Unit 2 Chapter 6 The Business Organisation Expanding a Business Methods of Expansion Conflict Between Stakeholders Choos

1. Unit 2 Chapter 6 The Business Organisation Expanding a Business Methods of Expansion Conflict Between Stakeholders Choosing the right legal structure Changing business aims and objectives Social costs and benefits Location / Going Global

2. Learning Objectives Unit 2 is all about how and why businesses grow and the main issues that expansion raises. Chapter 6 looks at how businesses grow and how their objectives may change as they grow At the end of this chapter you will be able to Understand why a business owner may want to expand the business Understand the different ways a business can grow Understand how business growth can affect stakeholders Understand the differences between private and public limited companies Understand the objectives that an expanding business might have Understand the social costs and social benefits of a business Understand the factors that should be considered when relocating a growing business

3. What you should already know The objectives that the owners of a newly formed business might have The different legal forms of small businesses The importance of the location decision for a new business

4. What do you know about growing a business How different ways do you think a business could grow Think about a manufacturer of beer – how could it grow? Think about a business with one or two retail shops – how could it grow? You have 5 minutes to discuss this in pairs and then we will discuss as a class

5. 6.1 Expanding a Business Business expansion means that the output (how much you make) and sales will increase over a period of time If this is happening it may indicate that the business owner is running a successful firm Survival may be the main aim when a firm is first set up but as time goes on objectives will change One of these objectives may be to expand There are benefits to expanding but there are also risks

6. 6.1 Expanding a Business – Benefits and Risks One reason to grow the business is to increase sales Why would a firm want to do this? It should lead to an increase in profits What are the risks? If costs increase more than sales, profit will not increase If the firm reduces its prices too much to get more sales there will not be an increase in profit Another reason to grow the business is to increase market share How can a business increase it’s market share? It can take customers from other competitors If the sales of the business grow faster than total sales in the market its share of the market will increase What are the benefits of growing market share? Customers may like to buy from the most popular company Retailers might be more prepared to stock products from this business The risk is that other firms will also increase their sales at an even faster rate and the firm will lose market share

7. Economies of scale occur when the cost per unit falls as a business expands 6.1 Expanding a Business – Benefits and Risks A third reason for growing the business is to gain economies of scale The more the firm produces the lower its average costs The more the firm buys to make its products the better discount it may get The risk is that it is much more difficult to manage a large business and a badly managed business can increase costs The last reason for growing a business is that customers may view your business as more secure people often feel more comfortable dealing with larger businesses because they think they will be around for the lifespan of the products they are buying This may increase sales Another risk of growing at that the business may grow too quickly and end up making losses that will force them out of business

8. Body Shop case study In 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 Lancôme 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? Answers might include: to gain its profits to have access to its shops where it might sell its products to benefit from its expertise and supplies and brand name to grow its business in a fast-growing business area

9. 6.1 Reasons for not expanding Rapid growth can end in tears…why? Rapid growth is one of Starbuck’s main objectives In an economic recession Starbucks might find it has too many branches that are not making a profit

10. 6.1 Reasons for not expanding Some business owners do not aim for the growth of their firm for several reasons To keep control The larger the business the owner will have to recruit managers and the business may have to be divided into divisions Decisions making authority will need to be given to these managers To offer a personal service to customers Personal service is often lost as a firm grows and the owners don’t know customers individually To avoid too much risk Expansion means putting more money into the business To avoid increased worry and workload Complete both activities on P93

11. Homework • Activities 1 to 4 • Research activity 1 • Bullet points if you have not completed them • To be handed in next lesson (period 1 Sunday)

12. Recap

13. Recap What does business expansion mean? output (how much you make) and sales will increase over a period of time Why would a business want to expand? to increase sales in order to increase profits to increase market share How can they do that? take customers from other competitors What are the benefits of growing market share? Customers may like to buy from the most popular company Retailers might be more prepared to stock products from this business

14. Economies of scale occur when the cost per unit falls as a business expands Recap What other reason might a business want to grow a business? to gain economies of scale The more the firm produces the lower its average costs The more the firm buys to make its products the better discount it may get For example McDonalds has to buy beef to make its burgers The more beef it can buy the more discount it will get The more discount it gets the lower its costs will be If it can lower its costs it can maybe pass some of this saving onto the customer – it can give them a burger at a lower price So as McDonalds grows and opens more stores it gets more customers It sells more burgers It buys more beef It gets more discount Costs reduce It can reduce its price It will get more customers And so on…….

