Category: Economics for Business: 8e Ch 13

As the Times Online article below states, “Barely a year ago, The Co-operative Group was selling itself as an antidote to big business, an ethical alternative to the ruthlessness of mammon, but now it has decided to take on the Big Four supermarkets at their own game.”

So just what is the business strategy of the Co-op? Is ethical business consistent with profit maximisation? Does the takeover of Somerfield make the new Co-op a very different type of supermarket from that of a few months ago? The following articles look at the Co-op’s business strategy.

Co-op hits back with its own triple whammy Times Online, Marcus Leroux (30/11/09)
Christmas battle has started but the real test will be 2010 Telegraph, James Hall (5/12/09)
Co-op supermarket chain enjoys Somerfield boost BBC News, Will Smale (11/12/09)

See also the Co-operative group site:
The Co-operative

Questions

  1. What do you understand by ‘ethical business’? Would you describe the Co-op as an ethical business?
  2. What type of merger is the one between the Co-op and Somerfield?
  3. What economies of scale are likely be realised by Co-op’s takeover of Somerfield?
  4. What type of growth strategy is the Co-operative group pursuing?
  5. Is being ethical likely to slow or accelerate the expansion of the Co-op?

It’s one of a declining number of UK-owned industries still left in the UK: Cadbury. However, over the past few years, mergers have become the norm and Cadbury looks set to become the next. Kraft, an American food giant, has been interested in taking over Cadbury for some time and this topic was covered on the Sloman Economics News Site at the beginning of September, when we considered Kraft’s bid of £10.2 billion. (see Cadbury: Chocolate all change). Since then Kraft shares have dropped in value and so Kraft’s current bid is now worth less: a hostile bid of £9.8 billion. This has been refused by Cadbury’s Board of Directors, calling it ‘derisory’.

From the time that Kraft’s bid was formally submitted, the stopwatch begins to tick. A 60-day period is allowed under the ‘takeover code’ which is in place to protect shareholders without resorting to a date in court. Following Kraft’s bid, Cadbury share prices immediately fell, but then began to recover as the implications became clearer. Other companies mentioned as potential rivals include Nestlé and Unilever, although, given Cadbury’s recent boost in sales, Unilever has said that it is no longer interested. So, what does the future hold for Cadbury? Will it be the latest in a long line of British companies to leave their UK owners?

Kraft’s Cadbury takeover bid will set 60-day timetabling ticking Guardian, Jill Treanor (9/11/09)
Kraft plays long game in Cadbury pursuit Reuters (9/11/09)
Cadbury rejects hostile Kraft bid BBC News (9/11/09)
Kraft facing 5pm deadline in battle for Cadbury Guardian, Julia Kollewa and Elena Moya (9/11/09)
Strong sales rise boosts Cadbury BBC News (21/10/09)
Cadbury rejects £9.8bn hostile bid from Kraft Guardian, Julia Kollewe (9/11/09)
Kraft may offer more cash in bid for Cadbury Telegraph, Amy Wilson (4/11/09)
Paulson raises Cadbury stake Guardian, Nick Fletcher(11/11/09)
Unilever rule out Cadbury bid as sales beat forecasts Telegraph, Amy Wilson (5/11/09)
Cadbury’s fight for independence BBC News, Edwin Lane (24/12/09)

Questions

  1. Kraft is looking to expand by taking over Cadbury. What type of takeover would you classify this as and what do you think Kraft’s motives are for this takeover bid?
  2. If Kraft is successful, what are the likely advantages and disadvantages for (a) consumers of Cadbury chocolate; (b) shareholders of Kraft; (c) shareholders of Cadbury; (d) competitiors?
  3. Cadbury has said that the £9.8bn bid was ‘derisory’. How will Kraft have decided on the price it’s willing to offer and what factors are likely to influence this?
  4. John Paulson has raised his stake in Cadbury by purchasing another 6.3m shares. What effect do you think this will have on Cadbury’s share price and why? Does this make the takeover by Kraft more or less likely?
  5. Is there a role for the Competition Commission in this possible takeover? If so, why; and if not, why not?
  6. Cadbury has reported a boost in sales. What effect will this have on the takeover bid from Kraft? Why has this sales boost caused Unilever to pull out?

It’s probably one of the most recognisable names in the world – Disney. Well, as if the company wasn’t already established enough, it’s just got a bit bigger, with a $4bn deal with Marvel Entertainment, Inc. Characters such as Mickey Mouse, Cinderella and Donald Duck have now been joined by some more masculine characters including Spider-Man, Iron Man and the X-Men. Much of Disney’s recent success has come from films appealing to girls, but in-house Disney franchises appealing to boys are fewer and further between. “We would love to attract more boys, and Marvel skews more in the boys’ direction, although there is universal appeal to many of its characters” said Bob Iger, Disney chief executive. “Marvel’s is a treasure trove of characters and stories, and this gives us an opportunity to mine characters that are well known and characters that are not well known.”

This new deal is likely to have major repercussions for Warner Bros and all of the major Hollywood studios, as well as those with a vested interest in Marvel. It is also hoped that this deal will restore some of Disney’s profits, which have been reduced through the current economic downturn. The following articles consider this deal and the likely results.

Weaker sales dent Disney profits BBC News (30/7/09)
Disney to buy Marvel in $4bn deal BBC News (31/8/09)
Walt Disney buys Marvel Entertainment in £2.5billion deal Mirror News (1/9/09)
Disney take-over of Marvel Telegraph, Paul Gent (2/9/09)
Disney’s Marvel Deal Forces DC’s Hand Defamer, Andrew Belonskey (10/9/09)
Disney deal puts Marvel online slots at risk for Cryptologic Online Gambling News (9/9/09)
Disney’s picl-up of Marvel not so super: Citi FP, Trading Desk (4/9/09)
Disney to buy Marvel in $4bn deal (video) BBC News (1/9/09)
Of mouse and X-men Economist (3/9/09)
Disney buys Marvel, Now in Business with every studio in Hollywood Defamer, Brian Moylan (31/8/09)

For Disney’s announcement of the take-over, see:
Disney to acquire Marvel Entertainment Disney Corporate News Release

Questions

  1. Discuss the pros and cons for consumers of the take-over of Marvel Entertainment by Disney.
  2. Which factors will have had a significant impact on Disney’s profits in the current recession? Explain why.
  3. What do you think will be the likely impact of the take-over on Marvel’s shareholders?
  4. Discuss the main ways in which a business can grow and consider their advantages and disadvantages.
  5. How will Disney’s Marvel deal affect its competitors and those with whom it does business? Is Disney going to be able to control prices and other aspects of business deals?

Google is a classic example of the new ‘Internet economics’. The main service it provides – search – is completely free and yet it is an enornmously profitable company and growing fast. Much of what they provide in addition to their search service is also free: Google Docs, Google Maps and Google Scholar. So how do they do it? The first link below is an article considering this issue and the second link gives access to an archived version of In Business giving further detail. The programme is well worth listening to. A key part of the explanation for this new phenomenon relates to the low and falling costs of providing these internet services.

Buy none, get one free BBC News Online (8/1/09)
Free for all BBC News Online (8/1/09) In Business – programme archive

Questions

  1. Write a short paragraph explaining briefly the Google business model.
  2. Identify two fixed and two variable costs of running an internet search service.
  3. What are the marginal costs of Google providing additional internet searches?
  4. Discuss the relationship between costs, revenue and profit for a company like Google as demand for their servces grows.