Internal vs External Development in Business

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Questions and Answers

What is a key advantage of external development compared to internal development?

It eliminates all risks associated with investments.

It allows for immediate integration of output capacity. (correct)

It requires less financial investment.

It guarantees success in new market entries.

Which type of external development involves the complete disappearance of at least one firm?

Vertical integration

Firm merger (correct)

Firm acquisition

Strategic alliance

Which type of relationship involves firms that are direct competitors within the same industry?

Complementary relationship

Cooperative relationship

Horizontal relationship (correct)

Vertical relationship

Why is external development particularly recommended in emerging or growth industries?

It facilitates the acquisition of market shares due to intense competition. Signup and view all the answers

What characteristic differentiates a firm acquisition from a firm merger?

An acquisition allows both firms to retain their legal personalities. Signup and view all the answers

What characterizes internal development in a firm?

Investing in its own facilities and production capabilities Signup and view all the answers

Which of the following is not a reason for justifying external development?

Increase in overall market output production Signup and view all the answers

How does external development impact the economic system compared to internal development?

It does not generate new growth in aggregate production. Signup and view all the answers

What advantage does external development offer in terms of transaction costs?

It fosters relationships that minimize transactional risks. Signup and view all the answers

Which of the following statements about the motivations for external development is true?

It often relies on the availability of surplus funds for new investments. Signup and view all the answers

What is a potential negative consequence of cooperation in alliances?

Loss of independence in decision-making Signup and view all the answers

Which of the following can arise from diverging interests among partners in an alliance?

Hindered implementation of a joint strategy Signup and view all the answers

What characteristic is common in contractual agreements?

No investment in the capital of existing firms Signup and view all the answers

How may a lack of trust among partners affect an alliance?

It can result in diminished effectiveness of the agreement. Signup and view all the answers

Which type of agreement is characterized by partners working towards a joint goal involving multiple activities?

Complex agreement Signup and view all the answers

In what way can cooperation be seen as a 'Trojan horse'?

It attracts competitors to exploit market opportunities. Signup and view all the answers

What is one of the costs associated with entering alliances?

Costs in time and money for negotiation and surveillance Signup and view all the answers

What is a Public Takeover Bid (TOB)?

An offer made by a firm to purchase all or part of another firm's shareholder capital. Signup and view all the answers

What challenge often complicates the price-setting in mergers and acquisitions?

Valuing intangible assets that do not appear on the balance sheet. Signup and view all the answers

What is typically included in a firm’s decision to proceed with a Public Takeover Bid?

Specific terms regarding the purchase price and percentage of shares. Signup and view all the answers

What does the term 'control premium' refer to in the context of acquisitions?

The additional amount paid by a purchaser to gain control over the target firm. Signup and view all the answers

Which financing method involves raising significant capital through loans secured by the acquisition firm's assets?

Leveraged buyout (LBO). Signup and view all the answers

What type of purchase is characterized by the management team of the target firm being the purchasing party?

Management Buyout (MBO). Signup and view all the answers

What is one consequence when a Public Takeover Bid succeeds?

The purchasing firm must pay shareholders more than the market value of their shares. Signup and view all the answers

What is the focus of 'due diligence' in a merger or acquisition?

Locating the target firm and assessing its value and risks. Signup and view all the answers

Study Notes

Internal Versus External Development

Internal Development (Organic Growth): A firm grows by investing in its own facilities, staff, machinery, and production factors to increase output. It focuses on expanding existing businesses or creating new ones within the same industry.
External Development: A firm increases its size by acquiring, associating with, or controlling other firms or their assets. This can involve expanding current businesses or entering new ones, but does not necessarily involve increasing overall real investment.

Justifying External Development

Economic Efficiency:
- Reduced Operating Costs: Economies of scale and synergies between merging firms can reduce operating costs.
- Lower Transaction Costs: Internalized transactions (mergers or acquisition) or trust between firms reduces transaction costs.

Strategic Reasons

Resource and Capability Acquisition: Gaining new resources and capabilities through mergers or acquisitions, especially complex tacit knowledge or difficult to reproduce skills.
Overcoming Industry/Country Barriers: Acquiring resources to compete in a specific industry or country.
Reducing Competition: Merging with competitors diminishes competition within the industry.
Vertical Integration: Merging firms at different stages of the production cycle to control the whole supply chain.
Larger Market Share: Increasing in size to enhance competition and take a larger market share.
Exploiting Surplus Funds: Gaining a better return from surplus funds through the acquisition of another company.
Fulfillment of Management's Interests: Top managers seek to increase their power or remuneration through external development, potentially at the expense of the shareholder.
Responding to Industry Trends: Responding to industry trends or governmental/bank pressure.

Advantages and Pitfalls of External Development

Faster Development: Quickly incorporates output and capacity from acquired firms without waiting for internal investment to mature.
Reduces Risk, Facilitates Internationalization/Diversification: Entering target industries/countries more easily.
Mature Market Entry: Easier access to mature markets, taking advantage of existing infrastructure instead of investment in developing it.

Types of External Development

Firm Merger: Two or more firms combine to form a new entity where at least one firm is dissolved.
Acquisition: One firm purchases another, the purchased firm continues as a subsidiary.
Takeovers/Acquisitions: One firm acquires the other.
Partial Asset Transfer: One firm transfers some assets, and not the whole organization, into another firm.
Spin-offs/Demergers: Part of the net worth of an existing firm is broken up to form separate firms.

Types of Mergers and Acquisitions

Pure Merger: Two or more firms combine to form a completely new company.
Merger by Takeover/Acquisition: One firm acquires another, and the acquired firm ceases to exist with its equity transferred.
Merger with Partial Assets Transfer : One firm transfers only some aspects of its assets, but the firm that transfers does not dissolve completely.

Types of Acquisitions

Investing/Taking Over Companies: Different methods for acquiring shares (majority or minority) to gain full or partial control.
Public Takeover Bid (TOB): Purchasing a company when obtaining ownership of shares is not possible otherwise.

Managing Mergers and Acquisitions

Due Diligence: Identifying target firm characteristics and calculating its value.
Setting the Price: Valuing the firm based on its assets, intangible factors (future income), and the control premium.
Financing: Funding the acquisition using cash, share exchanges, or bonds.
Organizational and Cultural Integration: Combating challenges after merger or acquisition from differing cultures, values, and operating systems.

Strategic Alliances and Cooperation

Cooperation: Agreement between firms that share resources or capabilities, aiming to reinforce their competitive advantages, without merging
Inter-Organizational Networks: A form of joint activity between firms that lies between the market and the company, combining cooperation and competition.
Contractional Agreements: Agreements formed between partners for specific tasks.
Shareholder Agreements: Agreements where partners exchange shares.
Joint Venture: Two or more independent firms combine to enter new markets and businesses.

Managing Strategic Alliances

Pre-Agreement Process: Analyzing potential partners and creating the agreement.
Agreement Management: Overseeing the fulfillment of agreed plans during the partnership.

Outcomes of Cooperation

Successful Alliances: Successful outcomes when strategic objectives are achieved.
Failures: Possible conflicts with partner objectives or a failure in implementation.

Measuring the Outcomes of Cooperation

Dual Perspective: Assessing success from both the alliance's perspective and individual partner views.

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Description

Explore the concepts of internal and external development strategies in business growth. Understand how firms can either invest in their own resources or acquire others to increase efficiency and capability. This quiz delves into the advantages of each approach and their impact on economic efficiency.