Business Expansion Unit 5

Aims of this chapter Identify 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 expansion 1. Economies of Scale Large scale production arising from expansion reduces the unit cost of production

Reasons for expansion Increased financial strength and security A large business commands influence and power

Reasons for expansion Eliminate competition Competition can be eliminated through a merger or takeover of a competitor

Reasons for expansion Protect sources of raw materials Consolidation of businesses may emerge due to scarcity of raw materials

Reasons for expansion Diversification Growth into different product areas reduces risk

Reason for expansion Ambition Many entrepreneurs want to build empires. They want the fame and achievement

Methods of expansion Organic growth. Inorganic growth Internal 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: Mergers Acquisitions Takeovers Management buy-outs Alliances

Examples of external growth Takeover

Examples of external growth Alliance

Examples of external growth Merger

Examples of external growth Takeover

Examples of external growth Alliance

Examples of external growth Acquisition

Finance for expansion Equity capital Retained earnings Debt capital This is when the company raises finance by selling shares. Shareholders receive dividends and voting rights. Retained earnings When 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 revenues Better quality goods and services as more money is spend in research by bigger firms Bigger firms can compete internationally E.g. Ryanair, Kerry Group, CRH construction

Importance of Irish business expansion in foreign markets Economies of scale Increased sales and profits Less dependence on home market Exporting improves balance of payments i.e More money comes into the country