Internal vs External Development
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Questions and Answers

What is a primary advantage of merging with another firm when it comes to acquiring complex capabilities?

  • Elimination of all entry barriers
  • Increased competition within the industry
  • Ability to acquire tacit knowledge more effectively (correct)
  • Reduction of overall market share

What is a potential risk of cooperation mentioned in the content?

  • Loss of independence in decision-making (correct)
  • Increased market competitiveness
  • Increased autonomy in decision-making
  • Streamlined operational processes

Which of the following correctly describes the outcome of horizontal mergers?

  • Higher levels of competition due to market expansion
  • Increased market power for the resulting firm (correct)
  • Decreased economies of scale
  • Greater innovation from merged firms

What major factor can hinder the implementation of a joint strategy among partners?

<p>Diverging interests (C)</p> Signup and view all the answers

Why might top managers pursue mergers and acquisitions that do not necessarily create shareholder value?

<p>To fulfill their own interests and achieve personal utility (A)</p> Signup and view all the answers

What is a common motivation behind vertical integration in mergers?

<p>To reduce costs associated with external suppliers (A)</p> Signup and view all the answers

Which of the following best describes contractual agreements?

<p>Do not involve an exchange of shares (B)</p> Signup and view all the answers

Which motivation can lead a firm to imitate merger strategies pursued by competitors?

<p>Response to industry trends or pressure groups (D)</p> Signup and view all the answers

Under which condition is cooperation likely to be less effective?

<p>When partners are direct competitors (A)</p> Signup and view all the answers

What potential benefit might a company gain from taking over a significantly underperforming target firm?

<p>Opportunity to replace the management team (C)</p> Signup and view all the answers

What is a critical cost incurred by cooperation as mentioned in the content?

<p>Costs in negotiation and surveillance (A)</p> Signup and view all the answers

Why might firms opt for strategic alliances instead of mergers and acquisitions?

<p>To maximize benefits while minimizing risks (C)</p> Signup and view all the answers

What type of complexity can arise due to cooperation between partners?

<p>Operational complexity (A)</p> Signup and view all the answers

What is an expected benefit of mergers resulting in a larger firm size, according to government policies?

<p>Eligibility for tax breaks (D)</p> Signup and view all the answers

Which agreement is characterized by a firm granting another the right to retail products in a specific area?

<p>Franchise (D)</p> Signup and view all the answers

In terms of the number of partners involved, which type of agreement is indicated?

<p>Multi-partner agreements (A)</p> Signup and view all the answers

What is primarily necessary for effective cooperation in strategic alliances?

<p>Complementarity of activities (B)</p> Signup and view all the answers

What is a defining characteristic of strategic alliances among firms?

<p>Voluntary cooperation without subordination of partners. (D)</p> Signup and view all the answers

Which factor must be compared against other options when deciding on cooperation as a strategic development method?

<p>Intrinsic benefits of cooperation (D)</p> Signup and view all the answers

What best describes the 'strategic fit' in choosing alliance partners?

<p>Complementarity of resources and capabilities (A)</p> Signup and view all the answers

What is a primary challenge in organizational and cultural integration during mergers and acquisitions?

<p>Retention of the original firm's culture, values, and identity (A)</p> Signup and view all the answers

What is the primary advantage of forming a strategic alliance?

<p>The ability to combine resources to achieve goals more efficiently. (C)</p> Signup and view all the answers

Which of the following is NOT a consideration when managing strategic alliances?

<p>Political connections of each firm (D)</p> Signup and view all the answers

Which aspect is a factor of psychological nature that can affect the integration process in mergers?

<p>Different management and leadership styles (A)</p> Signup and view all the answers

What does the 'blurring of organizational boundaries' in a strategic alliance imply?

<p>Difficulty in distinguishing between the activities of the partners. (C)</p> Signup and view all the answers

What could be a consequence of mismatched employee compensation systems during integration?

<p>A potential mass exodus of key employees (A)</p> Signup and view all the answers

What potential risk do strategic alliances carry?

<p>They can undermine competitive positioning with shared resources. (A)</p> Signup and view all the answers

What role do networks play in competitive positioning for firms?

