UNIT 5.4

BUSINESS EXPANSION

CHAPTER 17

The syllabus states that students should know the reasons and finance for expansion. They should also know the implications and methods of expansion.

Reasons for Expansion.

The reasons for expansion can be divided into three categories:

Psychological.

  • Esteem.
  • Self-actualisation (a challenge).
  • Greed (empire building).
  • Ambition.

Defensive

  • Cheaper (economies of scale)
  • Safeguard supplies
  • Bigger is stronger
  • Diversify
  • Deny Opportunities to competitors

Aggressive

  • Market share
  • Eliminate competition
  • Synergies
  • Acquire new technologies
  • Better use of resources.

Finance for Expansion.

Finance can come from any of the long-term sources. These are Shares; Reserves; Mortgage; Debentures; Grants; Sale and Leaseback. However, for the purposes of this chapter, discussion is confined to Debt and Equity.Debt refers to Mortgages or Debentures.

Equity refers to Reserves and Share Capital.

If an answer requires discussion on finance, you should do so under the following headings: Control; Risk; Cost; Security; Tax; Gearing.

Methods of Expansion.

Expansion or Growth can be Organic and Inorganic.

Organic.

This refers to growth from within the organisation. It can be achieved in two ways.

1.Using Existing Products. This is done by increasing domestic sales, exporting, licensing and franchising (see book p317 for features, advantages and disadvantages).

2.Developing New Products. This involves R and D, advertising, churning, copying competitors, etc.

Inorganic.

1. Take-over or Acquisition. Some terms, which may apply, here are: Subsidiary (51%); Associate (20%);

Holding Company; Conglomerate; Transnational; Costs; Problems with different management cultures.

Advs: remove competitor, diversify, synergies, distribution network, guarantee supply, guarantee market.

Disadvs: cost, redundancies, hostile, asset stripping.

2. Merger.

Advs: Same as takeover+ good brand name kept.

Disadvantages; redundancies and shared control

3.Alliances or Joint Ventures. Companies involved are usually competitors and ally in one area only. For

Example, technological development.

Advantages: cheap expansion; share skills, technology and markets.

Disadvantages: shared control and profits; possible clashes

Implications of Expansion.

Short term.

I. New organisation structure required.

2. More finance needed.

3. Careful control of cash flow required.

4. Human Resource Planning required.

5. Other resources needed.

Long term.

I. Strategic Planning.

2. Future Marketing.

3. Higher Profits.

4. Economies of scale.

5. Loss of 'Personal Touch'.

6. Industrial Relations (argue either way).

Preventing Unfair Competition.

Competition Authority

Aim: to protect consumers and other businesses from unfair practices which can result from mergers or takeovers.

Powers: to investigate, prohibit or impose conditions on a merger or takeover.

EU Competition Policy

Aim: to ensure that companies don’t abuse their dominant position in the market.

Powers: the EU Commissioner for Competition can;

  • Prevent mergers and takeovers
  • Impose fines of up to 10% of turnover for unfair practices.

Staying Small

Advantages:

  • Better control
  • Personal touch
  • Better employee motivation

Disadvantages:

  • Fewer economies
  • Not enough resources to fight off bigger companies
  • Not enough promotion opportunities so good staff leave.