Expansion

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Expansion of a business means

Growth of a business

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Two Methods of Expansion (Growth) Organic Growth

Inorganic Growth

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Organic Growth Natural growth within the business Does not involve outside firms Happens gradually over time Financed by Retained Earnings Eg. Using existing products or developing new products

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Organic Growth Using Existing Products

Increase domestic sales: Cheap, low risk Export: Slower, research needed, risky Licencing/Franchising: Allow other firms

to use or sell invention for a royalty(fee)

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Franchising Is a business arrangement whereby

the franchiser sells the right to use his/her name & idea/product.

The franchisee pays a fee and a percentage of profits.

They must obey rules & conditions set down by the franchiser.

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Advantages of Franchising Quick and inexpensive way to expand.

Receive up front fee & royalties.

Benefit from national advertising & economies of scale.

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Disadvantages of Franchising

If the franchisee is not competent it may affect the reputation of the franchise.

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Organic Growth Develop new products

Market research & testing: Slow & expensive

Develop USP:Com up with new ideas. Eg: washing powder, tablets, gel… Eg: nintendo, childrens games, adult

gamesMr Poole Business

Inorganic Growth The business may have grown to full

potential They may wish to expand more rapidly Financed by Reserves, Shares & Loans Eg. The business may take over/acquire,

merge or form alliances with outside firms

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Acquisition/Takeover Is a takeover of another co. Where one co. buys 51% or more shares in another

co. They gain control of co. Eg:Topaz takeover of statoil Adv: Quick Disadv: Expensive, may be bad feeling Hostile takeover: opposed by shareholders White knight: alternative buyer that sharholders

agree to

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Merger Two co.’s agree to come together to

run their business as one More friendly than takeover Eg: Avonmore+Waterford

Foods=Glanbia plc. Adv: cheaper, quick, synergy (2+2=5) Disadv: confusion over control

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Mr Poole Business

Strategic Alliance/Joint Venture Two or more firms co-operate to

achieve a specific purpose Firms remain separate but share skills

and resources Eg: PostBank (An Post +Fortis Bank) Adv: Cheap, quick, easily disbanded,

mutual benefit, increased profit

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Types of ExpansionHorizontal integration/growth

Firms in the same line of business and At the same stage of productionEg. Statoil taking over jet petrol stations Topaz taking over statoil petrol stations

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Types of Expansion Vertical integration/growth

Firms in the same line of business but At a different stage in the production

process Eg: Ford Motor Company Steel, glass, paper, manufacturin gcars

warehousing, distribution, spare parts ……

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Types of ExpansionLateral Growth

Firms in related business At same stage of production process

Eg: Waterford Crystal + Wedgewood China + Waterford Wedgewood

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Diversifying Growth

Taking over or joining with firms of totally unrelated business

Eg: British American Tobacco acquiring Lancome

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Reasons for ExpansoionEconomies of Scale A bigger firm produces more goods As more of a good is produced the

cost per unit decreases

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Mr Poole Business

Reasons for ExpansionSupply of Raw Materials Manufacturing firms take over

suppliers of raw materials in order to guarantee availablilty.

Vertical Growth H. Ford – motor industry N. Rockerfeller – oil industry

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Reasons for ExpansionReduce Competition

Merging or taking over rival firms reduces the no, of competitors you have.

Eg: Lloyds TSB taking over Halifax Bank of Scotland

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Reasons for ExpansionSynergy

The sum of two parts working together is greater than that of two parts working separately

Two heads work better than one 2+2=5

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Reasons for ExpansionDiversifying

Moving into different locations Moving into different areas of business Not “putting all eggs in one basket” Will not suffer too much if one location

or product fails

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Finance for Expansion

Long Term Sources

Reserves Share (Equity) Capital Debentures

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Reserves Retained Earnings. The profit that is left over after shareholders

receive dividends. Ploughing Back Profits. Adv: No security needed, no loss of control, no

interest, no repayments. Disadv: Takes time to build up, low div, unhappy

s/h, sell shares, reduce share price and value of co.

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Share Capital Sell part ownership of the business to acquire cash Co. can give shares instead of cash to the co. they

are buying. (may be worth a lot of money) Equity – s/h = owners = risk takers Adv: No security needed, no interest, no repayments,

decide on your own dividend, only paid back if co. winds up

Dis adv: Loss of control, div not tax deductable, low div = s/h sell shares, share price drop, may be a takeover

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Debentures Long Term Loan Fixed interest Fixed repayment date Adv: Quick to obtain, no loss of control,

interest is tax deductable. Disadv: Security is needed, interest must

be paid, high gearing, s/h unhappy, sell shares…..

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Implications of Expansion Advantges in the short term

New assets, equipment, buildings.. New products New markets New management

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Implications of Expansion Advantages in the long term

Increased sales Economies of scale: decreased cost

per unit Increased profits Better chance of survival

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Implications of Expansion Disadvantages in the short term

Job losses Cost increases, profits may fall Low staff morale due to uncertainty..

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Implications of Expansion Disadvantages in the long term

Personal touch is lost ,loss of consumer confidence

More difficult to manage a large firm More difficult to control costs, staff

stock etc in a large firm

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Importance of expansion in the domestic market (Ireland)

Jobs are created and sustained. Taxes revenue from corporation tax ,

Vat and PAYE increase. Survival is more likely in a large

efficient firm. Exports increase improving the

balance of trade.

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Importance of Irish companies expanding abroad

Profits are repatriated back to head office in Ireland, benefits Irish shareholders.

Tax revenue from corporation tax is increased.

Effeciency & quality are improved in order to compete on the world stage, benefits consumers.

New technology & product ideas are introduced to Ireland form abroad.

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Irish Competition Law Enforced by the Competition Authority. They promote fair competition. They can approve or disapprove

mergers & takeovers. They monitor price fixing & below cost

selling.

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EU Competition Policy Are rules to ensure fair competition in the EU. Cartels(firms that agree to fix prices) are illegal. Governments cannot subsidise firms that are

in trouble (seen as unfair competition). EU can stop mergers & takeovers if… EU can fine co.’s that abuse their dominant position eg. Aerlingus.

EU Competition Law

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Exam Questions Short 2007 Q 1 acquisition

Long 2006 Q 6 (b) imp for bus, 2 methods 2005 Q 5 (b) sof & reasons for exp 2000 Q2 (b) alliance v franchise 2000 Q 7 (a) reasons, sof 1999 Q 2 (a) alliance v franchise

Mr Poole Business

Mr Poole Business