15. Recap Say for example McDonalds had a large factory that cost £1 million per year to run If it made 1 million burgers then each of these burgers would cost what? £1 McDonalds would have to charge its customer more than £1 for the burger to make a profit If McDonalds made 2 million burgers how much would each one cost? £0.50 McDonalds can now charge the customer less than a £1 to make a profit This is benefitting from economies of scale

16. Recap £984,000 for six bikes! Diseconomies of scale Tesco mistakenly paid Universal Cycles, who are owned by Sports Direct, £984,000 for six bicycles when they were meant to pay £984. They are still to get their money back with sports direct holding on to more than £120,000. This is a great example of Tesco suffering from diseconomies of scale as they have now become so big that no one noticed almost a million pounds being paid for 6 bikes until 10 days too late!

17. Recap Another reason for growing? customers may view your business as more secure people often feel more comfortable dealing with larger businesses because they think they will be around for the lifespan of the products they are buying This may increase sales

18. Recap What are the risks of expanding? If costs increase more than sales, profit will not increase If the firm tries to get more sales by reducing prices and it reduces its prices too much to get there will not be an increase in profit more difficult to manage a large business and a badly managed business can increase costs business may grow too quickly and end up making losses that will force them out of business Starbucks could open too many branches and find there is not enough customers to make a profit

19. Recap Why might an owner of a business decide not to grow? To keep control Won’t need to recruit more managers and divide business into divisions Won’t need to give decision making authority to other managers Wants to keep offering a personal service to customers To avoid too much risk Expansion means putting more money into the business To avoid increased worry and workload

20. 6.2 Methods of Expansion – organic growth How do you think a business could grow? There are two ways in which any business can grow Organic or internal growth Inorganic or external growth Organic growth can be achieved in a number of ways Open a new branch, office or factory in another location Sell franchises Expand through internet selling

21. 6.2 Methods of Expansion – organic growth Why would opening branches be a good way of growing? Opening branches is good because It is slow and steady – it is less risky and managers can manage this form of growth more easily It is often paid for from profits (does not need loans or the sale of shares to pay for it) Don’t have to pay interest or lose control by selling shares Easier to manage and control slower growth means management will have time to consider all the risks and benefits Managers will have experience in the market

22. 6.2 Methods of Expansion – organic growth What might be the disadvantages of growing by opening branches? There are some disadvantages It is too slow for some owners – it can take several years to significantly increase the size of the business If other businesses are expanding quickly the firm may lose market share Don’t get the gains that you would from integrating with another business (inorganic) Activity P94 and P95

23. 6.2 growth through the internet What do you think the advantages of growing using the internet are? No high costs of setting up new branches Relatively low cost to set up Less risk – if it doesn’t work it is not so expensive to close down Complete activity P95

24. Learning Objectives Complete our understanding of organic growth Understand the advantages and disadvantages of inorganic growth Apply our knowledge to some real life examples Be able to judge which type of growth is best

25. Recall!! • What do we know about growth so far? • Write down as many things as you can possibly think of • See who can get the most (don’t cheat!!)

26. McDonald’s franchisee Paul Crocker ran a number of successful petrol station businesses before taking on a McDonald’s franchise in 1995. He now operates five restaurants in Kent with the help of his wife. Would you buy a franchise or would you prefer to set up on your own? Why? Answers might include: buying a franchise means you are buying into an existing business you can look at its track record the franchisor provides advice, products and expertise, which can reduce the risk of starting up But: you have to pay a fee for the franchise and a percentage of your turnover so this may mean less profit than if it was your own business you may not agree with all the franchisor’s policies and want more freedom

27. Merger – an agreement between 2 businesses to combine and operate as one business Takeover – purchasing another business from its owners 6.2 Inorganic growth This is also called external growth It can be achieved with a merger or a takeover We use the word integration to describe the joining of two businesses You need to know about 4 types of integration Diversification where a business buys another business that is in a different industry If one industry sees a fall in demand the other business may not suffer – this spreads risk

