BUSINESS EXPANSION

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)
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
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.
Diversification
 Introduction:
Introduction: The
The Basic
Basic Issues
Issues

Diversification decisions involve two basic issues:

• Is the industry to be entered more attractive than the

firm’s existing business?

• Can the firm establish a competitive advantage within

the industry to be entered? (i.e. what synergies exist
between the core business and the new business?)
 Relatedness
Relatedness in
in Diversification
Diversification

Synergy in diversification derives from two main types of

relatedness:
• Operational Relatedness-- synergies from sharing resources
across businesses (common distribution facilities, brands, joint
R&D)
• Strategic Relatedness-- synergies at the corporate level deriving
from the ability to apply common management capabilities to
different businesses.

Problem of operational relatedness:- the benefits in terms of

economies of scope may be dwarfed by the administrative costs
involved in their exploitation.
 Motives
Motives for
for
Diversification
Diversification
GROWTH --The desire to escape stagnant or declining industries
has been one of the most powerful motives for
diversification (tobacco, oil, defense).
--But, growth satisfies management not shareholder
goals.
--Growth strategies (esp. by acquisition), tend to
destroy shareholder value
RISK --Diversification reduces variance of profit flows
SPREADING --But, does not normally create value for
shareholders, since shareholders can hold diversified
portfolios.
--Capital Asset Pricing Model shows that
diversification lowers unsystematic risk not
systematic risk.

PROFIT --For diversification to create shareholder value, the act

of bringing different businesses under common owner-
ship must somehow increase their profitability.
 Diversification
Diversification and
and Shareholder
Shareholder Value:
Value:
Porter’s
Porter’s Three
Three Essential
Essential Tests
Tests

If diversification is to create shareholder value, it must meet three

tests:

1. The Attractiveness Test: diversification must be directed towards

actual or potentially-attractive industries.

2. The Cost of Entry Test : the cost of entry must not capitalize all
future profits.

3. The Better-Off Test: either the new unit must gain competitive
advantage from its link with the corporation, or vice-versa. (i.e.
synergy must be present)
 The
The Divisionalized
Divisionalized Firm
Firm in
in Practice
Practice

• Constraints upon decentralization. Few diversified companies achieve

clear division of decision making between corporate and divisional
levels. On-going dialogue and conflict exists between corporate and
divisional managers over both strategic and operational issues.
• Standardization of divisional management. Despite potential for
divisions to differentiate strategies, structures and styles--- corporate
systems may impose uniformity.
• Managing divisional inter-relationships. Managing relationships
between divisions requires more complex structures e.g.. matrix
structures where functional and/or geographical structure is imposed
on top of a product/market structure.
Owner Succession Planning
 Your Unique Qualities
●
Financial interdependence – business’s financial
success depends on the owner
●
Emotional investment – invested many years of
hard work, source of family identity, difficult to give
up control
●
Family/business overlap – working with relatives
●
Major portion of owner’s wealth – illiquidity
problem
●
Co-Owners’ Considerations
 Goals of Owners
●
Family Harmony
●
Perpetuate the business
●
Financial security for retirement/disability
●
Financial security for surviving family
members
●
Reduce taxes
 Entity Issues
●
Partnership, Corporation, Sole Proprietor
●
Identify legal entity
●
Determine rules regardless of form of legal
entity
 Factors to Consider
●
Role family may play in the succession of
management
●
Economic requirements for retirement and
timing issues
●
Your professional role: active or inactive
●
Providing for management, employees,
customers and suppliers
●
Financial requirements for dependent family
members
 Benefits of Effective Plan
●
Smooth transition
●
Improved communication with family,
employees, customers and suppliers
●
Commitment to future success
●
Happier work environment
●
More financial security
●
Improves customer loyalty
 Exit Strategies
●
Sell company to competitor, third party
buyer, management team
●
Gift shares to children or relatives in
business
●
Liquidate the company and sell assets
●
Do nothing – let heirs worry about it
●
Sell interest in the entity to operating
partner
 Preparing for Ownership
Transition
●
Develop competent management
successors
●
Retain key employees
●
Select time frame for transfer
●
Communicate to employees, customers and
suppliers
●
Transfers to children and/or relatives
 Preparing for Ownership
Transition
●
Review method for valuing your business
●
Establish an estate plan
●
Determine tax strategies
●
Fund an effective business succession plan
 Valuation Issues
●
Valuation methods
●
Discounts
●
Independent Appraiser