9.1 Assessing a change in scale Methods of growth

Learning outcomes You should be able to understand: The methods and types of growth.

Methods of growth: mergers and takeovers Mergers – two or more businesses agree to come together under one board of directors. This is always agreed between the boards. Takeovers (acquisitions) – one firm buys the majority shareholding in another firm and takes full managerial control. This can be hostile. Mergers and takeovers were very popular, especially in boom times.

Methods of growth: Ventures

Methods of growth: franchising A franchise is a business (franchisor) that gives another business (franchisee) the right to supply its product or service to its customers. Franchising is a recognised method of growth because your brand is expanded but you don’t have to acquire or invest in new opportunities. It is the franchisee who invests. If the franchisor has a recognised brand, they can ‘sell’ the business idea to franchisees.

Problems with franchising Considerable capital is required Brand name is risked if unsuitable franchisee Franchisee may place pressure on franchisor to do it their way The franchisor has to divulge confidential information to the franchisee – may impact the business if they later leave May be technical problems if franchisor has not researched the business carefully Costs may be higher than expected Rules in lace may stop franchisee from meeting needs of local client base Non-competition clauses may be put in place that affect franchisee in future Franchisee impacted by business health of franchisor

Methods of growth: vertical integration The coming together of businesses in the same industry, but in different stages of the production process. This can be: Backward vertical integration – acquiring a business backwards in the production process, e.g. Morrison’s supermarket bought farms in Scotland to supply their supermarkets. Forward integration – acquiring a business forwards in the production process, e.g. Jaguar Land Rover buying garages to sell their cars. The supply of the goods can be guaranteed – the retailer controls the quality and then sells the goods. Or the manufacturer controls how the product is sold.

Methods of growth: horizontal integration The coming together of businesses in same stage of production and in the same market. For example, two supermarkets coming together: both are retailers and sell the same type of goods. This can cause economies of scale and may result in closed branches and job losses for some of the workforce.

Methods of growth: conglomerate integration The coming together of firms that operate in unrelated markets. For example, Morrisons bought Peacocks, the clothing stores. This method concentrates on diversification and aims to spread the risk of money invested. As businesses and the economy grow, more acquisitions occur because managers become less risk-averse, and there is more money floating around so businesses might as well invest it!

Discussion or activity Morrison’s has grown rapidly and has had to retrench. Identify how the business has grown, and how they have retrenched. Consider the effect this has had on the staff. Morrison’s timeline: 1899 Founded as a business selling eggs and butter on a market in Bradford 1958 Small shop opened; Ken Morrison took over from his father 1961 First supermarket opened with three checkouts 1961–2004 Opened more stores, mainly in northern England 1967 Floated on Stock Exchange 2004 Bought 479 Safeway stores, mainly in Scotland and southern England. Management had to change their accounting system within 6 weeks to cope with strain! Within weeks, the carrier bags were replaced and Morrison’s own-brand products appeared on shelves. 2004 Purchase of 700 hectares of farm land in Scotland 2005 Closure of Safeway depots in Kent, Bristol and Warrington with the loss of 2,500 jobs 2008 Retirement of Sir Ken Morrison 2009 Co-operative Group were made to sell 35 Somerfield stores by the Competition Commission. Morrison’s bought them and expanded them into convenience supermarkets 2012 2.5% drop in sales 2013 5.6% drop in sales 2013 Online shopping introduced The conversion from Safeway to Morrison’s was the largest in British retail history. John Lewis also bought 19 of the Safeway stores, Sainsbury’s 14 and Tesco 10. 114 smaller 'Safeway Compact' stores (convenience stores) were sold to Somerfield.

Exam-style question Refer to the example on the previous slide. Evaluate the reasons why Morrisons has chosen to expand using horizontal integration rather than organic growth. Exam tips ‘Evaluate’ means ‘offer an opinion’, so the examiner is looking for an explanation of reasons followed by a conclusion. Identify why Morrison’s has used horizontal integration and the benefits that this has given them. Identify why organic growth would not have been as fast, and explain this. Conclude with why you think Morrisons followed this strategy.

Summary Businesses change their size and scale continually throughout their life. Their size can be attributed to the economic cycle that the economy is in, i.e. in a boom, businesses have more money to spend; in a recession, money is tighter and managers become risk-averse. Business may get clear advantages from being larger (economies of scale) or face disadvantages of being larger (diseconomies of scale). Greiner’s model of growth can be used to explain the issues that occur when businesses grow. Some businesses grow using organic growth, others through different types of acquisitions.