Internal vs. External Development in Business

A firm increases its size and output capacity by investing in its own operations, such as building new facilities, hiring staff, or purchasing machinery.

One firm acquires, invests in, or collaborates with another firm, increasing its size and output capacity by incorporating the acquired assets.

Achieving cost savings by combining operations and leveraging economies of scale, leading to synergies between the firms.

Reducing transaction costs by internalizing operations within the firm or building strong trust between partners.

Investing surplus funds in acquiring another company, leveraging available capital to expand operations and grow.

Gaining access to new resources and capabilities, such as technology, expertise, or market reach, through mergers, acquisitions, or strategic alliances.

Internal development benefits both the firm and the overall economy by creating new output capacity, while external development only benefits the firm.

The primary reasons for pursuing external development, driven by achieving economic efficiency and achieving strategic advantage.

Acquiring essential knowledge and skills by merging with a firm that possesses them. This is particularly helpful when entry barriers are high or the firm lacks the internal resources to compete effectively.

Merging with direct competitors (horizontal mergers) can reduce competition by increasing the merged firm's market power, leading to dominance.

Mergers of firms operating in different stages of the production cycle (vertical integration) can improve economic performance and market positioning.

Merging can enable a firm to achieve the optimal size needed for international competition, accelerating growth through external development.

Mergers may be driven by managers seeking personal gain, such as increased remuneration, power, or reduced risk, often prioritizing their own interests over shareholder value.

Mergers can be a response to industry trends, imitating successful strategies of other firms, or complying with pressure from financial institutions or government regulations.

A merger might occur to replace an underperforming management team, increasing the earning potential of the target firm.

Mergers can be encouraged by government policies offering tax incentives to promote firm growth and competitiveness.

The process of combining two or more companies into a single entity, with at least one losing its legal identity. This can offer benefits like increased market share and improved resource utilization.

Involves one company acquiring another company by purchasing a majority of its shares. This typically results in the acquiring company gaining control over the acquired company, while the acquired company maintains its legal identity.

A collaborative arrangement between two or more companies who aim to achieve a common goal. Strategic alliances can be formal collaborations with legal contracts or informal agreements.

Form of cooperation between two companies that compete in the same industry.

Form of cooperation between two companies that operate at different stages of the value chain for the same product.

Form of cooperation between two companies that are not direct competitors and operate in unrelated industries.

A company merging with a firm already present in the target industry or country. This strategy assists in entering new markets quickly, reducing risks, and acquiring valuable resources and capabilities.

This involves consolidating operations with a company already established in the industry. The new entity will acquire resources and capabilities to thrive in the existing market.

A public offer to buy all or part of the shareholder capital of another listed firm, often at a premium to the market price.

The extra amount paid to gain control of a target firm in a takeover bid, representing the additional value perceived in the target company beyond its market price.

The process of investigating and evaluating a potential target firm before deciding to acquire it, including assessing its financials, operations, and future prospects.

The price at which a company is acquired, determined through valuation methods and negotiations, often including a control premium.

A financing method for acquisitions where a significant portion of the purchase price is funded through debt, with the acquired company's assets and future cash flows serving as collateral.

A type of acquisition where the target company's management team becomes the buyer, often using debt financing to acquire the company they manage.

The process of combining two or more firms into a new entity, aiming to achieve synergies and create greater value.

The process of one firm acquiring control of another firm, usually by purchasing a majority of its shares.

The belief that each partner will act honestly and fulfill their commitments.

Each partner's genuine involvement in assigned tasks and the project's success, dedicating resources, time, and effort.

The ability to adapt to the characteristics, behaviors, and attitudes of other partners.

Well-defined objectives, clear roles and responsibilities, effective communication, and conflict resolution mechanisms.

Allocating resources, such as finances, personnel, and technology, in a way that supports the achievement of alliance goals.

Having top management support and involvement in the alliance's development and success.

Clearly defined objectives, tasks, and responsibilities for partners involved in the alliance.

Systems to track progress, measure results, and identify areas for improvement within the alliance.

Partners in a cooperation may have conflicting goals, hampering the successful implementation of a joint strategy.

Cooperation agreements can be costly due to negotiation and monitoring, along with the need for efficient coordination between partners.

When partners don't fully trust each other or aren't committed to the agreement, it can significantly reduce its effectiveness, especially when competitors are involved.

Cooperation can lead to a loss of control over decision-making as partners share control and are bound by agreement terms.

Cooperation agreements can be classified based on the type of relationship between the partners, such as horizontal or vertical.

A franchise agreement involves a franchiser granting a franchisee the right to sell products or services in a specific area.

Contractual agreements between firms that don't involve share exchange or investment in another firm's capital.

Cooperation agreements require a certain degree of ongoing collaboration to differentiate them from ordinary contracts or market transactions.