TOPIC 1 BUSINESS ORGANISATION

GROWTH & EVOLUTION

Learning Objectives• Analyse the main types of economies and diseconomies of scale and

apply these concepts to business decisions• Evaluate the relative merits of small Vs. large organisations• Recommend an appropriate scale of operation• Explain the difference between internal and external growth• Evaluate joint ventures, strategic alliances, mergers and takeovers• Analyse the advantages and disadvantages of franchising and

evaluate it as a growth strategy• Explain and apply Ansoff’s matrix as a decision-making tool• HL – Evaluate internal and external growth strategies as methods of

expansion • HL – Examine how Porter’s generic strategies provide a framework for

building competitive advantage

Why is one of the main business objectives growth?

What do businesses gain from growth?

Profits

Reduced Costs (EoS)

Market power

Risk aversion

Increased market shareDividends to shareholders

So how can businesses grow?

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 growth Expansion of existing production facilities Opening of new retail outlets Taking on more staff Investment in new technology Widening of the product range

External growth• Merger – agreement by shareholders and managers of 2

businesses to bring together the firms under a common board of directors

• Takeover – When a company buys over 50% of the shares of another company and becomes the controlling owner (acquisition)

Can you name me any recent merger or takeovers?

Kraft & Cadburys

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

External GrowthBackward vertical integration – same industry, towards supplier

Horizontal integration – same industry and same stage of production

Forward vertical integration – same industry, towards customer

Conglomerate diversification - different industry

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 Morrison's is example of the process of horizontal integration. (for £2.9bn)

$850m£652m

"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

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.

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

For each one, explain the impact on stakeholders

Type of integration Advantages Disadvantages Impact on stakeholder

Horizontal • Eliminates one competitor

• Possible EOS• Scope for rationalising• Increased power over

suppliers

• Rationalisation may bring bad publicity

• May lead to monopoly

• Less choice• Workers may lose job

security

Forward vertical • Business can control promotion and pricing

• Lack of experience in this sector

• Workers may have greater job security

• More varied career opportunities

Backward vertical • Control over quality• Encourages joint

research

• May lack experience • Supplying business

may become complacent

• Consumers may get improved quality

Conglomerate • Diversification• Spreads risk

• Lack of experience • Lack of clear focus and

direction

• Career opportunities • Job securtiy

Rationalisation – selling off or closing down some parts

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