Integration and growth Philip Allan Publishers © 2016

What is business growth? Growth can occur as a result of naturally increasing sales levels. This is called organic or internal growth. Growth may also be the result of changes in business ownership — mergers and takeovers. Takeovers occur when one company buys the majority of shares in another company. This PowerPoint will help us understand the different types of mergers and takeovers that occur. Philip Allan Publishers © 2016

Why do businesses want to grow? To benefit from economies of scale. To increase their market share and therefore reduce competition. To increase their market power. Diversification Cost synergies Philip Allan Publishers © 2016

External growth When businesses grow by integrating (joining) with another business This can be done via: a merger The two businesses reach an agreement to join together and operate as one business. Tends to be of mutual benefit to both businesses. a takeover or acquisition One business buys another business. Tends to be more hostile, as the buying business is the main one to benefit. Philip Allan Publishers © 2016

Business integration (1) Backward vertical integration Horizontal integration Conglomerate Forward vertical integration Philip Allan Publishers © 2016

Business integration (2) Integration can take different formats depending upon whether the firms involved operate at the same or different stages of production. Horizontal integration Both firms operate at the same stage of the production process and they are in direct competition with each other, e.g. Lloyds and TSB. Vertical integration The firms operate at different stages of the production process, e.g. a fashion manufacturer opens a fashion store. Conglomerate The firms operate in different industries, e.g. a car manufacturer integrates with a stationery retailer. Philip Allan Publishers © 2016

Vertical integration Backward vertical Firm is at an earlier stage in the production process. Secures the supply of materials. Cuts out a middle layer. Can limit supplies to competitors. Forward vertical Firm is at a later stage in the production process. Secures an outlet for the products. Cuts out a middle layer. Can exclude competitors from that outlet. Philip Allan Publishers © 2016 Forward

Disadvantages of mergers and takeovers Takeovers can be very expensive. Difficult to control due to size. Different business structures and practices to bring together. Opposition from stakeholders. May attract negative publicity, especially if they result in job losses. Managers may lack experience. Philip Allan Publishers © 2016

Activity A British clothing manufacturer based in Cheltenham is considering merging with each of the following businesses. What type of integration would each one be? Car manufacturer Fashion magazine Shoe shop Confectionery manufacturer A competing clothes shop Mobile phone retailer UK delivery company (DPD) Philip Allan Publishers © 2016