28. 6.2 Inorganic growth The other 3 types of integration are Horizontal integration where 2 businesses in the same industry and at the same stage of production join together e.g. 2 shops Vertical integration – where 2 businesses in the same industry but at different stages of production join together Vertical forward integration (closer to the customer) Vertical backward integration (closer to the supplier)

29. Farm growing hops horizontal integration (if the brewer were to buy another brewer) Brewer – factory that creates the beer Brewer Brewer Brewer Think of a business and think of a supply chain for it. Then think of examples of vertical backward integration and vertical forward integration 6.2 supply chain Pub buys the beer and sells it to the customer Vertical forward integration (if the brewer were to buy the pub or the farm were to buy the brewer and the pub Vertical Backward integration (if the pub were to buy the brewer or the hop farm customer

30. Jack Welch Case Study – example of diversification Jack Welch was a very successful boss of General Electric, a conglomerate whose businesses include electrical goods, finance and engines. Under Jack Welch the company made many takeovers and became one of the largest companies in the world. Why do you think Jack Welch made so many takeovers? Answers might include: enabled the business to grow quickly meant General Electric could enter new markets quickly his pay and bonuses may have been linked to the size of the business by making the business bigger it may have been safer from takeover itself could gain control of suppliers or increase its market share depending on the type of takeover

31. Football billionaires - takeovers In 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 two years he had spent another £250m on players, a new manager and new facilities, all of which brought Chelsea great success. Malcolm 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. Why might someone want to take over a football club? Answers might include: for interest e.g. if they like football to diversify their business interests so they are operating in many different markets to spread risk because they think they can earn attractive profits from tickets and merchandising

32. YouTube Chad Hurley, Steve Chen and Jawed Karim set up YouTube in February 2005. Eighteen months later the business had grown so rapidly that they were able to sell it for £880m to Google. Why do you think Google was willing to pay so much for such a new business? Answers might include: because it was growing so fast and enabled Google to access the market quickly enabled Google to gain access to a well-established brand without having to build it up itself over time may have expected high future earnings e.g. through advertising revenues

33. Examiner’s Tip – Questions will often ask you to identify whether a merger or takeover is horizontal or vertical Examiner’s Tip – if you are asked about the advantages or disadvantages of inorganic growth remember to think about what type of inorganic growth it is. They are not all the same 6.2 Benefits/Disadvantages ofInorganic growth It is much quicker than organic growth Horizontal integration Can lead to a larger market share Reduces competition Economies of scale Vertical backward integration Reliable supplies Vertical forward integration Reliable outlets Protects the brand Diversification If one business does not do well the other may compensate (demand may be different in different industries)

34. Examiner’s Tip – Questions will often ask you to identify whether a merger or takeover is horizontal or vertical Examiner’s Tip – if you are asked about the advantages or disadvantages of inorganic growth remember to think about what type of inorganic growth it is. They are not all the same 6.2 Benefits/Disadvantages ofInorganic growth Disadvantages of inorganic growth Expensive – may need a loan or sell shares Problems for managing and controlling a larger business With vertical integration and diversification managers may lack experience of the markets Complete activity P97

35. 6.1 Quick Questions 1 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) Complete for next lesson

36. 6.1 Quick Questions 1 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) Complete for next lesson Go through answers

37. Lesson instructions

38. Examiner’s Tip – think about how the takeover or merger will affect the different stakeholders 6.3 Conflict between stakeholders What is a stakeholder? Anyone that is affected by the activities of a business Examples of stakeholders? Owners, workers, customers suppliers, banks, government Growth through takeover or merger will have a different impact on each of the stakeholders – in what ways? If you are the owner how will you feel about growth? You may benefit from an increase in sales but there is more risk involved which may cause stress If you were a worker how would you feel about growth? you might be happy because there could be more opportunity for promotion in a larger company but you might also be worried about losing your job if the business is merging with a company that has people doing the same job as you

39. 6.3 Conflict between stakeholders How would you feel if you were a customer? you might benefit from lower prices (due to economies of scale) but prices might also go up with less competition How would growth make you feel if you were a supplier? you might get more orders from a bigger business but the bigger business might demand lower prices If you were a bank how would you feel? you would be lending more money but there is more risk if the expansion is not successful If you were government how would you feel about the firm growing? you will get more tax from this larger firm but if a monopoly is created this may not be good for the public Examiner’s Tip – think about how the takeover or merger will affect the different stakeholders

