Chap 18.

BUSINESS EXPANSION
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 2. Develop 3. 4. Mergers/

existing new product Strategic acquisitions
products alliances

Internal

External

Risk Low risk High risk Low risk High risk

Example Baileys Lucozade Sport Aerlingus Quinnhealhcare

Sky + 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 finance Debts/loans as finance

Amount There is large amounts available There is large amounts available

Control Control can be lost due to outside No direct loss in control. However assets
investment may be used as security for a loan

Cost This can be cheap as company only pays Loan interests must be paid regardless of
dividend when profits are made profit/loss occurring

Security No security required Security such as property deeds may be

required

Risk A company financed by equity is said to A company financed by long term debt is
be a low risk business
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 Implications Long Term Implications

Find new Business will rise in value &

owners/shareholders profit
Find money/finance Staff have better pay

Do market research Staff/investors/suppliers will

Develop product ideas have more confidence

Hire employees More choice available to

Develop & manage

consumers
structures 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.
 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