Expansion

Business Expansion

Unit 5

 

Expansion

The main aim of a commercial business is to make profit.  A business can make profit by growing and becoming larger, more successful business'.

 

Watch this short video on Expansion

Classroom key words

Types of expansion

There are two main methods of expansion:

 

 

1. Organic Expansion

Natural, slow internal expansion

• Increase Sales

Selling more products and making more profit.  A business can do this by improving their marketing mix.

 

Nintendo did this by bringing out a new game 'More Brain Training'.  This new product hit a new older target market.  They promoted the product with PR, using Nicole Kidman to endorse it.  Sales grew and the company expanded.

 

• Franchising

This is when an original owner (franchiser) grants permission to other entrepreneurs (franchisee) to use their idea, as they created it for a fee.

 

McDonald's is a franchise, it has expanded globally this way.  Every McDonald's franchise using the same products, the same promotion, the same decor.

 

 

2. Inorganic Expansion

Quicker expansion using external sources.

• Strategic Alliance / Joint Venture

When two businesses come together to work on a single project.  The business each maintain their own identity.  Both businesses benefit sharing, time, resources and expertise.

 

The watch company Swatch and the car manufacturer Mercedes came together and created the SMART (Swatch Mercedes Art) car.  This allowed both companies expanded into new areas

 

 

• Merger / Amalgamation

When two businesses join together to form one larger, stronger business.  In a merger the businesses join together permanently.

 

 

Irish Life, an insurance company and Irish Permanent, a building society merged in 1999 to form Irish life and permanent PLC.  They expanded to form a larger financial services company.

 

 

• Takeover / Acquisition

This is when one business takes control of another.  They buy it outright.

 

In 2008 O2 took over The Point in Dublin.  This allowed telecommunications company O2 expand into a new area.

 


 

 

 

Exam papers

2013 Q6 (b)

2006 Q6 (b) (ii)

 

 Reasons for Expansion

The first reason is profit but business do expand for other reasons, including:

 

Psyological Reasons

These are basic needs of the business

 

• Ambition

Business want to be the biggest and the best possible.  They want sense of achievement from growing their business.

 

Donald Trump, he is the chairman and president of The Trump Organisation and the founder of Trump Entertainment Resorts.  He has great ambition and his business empire continues to grow.

 

• Challenge

Many entrepreneurs get a great thrill in starting a business and expanding it.  They enjoy the risks and challenges that come with this.

 

Sir Richard Branson really enjoys a challenge and many of his expansion ideas come from this.  His latest venture to expand is Virgin Galactic, the challenge to bring the public to space inspired him.

 

Defensive Reasons

Business want to defend their market and fight competition.  Expansions and growth allows them to do this.

• Economies of Scale

The bigger a business grows the lower the business costs become.  If costs are lower price can be lower and this gives a business an advantage over competitors.

 

Penny's buy stock in bulk and get big discounts (economies of scale), this gives them a competitive advantage over smaller shops. 

Diversification

A business may grow to protect itself.  A business may expand into a new market in order to spread the risk.

 

Sir Richard Branson has diversified the Virgin name into many different fields and has spread the risk of Virgin failing as a company.



Offensive Reasons

To become the biggest and the best

•  Eliminate Competition

A business will do this to gain more control of a market.

 

Ryan Air want to expand by taking over Aer Lingus, however this is being prevented by EU competition Policy as it would be unfair for the Irish consumer to only have choice of 1 airline

 

• Synergy

 2+2 = 5 if 2 businesses expand together they becoming bigger and more powerful working together

 

 In 2006 Adidas took over Reebok, it did this to get a stronger presence in the market.  It gained premises, shop space, employees, trade secrets and became a very strong market leader

 

 

 Exam Papers

2012 Q7 c
2005 Q5 c
 

 Finance for Expansion

 Expansion is long term and for this reason uses:

 LONG TERM FINANCE

Option1    EQUITY                 

 V                      

Option 2  DEBT

                             

1. Equity

Money from within the business. 
Shares and retained earnings

2. Debt

Money from outside the business.
Bank loans

 

Contrast

• Repayments

Equity: The business does not have to pay this back until the business is closed down.  The business does not have to pay dividends unless it makes a profit.
Debt:  Business must pay back at set times with interest.  If a business fails to repay loans it could go bankrupt.

• Control

Equity: Shareholders make decisions and have power to make changes in the business
Debt: The lenders do not want to run the business they are just giving finance and have no other role

• Security

Equity: Shareholders do not require security, they take a financial risk investing their money
Debt: A loan will require collateral and if the loan is not repaid the business risk losing this fixed asset.

• Tax deductions

Equity: dividends are not tax deductible. Business can not subtract the dividends from the taxable profits.

Debt: Interest paid on a loan is tax deductible, thus the business will pay less tax

 

• Gearing position

Equity: gives business a low gearing position.  The original owners may lose their control to other shareholders.
Debt: gives business a high gearing position.  This may mean it is difficult to get further loans in the future

Factors to consider when choosing Finance

• Repayments
• Control
• Security
• Tax deductions
• Gearing position

Be able to expand on each

 

Exam Papers

2011 Q6 b         2005 Q5 b

 Implications of a Business Expansion

• Share Price

Short term: Based on public expectations of expansion and growth there should be more demand for shares and share price should rise.

Long term: As profits increase with expansion this should also impact the price of shares.  Higher profits will result in a higher share price.

 

• Products

Short term: As the business expands the product range will also expand.  If a business engages in diversification it will enter into an entirely new line of products.

Long term: As the business expands and becomes more successful they will have more money available to invest in product development.  They may be able to establish a research and development department to develop new product ideas.

 

• Management Structure

Short term: As business expands it may engage in a merger or a take over.  This will result in a double up of management.  The business will need to restructure and develop a new line management structure with clear roles.

 

Long term: As the business develops and grows in the future work will be delegated.  The business could use a matrix structure and develop project teams.

• Finances

Short term: As the business expands it will need long term finance as this is a long term project.  They must decided if they should use debt or equity finance.

Long term: As profits increase with expansion and the business is doing well finance should be easier to avail of.

• Profits

Short term: Expansion can be an expensive process.  It may involve redundancies, new premises etc.  During this time profit will be low.

Long term: As the business grows and establishes itself profits should then rise.

• Employees

Short term: Employees do not like change.  Management must communicate with employees and unions during this time.  Offering employees a financial reward for engaging in change can help the process.

Long term: As business expands and becomes more profitable this can in turn offer opportunity to employees for higher salary, promotions and better job security.

• Customers

Short term: Customers are excited and curious about expansion.  They will enjoy the bigger range of products and the lower prices because of economies of scale.

Long term: Sometimes although the consumer enjoys the low prices they may be put off by the impersonal nayure of a very large business.

 

Exam Papers

2013 Q6 c

2006 Q6 b (ii)

 

Importance of Business Expansion

• Positive for our Balance of trade and payments

Exporting helps improve our economy, it brings money into our country during these difficult times.

• Creates more jobs

when a business expands it needs to hire more staff and create more employment and reduce unemployment.

• Source of income for the government

Companies will pay corporation tax on their higher profits.  More staff will pay PAYE on their wages.  This is all current income to the government.

 
• Lower prices for consumers

As business grow they will avail of economies of scale and in turn will be able to charge consumers lower prices.

 

Now watch the following short clip summary:

Joey and Julie discuss expansion

 

 

 

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