Cause of Change!Growth / Retrenchment!

Syllabus requirements Internal Causes of ChangeChange in organisational sizeNew owners/leadersPoor 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?ProfitsReduced Costs (EoS)Market powerRisk aversionManagerial motivesDividends to shareholders

The motivations for growthThe profit motive: May be driven by stock market expectationsShareholders looking for capital gains from rising share prices and regular income from share dividendsThe cost motive: Increasing returns (economies of scale) which leads to a fall in long run average costLower costs important in establishing and maintaining a competitive advantageThe market power motive: Market dominance gives a business increased pricing power in specific marketsMonopolies for example can engage in price discrimination.

The motivations for growthThe risk motive: The expansion of a business might be motivated by a desire to diversify production and salesDiversification of products and also out-sourcing of different stages of productionManagerial motives: Decisions and strategies of managers employed by a firm might be different from those with an equity stake in the businessBehavioural 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 growthInternal 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 growthExpansion of existing production facilitiesOpening of new retail outletsTaking on more staffInvestment in new technologyWidening of the product range

How has Tesco grown?Built new retail outletsOpened express storesExpanded current storesOpened in other countriesRecruited more staffOn line storeCatalogueDiversify into new products.All Internal growth!

External Growth

External GrowthIntegrationThe bringing together of two or more firmsMergerWhen two or more firms agree to become integrated to form one firm under joint ownership An agreementTakeoverWhen one firm gains control over another and becomes the owner, can be achieved by buying 51% of the sharesCan be hostileABBA+=++++++++=+ABA

Whats 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

ExamplesDecember 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 performanceHeineken & Scottish & NewcastleSantander buyout of Alliance & Leicester, Abbey and Bradford & BingleyFor 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=

TataRatan 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 objectivesAs the group entered the 21st Century, Ratan Tata was obsessed with four critical issues. The first was to globalise his group's operations, where he has succeeded to a certain extent. 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. So, to thwart any threats, Tata decided to up his stakes in most of the group companies. 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. 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 UKhttp://www.guardian.co.uk/business/2010/jan/24/weak-sterling-fuels-takeover-boom

Types of Intergration

Horizontal integrationHorizontal 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) $850m652mX

"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 IntegrationLateral 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 integrationVertical 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 IntegrationBackward

Tertiary businesses that integrates with secondary business.

Secondary business that integrates with a primary supplierForward

A primary business that integrates with a secondary manufacturer

A Secondary manufacturer that integrates with a tertiary business.ForwardBackwards

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 integrationConglomerate 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

What are the benefits of integration?Why do some firms prefer external to internal growth?Quicker to achieve EoS managerial, financial & productionAchieves greater concentration ratio/ reduces competitionRationalisation reduces costs

External GrowthTUI merge with First ChoicePorsche and VW to mergeWatch these 2 video clipsIn each case identify the objectives of the mergers, the advantages and any potential disadvantagesCorus accepts takeover bidHigh Court clears P&Os takeoverLittle Chef takeover talksIdentify the different reasons for and approaches to these takeoversWhy might the Government intervene to disallow a takeover?

Whiteboards ready?Choose which type of integrationLabel 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 & LOreal2006 saw the purchase of The Body Shop by French cosmetics giant LOreal. The deal was controversial because the Body Shop shareholders and customers were concerned that LOreal would fail to maintain Body Shops unique culture of socially responsible business. However, Body Shop was eventually sold for 500m, enabling LOreal to add another brand to its porfolio of products including Ambre Solaire, Lancome, Elvive, Studio Line and Plenitude. LOreals 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:Explain the possible motives behind LOreals purchase of Body Shop. (6)Analyse the possible difficulties that LOreal may encounter within the Body Shop following the takeover. (8)To what extent is LOreals plan to run Body Shop as a separate business a sensible plan? (15)

Corus steel & Tata (Indian) http://news.bbc.co.uk/1/hi/world/south_asia/6071090.stm

**Corus steel & Tata (Indian) http://news.bbc.co.uk/1/hi/world/south_asia/6071090.stm

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