Download Business growth File

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?
Profits
Market power
Reduced
Costs
(EoS)
Dividends to
shareholders
What do businesses
gain from growth?
Risk
aversion
Managerial motives
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
A
+
+
B
=
+
AB
• 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
=
+
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 2005
Buyer – ITV plc | price - £175million
http://www.telegraph.co.uk/finance/2927757/ITVbuys-Friends-Reunited-for-175m.html
December 2006
Buyer – First Choice | price £120million
http://www.manchestereveningnews.co.uk/news/busine
ss/s/231/231640_first_choice_snaps_up_120m_lateroo
mscom.html
Examples of takeovers due to ‘poor
performance’
• Heineken & Scottish &
Newcastle
For latest Acquisitions and mergers info
• Santander buyout of Alliance
& Leicester, Abbey and
Bradford & Bingley
Examples
March 2004
Buyer – WM Morrisons| price - £3bn
http://news.bbc.co.uk/1/hi/business/3
542291.stm
January 2007
Buyer – Tata| price - £5.8bn
http://news.bbc.co.uk/1/hi/business/6
315823.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.
Types of Intergration
X
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)
£652m
$850m
"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
Forward
• Backward
• Forward
• Tertiary businesses that
integrates with
secondary business.
• A primary business that
integrates with a
secondary manufacturer
• Secondary business that
integrates with a primary
supplier
• A Secondary manufacturer
that integrates with a
tertiary business.
Backwards
Broadcaster BSkyB
acquired television settop 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?
Quicker to
achieve EoS
– managerial,
financial &
production
Why do some firms
prefer external to internal
growth?
Rationalisation
reduces costs
Achieves greater
concentration ratio/
reduces competition
External Growth
TUI merge with First
Choice
Porsche and VW to
merge
Corus accepts takeover
bid
High Court clears P&O’s
takeover
Little Chef “takeover”
talks
Watch these 2 video
clips
In each case identify
the objectives of the
mergers, the
advantages and any
potential disadvantages
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)