital - the business doesn’t have to pay dividends

Contrast debt capital and equity capital in terms of risk.

Debt capital - assets will be liquidated if it cannot be repaid Equity capital - more equity than debt finance is low gearing and has a lower risk of bankruptcy

Contrast debt capital and equity capital in terms of collateral.

Debt capital - the business must provide collateral | Equity capital - no collateral required

Contrast debt capital and equity capital in terms of tax.

Debt capital - interest payments are tax deductible expense (reduce tax ) Equity capital - dividends are not tax deductible

What are short term implication for the business of expanding?

Organisation structure - Firm can introduce a formal organizational structure which outlines the chain of command Product mix - product range will increase Profitability - profits will decrease due to an increase in expenditure Employment - some jobs are lost due to duplication

What are long term implication for the business of expanding?

Organisation structure - changed to fit the business e.g. functional changes to geographic Product mix - different marketing mix will have to be put in place Profitability - sales and profits will increase Employment - once the business is established hr can recruit new staff

What are implications of expanding for consumers?

Lower prices due to economies of scale, wider choice of products

What are implications of expanding for the government?

Increases in tax revenue

What are implications of expanding for the local community?

More jobs Investment in community initiatives Traffic congestion Pollution

What are implications of expanding for employees?

Increase promotional opportunities

What are implications of expanding for investors?

Decreases the control of existing shareholders if more shares are sold

What is the importance of expansion in the domestic economy?

Increased employment Increase tax revenue Further expansion Lower prices

What is the importance of expansion in the foreign market?

``` Increased employment Increase exports Foreign currency Spreading risk (less dependent on domestic market) Improved international relations ```

How is expansion restricted?

Irish law - ccpc must approve a takeover if it is over a certain financial value, they can deny it if they believe it will have a negative impact on consumers EU law - commissioner is appointed to approve or deny mergers over a certain financial value, they can deny it if they believe it is not in the best interest of the consumer

What are the advantages and disadvantages of a business remaining small?

1. Easier to manage 2. Customer loyalty 3. More flexible to change 4. Faster decision making 1. More costs 2. Lack of capital 3. Difficult to retain and recruit staff due to pay and working conditions 4. Less profits