The Business OrganisationChapter 6

AQA Business StudiesEXPANDING A BUSINESS (pgs. 132-139)

The Business OrganisationThis chapter focuses on how and why

businesses change as they get bigger and how this influences decisions such as where to locate and what to aim for.

Expanding a businessThe objective of many managers and owners

is to grow their business.This may face opposition from stakeholders.

By the end of this section, you should know:The ways in which businesses expandAbout possible conflict between stakeholders

Introduction to growthA business may grow through:

Internal growth Also called organic growth, by selling more of its

own productsExternal growth

Also called integration, by joining with another business

Selling franchises This involves selling the rights to the business’s

name and products to another business

Forms of growth

Internal(organic)

External

Merger Takeover(acquisition)

External GrowthMerger

A merger occurs when two or more firms join together and create another joint business.

TakeoverA takeover (or acquisition) occurs when one

firm gains control of another and buys it up. In 2005 the shareholders of Reebok sold their

shares to Adidas and are no longer owners of the business.

Key TermsOrganic growth

Or internal growth occurs when a business sells more of its products.

External GrowthOr integration

occurs when a business joins together with another business.

MergerOccurs when two or

more businesses join together to form a new business.

TakeoverOr acquisition occurs

when one business gains control of another.

FranchiseOccurs when one

business (a franchisor) sells the rights to its name and products to another (a franchise).

Business insightIn 2006, Body Shop (the high-street cosmetics retailer)

agreed to be taken over by the huge French cosmetics firm, L’Oreal, for £652m.

L’Oreal makes a wide range of cosmetics, including Ambre Solaire sun cream and Lancome lipsticks.

Body Shop is known for its ethical products and has over 2,000 stores in 53 countries.

L’Oreal’s chairman said, ‘We have always had great respect for the Body Shop’s success and for the strong identity and values created by its outstanding founder, Dame Anita Roddick. A partnership between our companies makes perfect sense.

Why might L’Oreal have wanted to buy the Body Shop?

External GrowthTypes of integration

Horizontal integration occurs when one firm joins with another firm at the same stage of the same production process. (p. 110 Review production process)

Vertical integration occurs when one firm joins with another firm at a different stage of the same production process. Backward vertical integration – firm joins with its

suppliers Forward vertical integration – firm joins with its

distributors Pepsi - KFC

External GrowthConglomerate integration occurs when

one firm joins together with another firm in a different type of production process.

Forms of integration

Vertical Horizontal

Foorward Backward

Conglomerate

External GrowthAdvantages of integration

By joining together, firms may be able to benefit from sharing ideas, experience, resources and skills, and by having more power and status in the market. Horizontal integration can lead to economies of

scale Vertical integration can ensure a firm keeps control

of its supplies or distribution Conglomerate integration can spread risks as a firm

is operating in more than one market.

http://www.bbc.co.uk/schools/gcsebitesize/business/aims/sizeandorganisationrev2.shtml

External GrowthDisadvantages of integration

Diseconomies of scale are the problems involved with controlling, communicating and motivating staff in a bigger business.

Culture clashes can occur because firms are used to doing things in different ways. Examples: AOL when it merged with TimeWarner in

2000

Business insightIn 2003 Roman Abramovich, a Russian

billionaire, bought Chelsea football club for around £140m. Abramovich is the main shareholder in Sibneft, a major Russian oil company.

Within 2 years of buying Chelsea he had spent another £250m on players, a new manager and new facilities, all of which brought the club great success.

Business insightMalcolm Glazer owns Tampa Bay Buccaneers,

a big American football club. In 2005 Glazer bought Manchester United in

a £790m takeover bid. The takeover was opposed by many United

fans who were worried it would lead to an increase in ticket prices.

Question/DiscussionWhy might someone want to take over a

football club?

FranchisesA franchise occurs when one business sells

the right to another business to use its name and sell its products.

