03 Growth of Businesses

7/31/2019 03 Growth of Businesses

1/43

Cause of Change!

Growth / Retrenchment!


2/43

Syllabus requirementsInternal Causes of Change

Change in organisational size

New owners/leaders

Poor business performance.

Changes in organisation size may come about due to

mergers, takeovers, organic growth and retrenchment.


3/43

Why is one of the main businessobjectives growth?

What do businessesgain from growth?

Profits

Reduced

Costs(EoS)

Market power

Risk

aversion

Managerial motivesDividends to

shareholders


4/43

The motivations for growth

The profit motive:

May be driven by stock market expectations

Shareholders looking for capital gains from rising share prices and regularincome from share dividends

The cost motive:

Increasing returns (economies of scale) which leads to a fall in long runaverage cost

Lower costs important in establishing and maintaining a competitiveadvantage

The market power motive:

Market dominance gives a business increased pricing power in specificmarkets

Monopolies for example can engage in price discrimination.


5/43

The motivations for growth

The risk motive:

The expansion of a business might be motivated by a desire todiversify production and sales

Diversification of products and also out-sourcing of different stagesof production

Managerial motives:

Decisions and strategies of managers employed by a firm might bedifferent from those with an equity stake in the business

Behavioural theories of the firm suggest that pure profit maximisationis difficult to achieve and rarely seen


6/43

So how can businesses grow?

Theory bit


7/43

Internal and external growth

Internal ororganicgrowth occurs when a firmincreases their own scale of operation eg they open anew plant or production line.

External growth is where a company expands throughacquisitions ie mergers ortakeovers.


8/43

Internal or Organic growth


9/43

Internal growth

Expansion of existing production facilities

Opening of new retail outlets

Taking on more staff

Investment in new technology

Widening of the product range


10/43

How has Tesco grown?

Built new retail outlets

Opened express stores

Expanded current stores Opened in other countries

Recruited more staff

On line store

Catalogue

Diversify into new products.

AllInternal

growth!
http://uk.wrs.yahoo.com/_ylt=AgkY08Q0DZrebZJ1NY.Olg1NBQx.;_ylu=X3oDMTBpdnJhMHUzBHBvcwMxBHNlYwNzcgR2dGlkAw--/SIG=1f33ekjea/**http%3A//uk.images.search.yahoo.com/search/images/view%3Fback=http%253A%252F%252Fuk.images.search.yahoo.com%252Fsearch%252Fimages%253Fp%253DTesco%252Blogo%2526ei%253DUTF-8%2526fr%253Dyfp-t-501%2526x%253Dwrt%26w=158%26h=158%26imgurl=www.tucoo.com%252Flogo%252Flogo_eps120%252Fs%252FTescos.png%26rurl=http%253A%252F%252Fwww.tucoo.com%252Flogo%252Flogo_eps120%252Findex2.htm%26size=7.7kB%26name=Tescos.png%26p=Tesco%2Blogo%26type=png%26no=1%26tt=427%26oid=a280a62c925ee744%26ei=UTF-8


11/43

External Growth


12/43

External Growth

Integration

The bringing together of two or more firms

Merger

When two or more firms agree to become integratedto form one firm under joint ownership

An agreement

Takeover

When one firm gains control over another andbecomes the owner, can be achieved by buying 51%of the shares

Can be hostile

A B

BA

+=+

+++

++

+

+=

+

AB

A


13/43

Whats the difference between a

merger & a takeover?

Merger = where 2 companies combine to become onenew company

Takeover = where one company wants to buy anothercompany and make it part of its existing business


14/43

Can you name me any recent mergeror takeovers?