<p>They provide support in confronting dominant competitors. (B)</p> Signup and view all the answers

What does cultural fit in a strategic alliance refer to?

<p>The core values and organizational culture of partners (A)</p> Signup and view all the answers

What is included in evaluating the organizational fit process?

<p>Integration of production systems (B)</p> Signup and view all the answers

Which of the following is NOT a characteristic of strategic alliances?

<p>Maintaining complete autonomy in all activities. (D)</p> Signup and view all the answers

Why might a firm choose to enter a strategic alliance instead of a merger?

<p>To avoid risks associated with full organizational integration. (A)</p> Signup and view all the answers

Which dilemma may arise from asset duplication in mergers and acquisitions?

<p>The necessity for staff reductions (C)</p> Signup and view all the answers

In the process of securing a strategic alliance, what is the first stage?

<p>The decision to choose cooperation (C)</p> Signup and view all the answers

What type of laws must mergers and acquisitions often consider to ensure compliance?

<p>Competition or anti-trust laws (B)</p> Signup and view all the answers

What is a consequence of interdependence in strategic alliances?

<p>Dependence on each other to fulfill the alliance agreement. (B)</p> Signup and view all the answers

What is a potential impact of networks in strategic alliances?

<p>They can hinder the formation of other alliances. (B)</p> Signup and view all the answers

What is one purpose of strategic alliances?

<p>To strike a balance between performance and flexibility. (B)</p> Signup and view all the answers

Which of the following is NOT a structural feature evaluated during the organizational fit process?

<p>Communication systems (D)</p> Signup and view all the answers

What is a significant issue that may arise when integrating operations during mergers?

<p>Managing the relocation of activities (A)</p> Signup and view all the answers

What is a key characteristic of managing the agreement effectively?

<p>Active trust, commitment, and flexibility among partners (B)</p> Signup and view all the answers

Which of the following is NOT a factor in the planning stage of the agreement?

<p>Periodic performance reviews of all partners (C)</p> Signup and view all the answers

What role does flexibility play in the partnership agreement?

<p>It facilitates adaptation to partners' characteristics and behaviors (C)</p> Signup and view all the answers

What is one mechanism included to ensure the agreement's success?

<p>Support from top management (A)</p> Signup and view all the answers

Which of the following elements is essential for resolving conflicts in the agreement?

<p>Mechanisms for identifying expected returns (D)</p> Signup and view all the answers

What is emphasized as critical when the activities under the agreement begin?

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

What should be included in the operational plans for each partner?

<p>Specific duties and responsibilities (A)</p> Signup and view all the answers

How can partners ensure effective monitoring and control of results?

<p>By implementing formal monitoring and control systems (C)</p> Signup and view all the answers

Flashcards

Merging for Capability Acquisition

Acquiring tacit knowledge or complex capabilities by merging with a firm possessing them. This is a strategy for overcoming entry barriers where internal skill development is challenging.

Reducing Competition through Mergers

Merging with a direct competitor can reduce competition and increase the merged firm's market power.

Vertical Integration through Mergers

Merging with firms in different stages of the production process (e.g., raw material supplier and manufacturer) can benefit economic performance and market positioning.

Merging for Global Competition

Mergers help firms achieve a suitable size for global competition through external development processes.

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Mergers for Manager Self-Interest

Top managers may pursue mergers to increase their own remuneration, power, and social recognition, even if it doesn't benefit shareholders.

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Mergers Driven by External Pressure

Mergers can be driven by industry trends, pressure from financial institutions, or government policies.

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Replacing Management in Mergers

Replacing a poorly performing management team in a target firm during a merger can create value.

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Strategic Alliances: Alternatives to Mergers

Alliances are alternatives to mergers, allowing firms to gain advantages while minimizing risks by keeping their management teams separate.

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Organizational & Cultural Integration Issues

The challenges that arise when merging two companies with different cultures, values, structures, and employee systems. This can cause friction in operations, morale, and overall success.

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Maintaining Distinct Cultures in Mergers

When merging companies, maintaining the unique culture, values, and identity of each original firm can be difficult, leading to confusion and resistance.

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Organizational Fit Process

The process of evaluating how compatible two companies are in terms of their organizational structures, administrative processes, human resources, culture, and operations before merging.

