Chap 18.

BUSINESS EXPANSION

CHAPTER TOPICS1. 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

expansion6. 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 risk High risk Low risk High risk

Example Baileys Lucozade SportSky +

Aerlingus QuinnhealhcareGlazors - 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 finance Debts/loans as finance

Amount

There is large amounts available 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 required Security 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 forOwners 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 ExpansionShort Term

ImplicationsLong Term Implications

Find new owners/shareholdersFind money/financeDo market researchDevelop product ideasHire employeesDevelop & manage structures

Business will rise in value & profitStaff have better payStaff/investors/suppliers will have more confidenceMore choice available to consumersStructure of company must be renewed/redeveloped

7. How is business expansions controlled?

A – EU Competition LawThis 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