15/43

Kraft & Cadburys


16/43

Examples

December 2005Buyer ITV plc | price - 175millionhttp://www.telegraph.co.uk/finance/2927757/ITV-buys-Friends-Reunited-for-175m.html

December 2006Buyer First Choice | price -120millionhttp://www.manchestereveningnews.co.uk/news/busine

ss/s/231/231640_first_choice_snaps_up_120m_lateroomscom.html
http://www.telegraph.co.uk/finance/2927757/ITV-buys-Friends-Reunited-for-175m.htmlhttp://www.telegraph.co.uk/finance/2927757/ITV-buys-Friends-Reunited-for-175m.htmlhttp://www.manchestereveningnews.co.uk/news/business/s/231/231640_first_choice_snaps_up_120m_lateroomscom.htmlhttp://www.manchestereveningnews.co.uk/news/business/s/231/231640_first_choice_snaps_up_120m_lateroomscom.htmlhttp://www.manchestereveningnews.co.uk/news/business/s/231/231640_first_choice_snaps_up_120m_lateroomscom.htmlhttp://www.manchestereveningnews.co.uk/news/business/s/231/231640_first_choice_snaps_up_120m_lateroomscom.htmlhttp://www.manchestereveningnews.co.uk/news/business/s/231/231640_first_choice_snaps_up_120m_lateroomscom.htmlhttp://www.manchestereveningnews.co.uk/news/business/s/231/231640_first_choice_snaps_up_120m_lateroomscom.htmlhttp://www.telegraph.co.uk/finance/2927757/ITV-buys-Friends-Reunited-for-175m.htmlhttp://www.telegraph.co.uk/finance/2927757/ITV-buys-Friends-Reunited-for-175m.htmlhttp://www.telegraph.co.uk/finance/2927757/ITV-buys-Friends-Reunited-for-175m.htmlhttp://www.telegraph.co.uk/finance/2927757/ITV-buys-Friends-Reunited-for-175m.htmlhttp://www.telegraph.co.uk/finance/2927757/ITV-buys-Friends-Reunited-for-175m.htmlhttp://www.telegraph.co.uk/finance/2927757/ITV-buys-Friends-Reunited-for-175m.htmlhttp://www.telegraph.co.uk/finance/2927757/ITV-buys-Friends-Reunited-for-175m.htmlhttp://www.telegraph.co.uk/finance/2927757/ITV-buys-Friends-Reunited-for-175m.htmlhttp://www.telegraph.co.uk/finance/2927757/ITV-buys-Friends-Reunited-for-175m.htmlhttp://www.telegraph.co.uk/finance/2927757/ITV-buys-Friends-Reunited-for-175m.htmlhttp://www.telegraph.co.uk/finance/2927757/ITV-buys-Friends-Reunited-for-175m.htmlhttp://www.telegraph.co.uk/finance/2927757/ITV-buys-Friends-Reunited-for-175m.html


17/43

Examples of takeovers due to poor

performance

Heineken & Scottish &Newcastle

Santander buyout of Alliance& Leicester, Abbey andBradford & Bingley

For latest Acquisitions and mergers info
http://www.aqm-e.com/index.asp


18/43

Examples

March 2004Buyer WM Morrisons| price - 3bnhttp://news.bbc.co.uk/1/hi/business/3542291.stm

January 2007Buyer Tata| price - 5.8bnhttp://news.bbc.co.uk/1/hi/business/6315823.stm
http://news.bbc.co.uk/1/hi/business/3542291.stmhttp://news.bbc.co.uk/1/hi/business/3542291.stmhttp://news.bbc.co.uk/1/hi/business/6315823.stmhttp://news.bbc.co.uk/1/hi/business/6315823.stmhttp://news.bbc.co.uk/1/hi/business/3542291.stmhttp://news.bbc.co.uk/1/hi/business/6315823.stmhttp://news.bbc.co.uk/1/hi/business/6315823.stmhttp://news.bbc.co.uk/1/hi/business/3542291.stmhttp://news.bbc.co.uk/1/hi/business/3542291.stm


19/43

Some previous mergers

&

&

Sowho/whatis Tata?

http://news.bbc.co.uk/1/hi/world/south_asia/6071090.stm

=
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20/43

Tata

Ratan Tata, 69, who controls the$22bn Tata group, which includes 96companies manufacturing a range of

products from automobiles towatches, steel to fertilisers.


21/43

Tata business objectives

As the group entered the 21st Century, Ratan Tata was obsessed withfour critical issues.

