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Economics

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BUSINESS ECONOMICS

BS410 Assignment (2013/4)

Three firms: Changes in their business environment

Dhan Gill: K1312023

Date: 3/3/2014

Kingston University

Contents

Page

1. Title Page

2. Contents Page

3. Summary

4. Story 1 – Facebook buys Whatsapp

http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/digital-media/10650309/Facebook-to-buy-WhatsApp-for-19bn.html

By Katherine Ruston, 19 Feb 2014

6. Story 2 – Landlords win legal battle over Game

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10658451/Landlords-win-legal-battle-over-Game.html

By Graham Ruddick, 24 Feb 2014

7. Story 3 – Greggs shares slide as bakery chain suffers profit hit

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10662420/Greggs-shares-slide-as-bakery-chain-suffers-profit-hit.html

By Graham Ruddick, 26 Feb 2014

9. Conclusion

10. References/Bibliography

11. Appendices

Summary

The firms that have been chosen for analysis in this report are Facebook, Game, and Greggs.

Facebook, an Internet company, has a story (1) which outlines their takeover of the social media instant messaging Whatsapp. Analysis will begin with the implications of this takeover on the Internet and the companies that have a major share and majority control over the Internets marketplace. Along with this I will analyze the pros and cons of this takeover and the impact it will have on Facebook’s success.

The story (2) on Game, in the computer games industry, describes legal changes that have recently caused Game, a currently under administration organisation, difficulties and financial ramifications. Here I wish to look at legislation and the insolvency law changes that impact Game, how it will affect them and what they could do to improve their current market situation.

Greggs’ (3) story, an organisation in the barkery retailing market, highlights their lose in market share, sharp drop in recent profits and the decrease in their share price. Analysis will include demand curves and porter’s five forces model.

Story 1 – Facebook buys Whatsapp

Facebook has bought instant messaging service Whatsapp for £11bn, giving Facebook access to Whatsapp 450 million users. The deal was split into £2.4bn in cash, £7.2bn in Facebook shares and £1.8bn in restricted stock awards for the Whatsapp founders and employees. Facebook has also paid a break fee of £1.2bn (Rushton 2014).

Facebook’s acquisition of Whatsapp can be described as a hostile takeover in effort for Facebook to monopolize on the Internet market, to gain a larger market share in a horizontal market and create overall organisational growth.
Facebook sees Whatsapp as a long term investment as Facebook has essentially spent its next 19 years of profit on the company, if it continues to make profit at the rate it is now.

Facebook recognizes its need to a messaging service that in extremely popular, Whatsapp with 450millionn users and Facebook with 1.2bn, the acquisition of this distinct messaging service should help Facebook; gain more control of the internet by eliminating a competitor, preserve its position in the market and to stop anyone else creating new ideas that could pose a threat, restricting competition in the social media messaging market. Facebook is among 4 big companies including, Apple, Google and Intel, which are the only established companies that are truly in the position to have the ability to acquire companies in its horizontal market place. This shows that Facebook has made a good decision in its bid for Whatsapp takeover, as this will help cement them in their position as an Internet giant for at least the next decade in a maturing market.

By acquiring Whatsapp, Facebook has added a social media application with distinct properties to its social media arsenal, which also includes Instagram. The positive of this is that all the different apps appeal to different groups of consumer, thus allowing them to control a larger market share and have access to a myriad of users, of which may only use one or all of the Facebook owned applications.

This is advantageous to Facebook in an economies of scale format aswell, as most costs of internet companies are fixed, meaning the more users the less the average cost of each transaction, the more users clicking on advertisements, thus drawing in more income and popularity towards Facebook, in turn increasing market share. Whatsapp has also had a faster growth since start up when compared to Facebook, during the first five years since creation Whatsapp has attained 3 times more users then Facebook did in its first five years.

Story 2 – Landlords win legal battle over Game

Computer game retailer Game is required to pay £3million to a collection of landlords after it lost a legal case about unpaid rent. The ruling by the court of appeal closed a legal loophole that meant organisations could avoid paying rent for three months if administrators were appointed after the quarterly rent day (Ruddick 2014).

Thanks to the closing of the legal loophole any business in administration is now required to pay rent on a “pay as you go” basis, with rent classified as an administration expense (Ruddick 2014).

This external influence that has affected Game during hard times, is a legal factor, change in insolvency laws, which allow under pressure retailers to exploit loopholes. Closer of this legal loophole has allowed the property companies to claw back rent that would have once seen them out of pocket. This adds to Game’s expenses piling on large financial ramifications to the already under administration organisation.

