Cause of Change!

Growth / Retrenchment!

Syllabus requirements Internal 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.

Why is one of the main business objectives growth?

What do businesses gain from growth?

Profits

Reduced Costs (EoS)

Market power

Risk aversion

Managerial motivesDividends to shareholders

The motivations for growth

• The profit motive: – May be driven by stock market expectations– Shareholders looking for capital gains from rising share prices and regular

income from share dividends• The cost motive:

– Increasing returns (economies of scale) which leads to a fall in long run average cost

– Lower costs important in establishing and maintaining a competitive advantage

• The market power motive: – Market dominance gives a business increased pricing power in specific

markets– Monopolies for example can engage in price discrimination.

The motivations for growth

• The risk motive: – The expansion of a business might be motivated by a desire to

diversify production and sales– Diversification of products and also out-sourcing of different stages

of production

• Managerial motives: – Decisions and strategies of managers employed by a firm might be

different from those with an equity stake in the business– Behavioural theories of the firm suggest that pure profit maximisation

is difficult to achieve and rarely seen

So how can businesses grow?

Theory bit…

Internal and external growth

• Internal or organic growth occurs when a firm increases their own scale of operation eg they open a new plant or production line.

• External growth is where a company expands through acquisitions ie mergers or takeovers.

Internal or Organic growth

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

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….

All Internal growth!

External Growth

External Growth

• Integration– The bringing together of two or more firms

• Merger– When two or more firms agree to become integrated

to form one firm under joint ownership – An agreement

• Takeover– When one firm gains control over another and

becomes the owner, can be achieved by buying 51% of the shares

– Can be hostile

A B

BA

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AB

A

What’s the difference between a merger & a takeover?

• Merger = where 2 companies combine to become one new company

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

Can you name me any recent merger or takeovers?

Kraft & Cadburys

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 - £120million http://www.manchestereveningnews.co.uk/news/business/s/231/231640_first_choice_snaps_up_120m_lateroomscom.html

Examples of takeovers due to ‘poor performance’

• Heineken & Scottish & Newcastle

• Santander buyout of Alliance & Leicester, Abbey and Bradford & Bingley

For latest Acquisitions and mergers info

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

Some previous mergers…

&

&

So who/what is Tata?

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

=

Tata…

• Ratan Tata, 69, who controls the $22bn Tata group, which includes 96 companies manufacturing a range of products from automobiles to watches, steel to fertilisers.

Tata business objectives

• As the group entered the 21st Century, Ratan Tata was obsessed with four critical issues.

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

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

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

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

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

Read more…. For future news of mergers in UK

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

Types of Intergration

Horizontal integration

• Horizontal integration: – Horizontal integration occurs when two businesses in the

same industry at the same stage of production become one – for example a merger between two car manufacturers or drinks suppliers

– The takeover of Safeway by Morrisons is example of the process of horizontal integration. (for £2.9bn)

$850m£652m

X

"This is a once in a lifetime opportunity to combine two of the most respected and well-known companies in the worldwide sporting goods industry", CEO Adidas

= Horizontal integration

Lateral Integration

• Lateral integration occurs when two businesses join together that produce similar but related products

• Ottakars and HMV • Sony and BMG • eBay and Skype • Google and You Tube • Gillette and Proctor & Gamble

Vertical integration

• Vertical integration: – Vertical Integration involves acquiring a business in the

same industry but at different stages of the supply chain

– Uses primary, secondary and tertiary industries

– For example an oil company that owns drilling and extraction businesses together with refining, distribution and retail subsidiaries.

Vertical Integration

• Backward

• Tertiary businesses that integrates with secondary business.

• Secondary business that integrates with a primary supplier

• Forward

• A primary business that integrates with a secondary manufacturer

• A Secondary manufacturer that integrates with a tertiary business.

Forward

Backwards

Broadcaster BSkyB acquired television set-top box maker Amstrad for about £125m. Sky said that the deal meant they could now save money, design their products in-house and be more innovative.

= Backward vertical integration

Conglomerate integration

• Conglomerate Integration or diversification is when a company buys another firm in an unrelated industry, often to spread risk.

• Glazer's 60-year business career, incorporating property, fish, fast food restaurants, local television stations and nursing homes

Summary…

Direction Explanation

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

Backward + vertical

Acquiring a business operating earlier in the supply chain – 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 the business buying it

What are the benefits of integration?

Why do some firms prefer external to internal

growth?

Quicker to achieve EoS – managerial, financial & production

Achieves greater concentration ratio/ reduces competitionRationalisatio

n reduces costs

External Growth

TUI merge with First Choice

Porsche and VW to merge

Watch these 2 video clips

In each case identify the objectives of the

mergers, the advantages and any

potential disadvantages

Corus accepts takeover bid

High Court clears P&O’s takeover

Little Chef “takeover” talks

Identify the different reasons for and

approaches to these takeovers

Why might the Government

intervene to disallow a takeover?

Whiteboards ready?Choose which type of integration

Label one side horizontal, the other vertical

(with arrow up = forward or down = backward)

What type of integration is this?

• J Sainsbury buying a breakfast cereal manufacturer?

Vertical Backward integration

What type of integration is this?

• Ford motor company buying a steel works?

Vertical Backward integration

What type of integration is this?

• Merger of Lloyds Bank with Barclays bank?

Horizontal integration

What type of integration is this?

• A bakery buying a bread shop?

Vertical Forward integration

What type of integration is this?

• ICI chemical manufacturer takes over a specialist chemical sector of Unilever?

Horizontal? integration

What type of integration is this?

• Milk Marque (farmer co-operative) which collects and sells 60% of raw milk buys Aeron Cheese, A Welsh maker of farmhouse cheeses?

Vertical Forward integration

What type of integration is this?

• Phoenix Inns a chain of 1800 pubs buys Spring Inns with 4300 pubs?

Horizontal integration

Homework – Body Shop & L’Oreal

• 2006 saw the purchase of The Body Shop by French cosmetics giant L’Oreal. The deal was controversial because the Body Shop shareholders and customers were concerned that L’Oreal would fail to maintain Body Shop’s unique culture of socially responsible business. However, Body Shop was eventually sold for £500m, enabling L’Oreal to add another brand to its porfolio of products including Ambre Solaire, Lancome, Elvive, Studio Line and Plenitude. L’Oreal’s plan was to run Body Shop as a self contained business, in an attempt to retain the firms image, its major selling point among a loyal band of customers that undoubtedly makes up a significant niche within the beauty market.

QUESTIONS:1. Explain the possible motives behind L’Oreal’s purchase of Body Shop.

(6)2. Analyse the possible difficulties that L’Oreal may encounter within the

Body Shop following the takeover. (8)3. To what extent is L’Oreal’s plan to run Body Shop as a separate

business a sensible plan? (15)