1. The first was to globalise his group's operations, where he hassucceeded to a certain extent.

2. The second was to safeguard his companies against possible hostiletakeovers after the London-based Indian, Lakshmi Mittal, purchased theLuxembourg-based Arcelor early in 2006 to become the world's largeststeelmaker, and announced his ambitious plans in India.

3. So, to thwart any threats, Tata decided to up his stakes in most of thegroup companies.

4. Ratan Tata's most important concern, however, was to protect his toplines and bottom lines in the face of ever-increasing competition fromdomestic and global players.

5. To achieve this objective, he had no option but to become aggressive, aquality that helped him in other areas.


22/43

Read more. For future news of mergers

in UK

http://www.guardian.co.uk/business/2010/jan/24/weak-sterling-fuels-takeover-boom
http://www.guardian.co.uk/business/2010/jan/24/weak-sterling-fuels-takeover-boomhttp://www.guardian.co.uk/business/2010/jan/24/weak-sterling-fuels-takeover-boomhttp://www.guardian.co.uk/business/2010/jan/24/weak-sterling-fuels-takeover-boomhttp://www.guardian.co.uk/business/2010/jan/24/weak-sterling-fuels-takeover-boomhttp://www.guardian.co.uk/business/2010/jan/24/weak-sterling-fuels-takeover-boomhttp://www.guardian.co.uk/business/2010/jan/24/weak-sterling-fuels-takeover-boomhttp://www.guardian.co.uk/business/2010/jan/24/weak-sterling-fuels-takeover-boomhttp://www.guardian.co.uk/business/2010/jan/24/weak-sterling-fuels-takeover-boomhttp://www.guardian.co.uk/business/2010/jan/24/weak-sterling-fuels-takeover-boomhttp://www.guardian.co.uk/business/2010/jan/24/weak-sterling-fuels-takeover-boomhttp://www.guardian.co.uk/business/2010/jan/24/weak-sterling-fuels-takeover-boom


23/43

Types of Intergration


24/43

Horizontal integration

Horizontal integration:

Horizontal integration occurs when two businesses in the

same industry at the same stage of production becomeone for example a merger between two carmanufacturers or drinks suppliers

The takeover of Safeway by Morrisons is example of theprocess of horizontal integration. (for 2.9bn)

