1. Topic 1 Business organisation Growth & evolution

2. 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

3. Why is one of the main business objectives growth?
Market power
What do businesses
gain from growth?
Profits
Reduced
Costs
(EoS)
Risk
aversion
Dividends to
shareholders
Increased market share

4. So how can businesses grow?

5. 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.

6. 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

7. 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)

8. Can you name me any recent merger or takeovers?
Corus steel & Tata (Indian)

9. Kraft & Cadburys

10. 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

11. Examples March 2004 Buyer – WM Morrisons| price - £3bn
January 2007
Buyer – Tata| price - £5.8bn 11

12. External Growth
Backward vertical integration – same industry, towards supplier
Horizontal integration – same industry and same stage of production
Conglomerate diversification - different industry
Forward vertical integration – same industry, towards customer

13. 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)
£652m
$850m

14. = Horizontal integration
"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

15. 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.

16. Vertical Integration Forward Backwards 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.
Backwards

17. = Backward vertical integration
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

18. Conglomerate integration
Conglomerate Integration or diversification is when a company buys another firm in an unrelated industry, often to spread risk.

19. 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

20. Rationalisation – selling off or closing down some parts
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

21. What type of integration is this?
J Sainsbury buying a breakfast cereal manufacturer?
Vertical
Backward integration

22. What type of integration is this?
Ford motor company buying a steel works?
Vertical
Backward integration

23. What type of integration is this?
Merger of Lloyds Bank with Barclays bank?
Horizontal integration

24. What type of integration is this?
A bakery buying a bread shop?
Vertical
Forward integration

25. What type of integration is this?
ICI chemical manufacturer takes over a specialist chemical sector of Unilever?
Horizontal?
integration

26. 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

27. What type of integration is this?
Phoenix Inns a chain of 1800 pubs buys Spring Inns with 4300 pubs?
Horizontal integration