1. Cause of Change!
Growth / Retrenchment!

2. 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.

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
Managerial motives

4. 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.

5. 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

6. So how can businesses grow?
Theory bit…

7. 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.

8. Internal or Organic growth

9. 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

10. 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….
All Internal growth!

11. External Growth

12. External Growth Integration Merger Takeover
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 AB A B
+++
+=+ A A B
+++
+=+

13. 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

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

15. Kraft & Cadburys

16. Examples December 2005 Buyer – ITV plc | price - £175million
December 2006
Buyer – First Choice | price - £120million 16

17. 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

18. Examples March 2004 Buyer – WM Morrisons| price - £3bn
January 2007
Buyer – Tata| price - £5.8bn 18

19. Some previous mergers…=
&
Corus steel & Tata (Indian)
So who/what is Tata?
&

20. 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.

21. Tata business objectives
As the group entered the 21st Century, Ratan Tata was obsessed with four critical issues.
The first was to globalise his group's operations, where he has succeeded to a certain extent.
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.
So, to thwart any threats, Tata decided to up his stakes in most of the group companies.
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.
To achieve this objective, he had no option but to become aggressive, a quality that helped him in other areas.

22. Read more…. For future news of mergers in UK

23. Types of Intergration

24. Horizontal integrationX
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)
£652m
$850m

25. = 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

26. 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

27. 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.

28. 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

29. = 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

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

31. Glazer's 60-year business career, incorporating property, fish, fast food restaurants, local television stations and nursing homes

32. 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

33. 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

34. External Growth Watch these 2 video clips TUI merge with First Choice
In each case identify the objectives of the mergers, the advantages and any potential disadvantages
TUI merge with First Choice
Porsche and VW to merge
Identify the different reasons for and approaches to these takeovers
Why might the Government intervene to disallow a takeover?
Corus accepts takeover bid
High Court clears P&O’s takeover
Little Chef “takeover” talks 34

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

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

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

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

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

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

41. 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

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

43. 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:
Explain the possible motives behind L’Oreal’s purchase of Body Shop. (6)
Analyse the possible difficulties that L’Oreal may encounter within the Body Shop following the takeover. (8)
To what extent is L’Oreal’s plan to run Body Shop as a separate business a sensible plan? (15)