The Business Organisation Chapter 6 AQA Business Studies EXPANDING A BUSINESS (pgs. 132-139)

The Business Organisation This chapter focuses on how and why businesses change as they get bigger and how this influences decisions such as where to locate and what to aim for.

Expanding a business The objective of many managers and owners is to grow their business. This may face opposition from stakeholders. By the end of this section, you should know: The ways in which businesses expand About possible conflict between stakeholders

Introduction to growth A business may grow through: Internal growth Also called organic growth, by selling more of its own products External growth Also called integration, by joining with another business Selling franchises This involves selling the rights to the business’s name and products to another business

Forms of growth Internal (organic) External Merger Takeover (acquisition)

External Growth Merger Takeover A merger occurs when two or more firms join together and create another joint business. Takeover A takeover (or acquisition) occurs when one firm gains control of another and buys it up. In 2005 the shareholders of Reebok sold their shares to Adidas and are no longer owners of the business.

Key Terms Merger Takeover Organic growth Franchise External Growth Occurs when two or more businesses join together to form a new business. Takeover Or acquisition occurs when one business gains control of another. Franchise Occurs when one business (a franchisor) sells the rights to its name and products to another (a franchise). Organic growth Or internal growth occurs when a business sells more of its products. External Growth Or integration occurs when a business joins together with another business.

Business insight In 2006, Body Shop (the high-street cosmetics retailer) agreed to be taken over by the huge French cosmetics firm, L’Oreal, for £652m. L’Oreal makes a wide range of cosmetics, including Ambre Solaire sun cream and Lancome lipsticks. Body Shop is known for its ethical products and has over 2,000 stores in 53 countries. L’Oreal’s chairman said, ‘We have always had great respect for the Body Shop’s success and for the strong identity and values created by its outstanding founder, Dame Anita Roddick. A partnership between our companies makes perfect sense. Why might L’Oreal have wanted to buy the Body Shop?

External Growth Types of integration Horizontal integration occurs when one firm joins with another firm at the same stage of the same production process. (p. 110 Review production process) Vertical integration occurs when one firm joins with another firm at a different stage of the same production process. Backward vertical integration – firm joins with its suppliers Forward vertical integration – firm joins with its distributors Pepsi - KFC

External Growth Conglomerate integration occurs when one firm joins together with another firm in a different type of production process. Forms of integration Vertical Horizontal Conglomerate Foorward Backward

External Growth Advantages of integration By joining together, firms may be able to benefit from sharing ideas, experience, resources and skills, and by having more power and status in the market. Horizontal integration can lead to economies of scale Vertical integration can ensure a firm keeps control of its supplies or distribution Conglomerate integration can spread risks as a firm is operating in more than one market.

External Growth Disadvantages of integration Diseconomies of scale are the problems involved with controlling, communicating and motivating staff in a bigger business. Culture clashes can occur because firms are used to doing things in different ways. Examples: AOL when it merged with TimeWarner in 2000

Business insight In 2003 Roman Abramovich, a Russian billionaire, bought Chelsea football club for around £140m. Abramovich is the main shareholder in Sibneft, a major Russian oil company. Within 2 years of buying Chelsea he had spent another £250m on players, a new manager and new facilities, all of which brought the club great success.

Business insight Malcolm Glazer owns Tampa Bay Buccaneers, a big American football club. In 2005 Glazer bought Manchester United in a £790m takeover bid. The takeover was opposed by many United fans who were worried it would lead to an increase in ticket prices. Question/Discussion Why might someone want to take over a football club?

Franchises A franchise occurs when one business sells the right to another business to use its name and sell its products. ADVANTAGES The franchisor gets a fee from the franchisees and a percentage of their profits The franchisee provides most of the finance to set up the new outlet

Franchises ADVANTAGES The franchisee takes a major proportion of the profits and so should be very motivated to make the business a great success Franchisees can learn from each other All the franchisees can help to finance an overall marketing campaign that can raise awareness of the brand much more effectively

Franchises DISADVANTAGES The original entrepreneurs no longer own the entire business; most of the profits go to the franchisee If there are quality problems with one franchisee, this can damage the whole business.

Growth and stakeholders ADVANTAGES Employees may have more job security and receive greater rewards if the business is growing and doing well. Suppliers may benefit from additional orders and more opportunities to supply the bigger business The local community may benefit if the business has more funds to invest. The government may benefit by receiving more taxes and paying out less benefits to the unemployed.

Growth and stakeholders DISADVANTAGES Suppliers may be bullied by a much bigger firm. Employees may no longer feel part of the business. Communication can be difficult in a big business and employees may not feel properly informed about what is going on. The business may not invest in the community. For example, it may switch production to overseas where production is cheaper The government may not benefit if the business relocates some of its production overseas

Growth and stakeholders How can stakeholders protect their interests? Lobby Government Boycott the products Strike Complain Vote or sell their shares

Expanding a business SUMMARY Many businesses want to expand. They can achieve this through internal growth, external growth or franchises. Each method of growth has advantages and disadvantages. Internal growth may be more manageable but slower. External growth can be fast but can cause problems if the businesses are very different in the way they are run. Selling franchise enables rapid growth but involves losing some control. When a business grows it will affect eh various stakeholders in different ways.

The Tata Nano The Tata Nano, which was intended to be one of the cheapest cars in the world, was going to be made in the West Bengal region of India. However, because of violent opposition (due to disputes about land ownership) this plan had to be abandoned in 2008. What do you think Tata considered before choosing a new place in which to produce?

Quick questions What is ‘organic growth’? (2 marks) Explain two reasons why a business might want to take over a competitor. (4 marks) Explain what is meant by ‘diseconomies of scale’. (4 marks) What is a ‘stakeholder’? (2 marks) Explain two reasons for selling a franchise. (4 marks)

Section Assessment Integration in the car industry Over the years, many car companies have joined together through merger or takeover, such as Tata and Jaguar, and Volvo and Saab. QUESTIONS State two possible problems that might occur following a takeover in the car industry. (2 marks) Explain two ways in which stakeholders might be affected by a takeover in the car industry. (5 marks) Discuss the reasons why one car company might take over another one. (9 marks)

Extension exercises Will all stakeholders be better off after a takeover? Which is the best way for a business to grow: internally, by takeover or by selling franchises? Explain your answer.

Extension exercises 1. Will all stakeholders be better off after a takeover? Answers might include: not necessarily, depends on how the bigger business acts, whether the takeover works or not, the values and plans of the businesses, how the business is run, whether it experiences diseconomies of scale.

Extension exercises 2. Which is the best way for a business to grow: internally, by takeover or by selling franchises? Explain your answer. Answers might include Takeover involves fast growth and can enable you to quickly enter new markets or gain control of suppliers or distributors. Internal growth is usually slower as it relies on demand growing or finding new markets selling more of your own products. Selling franchises can be relatively quick but means you lose some control to franchisees; selling franchises will earn the business money rather than it having to spend money on growth.

Extension exercises 2. Which is the best way for a business to grow: internally, by takeover or by selling franchises? Explain your answer. Answers might include Each of these ways of growing has their advantages and disadvantages; the best way depends on what the business wants e.g. how fast it wants to grow, how much control it wants, whether there is demand for franchises, whether it can find a suitable business to take over at the right price.