Topic 1 Business organisation Growth & evolution
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Transcript of Topic 1 Business organisation Growth & evolution
TOPIC 1 BUSINESS ORGANISATION
GROWTH & EVOLUTION
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
Why is one of the main business objectives growth?
What do businesses gain from growth?
Profits
Reduced Costs (EoS)
Market power
Risk aversion
Increased market shareDividends to shareholders
So how can businesses grow?
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 growth Expansion of existing production facilities Opening of new retail outlets Taking on more staff Investment in new technology Widening of the product range
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)
Can you name me any recent merger or takeovers?
Kraft & Cadburys
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
External GrowthBackward vertical integration – same industry, towards supplier
Horizontal integration – same industry and same stage of production
Forward vertical integration – same industry, towards customer
Conglomerate diversification - different industry
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 Morrison's is example of the process of horizontal integration. (for £2.9bn)
$850m£652m
"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
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
Conglomerate integration
Conglomerate Integration or diversification is when a company buys another firm in an unrelated industry, often to spread risk.
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
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
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