ADVANTAGES

The franchisor gets a fee from the franchisees and a percentage of their profits

The franchisee provides most of the finance to set up the new outlet

FranchisesADVANTAGES

The franchisee takes a major proportion of the profits and so should be very motivated to make the business a great success

Franchisees can learn from each otherAll the franchisees can help to finance an

overall marketing campaign that can raise awareness of the brand much more effectively

FranchisesDISADVANTAGES

The original entrepreneurs no longer own the entire business; most of the profits go to the franchisee

If there are quality problems with one franchisee, this can damage the whole business.

Growth and stakeholdersADVANTAGES

Employees may have more job security and receive greater rewards if the business is growing and doing well.

Suppliers may benefit from additional orders and more opportunities to supply the bigger business

The local community may benefit if the business has more funds to invest.

The government may benefit by receiving more taxes and paying out less benefits to the unemployed.

Growth and stakeholdersDISADVANTAGES

Suppliers may be bullied by a much bigger firm.

Employees may no longer feel part of the business.

Communication can be difficult in a big business and employees may not feel properly informed about what is going on.

The business may not invest in the community. For example, it may switch production to overseas where production is cheaper

The government may not benefit if the business relocates some of its production overseas

Growth and stakeholdersHow can stakeholders protect their interests?

Lobby GovernmentBoycott the productsStrikeComplainVote or sell their shares

Expanding a businessSUMMARY

Many businesses want to expand. They can achieve this through internal growth, external growth or franchises.

Each method of growth has advantages and disadvantages.

Internal growth may be more manageable but slower.External growth can be fast but can cause problems if

the businesses are very different in the way they are run.

Selling franchise enables rapid growth but involves losing some control.

When a business grows it will affect eh various stakeholders in different ways.

The Tata NanoThe Tata Nano, which was intended to be one

of the cheapest cars in the world, was going to be made in the West Bengal region of India.

However, because of violent opposition (due to disputes about land ownership) this plan had to be abandoned in 2008.What do you think Tata considered before

choosing a new place in which to produce?

Quick questions1. What is ‘organic growth’? (2 marks)2. Explain two reasons why a business might

want to take over a competitor. (4 marks)3. Explain what is meant by ‘diseconomies of

scale’. (4 marks)4. What is a ‘stakeholder’? (2 marks)5. Explain two reasons for selling a franchise.

(4 marks)

Section AssessmentIntegration in the car industry

Over the years, many car companies have joined together through merger or takeover, such as Tata and Jaguar, and Volvo and Saab.

QUESTIONS1. State two possible problems that might occur

following a takeover in the car industry. (2 marks)2. Explain two ways in which stakeholders might be

affected by a takeover in the car industry. (5 marks)

3. Discuss the reasons why one car company might take over another one. (9 marks)

Extension exercises1. Will all stakeholders be better off after a

takeover?2. Which is the best way for a business to

grow: internally, by takeover or by selling franchises? Explain your answer.

Extension exercises1. Will all stakeholders be better off after a

takeover? Answers might include: not necessarily, depends on how the bigger business acts, whether the takeover works or not, the values and plans of the businesses, how the business is run, whether it experiences diseconomies of scale.

Extension exercises2. Which is the best way for a business to grow:

internally, by takeover or by selling franchises? Explain your answer.

Answers might include Takeover involves fast growth and can enable you

to quickly enter new markets or gain control of suppliers or distributors.

Internal growth is usually slower as it relies on demand growing or finding new markets selling more of your own products.

Selling franchises can be relatively quick but means you lose some control to franchisees; selling franchises will earn the business money rather than it having to spend money on growth.

Extension exercises2. Which is the best way for a business to grow:

internally, by takeover or by selling franchises? Explain your answer.

Answers might include Each of these ways of growing has their

advantages and disadvantages; the best way depends on what the business wants e.g. how fast it wants to grow, how much control it wants, whether there is demand for franchises, whether it can find a suitable business to take over at the right price.