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Business > U5 Ch.22 Expansion > Flashcards

U5 Ch.22 Expansion Flashcards

1
Q

Reasons for expansion

A
  1. Psychological
  2. Defensive
  3. Offensive
    Each of these has reasons within them but in a question the heading should be each of these 3 then explain the inner reasons. If not going to fully explain each then make sure to include at least 1 inner reason from each of 3 outer reasons
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2
Q

Expansion Defensive Reasons

A
  1. Reducing Costs (benefit from economies of scale)
  2. Protect supplies (backwards vertical integration guarantees access to supplies at cost price)
  3. Diversification (more products entering into new markets protect from competition since not dependent on one)
  4. Protect Distribution (forward vertical integration to ensre constant distribution)
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3
Q

Expansion Psychological Reasons

A
  1. Challenge (enjoy managing new market or acquisition and satisfaction of success)
  2. Ambition (be most successful or wealthy. or build an empire)
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4
Q

Expansion Offensive Reasons

A
  1. Eliminate Competition (dominate market ensure largest market share)
  2. Access new products (cheaper to acquire than develop a competing product)
  3. Asset Stripping (buying and selling off assets at a profit)
  4. Increasing Profits (grow to be able to profit also economies of scale)
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5
Q

Backward Vertical Integration

A

Expanding back into supply chain

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6
Q

Forward Vertical Integration

A

Expanding forward into market for product (e.g. buying a retailer)

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7
Q

Organic Growth

A

(Internal Growth) achieved naturally within business itself. Slow and happens gradually with time. Use own resources and doesn’t involve outside firms. Includes:
1. Growing Sales (of existing product or develop new product)
2. Licensing
3. Franchising

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8
Q

Inorganic Growth

A

(external growth) involving other businesses. quick form of expansion. Includes:
1. strategic alliance
2. merger
3. acquisition

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9
Q

Licensing

A

Business(licensor) allows another firm(licensee) to use designs and products in return for royalty payment. E.g. Toys based on movies
-Low Cost
-Continous income
-Loses Quality control
-May lose control of production / distribution

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10
Q

Royalty Payment

A

payment made for ongoing right to use design and products of a business

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11
Q

Franchising

A

business (franchisor) lets another business (franchisee) use name, logo and business idea in return for a fee and percentage of profits. Franchisee is trained on how to operate and must adhere to strict guidelines

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12
Q

Franchising Advantages

A
  1. Low capital cost (money for premises/equipment comes from franchisee)
  2. Rapid (no overheads and costs associated with company owned)
  3. Less management needed (handled by franchisee)
  4. Low risk (if guidelines broken franchise can be cancelled to avoid brand damage)
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13
Q

Franchising Risks

A
  1. Control lost (of day to day management. Can be difficult to monitor a lot of franchised outlets)
  2. Training (expensive + time consuming)
  3. Regular Monitoring needed
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14
Q

Strategic Alliance

A

(Joint Venture) 2 or more independent firms agree to co-operate and share expertise + resources for mutual benefit. Firms remain independent legally and maintain own seperate trading identity
e.g. Apple and mastercard developed Apple Pay to enable customers to pay for items using their phones

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15
Q

Merger

A

friendly amalgamation of two or more businesses for mutual benefit. Single new legal entity is formed.
E.g. Irish Permanent Building Society merged with Trustee Savings Bank to become Permanent TSB

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16
Q

Benefits of Strategic Alliance

A
  1. Less risk (venture split between two businesses)
  2. Knowledge and expertise (shared allow to learn from each other)
  3. New Markets (can be opened for both firms)
  4. Temporary in nature (easy to from / dissolve)
17
Q

Disadvantages of Strategic Alliance

A
  1. Slow Decisions
  2. Disagreements
18
Q

Advantages of Merger

A
  1. Economies of scale (larger)
  2. Product development (more resources makes faster and better)
  3. Profits (larger customer base)
19
Q

Disadvantages of Merger

A
  1. Redundancies (job duplication)
  2. Conflict (different business cultures don’t mix and lead to IR)
  3. Slow decisions (if low trust between merged workforce)
20
Q

Acquisition / Takeover

A

business buys controlling stake (50.1% or more of voting shares) in another business and acquires it. Can be friendly but usually hostile and are against wishes of existing owner. Acquiring firm(holding company) absorbs other firm (subsidiary company) and it becomes part of holding company)
e.g. Apple takeover of Beats by Dr. Dre

21
Q

Hostile Takeover

A

One firm acquires another even though management opposes acquisition
e.g. AOL acquired Times Warner for a bid of almost €142 billion

22
Q

Takeover Advantages

A
  1. New Products (bigger product portfolio. More sales and profit)
  2. Market Share (instantly gained)
  3. Expertise (from staff)
23
Q

Takeover Disadvantages

A
  1. Expensive (have to buy at least 50.1% of shares as well as legal fees)
  2. IR Issues (if takeover is hostile staff may not be happy to be working under holding company)
  3. Redundancies (job duplication. this can also lead to IR issues)
24
Q

Sources of finance for expansion

A
  1. Equity Capital
  2. Debt Capital
  3. Retained Earnings
  4. Grant
  5. Sale and Leaseback
  6. Venture Capital
25
Q

Expansion Debt Capital vs. Equity Capital

A
  1. Interest (DC must be repaid with interest. EC does not. E.g. debenture involves interest payments until last year when capital amount is repaid)
  2. Control (EC involves selling shares which dilutes control as shareholders become part owners)
  3. Collateral (DC loans require asset as security)
  4. Risk (DC runs risk of being unable to pay and being declared bankrupt)
  5. Tax (Interest is tax deductible. Dividends are not)
  6. Repayments (EC doesn’t have to be repaid unless business is being closed down)
26
Q

Short term Business Implications of expansion

A
  1. Job Losses (duplication)
  2. Loss of profits (used to fund expansion)
  3. Organisational Structure (may need to be restructured to clarify chain of command)
  4. Increased Product Range
27
Q

Long term Business Implications of expansion

A
  1. New jobs created (due to business growth)
  2. Profit (economies of scale and brand establishment will allow them to reap rewards of expansion)
  3. Organisational Structure (may need to become geographic)
  4. Different Marketing Mixes (for wide range of products)
28
Q

Business remaining small implications

A
  1. Easier to manage
  2. Customer Loyalty (more personal)
  3. Flexible (don’t have to worry about changing large departments)
  4. Faster Decisions
  5. No economies of scale (higher costs)
  6. Harder to raise capital (less established)
  7. Staff (unable to provide same pay as larger firms)
  8. Smaller Profits

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