Expansion

1. Expansion Mr Poole Business

2. Expansion of a business means • Growth of a business Mr Poole Business

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

4. 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

5. 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

6. 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

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

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

9. 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

10. 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

11. 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

12. 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

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14. 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

15. 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

16. 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

17. 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

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

19. 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

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21. 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

22. 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

23. 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

24. 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

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

26. 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

27. 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

28. 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

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

30. 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

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

32. 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

33. 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

34. 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

35. 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

36. EU Competition Law • 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. Mr Poole Business

37. 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 Exam Questions Mr Poole Business

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