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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.

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Cause of change

Cause of Change!

Growth / Retrenchment!


Syllabus requirements internal causes of change
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
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


The motivations for growth
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 growth1
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



Internal and external growth
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
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
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

  • 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

AB

A

B

+++

+=+

A

A

B

+++

+=+


What s the difference between a merger a takeover
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




Examples
Examples

December 2005

Buyer – ITV plc | price - £175million

http://www.telegraph.co.uk/finance/2927757/ITV-buys-Friends-Reunited-for-175m.html

December 2006

Buyer – 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

Examples of takeovers due to ‘poor performance’

For latest Acquisitions and mergers info


Examples1
Examples

March 2004

Buyer – WM Morrisons| price - £3bn

http://news.bbc.co.uk/1/hi/business/3542291.stm

January 2007

Buyer – Tata| price - £5.8bn

http://news.bbc.co.uk/1/hi/business/6315823.stm


Some previous mergers
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
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.


Read more for future news of mergers in uk

Read more…. For future news of mergers in UK

http://www.guardian.co.uk/business/2010/jan/24/weak-sterling-fuels-takeover-boom



Horizontal integration
Horizontal integration

X

  • 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


"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


Lateral integration
Lateral Integration the most respected and well-known companies in the worldwide sporting goods industry",

  • 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 the most respected and well-known companies in the worldwide sporting goods industry",

  • 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 integration1

Backward the most respected and well-known companies in the worldwide sporting goods industry",

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.

Vertical Integration

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.

Conglomerate integration



Summary
Summary… fish, fast food restaurants, local television stations and nursing homes


What are the benefits of integration
What are the benefits of integration? fish, fast food restaurants, local television stations and nursing homes

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 growth1
External Growth fish, fast food restaurants, local television stations and nursing homes

Watch these 2 video clips

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


Whiteboards ready choose which type of integration

Whiteboards ready? fish, fast food restaurants, local television stations and nursing homes 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
What type of integration is this? fish, fast food restaurants, local television stations and nursing homes

  • J Sainsbury buying a breakfast cereal manufacturer?

Vertical

Backward integration


What type of integration is this1
What type of integration is this? fish, fast food restaurants, local television stations and nursing homes

  • Ford motor company buying a steel works?

Vertical

Backward integration


What type of integration is this2
What type of integration is this? fish, fast food restaurants, local television stations and nursing homes

  • Merger of Lloyds Bank with Barclays bank?

Horizontal integration


What type of integration is this3
What type of integration is this? fish, fast food restaurants, local television stations and nursing homes

  • A bakery buying a bread shop?

Vertical

Forward integration


What type of integration is this4
What type of integration is this? fish, fast food restaurants, local television stations and nursing homes

  • ICI chemical manufacturer takes over a specialist chemical sector of Unilever?

Horizontal?

integration


What type of integration is this5
What type of integration is this? fish, fast food restaurants, local television stations and nursing homes

  • 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 this6
What type of integration is this? fish, fast food restaurants, local television stations and nursing homes

  • Phoenix Inns a chain of 1800 pubs buys Spring Inns with 4300 pubs?

Horizontal integration


Homework body shop l oreal
Homework – Body Shop & L’Oreal fish, fast food restaurants, local television stations and nursing homes

  • 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)


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