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LC Bus Bus Expansion
LC Business: Business Expansion
| Question | Answer |
|---|---|
| Reasons for business expansion and growth | Improvement in profit/sales, self actualisation, elimination of competitors, gap in the market, increased security by diversifying, spread the risk across different product lines, synergy, financial strength, acquire new skills |
| Defensive reasons for business expansion | Protecting essential stock of supplies, Economies of scale, Profitability/financial strength, Diversification. |
| Protecting essential stock of supplies | Reverse integration into the chain of supply may safeguard the company’s supply chain, guaranteeing a supply of stock for resale. |
| Economies of scale | As a firm expands the costs fall because of bulk buying, savings in transport, lower storage costs etc. Lower costs mean cheaper goods, higher sales and more profits for the company |
| Profitability/financial strength | Strength through sheer size. A large business enterprise commands prestige, influence and power, Being a big player with a large market share will obviously strengthen the enterprise in the market place. Also able to weather the storms of recession. |
| Diversification | Spreading the risk by moving away from a company’s core area of business. e.g.by expanding into the foreign market. Diversification into varying product ranges reduces its risk exposure and has a higher chance of survival. |
| Aggressive reasons for expansion | Eliminating competition, access to new technology and products, synergy. |
| Eliminating competition | Is often behind business expansion.By one company merging with or taking over a competitor the business may eliminate a threat to its market share. |
| Access to new technology and products | Expansion may allow a company to acquire new technology and new products developed by competitors. Helps to acquire certain patents, processes, expertise or technologies that enhance the overall profitability of the business in the short and long term. |
| Synergy(2+2=5) | Is where business enterprises merge together, the sum of the potential of the two amalgamated businesses is higher than the sum of the two enterprises if they remained separate from each other. |
| Psychological reasons for expansion | Build an empire, ambition & drive. |
| Short Term Sources of Finance | Bank overdraft, accrued expenses, trade credit. |
| Bank Overdraft | Bank allows current account holders to withdraw more money from their account than in it. Interest is charged, can be recalled by the bank at any time. Used to purchase stock or pay the wages or working capital in day-to-day business operations. |
| Accrued Expenses | This source of finance frees up money by delaying the payment of regular bills such as utilities, rent or insurance. This would free up cash to pay for supplies which in turn could be sold allowing these bills to be paid later |
| Trade Credit | A company may buy stock for resale on a “buy now and pay later” basis. The amount of credit available is influenced by the creditworthiness of the company. There is no direct charge but cash discounts may be forgone. |
| Medium Term Sources of Finance | Medium term loan. Hire Purchase, Leasing. |
| Medium Term Loan | Has a fixed rate of interest,repaid in equal monthly instalments up to a five year period, can cash purchase and negotiate the best cash prices. The bank may require security or personal guarantees. Interest paid is tax deductible. Can budget accordingly. |
| Hire Purchase | Over a five year period or less. Immediate possession of good however ownership doesn’t transfer until the last instalment is made. Expensive source of finance. No security is required but the HP Co. may repossess the asset if default. |
| Leasing | Involve the renting of an asset from a finance company. A lump sum is not required,full use and possession of an asset provided,fixed and regular payments to the company. While leasing costs more than cash purchase it can help the cash flow of a business. |
| Long Term Finance | Mortgage, long term loan, debenture, equity capital, share capital, owners capital, government grants. |
| Mortgage/Long Term Loan/Debenture | Taken out for more than 5 years. Security required. Paid in agreed instalments including interest which is tax deductible. |
| Equity/Share Capital/Owners Capital | If the company is a Private limited company and the money needed to purchase an asset could be raised by selling ordinary shares to new or existing shareholders. No security or repayments are required for the company. |
| Government Grants | Government agencies such as Enterprise Ireland or County Enterprise Boards could be approached for grant aid assistance to help purchase the fasset. Normally they are interest free and do not have to be repaid if used for their intended purpose. |
| Equity capital | Is money invested by the owners or shareholders and is low risk and does not require security. A firm financed mostly by Equity is lowly geared. |
| Debt capital | Is loans from financial institutions, is high risk as interest and capital must be repaid, irrespective of profitability. A firm financed mostly by debt is highly geared. |
| Short and long term implications | Organisational structure, product mix, profitability, employment. |
| Merger | A friendly/voluntary amalgamation or joining together of two or more firms for their mutual benefit, trading under a common name. It involves mutual consent of two equal companies to combine and become one entity. |
| Takeover/acquisiton | This occurs when one company purchases 51% or more of the shares in another company in either a hostile or friendly manner. |
| Strategic/Business Alliance/Joint Venture | An agreement between two or more independent businesses to pool resources and/or expertise to work together for their mutual benefit over a specified period of time or to complete a specified project, while all parties maintain their separate identities |
| Franchise | Arrangement whereby the existing business with the proven business mode grants a contractual licence/permission to the person setting up the business to use its name, logo and business idea in return for a fee or a percentage of profits or sales. |
| Organic Growth | A business expands gradually through the use of its existing products or by developing new products. |
| Inorganic Growth | Growth with the aid of outside Firms eg strategic alliance, mergers or takeovers |
| Subsidiaries | Another company called a Holding Company owns 51% of its voting shares |
| Debentures | Long Term Loan that has a fixed interest rate and fixed repayment date. |
| Name 3 agencies that give grants | County Enterprise Boards (for small firms) Enterprise Ireland (for Exporting Firms) IDA Ireland (for foreign owned firms in Ireland) |
| Asset Stripping | when a company is taken over and instead of continuing to run it, the assets are sold off for profit |
| Licensing | means allowing other firms to use or sell an invention or design in return for payment of a license fee or royalty. |
| Joint Venture | this occurs when two or more firms agree to cooperate in the establishment of a project or business together. They remain separate companies but share skills and resources to maximise possibility of success |
| Retained Earnings | The profits the business has saved up. It can use these profits to pay for expansion. |
| How does a business grow organically? (Method of Expansion) | By increasing sales domestically, exporting, franchising, new products/services |
| How does a business grow inorganically? (Method of Expansion) | Through Acquisition/takeover, alliance/joint venture, Merger |
| What are the implications of expansion? | Profits, organisational structure (chagnge structure), financial sturcture (creates a need for additional finance), redundancies (cut costs), loss of personal touch with customers |
| what is the importance of Irish business expansion in domestic markets? | Greeater chance of survival, larger amounts of tax revenue because of increased profits and increase in employment, increased exports (improves balance of trade), decrease in unemployment, increased investment in R&D, increased competitiveness. |
| What is the importance of Irish business expansion into foreign markets? | repatriated profits (increases wealth in Ireland), exposure to new technologies, increased global profile can attract business to Ireland, economies of scale (increased sustainability) |
Created by:
MrFromholz
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