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Cause of Change!
Growth / Retrenchment!
Syllabus requirements Internal Causes of Change
• Change in organisational size
• New owners/leaders
• Poor business performance.
• Changes in organisation size may come about due to mergers, takeovers, organic growth and retrenchment.
Why is one of the main business objectives growth?
What do businesses gain from growth?
Profits
Reduced Costs (EoS)
Market power
Risk aversion
Managerial motivesDividends to shareholders
The motivations for growth
• The profit motive: – May be driven by stock market expectations
– Shareholders looking for capital gains from rising share prices and regular income from share dividends
• The cost motive: – Increasing returns (economies of scale) which leads to a fall in long run
average cost
– Lower costs important in establishing and maintaining a competitive advantage
• The market power motive: – Market dominance gives a business increased pricing power in specific
markets
– Monopolies for example can engage in price discrimination.
The motivations for growth
• The risk motive:
– The expansion of a business might be motivated by a desire to diversify production and sales
– Diversification of products and also out-sourcing of different stages of production
• Managerial motives:
– Decisions and strategies of managers employed by a firm might be different from those with an equity stake in the business
– Behavioural theories of the firm suggest that pure profit maximisation is difficult to achieve and rarely seen
So how can businesses grow?
Theory bit…
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.
Internal or Organic growth
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
How has Tesco grown?
• Built new retail outlets
• Opened express stores
• Expanded current stores
• Opened in other countries
• Recruited more staff
• On line store
• Catalogue
• Diversify into new products….
All Internal growth!
External Growth
External GrowthExternal Growth
• Integration
– The bringing together of two or more firms
• Merger
– When two or more firms agree to become integrated to form one firm under joint ownership
– An agreement
• Takeover
– When one firm gains control over another and becomes the owner, can be achieved by buying 51% of the shares
– Can be hostile
A B
BA
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AB
A
What’s the difference between a merger & a takeover?
• Merger = where 2 companies combine to become one new company
• Takeover = where one company wants to buy another company and make it part of its existing business
Can you name me any recent merger or takeovers?
Kraft & Cadburys
Examples
December 2005Buyer – ITV plc | price - £175millionhttp://www.telegraph.co.uk/finance/2927757/ITV-buys-Friends-Reunited-for-175m.html
December 2006Buyer – First Choice | price - £120million http://www.manchestereveningnews.co.uk/news/business/s/231/231640_first_choice_snaps_up_120m_lateroomscom.html
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
Examples
March 2004Buyer – WM Morrisons| price - £3bnhttp://news.bbc.co.uk/1/hi/business/3542291.stm
January 2007Buyer – Tata| price - £5.8bnhttp://news.bbc.co.uk/1/hi/business/6315823.stm
Some previous mergers…
&
&
So who/what is Tata?
http://news.bbc.co.uk/1/hi/world/south_asia/6071090.stm
=
Tata…
• Ratan Tata, 69, who controls the $22bn Tata group, which includes 96 companies manufacturing a range of products from automobiles to watches, steel to fertilisers.
Tata business objectives
• As the group entered the 21st Century, Ratan Tata was obsessed with four critical issues.
1. The first was to globalise his group's operations, where he has succeeded to a certain extent.
2. The second was to safeguard his companies against possible hostile takeovers after the London-based Indian, Lakshmi Mittal, purchased the Luxembourg-based Arcelor early in 2006 to become the world's largest steelmaker, and announced his ambitious plans in India.
3. So, to thwart any threats, Tata decided to up his stakes in most of the group companies.
4. Ratan Tata's most important concern, however, was to protect his top lines and bottom lines in the face of ever-increasing competition from domestic and global players.
5. To achieve this objective, he had no option but to become aggressive, a quality that helped him in other areas.
Read more…. For future news of mergers in UK
http://www.guardian.co.uk/business/2010/jan/24/weak-sterling-fuels-takeover-boom
Types of Intergration
Horizontal integration
• 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 Morrisons is example of the process of horizontal integration. (for £2.9bn)
$850m£652m
X
"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= Horizontal integration
Lateral Integration
• Lateral integration occurs when two businesses join together that produce similar but related products
• Ottakars and HMV
• Sony and BMG
• eBay and Skype
• Google and You Tube
• Gillette and Proctor & Gamble
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.
Vertical Integration
• 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.
Forward
Backwards
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= Backward vertical integration
Conglomerate integration
• Conglomerate Integration or diversification is when a company buys another firm in an unrelated industry, often to spread risk.
• Glazer's 60-year business career, incorporating property, fish, fast food restaurants, local television stations and nursing homes
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
What are the benefits of integration?
Why do some firms prefer external to internal
growth?
Quicker to achieve EoS
– managerial, financial & production
Achieves greater concentration ratio/ reduces competition
Rationalisation reduces costs
External GrowthExternal Growth
TUI merge with First Choice
Porsche and VW to merge
Watch these 2 video clips
In each case identify the objectives of the
mergers, the advantages and any
potential disadvantages
Corus accepts takeover bid
High Court clears P&O’s takeover
Little Chef “takeover” talks
Identify the different reasons
for and approaches to
these takeoversWhy might the Government intervene to disallow a takeover?
Whiteboards ready?Choose which type of integration
Label one side horizontal, the other vertical
(with arrow up = forward or down = backward)
What type of integration is this?
• J Sainsbury buying a breakfast cereal manufacturer?
Vertical Backward integration
What type of integration is this?
• Ford motor company buying a steel works?
Vertical Backward integration
What type of integration is this?
• Merger of Lloyds Bank with Barclays bank?
Horizontal integration
What type of integration is this?
• A bakery buying a bread shop?
Vertical Forward integration
What type of integration is this?
• ICI chemical manufacturer takes over a specialist chemical sector of Unilever?
Horizontal? integration
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
What type of integration is this?
• Phoenix Inns a chain of 1800 pubs buys Spring Inns with 4300 pubs?
Horizontal integration
Homework – Body Shop & L’Oreal
• 2006 saw the purchase of The Body Shop by French cosmetics giant L’Oreal. The deal was controversial because the Body Shop shareholders and customers were concerned that L’Oreal would fail to maintain Body Shop’s unique culture of socially responsible business. However, Body Shop was eventually sold for £500m, enabling L’Oreal to add another brand to its porfolio of products including Ambre Solaire, Lancome, Elvive, Studio Line and Plenitude. L’Oreal’s plan was to run Body Shop as a self contained business, in an attempt to retain the firms image, its major selling point among a loyal band of customers that undoubtedly makes up a significant niche within the beauty market.
QUESTIONS:
1. Explain the possible motives behind L’Oreal’s purchase of Body Shop. (6)
2. Analyse the possible difficulties that L’Oreal may encounter within the Body Shop following the takeover. (8)
3. To what extent is L’Oreal’s plan to run Body Shop as a separate business a sensible plan? (15)
