Expansion Mr Poole Business

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

Two Methods of Expansion (Growth) Organic Growth Inorganic Growth Mr Poole Business

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 Mr Poole Business

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) Mr Poole Business

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. Mr Poole Business

Advantages of Franchising Quick and inexpensive way to expand. Receive up front fee & royalties. Benefit from national advertising & economies of scale. Mr Poole Business

Disadvantages of Franchising If the franchisee is not competent it may affect the reputation of the franchise. Mr Poole Business

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 games Mr 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 Mr Poole Business

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 Mr Poole Business

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 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 Mr Poole Business

Types of Expansion Horizontal integration/growth  Firms in the same line of business and  At the same stage of production Eg. Statoil taking over jet petrol stations Topaz taking over statoil petrol stations Mr Poole Business

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 …… Mr Poole Business

Types of Expansion Lateral Growth Firms in related business At same stage of production process Eg: Waterford Crystal + Wedgewood China + Waterford Wedgewood Mr Poole Business

Diversifying Growth  Taking over or joining with firms of totally unrelated business  Eg: British American Tobacco acquiring Lancome Mr Poole Business

Reasons for Expansoion Economies of Scale A bigger firm produces more goods As more of a good is produced the cost per unit decreases Mr Poole Business

Reasons for Expansion Supply 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 Mr Poole Business

Reasons for Expansion Reduce Competition  Merging or taking over rival firms reduces the no, of competitors you have.  Eg: Lloyds TSB taking over Halifax Bank of Scotland Mr Poole Business

Reasons for Expansion Synergy  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 Mr Poole Business

Reasons for Expansion Diversifying 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 Mr Poole Business

Finance for Expansion Long Term Sources Reserves Share (Equity) Capital Debentures Mr Poole Business

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. Mr Poole Business

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 Mr Poole Business

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….. Mr Poole Business

Implications of Expansion Advantges in the short term New assets, equipment, buildings.. New products New markets New management Mr Poole Business

Implications of Expansion Advantages in the long term Increased sales Economies of scale: decreased cost per unit Increased profits Better chance of survival Mr Poole Business

Implications of Expansion Disadvantages in the short term Job losses Cost increases, profits may fall Low staff morale due to uncertainty.. Mr Poole Business

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 Mr Poole Business

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. Mr Poole Business

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. Mr Poole Business

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. Mr Poole Business

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 Mr Poole Business

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