Chap 18. BUSINESS EXPANSION

CHAPTER TOPICS 1. Reasons for business expansion: 2. THE 4 Paths to Business Expansion 3. Where can businesses get finance for expansion? 4. Similarities /differences between equity capital/ debt capital 5. Positives/negatives for business expansion 6. Short & Long Term Implications of Expansion 7. How is business expansions controlled?

1.Reasons for business expansion: Improvement in profit and sales Self actualisation/Personal fulfilment Elimination of competitors in market Gap available in the market More security available in diversifying into development of other products Better ability to spread the risk across the different product lines (i.e.) (better not to have all eggs not in one basket)

2. THE 4 Paths to Business Expansion Organic Growth- (internal to business) Path 1: Using Existing Products This is a method of business expansion that is self- generated. This is mainly done through increases in marketing & sales of current product, exporting goods to foreign countries, and franchising. This is a relatively low risk method of business expansion. Businesses use franchising, licensing and exporting as methods to develop their existing products. Examples: BAILEYS IRISH CREAM, - baileys mint McDonalds

Path 2: Develop new product This is seen as a high-risk method of expansion as products new to market can have high failure rates. A recent example of this failure would of Guinness Company promoting GUINNESS LIGHT. This type of new development can be of huge cost, time consuming to conduct market research & develop prototypes etc before going to market. Most businesses that are successful in this arena have a distinctive USP. Examples: LUCOZADE SPORT, BUDWEISER – bud light SKY +, Asics gel sports shoes

Inorganic Growth (External to the business) Path 3: Forming Strategic Alliance This is a low risk expansion arrangement whereby 2 or more companies work together for the benefit of both. The companies stay separate but have a common goal of increasing profit. (i.e.) (Where one company will produce a product and the other company may provide more skills in the marketing of it). Example: AER LINGUS formed an alliance with British Airways & American Airlines

Path 4: Mergers/Acquisitions A merger is a joining of two or more firms of similar size. They both agree to voluntarily form a single business. An acquisition is often termed a takeover and involves one firm taking the majority control of the shares. These are seen are high-risk ways of expanding companies as top management can resist change. Businesses can become difficult/sometimes hostile working environments for employees. This can hinder future product developments. Examples: QUINN HEALTHCARE take over of BUPA, GLAZOR Group majority share in Manchester Utd GILLETT brothers majority share in Liverpool FC

Summary table of paths to expansion 1. Using existing products 2. Develop new product 3. Strategic alliances 4. Mergers/ acquisitions Internal External Risk Low riskHigh riskLow riskHigh risk ExampleBaileys Lucozade Sport Sky + Aerlingus Quinnhealhcare Glazors - MUFC

3. Where can businesses get finance for expansion? Equity investment- this is the investment of owners. It can be in the form of cash/assets or attracting the cash/assets of new investors. Government Grants Bank loans - mortgages Examples: Forbairt, Bord Trachtala, Bord Bia, Udaras na Gaeltachta EPA – environmental protection agency, EI – Enterprise Ireland.

4. Similarities /differences between equity capital/ debt capital Equity as financeDebts/loans as finance Amount There is large amounts available Control Control can be lost due to outside investment No direct loss in control. However assets may be used as security for a loan Cost This can be cheap as company only pays dividend when profits are made Loan interests must be paid regardless of profit/loss occurring Security No security requiredSecurity such as property deeds may be required Risk A company financed by equity is said to be a low risk business A company financed by long term debt is said to be a high risk business

5. Positives/negatives for business expansion Positives to expansion for Owners Higher profits available, business is attractive to potential customers, investors Management Leads to more diverse responsibility, expertise & workload Employees Better wages, conditions. New methods of training Customers More choice available at reduced prices Community Likely to increase employment and spend money in local area Government Increased payment of taxes to the government from employees and businesses

Negatives to expansion for Owners Need to find finance to expand – high risk involved Management Need to improve delegation skills, communication skills Employees May be unrest amongst staff, they become alienated with new expansion Customers Possibility of customers not being given the personal attention Community New expansion may have pollution or environmental issues. They may be seem as less committed to the local area. Government New businesses can make a division in a market where other smaller companies exist. This may lead to a strike or industrial disputes.

6. Short & Long Term Implications of Expansion Short Term ImplicationsLong Term Implications  Find new owners/shareholders  Find money/finance  Do market research  Develop product ideas  Hire employees  Develop & manage structures  Business will rise in value & profit  Staff have better pay  Staff/investors/suppliers will have more confidence  More choice available to consumers  Structure of company must be renewed/redeveloped

7. How is business expansions controlled? A – EU Competition Law This is concerned with preventing activities that reduce competition or unethical practice. They investigate complaints that involve large international firms that affect stakeholders are within the European markets (SEM). If found guilty theses companies can be fined up to 10% of annual profits. B- Irish Competition Law In Ireland the Competition Authority is a state agency set up to PREVENT deals between firms that may be seen to reduce competition or is seen to be conducting unethical business practice. It investigates mergers, acquisitions/takeovers etc. The competition authority has the right to be informed of a merger/takeover if the company involved is gaining over 50% of the market share. It investigates the effect of this takeover on stakeholders (i.e) employees, customers, competitors. The Competition Authority was established in 1991.

KEY DEFINITIONS

LC EXAM QUESTIONS 2006 Q6 (B) `20 marks (i) Describe the implications for the business of expansion? (ii) Explain two methods of expansion you would advise them to consider?

LC EXAM QUESTIONS 2005 Q5 (b) Discuss, using examples, the factors a manager should consider when selecting sources of finance for expansion. 20 marks (c) Describe three reasons for business expansion other than to increase profit. 30 marks

LC EXAM QUESTIONS 2000-Q7 (a) Outline two reasons for Business Expansion OTHER than increased profit? 20 marks (c) Contrast Equity & Loan Capital as sources of finance for expansion? 30 marks