1. Unit 3: Business Economics & Economic efficiency
Motivations for growth

2. Unit 3: Business Economics & Economic efficiency
Firms & their motivations:
Objectives, structure, costs, revenues, profit
Market Structure:
Perfect competition, Monopoly
Monopolistic competition, Oligopoly
Pricing Strategies and Contestable Markets
Government intervention to promote competition

3. Company Growth: Specification requirements
Students should understand how firms begin and the constraints on their development
Students should understand the reasons why firms seek an expansion in market shares and may derive monopoly power.
They should also be able to distinguish between different methods of the growth of firms e.g. the distinction between internal and external growth, and different types of integration.

4. The Growth of Businesses
Motivations for growth

5. Why and How do firms grow?
Explain internal and external growth
Explain two growth drivers for M&A transactions
Distinguish between forward, vertical and conglomerate integration
Explain why firms demerge

6. Company growth
A firm exists to bring together factors of production in order to produce goods or services
Firms range in organisational complexity from sole proprietors to PLCs
Firms may undergo organic growth, building upon their own resources and past profits
If limited by the size of their markets, firms may diversify into new markets or products
Firms may also grow through h o r i z o n t a l, VERTICAL or conglomerate mergers and acquisitions
Globalisation has enabled the growth of GIANT firms operating on a global scale

7. 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
Managerial motives

8. 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.

9. 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

10. Growth – the profit motive
Monopoly Profit MC
Price & Cost AC P1 AC AR MR Q1
Output

11. Growth of Firms – Scale Economies
Cost per unit
AC1
AC2
AC3
LRAC Q1 Q2 Q3
Output

12. So how can businesses grow?
Theory bit…

13. 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.

14. Internal or Organic growth

15. 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

16. How has Tesco grown? All Internal growth! 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….
Bank acquisition:
All Internal growth!

17. External Growth

18. 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

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

20. Kraft strategic objectives
Build a High-Performing Organization: It’s no coincidence that our first strategy is about our people – since our employees are the ones powering our success. We have a strong leadership team. We have a simplified organization that puts local business units at the heart of the company so decisions are made closer to the consumer.
Reframe Our Categories. We market many of the world’s leading and most beloved food brands. And we want our delicious products to give consumers millions of smiles every day. We’re doing this by focusing on building a global powerhouse in snacks, confectionery and quick meals … more delicious than ever.
Exploit Our Sales Capabilities. We’re taking full advantage of our size and broad reach. We have one of the largest and most powerful sales forces in the food industry. This gives us an advantage that other competitors simply can’t match. In the U.S., store managers have a single sales representative who handles all of our products. In developing markets, we're expanding our distribution in smaller traditional outlets. And we’re working closely with our global customers like Carrefour, Tesco and Wal-Mart.
Drive Down Costs Without Compromising Quality. For us, product quality always comes first. But we’re also always looking for ways to reduce costs, so we can invest more in making truly delicious products that people love.

21. UK M&A stats

22. Types of Integration

23. Types of Integration Before Vertical = Different stage of supply chain
Horizontal = at the same stage of supply chain
Firm
After
Customer

24. Types of Integration Backwards VERTICAL integration
Integrate with a business that comes before in the chain of production of a good
Conglomerate integration [Diversification]
Integrate with another different business/product line
H o r i z o n t a l Integration
Integrate with another similar business
Forwards VERTICAL integration
Integrate with a business that comes after in the chain of production of a good

25. Types of Integration Backwards vertical integration
Wheat Farmer
Flour Miller A
Horizontal Integration
Flour Miller B
Diversification
Purchases a perfume manufacturer
Forwards vertical integration
Bakery

26. 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

27. Whiteboards ready? Choose which type of integration
Label one side horizontal, the other vertical
(with arrow up = forward or down = backward)

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

29. What type of integration is this?
Ford Motor Company buying a steel works?
Vertical
Backward integration

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

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

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

33. 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

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

35. Reasons for demerger

36. Reasons for demerger Why did Fosters get into the wine market?
How much were their earning from wine to start with?
What has changed the situation?
What are the benefits of splitting the businesses?

37. Why and How do firms grow?
Explain internal and external growth
Explain two growth drivers for M&A transactions
Distinguish between forward, vertical and conglomerate integration
Explain why firms demerge