$850m652m

X
http://uk.wrs.yahoo.com/_ylt=AvecDpjyQvN6_NlRAw7_U6JNBQx.;_ylu=X3oDMTBpdnJhMHUzBHBvcwMxBHNlYwNzcgR2dGlkAw--/SIG=1ju8jlovj/**http%3A//uk.images.search.yahoo.com/search/images/view%3Fback=http%253A%252F%252Fuk.images.search.yahoo.com%252Fsearch%252Fimages%253Fp%253DBody%252Bshop%252B%25252B%252BL%252527Oreal%252Blogo%2526ei%253DUTF-8%2526fr%253Dyfp-t-501%2526x%253Dwrt%26w=125%26h=89%26imgurl=www.commercialpropertynews.com%252Fcommercialpropertynews%252Fphotos%252Fgeneral2%252Flogo_loreal.jpg%26rurl=http%253A%252F%252Fwww.commercialpropertynews.com%252Fcpn%252Farticle_display.jsp%253Fvnu_content_id%253D1002199035%26size=10.3kB%26name=logo_loreal.jpg%26p=Body%2Bshop%2B%252B%2BL%2527Oreal%2Blogo%26type=jpeg%26no=1%26tt=1%26oid=90e38210c48f6d4c%26ei=UTF-8http://uk.wrs.yahoo.com/_ylt=AjDcHfpKoN1KJLBKwVYJb2hNBQx.;_ylu=X3oDMTBpZm5udGl1BHBvcwM1BHNlYwNzcgR2dGlkAw--/SIG=1eupvu21a/**http%3A//uk.images.search.yahoo.com/search/images/view%3Fback=http%253A%252F%252Fuk.images.search.yahoo.com%252Fsearch%252Fimages%253Fp%253DAOL%252Blogo%2526ei%253DUTF-8%2526fr%253Dyfp-t-501%2526x%253Dwrt%26w=150%26h=188%26imgurl=www.bibleetnombres.online.fr%252Fimage15%252Flogo_aol.jpg%26rurl=http%253A%252F%252Fwww.bibleetnombres.online.fr%252Fnumerologi6.htm%26size=8.2kB%26name=logo_aol.jpg%26p=AOL%2Blogo%26type=jpeg%26no=5%26tt=13,335%26oid=3ef5534cd7f20d62%26ei=UTF-8http://uk.wrs.yahoo.com/_ylt=AnN0jVipHOunLQD7buM_3GZNBQx.;_ylu=X3oDMTBpdnJhMHUzBHBvcwMxBHNlYwNzcgR2dGlkAw--/SIG=1hlr7svnk/**http%3A//uk.images.search.yahoo.com/search/images/view%3Fback=http%253A%252F%252Fuk.images.search.yahoo.com%252Fsearch%252Fimages%253Fp%253DBody%252Bshop%252Blogo%2526ei%253DUTF-8%2526fr%253Dyfp-t-501%2526x%253Dwrt%26w=200%26h=200%26imgurl=www.sitedesmarques.com%252Fimages%252Fuploaded%252F4086-thebodyshop-new.jpg%26rurl=http%253A%252F%252Fwww.sitedesmarques.com%252Fmagasin-beaute-sante%252Fthe-body-shop-paris-75006-21292.htm%26size=10.9kB%26name=4086-thebodyshop-new.jpg%26p=Body%2Bshop%2Blogo%26type=jpeg%26no=1%26tt=3,774%26oid=b40ec8a43d13e654%26ei=UTF-8http://uk.wrs.yahoo.com/_ylt=AvecDpjyQvN6_NlRAw7_U6JNBQx.;_ylu=X3oDMTBpdnJhMHUzBHBvcwMxBHNlYwNzcgR2dGlkAw--/SIG=1ju8jlovj/**http%3A//uk.images.search.yahoo.com/search/images/view%3Fback=http%253A%252F%252Fuk.images.search.yahoo.com%252Fsearch%252Fimages%253Fp%253DBody%252Bshop%252B%25252B%252BL%252527Oreal%252Blogo%2526ei%253DUTF-8%2526fr%253Dyfp-t-501%2526x%253Dwrt%26w=125%26h=89%26imgurl=www.commercialpropertynews.com%252Fcommercialpropertynews%252Fphotos%252Fgeneral2%252Flogo_loreal.jpg%26rurl=http%253A%252F%252Fwww.commercialpropertynews.com%252Fcpn%252Farticle_display.jsp%253Fvnu_content_id%253D1002199035%26size=10.3kB%26name=logo_loreal.jpg%26p=Body%2Bshop%2B%252B%2BL%2527Oreal%2Blogo%26type=jpeg%26no=1%26tt=1%26oid=90e38210c48f6d4c%26ei=UTF-8


25/43

"This is a once in alifetime opportunityto combine two of

the most respectedand well-knowncompanies in theworldwide sporting

goods industry",CEO Adidas

= Horizontal integration
http://news.bbc.co.uk/1/hi/business/4740755.stm


26/43

Lateral Integration

Lateral integration occurs when two businesses jointogether that produce similar but related products

Ottakars and HMV

Sony and BMG

eBay and Skype Google and You Tube

Gillette and Proctor & Gamble


27/43

Vertical integration

Vertical integration:

Vertical Integration involves acquiring a business in thesame industry but at different stages of the supply chain

Uses primary, secondary and tertiary industries

For example an oil company that owns drilling andextraction businesses together with refining, distributionand retail subsidiaries.


28/43

Vertical Integration

Backward

Tertiary businesses thatintegrates withsecondary business.

Secondary business thatintegrates with a primarysupplier

Forward

A primary business thatintegrates with asecondary manufacturer

A Secondary manufacturerthat integrates with atertiary business.

