Theme 3 context

3.1 – Business Growth

 Preventing DOC – John Lewis Partnership (performance related pay)
o Partner pay is raised by a set baseline each year and all employees can earn a bigger
salary increase if they hit performance-linked targets.
 Mutuals – Cooperative group
o The Cooperative Group has been actively involved in initiatives to support the mental
wellbeing of its members. As part of its vision of Co-operating for a Fairer World, the
group has partnered with Mind, SAMH, and Inspire to bring communities together to
support mental wellbeing.
 Organic Growth – Poundland
o Poundland has pursued organic growth as its primary growth strategy. The company
has focused on opening new stores in suitable locations. (new routes into market)
 Vertical integration – Apple
o Having used to outsource producing some parts before, the company now
manufactures basically everything: from chipsets to cases. This allows Apple to offer
unique products, hard to counterfeit, keep client loyalty worldwide, and guarantee
their products' high quality.
 Horizontal integration – Amazon and LoveFilm
o Amazon took full control of the DVD rental and online video company LoveFilm,
buying the 58% of the business that it did not already own.
 Conglomerate integration – Tata group (Jaguar Land Rover, Citigroup, Ritz-Carlton Hotels etc)
o Tata group has diversified its business portfolio significantly by acquiring Jaguar Land
Rover, Citigroup and Ritz Carlton hotels
 Demergers – Kraft (spin-off), PepsiCo
o Kraft Foods Inc. spun off its North American grocery business to a new company
called Kraft Foods Group, Inc. The remainder of Kraft Foods Inc. was renamed
Mondelēz International, Inc. and was refocused as an international snack and
confection company. The spin-off allowed Kraft to concentrate on its fast-growing
international snacks business, of which Britain’s Cadbury is a central pillar.
o PepsiCo announced a multi-billion-dollar demerger of its KFC, Taco Bell, and Pizza
Hut restaurants to concentrate on the cut-throat battle with Coca-Cola for
dominance of the soft drink market and its Frito-Lay snacks business.

3.2 – Business Objectives

 Small vs Large Firm objectives – UBS vs Arbuthnot Latham
o Large firms like UBS and small firms like Arbuthnot Latham may have different
objectives due to their size and the markets they operate in. Large firms often aim
for growth and market dominance, while smaller firms may focus on niche markets
and personalized services. Small firms that are new to a market could also pursue
growth maximisation to increase their market share, and larger firms pay choose to
profit maximise if they have established monopoly power. (UBS acquisition of Credit
Suisse – Managers estimate that their will be cost synergies savings $8bn by 2027.)
3.3 – Revenues, Costs and Profits
 Economies of Scale – AstraZeneca (move to Cambridge – agglomeration)
o AstraZeneca has made Cambridge its home, spending about £500m building a global
strategic research and development site. The move to Cambridge, a world-leading
life sciences cluster, allows AstraZeneca to benefit from external economies of scale
and agglomeration benefits, such as knowledge spillovers and access to a skilled
workforce.

3.4 – Market Structures

 Perfectly competitive market – Forex market
o The foreign exchange market is very close to a perfectly competitive market. The
price is given, and none of the participants in the market is capable of influencing the
price significantly.
 Monopolistically competitive market – Pizza Delivery
o No significant barriers to entry in this market, as the ingredients for making pizzas
are relatively cheap, and producers can differentiate their pizzas by changing their
ingredients and offering different delivery options, giving them some pricing power.
 Collusion – mortgage providers, British Airways and Virgin, OPEC
o Leading sellers in mortgage and petroleum industries may establish the pricing
system for other suppliers in the market.
o In 2007, British Airways was fined £270m for illegal price-fixing arrangements with
Virgin on long haul flights. The two companies met to agree and collude on the extra
price of fuel surcharges in response to rising oil prices. Between 2004 and 2006,
surcharges on air tickets rose from £5 to £60 per ticket.
o The Organization of Petroleum Exporting Countries (OPEC) is an example of an
oligopoly colluding overtly to fix the price of a barrel of oil - currently there are 12
members and according to OPEC they control 81% of crude oil reserves.
 Natural monopoly – Network rail
o The infrastructure is owned, maintained and operated by Network Rail which is a
state-owned and "not-for-dividend" company. Building railways and operating
infrastructure has very high sunk costs and requires large levels of output to exploit
extensive economies of scale, so it would be inefficient to have more firm here.
 Other monopolies – De beers diamonds, AbbVie Humira patent
o In the 20th century, De beers diamonds controlled 90% of global diamond sales. They
had control over many diamond mines and got other suppliers to sell to them. They
could stockpile diamonds or flood the market to manipulate price. They used to have
resource control, but now new mines were discovered in Russia, Canada and
Australia, and suppliers stopped selling through De Beers, causing them to lose
monopoly power.
o AbbVie had a 20-year patent on Humira (for arthritis) giving them exclusive rights to
sell the drug, and they were able to generate $200 billion from sales over the course
of the patent.
 Contestable markets – UK Consumer Banking industry
 o There are high sunk costs in getting a network of banks set up, brand loyalty to banks
is high, so there may be high advertising costs, and existing banks make very high
profits (no hit and run competition). However, contestability is increasing in this
market due to the introduction of the internet allowing new firms to enter the
market for online banking (such as Virgin Business and Monzo) and the government
is trying to introduce regulation to reduce the time and costs of switching to another
current account.
 Monopsonies – British Sugar
o British Sugar buys almost the entire sugar beet crop produced in the UK year. Due to
the impracticalities of exporting such a bulky crop, British Sugar is effectively the only
processor buying from British producers. They have significant pricing power over
sugar beet farmers in the UK.
 Predatory pricing – Darlington bus wars 1994 (Busways vs DTC company)
o In the Darlington bus wars, Busways a new entrant into the deregulated bus markets,
offered free bus travel to try and force the rival DTC out of business. Busways were
also successful in attracting bus drivers from its rival (by paying higher wages). For a
time, they also offered free bus rides – attracting customers from their rivals The
result was that Darlington Transport Company (DTC) went out of business leading to
monopoly power for the remaining Busways company.

