5.4 Business Expansion

Question 1

Reasons for expansion

Answer 1

Psychological, Defensive, Offensive

Question 2

What is Psychological expansion?

Answer 2

It involves the challenge and ambition of entrepreneurs to set up and operate a business.

Question 3

What is Empire Building?

Answer 3

An attempt to increase the size of a firm’s staff and assets to dominate the market.

Question 4

What is Defensive expansion?

Answer 4

When a business expands to protect itself from competition.

Question 5

Reasons for Defensive expansion

Answer 5

Reducing costs, Diversification, Protecting supplies.

Question 6

What is Diversification?

Answer 6

When a business widens the range of goods & services it sells or enters new markets.

Example: Samsung - military hardware.

Question 7

What is backward vertical integration?

Answer 7

When a business expands into the supply chain, e.g., an ice cream manufacturer buys a dairy farm.

Question 8

What is forward vertical integration?

Answer 8

When a business expands forward into the market for its products, e.g., an ice cream manufacturer opens ice cream stores.

Question 9

What is Offensive expansion?

Answer 9

Business may expand to maximize profits and increase market share.

Question 10

Reasons for Offensive expansion

Answer 10

Increasing profits, Asset stripping, Eliminating competition.

Question 11

Summary of reasons for expansion

Answer 11

Ambition, Increasing sales & profits, Diversification, Eliminate competition, Economies of scale.

Question 12

What is Organic expansion?

Answer 12

Internal growth that occurs when a business expands gradually over time using its own resources.

Question 13

Methods of Organic expansion

Answer 13

Growing sales, Licensing, Franchising.

Question 14

Methods of Organic expansion: Growing sales

Answer 14

Increasing sales of existing products or developing new products.

Question 15

Advantages of increasing sales of existing products

Answer 15

Lower costs, Product knowledge, Reduced risk.

Question 16

Disadvantages of increasing sales of existing products

Answer 16

Obtaining finance, Slow sales.

Question 17

Advantages of growing sales via new products

Answer 17

High profits, Consumer loyalty.

Question 18

Disadvantages of growing sales via new products

Answer 18

High costs, High failure rate.

Question 19

What is Licensing?

Answer 19

A business allows another firm to use its designs & products in return for a royalty payment.

Question 20

Advantages of licensing

Answer 20

Low costs, Continuous income.

Question 21

Disadvantages of Licensing

Answer 21

Business reputation, Loss of control.

Question 22

What is Franchising?

Answer 22

A business allows another business to use their name, logo & ideas in return for a share of profits.

Question 23

Advantages of franchising for the franchisor

Answer 23

Low capital costs, Rapid expansion, Economies of scale.

Question 24

Disadvantages of franchising for franchisor

Answer 24

Loss of control, Business reputation, High cost.

Question 25

Advantages of franchising for Franchisee

Answer 25

Reduced risk, Advertising, Franchise support.

Question 26

Disadvantages of Franchising for franchisee

Answer 26

High cost, Revenue costs, Strict rules.

Question 27

What is Inorganic growth?

Answer 27

Growth occurs when a business expands by using resources outside of themselves via mergers, takeovers, or forming a strategic alliance.

Question 28

Forms of inorganic growth

Answer 28

Merger, Takeover/acquisition, Strategic alliance/Joint venture.

Question 29

What is a Merger?

Answer 29

Occurs when two or more businesses join together for mutual benefit.

Question 30

Advantages of a merger

Answer 30

Benefit from economies of scale, Increased profits, New products.

Question 31

Disadvantages of a merger

Answer 31

Redundancies, Conflict, Slow decision making.

Question 32

What is Horizontal Integration?

Answer 32

Two competing businesses merge.

Question 33

What is Conglomerate integration?

Answer 33

Two unrelated businesses merge.

Question 34

What is a Strategic alliance?

Answer 34

When two or more independent businesses work together on a project that benefits both firms.

Question 35

Advantages of Strategic Alliances

Answer 35

Expand into new markets, Increased success.

Question 36

Disadvantages of a strategic alliance

Answer 36

Slow decision making, Increased conflict.

Question 37

What is a Takeover/Acquisition?

Answer 37

One business purchases 51% of another business.

Question 38

What is a Hostile takeover?

Answer 38

One firm acquires another business even though management opposes it.

Question 39

Advantages of a takeover

Answer 39

Benefit from economies of scale, Increased profits, Prevents closure.

Question 40

Disadvantages of a takeover

Answer 40

High cost, Redundancies, Industrial relations.

Question 41

How is business expansion financed?

Answer 41

Equity capital, Debt capital, Retained earnings, Grants, Sale and leaseback, Venture capital.

Question 42

Importance of business expansion for the economy

Answer 42

Provide employment, Increased tax revenue, Lower price for consumers.

Question 43

Reasons businesses stay small

Answer 43

Easier to manage, Increased customer loyalty, Faster decision making.

Question 44

Implications of business expansion on a business

Answer 44

Reduced profitability, Employee redundancy.

Question 45

How is business expansion limited?

Answer 45

Irish law: CCPC, EU law: EU Commission.