. Learning Intentions: You should be able to : Describe using examples of methods of growth. Describe using examples of methods of contraction. To introduce pupils to methods of growth and contraction

Methods of growth  Merger  Takeover  Horizontal integration  Vertical integration  Diversification  De-merger  Divestment

Methods of growth  Merger – an agreement to bring two firms under one board of directors.  Takeover – when a firm buys over 50% of another firm’s share capital. Can be both “hostile” and “friendly”.

Horizontal integration  Occurs when a firm takes over or merges with another firm at the same stage of the production chain.  For example, if Ford Motor Company merged with or bought out Toyota – both are car manufacturers at the same stage of the production chain.

Vertical integration Rubber plantation Car showroom

Diversification  Diversification is when businesses reduce risk by expanding the number of goods/services they provide.  Virgin and General Electric are examples of diversified firms.

De-integration or contraction De-integration - conglomerate selling off firms to concentrate on “ core ” business – some examples  De-merger – when a firm is split into two parts. (see note on British Gas)  Divestment – selling off parts of the business that no longer fit the long-term strategy.  Contracting out/out-sourcing - getting other companies to do work on your behalf  Management buy-out/buy-in - usually a struggling company sold to a management team

Reasons for Growth  Eliminate competition/increase market share  Achieving greater economies of scale  Security from hostile take-over - more assets  Cutting out “ middlemen ”  Securing sources of raw materials  Controlling distribution of products  Spreading risks - ‘ not having all eggs in one basket ’  Smoothing seasonal fluctuations in sales

Growth How to answer questions from examination questions – PROPERLY!

2008 Past Paper Describe how both horizontal and Vertical integration could allow an organisation to become even larger and more profitable? 5 marks 10 minutes

Tips for success!  Always read the question carefully  Refer to the question at all times  Look at the mark allocation – in general 1 mark = 1 good point  Give real-life example  Use bullet points – but give an introductory paragraph at the start  Use paragraph – but do NOT waffle – an examiner can see through it

Key words  Describe: Write down in detail the main topics that the topic is requiring. In this example, the question is asking you about – HORIZONTAL and VERTICAL INTEGRATION and how an organisation can become larger and more profitable.

Solution – by bullet points Horizontal and vertical integration can benefit an organisation become even larger and profitable due to the following: Horizontal integration Can use economies of scale and reduce unit cost of products. Can dominate the market as a larger single organisation. May allow for higher prices to be charged as competition is reduced. Reduction in costs – max 1. Vertical integration Profits are increased by cutting out the ‘ middle men ’. Stock can be cheaper due to backward integration. Guaranteed source of supplies and prices of stock. Reduction in costs – max 1. Maximum of 4 for only horizontal or vertical.

Solution – by paragraph  An organisation can become even more profitable and larger through horizontal integration as this is when 2 companies that are at a similar stage in production join together and can experience the benefits of economies of scale and reduce the unit cost of production. By the 2 companies joining they can also dominate the market as they could become a very large organisation. Both companies may also be able to reduce costs as they will have a duplication of resources available and can cut down on this and become a more efficient operation. In addition, this may allow each of the companies to charge higher prices as the competition is reduced. A real-life example of this could be ASDA and Walmart. Likewise with vertical integration, which is when 2 companies who are at different stages of production in the same industry join together may experience higher profits as less “middle men” are required, stock prices can be cheaper due to backward integration – eg Jam factory taking over farm, a guaranteed source of supplies is always available at a good price and overall they can experience a general reduction in costs. Any of the above combinations will increase the size and profitability of an organisation.