1. The Business Organisation

1. The Business Organisation 1.1 Expanding a Business 1.1 Expanding a Business What do all these businesses have in common? Cadbury The Cooperative O2 Santander Telefonica Land Rover Abbey National Kraft Tata Somerfield Can you match them into pairs?

1.1 Expanding a Business Revisiting unit 1 • In unit 1 you looked at new businesses that were just starting up, now you are moving on to look at established businesses as they grow in size. • What were the business objectives as new firms? • Why might a business set an objective of growth? What businesses can you think of that are growing at the moment?

1.1 Expanding a Business 1.1 Expanding a Business • In this topic you will learn about: • Methods of expansion • Conflict between stakeholders

1.1 Expanding a Business Benefits to a business of expanding • Increase sales • Increase profit • Higher market share • Lower average costs • Improved reputation • More employees In pairs discuss each benefit and then add a sentence to explain each benefit

1.1 Expanding a Business Risks to a business of expanding • Actions of competitors • Difficult to manage • Failure • Increase work load • Fall in quality In pairs discuss each risk and then add a sentence to explain each risk

1.1 Expanding a Business Team work • The local council has announced that a new housing estate will be built on land near to your school. It has given planning permission for 1000 new 3 and 4 bedroom homes. • This could have a big impact on the number of students applying for places at your school and the council has proposed that the school expands in size in order to accommodate this. • What are the benefits and risks of the school expanding? • Overall do you think this is good or bad for the school? Justify your answer.

1.1 Expanding a Business Methods of Expansion • There are 2 main ways in which a business can expand: • Internal growth, also known as organic • Opening new outlets • Franchises • External growth, also known as inorganic • Mergers • Takeovers

1.1 Expanding a Business Organic Growth • This is growth from within the business, it can be achieved by: • Opening new stores • Increasing product range • Moving into new markets • Internet sales What has Tesco done to achieve organic growth?

1.1 Expanding a Business Organic Growth • Easy to manage due to familiarity • Often slow but steady • Can be financed from retained profit • Relatively low risk • Rate of growth and opportunities can be limited

2 Minute Test - Revisiting unit 1 • What is a franchise? • What is the difference between a franchisee and franchisor? • Name 3 franchises • State two benefits of setting up a franchise • State two disadvantages of setting up a franchise End

1.1 Expanding a Business What or who am I? • Opened my 1st store in Conneticut, USA, in 1965 by 17 year old Fred DeLuca • In 1996 opened my 1st store in the UK, in Brighton • In 2002 I opened my 100th store in the UK and Ireland • In 2003 my 200th, 2005 my 500th and by 2007 my 1000th • By 2006 I had more stores in the UK and Ireland than BK, KFC and Pizza Hut and by 2008 more than McDonalds • In 2009 I was voted as the No.1 franchise opportunity by Enterprise Magazine • I now have over 32000 outlets in 92 countries • I continue to grow with an average of 5 stores opened every week

1.1 Expanding a Business Organic Growth by Franchise • Franchises are a popular way of achieving growth • Benefits • Franchisee provides finance to fund the growth • Workload is passed on to the franchisee • Highly motivated owners • Disadvantages • Potential loss of control/quality • Shared profits • Risk to brand image

1.1 Expanding a Business UK’s No1 Franchise Opportunity • Visit the web site to find out more about franchise opportunities • Design an advert to go in a business magazine or newspaper to encourage entrepreneurs to consider this franchise opportunity

1.1 Expanding a Business Organic Growth Item A Russ and his brother Greg run, Wheelies Ltd, a small chain of 4 tyre and exhaust centres in and around the city of Leicester. The business has built up a good reputation in the area with many loyal customers. Russ is keen to expand the business and suggests they look to open 2 new outlets one in nearby Loughborough and the other Coventry. Greg thinks that this will be expensive and is worried about the size of bank loan that would be needed to fund this growth. He suggests a better option would be to establish Wheelies Ltd as a franchise and advertise it in local papers as a franchise opportunity. Question time • What is meant by ‘franchise’? (2 marks) • Identify two possible reasons for Russ and Greg wanting to expand Wheelies Ltd. (2 marks) • Explain two benefits of introducing a franchise scheme to Wheelies Ltd. (5 marks)

1.1 Expanding a Business External Growth • When businesses grow by integrating (joining) with another business • This can be done via: • A Merger • The two businesses reach an agreement to join together and operate as one business • Tends to be of mutual benefit to both businesses • A Takeover • One business buys another business • Tends to be more hostile as the buying business is the main one to benefit

1.1 Expanding a Business Mergers and Takeovers (business integration) • Integration can take different formats depending upon whether the firms involved operate at the same or different stages of production • Horizontal Integration • Both firms operate at the same stage of the production process e.g. 2 banks • Vertical Integration • The firms operate at different stages of the production process e.g. A fashion manufacturer opens a fashion store • Diversification • The firms operate in different industries e.g. A car manufacturer integrates with a stationery retailer