Forward

Backwards


29/43

Broadcaster BSkyBacquired television set-top box maker Amstrad

for about 125m. Skysaid that the dealmeant they could nowsave money, designtheir products in-houseand be moreinnovative.

= Backward vertical integration
http://news.bbc.co.uk/1/hi/business/6923517.stm


30/43

Conglomerate integration

Conglomerate Integration ordiversification is when a company buys

another firm in an unrelated industry,often to spread risk.


31/43

Glazer's 60-yearbusiness career,incorporating property,fish, fast foodrestaurants, local

television stations andnursing homes


32/43

Summary

Direction Explanation

Forward + vertical Acquiring a business further up in the supply chaine.g. manufacturer buys a distributor

Backward + vertical Acquiring a business operating earlier in the supplychain e.g. a retailer buys a wholesaler

Horizontal Acquiring a business at the same stage of the supply

chain e.g. a manufacturer buys a competitor

Conglomerate Where the acquisition has no clear connection to thebusiness buying it


33/43

What are the benefits of integration?

Why do some firmsprefer external to internal

growth?

Quicker toachieve EoS

managerial,financial &

production

Achieves greaterconcentration ratio/reduces competitionRationalisation

reduces costs


34/43

External Growth

TUI merge with FirstChoice

Porsche and VW tomerge

Watch these 2 videoclips

In each case identifythe objectives of the

mergers, theadvantages and any

potential disadvantages

Corus accepts takeoverbid

High Court clears P&Os

takeover

Little Chef takeover

talks

Identify the differentreasons for and

approaches to thesetakeovers

Why might theGovernment

intervene to disallowa takeover?
http://news.bbc.co.uk/player/nol/newsid_6220000/newsid_6226600/6226637.stm?bw=nb&mp=wmhttp://news.bbc.co.uk/player/nol/newsid_4760000/newsid_4768900/4768946.stm?bw=nb&mp=rm&asb=1&news=1&bbcws=1http://news.bbc.co.uk/player/nol/newsid_6070000/newsid_6070300/6070318.stm?bw=nb&mp=rm&asb=1&news=1&bbcws=1http://news.bbc.co.uk/1/hi/business/8037159.stmhttp://news.bbc.co.uk/player/nol/newsid_6460000/newsid_6468500/6468563.stm?bw=nb&mp=rm&asb=1&news=1&bbcws=1


35/43

Whiteboards ready?Choose which type of integration

Label one side horizontal, the other vertical

(with arrow up = forward or down = backward)


36/43

What type of integration is this?

J Sainsbury buying a breakfast cereal manufacturer?

Vertical

Backward integration


37/43


Ford motor company buying a steel works?

Vertical

Backward integration


38/43


Merger of Lloyds Bank with Barclays bank?



39/43


A bakery buying a bread shop?

Vertical

Forward integration


40/43


ICI chemical manufacturer takes over a specialistchemical sector of Unilever?

Horizontal?

integration


41/43


Milk Marque (farmer co-operative) which collects andsells 60% of raw milk buys Aeron Cheese, A Welshmaker of farmhouse cheeses?

Vertical

Forward integration


42/43


Phoenix Inns a chain of 1800 pubs buys Spring Innswith 4300 pubs?



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HomeworkBody Shop & LOreal

2006 saw the purchase of The Body Shop by French cosmetics giantLOreal. The deal was controversial because the Body Shopshareholders and customers were concerned that LOreal would fail tomaintain Body Shops unique culture of socially responsible business.However, Body Shop was eventually sold for 500m, enabling LOreal toadd another brand to its porfolio of products including Ambre Solaire,

Lancome, Elvive, Studio Line and Plenitude. LOreals plan was to runBody Shop as a self contained business, in an attempt to retain the firmsimage, its major selling point among a loyal band of customers thatundoubtedly makes up a significant niche within the beauty market.

QUESTIONS:

1. Explain the possible motives behind LOreals purchase of Body Shop.(6)

2. Analyse the possible difficulties that LOreal may encounter within theBody Shop following the takeover. (8)

3. To what extent is LOreals plan to run Body Shop as a separatebusiness a sensible plan? (15)

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03 Growth of Businesses