“Game strongly argued against the law being changed on legal and commercial grounds and is now considering the possibility of an appeal to the Supreme Court.” (Rushton 2014)

Story 3 –
Greggs shares slide as bakery chain suffers profit hit

Greggs shares fall by 8% after it had reported a drop in profits, loosing out on sales to coffee chains such as Starbucks, Costa coffee and leading supermarket groups. Market conditions are challenging for Greggs, especially in terms of like for like sales.

Porter’s Five Forces (Porter 2008) can be applied to Greggs: -
(For Porter’s 5 forces diagram see appendices 1.1)

Competitive Rivalry within the industry refers to all of Greggs current competition and similar companies, such as Starbucks, Costa Coffee, Pret a Manger, small independently owned bakeries and coffee shops, and all large supermarkets that have operating bakeries with them. These competitors may also provide consumers with alternatives or a diversification of products which Greggs do not or have yet to offer.

Bargaining power of suppliers is not so significant as there are a large number of suppliers and it is fairly each to switch suppliers.

Bargaining power of consumers is very significant as there are many alternatives to Greggs, also Greggs do not offer differentiated products, fairly elastic products, and they do not target any specific group in the market, making them a convenience option. Greggs however may be able to provide many money saving offers as they do not have many overheads and expenses.

Threats of Substitutes can include fat food companies, supermarkets, cafes, and institution canteens.

The threat of new entrants is somewhat small as there will be a large initial cost of capital for start up companies, of which will have to offer some sort of product differentiation in the bakery industry to win over consumers and gain sales.

From the Porters Model it shows that structural factors; including buyer and seller competition, existing competition and cost and demand conditions, are affecting Greggs’ performance and profitability. This is and example of perfect competition resulting in a horizontal demand curve, and in the case of the story a decrease in demand (for diagram see appendices 1.2) resulting in a sharp drop in profits. The disadvantages of perfect competition for Greggs is that they have a lack of product variety, no substantial economies of scale, insufficient funds for investment, all resulting in constant battle for survival, an in the case of the story, drops in profit which in turn reduce share value.

Conclusion

To conclude Facebook has made a good choice in their efforts to gain larger market share and to restrict a potential competitor in Whatsapp. Though the cost of the takeover is extremely hefty, Facebook will be looking at the takeover as an investment, a step towards gaining more control of the Internet and a larger market share, allowing Facebook to influence and access a growing number of users for the next 5 to 10 years. There are other free instant messaging apps available including Facebooks own instant messaging, Kik, Line, Telegram, WeChat, Tango and Viber, however none as popular, with as rapid growth since start up as Whatsapp. Overall this is a positive move for Facebook as it has now gained control of the software developers employed by Whatsapp, this should allow for more creative projects and steps in new technological directions in the future.

Game has already had many problems leading to the company going into administration. The best move is for Game to concentrate on marketing their website and focusing on Internet sales, which will decrease costs and help the sustainability of the business.

Greggs needs to improve its food on the go by diversifying and introducing new products or complementors, to become more competitive in an already saturated market. Greggs can also look to utilise competitive pricing, lower prices of goods to increase demand, though it may have to use its bargaining power against suppliers in efforts to reduce supply costs in attempts to strategize economies of scale to source cheaper products so it does not effect their profit margins.

Word Count - 1416

Bibliography

Books

Michael E. Porter. January 2008, "The Five Competitive Forces that Shape Strategy", Harvard Business Review , p.86-104.

Digital Tabloids

Story 1 – Facebook buys Whatsapp

Katherine Ruston, 19 Feb 2014, Telegraph Online tabloid http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/digital-media/10650309/Facebook-to-buy-WhatsApp-for-19bn.html Story 2 – Landlords win legal battle over Game

Graham Ruddick, 24 Feb 2014, Telegraph Online tabloid http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10658451/Landlords-win-legal-battle-over-Game.html Story 3 – Greggs shares slide as bakery chain suffers profit hit

Graham Ruddick, 26 Feb 2014, Telegraph Online tabloid http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10662420/Greggs-shares-slide-as-bakery-chain-suffers-profit-hit.html Appendices

1.1. Porter’s 5 Forces Diagram

1.2 Demand curve – Decrease in Demand Diagram

-----------------------
Decrease

Increase

S1

S0

S2

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Q

P

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