Business ExpansionUnit 5

Aims of this chapterIdentify the reasons for and methods of

expansion.Identify the main sources of finance for

expansion.Analyse the importance of business

expansion in the domestic and foreign markets.

Compare and contrast equity and loan capital as sources of finance for expansion.

Reasons for expansion1. Economies of Scale

Large scale production arising from expansion reduces the unit cost of production

Reasons for expansion2. Increased financial

strength and securityA large business

commands influence and power

Reasons for expansion3. Eliminate competition

Competition can be eliminated through a merger or takeover of a competitor

Reasons for expansion4. Protect sources of raw

materialsConsolidation of

businesses may emerge due to scarcity of raw materials

Reasons for expansion5. Diversification

Growth into different product areas reduces risk

Reason for expansion6. Ambition

Many entrepreneurs want to build empires. They want the fame and achievement

Methods of expansionOrganic growth. Inorganic growthInternal growth occurs when a business:Retains profits and

reinvests in assets and resources.

Increases sales through marketing and diversification.

Develops new markets through exports.

Franchises

External growth is a quick expansion of a business through:MergersAcquisitionsTakeoversManagement buy-outsAlliances

Examples of external growthTakeover

Examples of external growthAlliance

Examples of external growthMerger

Examples of external growthTakeover

Examples of external growthAlliance

Examples of external growthAcquisition

Finance for expansionEquity capital

This is when the company raises finance by selling shares.

Shareholders receive dividends and voting rights.

Retained earningsWhen the profit is reinvested back into the

business rather than distributed as dividends.Debt capital

This is a long-term loan from a financial institution.

Interest must be paid.

Importance of expansion in Ireland Employment is created Increased tax revenuesBetter quality goods and services as more

money is spend in research by bigger firmsBigger firms can compete internationally

E.g. Ryanair, Kerry Group, CRH construction

Importance of Irish business expansion in foreign marketsEconomies of scaleIncreased sales and profitsLess dependence on home marketExporting improves balance of payments

i.e More money comes into the country