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Business (LC) > Chapter 22 - Business Expansion > Flashcards

Chapter 22 - Business Expansion Flashcards

1
Q

What are the 3 types of reasons for expanding?

A

Psychological
Defensive
Offensive

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2
Q

What are the psychological reasons for expansion?

A

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

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3
Q

What is empire building?

A

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

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4
Q

What are defensive reasons for expansion?

A

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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5
Q

What is diversification?

A

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

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6
Q

What is backward integration?

A

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

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7
Q

What is a forward vertical integration?

A

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

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8
Q

What are offensive reasons for expansion?

A

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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9
Q

What are methods of organic growth?

A

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

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10
Q

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

A
  1. Lower costs
  2. Product knowledge
  3. Difficulty financing
  4. Slow sales
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11
Q

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

A
  1. High profits
  2. Consumers are more willing to buy from a company they know
  3. High costs
  4. High failure rate (lack of consumer awareness)
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12
Q

What are the advantages and disadvantages of licensing?

A
  1. Low cost
  2. Continuous income
  3. Quality control (poor quality damages the firms reputation)
  4. Loss of control
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13
Q

What is licensing?

A

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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14
Q

What is a franchise?

A

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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15
Q

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

A
  1. Low capital costs (money comes from franchisee)
  2. Rapid expansion (as capital is already there)
  3. Franchise cancellation (franchiser can cancel the contract if the rules are not adhered to)
  4. Economies of scale
  5. Loss of control
  6. Risk of ruining the business reputation
  7. High costs for franchising training
  8. Regular monitoring is required to ensure quality standards are met
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16
Q

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

A
  1. Franchise support
  2. Advertising (taken care of because of already existing awareness for the brand)
  3. Less risk
  4. Cost is high
  5. revenue (must pay franchiser percentage of profits)
  6. Rules must be adhered to
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17
Q

What are 3 types of inorganic growth?

A

Strategic alliance/joint venture
Merger
Takeover/acquisition

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18
Q

What is a strategic alliance/joint venture?

A

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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19
Q

What are the advantages and disadvantages of a strategic alliance?

A
  1. Increased rate of success
  2. New markets are opened up to the business
  3. Slow decision making
  4. Disagreements (costs and leadership)
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20
Q

What is a merger?

A

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

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21
Q

What is horizontal integration?

A

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

22
Q

What is conglomerate integration?

A

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

23
Q

What are the advantages and disadvantages of a merger?

A
  1. Economies of scale
  2. New products
  3. Increased profits
  4. Many redundancies
  5. Conflict between the two businesses staff
  6. Slow decision making because of lack of trust
24
Q

What is a takeover?

A

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

25
Q

What is a hostile takeover?

A

One firm acquires another even though management oppose the acquisition

26
Q

What is a holding company?

A

The business that owns majority shareholding in an acquisition

27
Q

What is a subsidiary company?

A

The business that is acquired in a takeover

28
Q

What are the advantages and disadvantages of a takeover?

A
  1. Spreads risk of failure through the other company
  2. Economies of scale
  3. New products
  4. Expensive
  5. Staff redundancies because of too many staff
  6. Industrial relations
29
Q

Give 6 examples of long term finance available for expansion.

A 
Equity capital 
Retained earnings
Grant 
Debt capital
Sale and leaseback
Venture capital
30
Q

How can a private limited company obtain equity capital?

A

Inviting existing shareholders to purchase shares in the business

31
Q

How can a public limited company obtain equity capital?

A

Selling more shares on the stock market

32
Q

How can a partnership obtain more equity capital?

A

Inviting new partners into the business

33
Q

How can a sole trader obtain equity capital?

A

Entrepreneur invests more money into the business

34
Q

How can a business obtain a grant?

A

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

35
Q

Contrast debt capital and equity capital in terms of control.

A

Debt capital - doesn’t lead to a loss of control

Equity capital - diluted the owners control of the business because shareholders have a say

36
Q

Contrast debt capital and equity capital in terms of repayments.

A

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

37
Q

Contrast debt capital and equity capital in terms of risk.

A

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

38
Q

Contrast debt capital and equity capital in terms of collateral.

A

Debt capital - the business must provide collateral

Equity capital - no collateral required

39
Q

Contrast debt capital and equity capital in terms of tax.

A

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

40
Q

What are short term implication for the business of expanding?

A

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

41
Q

What are long term implication for the business of expanding?

A

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

42
Q

What are implications of expanding for consumers?

A

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

43
Q

What are implications of expanding for the government?

A

Increases in tax revenue

44
Q

What are implications of expanding for the local community?

A

More jobs
Investment in community initiatives
Traffic congestion
Pollution

45
Q

What are implications of expanding for employees?

A

Increase promotional opportunities

46
Q

What are implications of expanding for investors?

A

Decreases the control of existing shareholders if more shares are sold

47
Q

What is the importance of expansion in the domestic economy?

A

Increased employment
Increase tax revenue
Further expansion
Lower prices

48
Q

What is the importance of expansion in the foreign market?

A 
Increased employment 
Increase exports
Foreign currency 
Spreading risk (less dependent on domestic market)
Improved international relations
49
Q

How is expansion restricted?

A

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

50
Q

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

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

Business (LC) (23 decks)

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