40. 6.3 Ways to defend stakeholder interests Every stakeholder will have its own objectives and will take action to defend those interests during a takeover/merger What could each stakeholder do? Workers? Try to stop any job losses (defend their own job) Use trade unions to get a good settlement for people losing their jobs Negotiate better pay Argue for internal recruitment Customers? Use consumer groups and their websites to put pressure on large firms to give value to consumers Check prices after expansion

41. 6.3 Ways to defend stakeholder interests Suppliers? Insist on reasonable prices and prompt payment Bank? Keep a close watch on the firm’s account In very large firms the bank may ask for a senior manager to sit in on board of director meetings Government? Ask the competition commission to investigate and maybe recommend that the merger or takeover is stopped

42. 6.3 Stakeholder activity P99 Read case study below the table and on the right hand side of page Think about the questions and discuss in pairs Class discussion Homework Long questions

43. 6.3 Section Assessment Quick questions Long questions

44. Lesson Instructions • Hand in marked assessment questions from last lesson • Create a poster that contains all the information you need to know about choosing the right legal structure • Use the photocopied pages you have been given and your text book P100-101 • There will be a quick quiz at the end of the lesson • Make a note of your homework • Research activity P101

45. 6.4 Choosing the right legal structure - Jeopardy Here are the answers - what is the question? This is the market for shares Shareholders own it Because there would be no limit to the amount of money they would lose if they didn’t have it It can sell shares to the public and raise more money It can’t control who buys its share and is more regulated so it spends a lot of time working on information such as finances to give to shareholders This is when the shareholders and managers have different objectives This is when a private limited company decides to become a plc and sells shares to the public on the stock exchange It has more status than a sole trader and can attract private investors

46. 6.4 Choosing the right legal structure - Jeopardy Here are the answers - what is the question? This is the market for shares What is the Stock Exchange Shareholders own it Who owns a plc? Because there would be no limit to the amount of money they would lose if they didn’t have it Why do investors want limited liability? It can sell shares to the public and raise more money What is an advantage of becoming a plc? It can’t control who buys its share and is more regulated so it spends a lot of time working on information such as finances to give to shareholders What are two advantages of becoming a plc? This is when the shareholders and managers have different objectives What is divorce between ownership and control? This is when a private limited company decides to become a plc and sells shares to the public on the stock exchange What is flotation? It has more status than a sole trader and can attract private investors What are two advantages of being a private limited company?

47. 6.4 Choosing the right legal structure When starting a business the two most common business structures are? Sole trader and partnership As a business expands other types of structure become more common In the UK nearly all medium and large business are limited companies This is because as a firm grows it needs capital (finance) which it will get from investors investors don’t like to invest when there is unlimited liability What is limited liability? If the firm fails the investors will only lose the amount they have invested – they will not be forced to sell assets Complete activity P100

48. 6.4 Choosing the right legal structure There are two types of limited companies Private limited company Public limited company A private limited company cannot sell shares to the public but a public limited company can This means that the plc is able to raise more finance for growth There are advantages and disadvantages to each structure The advantages of a private ltd company are They have more status than a sole trader or partnership – suppliers and customers may have more confidence in dealing with the company Private investors that are known by the owners can be given limited liability and can buy a share in the company Owners often remain as directors or senior managers and run the company Limited liability for all shareholders

49. 6.4 Choosing the right legal structure The disadvantages of being a private ltd company Cannot be listed on the stock exchange so can’t sell shares – difficult to raise very large sums of money Expansion into a very large company is limited Share prices are not quoted daily so shareholders don’t have a good idea of value of shares Accounts are available at Companies house so it is possible to find out how the company is performing The advantages of being a public limited company Can sell shares and raise large amounts of finance Higher status Shareholders always know the value of shares and can buy and sell easily Limited liability

50. 6.4 Choosing the right legal structure The disadvantages of being a public ltd company Original owners lose control as a high proportion of shares are sold Owners may have different objectives to managers All accounts published creating pressure for short term profit Company can be taken over if shareholder buys majority of shares Complete activity P101