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What is a primary reason for a firm to merge with another when it comes to overcoming entry barriers in a new industry?
What is a primary reason for a firm to merge with another when it comes to overcoming entry barriers in a new industry?
What does a horizontal merger primarily aim to reduce?
What does a horizontal merger primarily aim to reduce?
What is one advantage of external development compared to internal development?
What is one advantage of external development compared to internal development?
Which method allows firms to maintain their legal personalities while collaborating?
Which method allows firms to maintain their legal personalities while collaborating?
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What may a firm achieve more quickly through external development processes such as mergers?
What may a firm achieve more quickly through external development processes such as mergers?
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Which factor may influence top managers to pursue mergers, regardless of shareholder value creation?
Which factor may influence top managers to pursue mergers, regardless of shareholder value creation?
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What type of external development is characterized by the integration of two or more firms where at least one disappears?
What type of external development is characterized by the integration of two or more firms where at least one disappears?
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What could be a consequence of merging firms that operate at different stages of production?
What could be a consequence of merging firms that operate at different stages of production?
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In which scenario would external development be particularly recommended?
In which scenario would external development be particularly recommended?
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Why might a firm replace the management team of the target firm during a merger?
Why might a firm replace the management team of the target firm during a merger?
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Which relationship type describes firms at different stages of product exploitation?
Which relationship type describes firms at different stages of product exploitation?
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What is a potential drawback of external development?
What is a potential drawback of external development?
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What external pressure could drive firms to pursue mergers or acquisitions?
What external pressure could drive firms to pursue mergers or acquisitions?
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Which of the following best describes a horizontal relationship?
Which of the following best describes a horizontal relationship?
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What is a potential advantage of forming an alliance instead of pursuing a merger?
What is a potential advantage of forming an alliance instead of pursuing a merger?
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What is a major benefit of merging with a firm already operating in a target country?
What is a major benefit of merging with a firm already operating in a target country?
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What is a potential negative consequence of cooperation between partners in an alliance?
What is a potential negative consequence of cooperation between partners in an alliance?
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Which of the following describes a major issue in alliances formed by direct competitors?
Which of the following describes a major issue in alliances formed by direct competitors?
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What can lead to the organizational complexity of alliances?
What can lead to the organizational complexity of alliances?
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What type of agreement does NOT typically involve an exchange of shares or investment capital?
What type of agreement does NOT typically involve an exchange of shares or investment capital?
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Which factor is NOT considered when categorizing types of agreements among partners?
Which factor is NOT considered when categorizing types of agreements among partners?
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What issue arises from a lack of delegation of power in partnerships?
What issue arises from a lack of delegation of power in partnerships?
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What is a characteristic of a franchise agreement?
What is a characteristic of a franchise agreement?
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What potential benefit might a partner with exploitable skills gain from an alliance?
What potential benefit might a partner with exploitable skills gain from an alliance?
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What is a Public Takeover Bid (TOB)?
What is a Public Takeover Bid (TOB)?
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What is typically required for a successful public takeover regarding the price offered?
What is typically required for a successful public takeover regarding the price offered?
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What is a control premium in the context of acquisitions?
What is a control premium in the context of acquisitions?
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What is one of the primary difficulties in setting the price for an acquisition?
What is one of the primary difficulties in setting the price for an acquisition?
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What does the 'due diligence' process involve in mergers and acquisitions?
What does the 'due diligence' process involve in mergers and acquisitions?
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In a leveraged buyout (LBO), what primarily secures the debt incurred?
In a leveraged buyout (LBO), what primarily secures the debt incurred?
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What defines a Management Buyout (MBO)?
What defines a Management Buyout (MBO)?
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Which factor is NOT mentioned as influencing the success of mergers and acquisitions?
Which factor is NOT mentioned as influencing the success of mergers and acquisitions?
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What is the primary characteristic of internal development for a firm?
What is the primary characteristic of internal development for a firm?
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Which of the following best defines external development?
Which of the following best defines external development?
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What is one of the economic efficiencies achieved through external development?
What is one of the economic efficiencies achieved through external development?
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How does internal development impact the economic system compared to external development?
How does internal development impact the economic system compared to external development?
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What might motivate a firm to engage in external development?
What might motivate a firm to engage in external development?
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What is a potential drawback of relying solely on external development?
What is a potential drawback of relying solely on external development?
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Which of the following is a strategic reason for pursuing external development?
Which of the following is a strategic reason for pursuing external development?
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What describes a key distinction between internal and external development?
What describes a key distinction between internal and external development?
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What aspect is critical for the success of an agreement during its implementation?
What aspect is critical for the success of an agreement during its implementation?
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Which element is NOT typically included in the planning of an agreement?
Which element is NOT typically included in the planning of an agreement?
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What is essential for ensuring that partners observe the commitments made in the agreement?
What is essential for ensuring that partners observe the commitments made in the agreement?
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Which factor contributes to the flexibility needed in managing an agreement?
Which factor contributes to the flexibility needed in managing an agreement?
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Which mechanism is important for resolving conflicts in an alliance?
Which mechanism is important for resolving conflicts in an alliance?
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What should partners clearly define to facilitate effective management of the agreement?
What should partners clearly define to facilitate effective management of the agreement?
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Which of the following is NOT a factor in the successful management of a portfolio of alliances?
Which of the following is NOT a factor in the successful management of a portfolio of alliances?
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What is the primary return expected from a well-managed alliance?
What is the primary return expected from a well-managed alliance?
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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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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.
