Internal vs. External Development in Business
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Questions and Answers

What is a primary reason for a firm to merge with another when it comes to overcoming entry barriers in a new industry?

  • To reduce operational costs
  • To enhance brand recognition
  • To gain political influence
  • To acquire complex tacit knowledge (correct)

    • What does a horizontal merger primarily aim to reduce?

  • Market power of competitors
  • Production costs
  • Financial risks for shareholders
  • Level of competition in the industry (correct)

    • What is one advantage of external development compared to internal development?

  • Reduction in risks associated with major investments (correct)
  • Higher costs in the integration process
  • Longer maturation periods before returns are seen
  • Increased uncertainty in market positioning

    • Which method allows firms to maintain their legal personalities while collaborating?

    <p>Cooperation or strategic alliances</p> Signup and view all the answers

    What may a firm achieve more quickly through external development processes such as mergers?

    <p>Market size adequacy</p> Signup and view all the answers

    Which factor may influence top managers to pursue mergers, regardless of shareholder value creation?

    <p>Personal career advancement</p> Signup and view all the answers

    What type of external development is characterized by the integration of two or more firms where at least one disappears?

    <p>Firm merger</p> Signup and view all the answers

    What could be a consequence of merging firms that operate at different stages of production?

    <p>Vertical integration advantages</p> Signup and view all the answers

    In which scenario would external development be particularly recommended?

    <p>Emerging or growth industries with intense competition</p> Signup and view all the answers

    Why might a firm replace the management team of the target firm during a merger?

    <p>To improve rent-earning potential</p> Signup and view all the answers

    Which relationship type describes firms at different stages of product exploitation?

    <p>Vertical</p> Signup and view all the answers

    What is a potential drawback of external development?

    <p>Performance that may be worse than expected</p> Signup and view all the answers

    What external pressure could drive firms to pursue mergers or acquisitions?

    <p>Trends within the industry</p> Signup and view all the answers

    Which of the following best describes a horizontal relationship?

    <p>Firms that operate in the same industry and compete with each other</p> Signup and view all the answers

    What is a potential advantage of forming an alliance instead of pursuing a merger?

    <p>Shared risks while maintaining separate management teams</p> Signup and view all the answers

    What is a major benefit of merging with a firm already operating in a target country?

    <p>Reduced growth risk and easier entry</p> Signup and view all the answers

    What is a potential negative consequence of cooperation between partners in an alliance?

    <p>Diverging interests among partners</p> Signup and view all the answers

    Which of the following describes a major issue in alliances formed by direct competitors?

    <p>Lack of trust and commitment</p> Signup and view all the answers

    What can lead to the organizational complexity of alliances?

    <p>Seamless coordination requirements</p> Signup and view all the answers

    What type of agreement does NOT typically involve an exchange of shares or investment capital?

    <p>Contractual agreement</p> Signup and view all the answers

    Which factor is NOT considered when categorizing types of agreements among partners?

    <p>Base of shared resources</p> Signup and view all the answers

    What issue arises from a lack of delegation of power in partnerships?

    <p>Inability to make timely decisions</p> Signup and view all the answers

    What is a characteristic of a franchise agreement?

    <p>It grants rights to retail under specific conditions</p> Signup and view all the answers

    What potential benefit might a partner with exploitable skills gain from an alliance?

    <p>Opening doors to new local markets</p> Signup and view all the answers

    What is a Public Takeover Bid (TOB)?

    <p>An offer made by a firm to buy all or part of another firm's shareholder capital.</p> Signup and view all the answers

    What is typically required for a successful public takeover regarding the price offered?

    <p>It has to exceed the market value to create an added cost for the purchaser.</p> Signup and view all the answers

    What is a control premium in the context of acquisitions?

    <p>The extra amount paid to obtain control over a target firm.</p> Signup and view all the answers

    What is one of the primary difficulties in setting the price for an acquisition?

    <p>Accurately valuing intangible assets related to future income generation.</p> Signup and view all the answers

    What does the 'due diligence' process involve in mergers and acquisitions?

    <p>Researching to identify the target firm's characteristics and value.</p> Signup and view all the answers

    In a leveraged buyout (LBO), what primarily secures the debt incurred?

    <p>The target firm's future cash flows and its assets.</p> Signup and view all the answers

    What defines a Management Buyout (MBO)?

    <p>When the target firm's management team makes the purchase.</p> Signup and view all the answers

    Which factor is NOT mentioned as influencing the success of mergers and acquisitions?

    <p>Company culture compatibility</p> Signup and view all the answers

    What is the primary characteristic of internal development for a firm?

    <p>It generates new output capacity through investments in its own structure.</p> Signup and view all the answers

    Which of the following best defines external development?

    <p>Purchasing, investing in, or controlling other firms to expand output capacity.</p> Signup and view all the answers

    What is one of the economic efficiencies achieved through external development?

    <p>Reduction in transaction costs by internalizing dealings.</p> Signup and view all the answers

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

    <p>It creates new output capacity that contributes to economic growth.</p> Signup and view all the answers

    What might motivate a firm to engage in external development?

    <p>To gain immediate access to new markets through mergers.</p> Signup and view all the answers

    What is a potential drawback of relying solely on external development?

    <p>It may lead to dependency on external sources for resources.</p> Signup and view all the answers

    Which of the following is a strategic reason for pursuing external development?

    <p>Gaining new resources and capabilities from other firms.</p> Signup and view all the answers

    What describes a key distinction between internal and external development?

    <p>Internal development relies on natural growth; external involves integrating existing firms.</p> Signup and view all the answers

    What aspect is critical for the success of an agreement during its implementation?

    <p>The attitudes maintained by each partner</p> Signup and view all the answers

    Which element is NOT typically included in the planning of an agreement?

