Topic 4 Methods of Growth Higher Business Management 1
Learning Intentions / Success Criteria Learning Intentions Methods of growth Success Criteria Learners should be aware of methods of growth available to an organisation, be able to describe the methods, give reasons for using each method and give any drawbacks to the method. Methods include: organic growth, mergers and acquisitions/takeovers, diversification, divestment, deintegration, asset stripping, demerger, buy-in, buy-out and outsourcing. 2
Organic Growth When a business decides to grow on their own without getting involved with other organisations. Businesses can grow through: - launching new products/services - opening new branches or expanding existing branches - introducing e-commerce - hiring more staff - increase production capacity. 3
Advantages/Disadvantages of Organic Growth Advantages Less risky than taking over other businesses Can be financed through internal funds (e.g. retained profits) Builds on a business strengths (e.g. brands, customers) Allows the business to grow at a more sensible rate. Disadvantages Growth achieved may be dependent on the growth of the overall market Harder to build market share if business is already a leader Slow growth shareholders may prefer more rapid growth Franchises (if used) can be hard to manage effectively. 4
Integration When two businesses become one. There are two ways that this can happen: 1. Takeover/acquisitions 2. Merger 5
1. Takeovers/Acquisitions When one business (usually a larger business) buys another (usually smaller) business. This can often be hostile and comes as a result of the smaller business struggling financially and the larger business exploiting the situation. Takeovers (also known as acquisitions) sometimes result in the smaller business stores or outlets taking the name of the larger one, as was the case when Spanish bank Santander took over Abby National. Sometimes the larger company just wants to add another product or service to its portfolio, for example, when Google bought YouTube. 6
Advantages/Disadvantages of Takeovers/Acquisitions Advantages The buying business gains the market share and resources of the taken-over business. Risk of failure can be spread. Economics of scale can be achieved. Competition is reduced, which will increase sales. Disadvantages Integration can lead to job losses in the taken-over business as the buying business wants its own management and employees. If the buying business moves the headquarters or production to its home country/area, this can have a bad effect on the taken-over business local economy Integration can be bad for customers as less competition means higher prices. A change of name can put off loyal customers of the taken-over business. It can be expensive to acquire another business. 7
Horizontal Integration Two businesses providing the same service, or producing the same product, join together (eg two airlines joining together). This will cause the business to become bigger, gain a greater market share and will reduce the number of competitors in the market. As a result of fewer competitors, higher prices could be charged by the business. It also allows the business to gain economies of scale, which will in turn lower production costs and increase profit. 8
Vertical Integration When businesses in the same industry, but who operate at different stages of production, join together this is called vertical integration. This cuts out the middle-men involved with two separate businesses, and therefore cuts costs. There are two types of vertical integration: backward vertical integration forward vertical integration. 9
Backward Vertical Integration Taking over a supplier, e.g. a jeans manufacturer taking over a cotton farmer. By taking over a supplier it means that the business should have sufficient supplies available at reasonable prices, as they will not need to add the element of profit to raw materials. 10
Forward Vertical Integration Taking over a customer, eg a jeans manufacturer taking over a jeans shop. By taking over a customer this will mean that supplies are readily available to the shop, helping to ensure regular sales. 11
2. Mergers A merger is when two businesses of approximately the same size agree to become one. This will allow sales and market share to increase. This is often friendlier than a takeover and can result in a new name and logo for the new, merged organisation. 12
Advantages/Disadvantages of Mergers Advantages Market share and resources are shared, which can spread risk of failure and increase profits. Economies of scale can be achieved. Each business can bring different areas of expertise to the merger. Unlike a takeover, jobs are more likely to be spared in both businesses. Can overcome barriers to entering a market, such as strong competition. Disadvantages Customers may dislike the changes a merger may bring e.g. new logo, new name etc as the familiarity of the previous business are lost. Marketing campaigns to inform customers of changes can be expensive. Can be bad for customers as less competition will mean higher prices. 13
Diversification Diversification is when two businesses that provide different goods and services join together. It is also referred to as a conglomerate. It will reduce the risk of failure by operating in more than one market and will also allow profit to be obtained from more than one market. Diversification can also occur when one business decides to begin trading in a new market, eg a supermarket deciding to open an optician or pharmacy. This also reduces risk and allows for increased profits. 14
Divestment Divestment is when a business sells off some of its assets or smaller parts of the business to raise finance. The parts of the business that are sold off are normally less profitable and this finance can be put back into the business. 15
De-integration (or De-merger) De-integration (or demerger) occurs when a business splits into two or more separate businesses. It will allow new organisations to focus their resources on core activity and become more efficient, therefore cutting costs. 16
Advantages/Disadvantages of De-integration (or De-merger) Advantages Each new component can concentrate on its own core activities and grow as a result. Each new component has the best chance to operate efficiently. De-merged components can be divested which can meet competition regulations, set by the EU. Disadvantages Customers may be put off by the de-merger and abandon the business altogether. There are significant financial costs involved, for example, in re-branding shop fronts, marketing campaigns to inform customers of the change. 17
Asset Stripping The process of buying an undervalued company with the intent to sell off its assets for a profit. The individual assets of the company, such as its equipment and property, may be more valuable than the company as a whole due to such factors as poor management or poor economic conditions. 18
Buy-in This is where an outside management company buys the business as it believes it can manage it more successfully. It is commonly seen in cases where the existing business is struggling to achieve success in the market. 19
Buy-out This involves an interested party buying or taking over control of the firm. This may be the existing management where they think that the owner s vision for the business will not lead to any great success. It could also refer to an employee buyout where the employees get together to fund buying the existing business. 20
Outsourcing A practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally. An example of a manufacturing company outsourcing would be Dell buying some of its computer components from another manufacturer in order to save on production costs. Alternatively, businesses may decide to outsource book-keeping duties to independent accounting firms, as it may be cheaper than retaining an inhouse accountant. 21
Advantages/Disadvantages of Outsourcing Advantages Specialists can be used to do the work. It reduces staff and other costs in the area that has been outsourced. Outsourced companies will have specialist equipment. The specialist firm may carry out the task to a higher standard. The service can be provided cheaper as the unit cost for the specialist supplier may be lower. The service needs to be paid for only when it is required. Organisations can concentrate on core activities. Disadvantages The service can be more expensive as the specialist supplier will add their own profit to the price changed. Organisations can lose control over outsourced work. Sensitive information may need to be passed to the specialist supplier. Communication needs to be very clear or mistakes can arise. Bad publicity may arise if staff are made redundant as a result. If the specialist supplier fails to deliver then the business will be seen in a bad light. 22