1.1 Expanding a Business Horizontal Integration • Operate at the same level • Gain market share • Reduces the amount of competition • Bigger and more powerful • Stronger negotiating power with suppliers

1.1 Expanding a Business Vertical Integration Backward • Backward Vertical • Firm is at an earlier stage in the production process • Secures the supply of materials • Cuts out a middle layer • Can limit supplies to competitors • Forward Vertical • Firm is at a later stage in the production process • Secures an outlet for the products • Cuts out a middle layer • Can exclude competitors from that outlet Forward

1.1 Expanding a Business Diversification • Operate within different industries • This can also be referred to as a _ _ _ _ _ _ _ _ _ _ _ _ • Helps to spread risk • What do the following brands all have in common? • Dolmio • Pedigree • Extra • Klix Look what other brands and companies are all owned by one major UK Business

1.1 Expanding a Business Disadvantages of mergers and takeovers • Takeovers can be very expensive • Difficult to control due to size • Different business structures and practices to bring together • Opposition from stakeholders • May attract negative publicity, especially if results in job losses • Managers may lack experience

1.1 Expanding a Business A manufacturer of soft drinks is considering merging with each of the following businesses, place each on the diagram below. Aluminium Can Manufacturer Fruit Farmer Vending Machine Supplier Confectionery Manufacturer A Competing Soft Drinks Manufacturer Mobile Phone Retailer Which option would you recommend? Justify your answer

1.1 Expanding a Business External Growth Item B Greg has been looking at alternative ways in which he and Russ could expand Wheelies and has identified a similar sized firm, Tyres To Go, operating in the nearby City of Nottingham. He has suggested that the 2 garages meet to discuss the option of merging and operating as one business trading under the name, Wheelies and Tyres To Go. Russ is unsure however, and thinks this is a dangerous move, he is happy waiting to grow at a slower pace. Question Time • What is meant by the term ‘merger’? (2 marks) • Is this an example of horizontal or vertical integration? Briefly explain your answer. (2 marks) • Explain two ways in which Wheelies could benefit from merging with Tyres To Go. (5 marks) • Recommend to Russ and Greg whether or not they should merge with Tyres To Go. Give reasons for your answer. (9 marks)

1.1 Expanding a Business Revisiting unit 1 - Stakeholders • In unit 1 you looked at the impact of business actions on stakeholders. Now we want to look at how the expansion of a business impacts on stakeholders. • What is meant by the term stakeholder? • Draw a spider diagram to show who the stakeholders of a business are • Identify each stakeholder as internal or external

1.1 Expanding a Business Stakeholders – Team activity • Reconsider the scenario given earlier in which the council had proposed the school expands to accommodate extra demand from a new housing estate. • Identify the stakeholders who would be affected by this decision • For each stakeholder explain how they would be affected and whether this is positive or negative • Place each stakeholder along this spectrum Strongly against Strongly in favour

1.1 Expanding a Business Stakeholders – Team activity cont. • Why might conflict exist between these stakeholders? • Identify 1 stakeholder from either side of the spectrum and explain the conflict • Choose 1 stakeholder from the strongly against side and write a letter to the local newspaper expressing their views Strongly against Strongly in favour

1.1 Expanding a Business Stakeholders • Stakeholders act in order to protect their own interests e.g. • Jobs • Investment • Environment • Orders • Fair prices • However, conflict will often exist i.e. What is in the interest of one stakeholder may damage the interest of another • It may even be that one stakeholder group can see positive and negative affects of a change in business size

1.1 Expanding a Business Stakeholder – Empathy Builder • A large chain of supermarkets has merged with a chain of local convenience stores (e.g. Sainsbury’s buys Jacksons) • How would you feel if you were: • Pensioner who relies on the local store for groceries • Manager at the local grocery store • Local farmer supplying to the convenience stores • Office worker who pops in at lunch times

1.1 Expanding a Business Impact on stakeholders of business growth • Work in pairs to complete the table below

1.1 Expanding a Business Actions of Stakeholders • Stakeholders are likely to take actions to try and protect their interests • These actions could include: • Pressure groups • Consumer groups • Trade unions • Bank negotiations • Government involvement • This might be particularly true if the business gains so much power from its size that it can exploit the customer • Media involvement

1.1 Expanding a Business What words have you learnt so far? • Fat Race Division • Rat Evoke • A Nattering Rhino Lit Zoo • Talked Horses • Great Monocle

5 Minute Test • What is meant by organic growth? • What is the difference between a merger and a takeover? • What is the difference between horizontal and vertical integration? • What is meant by diversification • State 3 stakeholders • State 1 interest for each of these stakeholders End

1. The Business Organisation