    <p>Personal backgrounds of each partner</p> Signup and view all the answers

    What is essential for ensuring that partners observe the commitments made in the agreement?

    <p>Appropriate support from top management</p> Signup and view all the answers

    Which factor contributes to the flexibility needed in managing an agreement?

    <p>Ability to adapt to partners' behaviors</p> Signup and view all the answers

    Which mechanism is important for resolving conflicts in an alliance?

    <p>Joint decision-making processes</p> Signup and view all the answers

    What should partners clearly define to facilitate effective management of the agreement?

    <p>The objectives and goals of the agreement</p> Signup and view all the answers

    Which of the following is NOT a factor in the successful management of a portfolio of alliances?

    <p>Individual performance bonuses for each partner</p> Signup and view all the answers

    What is the primary return expected from a well-managed alliance?

    <p>Gains in terms of information and learning</p> Signup and view all the answers

    Study Notes

    Internal vs. External Development

    • Internal Development (Organic Growth): A firm grows by investing in its own facilities, staff, machinery; increasing production capacity within its existing operations or launching new ones in existing or new industries.
    • External Development: A firm expands by acquiring, merging with, or associating with other firms or their assets; this doesn't increase aggregate production in the economy, just changes ownership.

    Justifying External Development: Economic Efficiency

    • Reduction in operating costs: Economies of scale from combining firms lead to synergies. Complementary firms benefit from each other's efficiency.
    • Reduced transaction costs: Internalizing dealings (mergers or alliances) decreases costs; trust between partners reduces opportunistic behavior in alliances.

    Exploiting Surplus Funds

    • Gaining access to surplus funds through acquisitions if current business doesn’t require those funds for investment.
    • A good investment through the acquisition of businesses if there is an opportunity not feasible through internal investment.

    Strategic Reasons for External Development

    • Gaining resources and capabilities: Acquiring resources and complementing them with existing resources. Useful for complex or tacit knowledge.
    • Overcoming entry barriers into industries or countries: Obtaining skills and resources needed to compete quickly in a new industry or market.
    • Reducing competition in an industry: Horizontal mergers reduce competition and increase the resulting firm's market power.
    • Vertical integration advantages: Synergies in firms from different stages of a production cycle. Improving economic performance and market positioning.
    • Achieving top-tier international status: Reaching sufficient size to compete effectively through external development.
    • Responding to prevailing industry trends and pressure groups: Following the lead or influence of similar actions or expectations related to industries.

    Advantages and Pitfalls of External Development

    • Faster development than internal development: Immediate incorporation of the acquired operation’s output capacity without needing a maturing period.
    • Facilitates unrelated diversification or internationalization: Acquiring firms already operating in target industries or countries assists with entry and reduces growth risks.
    • Provides better choice of entry time: May help an existing firm enter markets more effectively.
    • Easier in mature industries: Enables quicker acquisition of market share in potentially less competitive industries or in markets in the process of becoming competitive.

    Types of External Development (by Procedure)

    • Firm Merger: Two or more firms combine, at least one losing its distinct legal identity.
    • Acquisition: Operation in which shares are traded, each firm retaining its legal identity.
    • Cooperation or Strategic Alliances: Legal or political arrangements between businesses, preserving each firm’s distinct identity.
    • Horizontal mergers: Firms compete with each other.
    • Vertical mergers: Firms operate at different stages of a product cycle.
    • Complementary mergers: Firms have no vertical relationship nor are direct competitors.
    • Pure mergers: Two or more firms combine into a new company.
    • Merger by takeover: One firm acquires another entirely and the acquired firm disappears.
    • Merger with partial asset transfers: One or more firms give part of their assets to another firm to create a new firm, without disappearing.

    Types of Acquisitions

    • Investment in or taking over of companies: A firm adopts various procedures to acquire part, or all, of another firm's shareholder capital. Both firms continue to exist.
    • Spin-off or demerger: Parts of a company are broken into separate companies; the original company retains ownership of the new firms' stock.
    • Public Takeover Bid (TOB): A firm offers to buy a portion of another listed firm’s shareholder capital.

    Managing Mergers and Acquisitions

    • Due diligence: Investigate the target firm's characteristics.
    • Setting the price: Determining the purchase price for mergers or acquisitions.
    • Financing: Determining the payment method such as cash, exchanging shares, bonds, etc.
    • Organizational and cultural integration: Firms often need to integrate their human and organizational systems, especially cultures, values and levels.
    • Competition and anti-trust laws: Mergers face possible competition implications.
    • Managing strategic alliances: Managing issues regarding agreements and factors.
    • Cooperation agreement stages: Defining activities, resources and responsibilities for partnerships.
    • Cooperation outcomes: Success of the alliance will depend on how firms' stated goals align.
    • Measuring the results of partnerships: Evaluating the initial vs. final outcomes and stability of the various partnerships.

    Strategic Alliances (Cooperation)

    • No dominance of one firm: Partners work together voluntarily.
    • Coordination of future actions: Acceptance of obligations, and joint activities.
    • Loss of organizational independence: Partnership reduces independent operations.
    • Compromise: Potential conflict due to different partner interests and priorities.
    • Interdependence: Success hinges on mutual cooperation.

    Types of Agreements

    • Contractual agreements: Agreements between firms without exchanging shares.
    • Shareholder agreements: An agreement when a partner acquire shares of another firm
    • Inter-organizational networks: Intermediate between markets and firms. Combining cooperation and competition aspects.

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    Related Documents

    Methods of Development: Internal vs. External PDF

    Description

    Explore the concepts of internal and external development strategies in business. This quiz covers organic growth, mergers, and the economic efficiency gained through external development. Understand how firms can operate more effectively by making strategic decisions regarding growth.

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