3.5 – Labour Market

 Monopsonist – NHS, Walmart
o Main buyer of the labour of doctors and nurses is the NHS. Walmart has 2.3 million
employees globally, and they can reduce wages without losing too many workers.
 Shortage of highly skilled labour – Engineers
o There is a shortage of engineers in the UK – engineering and manufacturing accounts
for around 20% of the UK GDP, but there is a shortage of roughly 59,000 engineers
every year in the UK. By 2026, almost 20% of engineers in the UK are expected to
retire, and around half of new recruits lack the necessary technical skills to work in
the industry. This may be due to the lack of apprenticeships available in this sector.
There is a particular shortage of electrical industries and this will become a problem
due to the movement towards greener technology.
 Unions – NEU
o The National Education Union (NEU) is a trade union in the UK for schoolteachers.
The membership of the NEU was approximately 445,601 in 2022/23, compared with
457,368 in the previous reporting year.
o Between 1995 and 2022 union membership levels among UK employees fell by
860,000 (12.1%) from 7.11 million to 6.25 million
 National minimum/living wage
o NLW is currently £11.44 for those aged 24 and over and the NMW is currently £6.40
for those over school leaving age
 Pay ceilings
o Median pay for FTSE 100 CEOs is over 100 times that of the national average pay.
Labour would like to only award government contracts to companies that have
signed up to some form of pay limit for CEOs.
3.6 – Government Intervention
 Against monopolies – BT 2015
o BT once owned most of the fibre optic cable network, allowing them to use
monopoly power to charge households and firms higher prices to use the service. In
2015, Ofcom announced that it would force BT to open the cable network to
competitors such as Sky to promote competition
 Regulatory capture – Ofgem 2016
o In 2016 (when there were falling gas prices), energy companies increased their profit
margins and stopped showing consumers how much profit they made per
household, which meant that firms could exploit their monopoly power without
consumers being aware of their high profit levels, and Ofgem sided with the energy
companies without sufficient justification, potentially regulatory capture
 Punishments – CMA
o If the CMA finds a firm guilty of an anticompetitive merger, then they can fine that
firm up to 10% of global turnover and directors may be sent to jail, and there are
incentives for whistle-blowers (snitches) to get immunity, protection or a financial
reward
 Privatisation – Water industry 1989
o Water firms were privatised so that EU requirements could be met without the
burden of public borrowing. Prior to privatisation the water quality in the UK was
very poor, but once firms were privatised there was an initial investment of £160bn
to improve water quality and reduce pollution (leakages have fallen and wildlife has
returned to biologically dead rivers). Ofwat is in place to regulate this industry now.
However, water bills have increased by 40% in real terms since the privatisation.
Thames water does not pay corporation tax due to government’s capital allowance
scheme (incentivises investment) and Ofwat has failed to prevent repeated sewage
flooding by Thames water. Ofwat has allowed shareholders to extract excessive
dividends from the firms. Thames water has also seen its debt levels increase
significantly to £14.7bn in 2023.
 Government failure – EU Emissions Trading Scheme (ETS)
o EU created a market for pollution permits, and initially the scheme was a success,
but after the financial crisis there was a fall in economic activity and firms no longer
needed more permits. Therefore, the price fell and so it became easier for firms to
pollute rather than invest into greener alternatives. Prices stayed low until the EU
was forced to reduce the supply of pollution permits in 2014.