Expansion Mr Poole Business. Expansion of a business means Growth of a business Mr Poole Business.
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Transcript of Expansion Mr Poole Business. Expansion of a business means Growth of a business Mr Poole Business.
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Expansion
Mr Poole Business
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Expansion of a business means
Growth of a business
Mr Poole 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
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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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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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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
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