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Structural Features in Organizational Fit

Comparing the organizational structures of merging companies involves analyzing aspects such as job descriptions, reporting lines, unit sizes, and hierarchy.

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Administrative Processes & Systems in Organizational Fit

Evaluating the compatibility of administrative systems and processes involves analyzing their standardization, communication methods, planning procedures, and performance monitoring.

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Operations Integration in Mergers

Integrating the production systems of merging companies involves finding ways to leverage their strengths and eliminate redundancies to create efficiencies.

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Redundancies & Restructuring Costs

The cost associated with merging company operations, including restructuring, relocation, and potential staff reductions.

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Competition & Anti-Trust Laws

Laws that protect free market competition by regulating mergers and acquisitions, particularly between direct rivals.

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Strategic Alliance

An agreement between two or more companies to share resources and capabilities for mutual benefit, without merging.

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Partner Autonomy

Strategic alliances are characterized by partner firms maintaining their independence, while cooperating on specific projects or activities.

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Coordination of Actions

Partners in a strategic alliance coordinate their actions and make commitments towards shared goals.

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Interdependence

Strategic alliances involve a certain degree of interdependence, as partners rely on each other for successful implementation of the agreement.

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Blurred Boundaries

Strategic alliances can blur organizational boundaries as companies share resources and capabilities, making it difficult to clearly define where one firm ends and another begins.

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Balance of Performance and Flexibility

Strategic alliances offer a balance between performance and flexibility, allowing companies to benefit from cooperative efforts without the risks associated with mergers and acquisitions.

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Competitive Positioning Risk

Strategic alliances can undermine a firm's competitive advantage if partners are direct competitors, as sharing resources and knowledge can dilute their unique strengths.

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Specialization and Expertise

Strategic alliances allow companies to focus on their strengths and specialize in certain areas, contributing to the overall success of the alliance.

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Merger

Two or more firms combine to form a single entity, losing their independent identities.

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Franchise

A contractual agreement granting a firm (franchisee) the right to sell products or services under another firm's (franchiser) brand.

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Diverging Interests in Alliances

Partners in a strategic alliance have different goals and motivations, potentially hindering the alliance's success.

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Vertical Strategic Alliance

A relationship between two firms operating at different stages in the production process (e.g., supplier and manufacturer).

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Horizontal Strategic Alliance

A relationship between two firms operating at the same stage of the production process.

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Equity-Based Strategic Alliance

An agreement between two or more firms involving the exchange of shares or investment.

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Contractual Strategic Alliance

A strategic alliance agreement that involves a long-term contract, without equity exchange or investment in each other's capital.

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Choosing the right strategic partner

The process of selecting the right strategic partners for cooperation, which involves analyzing their strengths and weaknesses and ensuring alignment in terms of both strategy and culture.

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Strategic fit in alliances

The extent to which the partners' objectives and resources complement each other; this indicates if they can mutually benefit from the alliance.

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Cultural fit in alliances

The compatibility of partners regarding their internal values, cultures, ethical practices, and risk tolerance.

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Securing an alliance agreement

The initial steps involved in setting up an alliance, which includes identifying potential partners, conducting due diligence, and negotiating the agreement.

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Organizational culture in alliances

An organization's core beliefs and values that influence its actions and decisions. It's important for partners to have compatible cultural values and attitudes to ensure harmonious collaboration.

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Deciding on cooperation strategy

The process of comparing the potential benefits of cooperation (e.g., resource sharing, combined expertise) with alternative strategies like internal development or remaining independent.

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Types of cooperation models

The various ways in which companies can work together, including joint ventures, strategic partnerships, and licensing agreements. Choosing the right model depends on the specific objectives and needs of the alliance.

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Benefits and challenges of cooperation

The advantages gained through cooperation, such as access to new markets, shared resources, and combined expertise. However, cooperation is not always beneficial; it can also lead to conflicts, communication issues, and dependence on partners.

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Trust in Alliances

The belief that each partner will act honestly and fulfill their commitments, building trust is crucial for successful collaborations.

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Commitment in Alliances

The active involvement of each partner in the tasks assigned to them, essential for achieving the project's goals.

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Flexibility in Alliances

The ability to adapt to the needs, behaviors, and values of other partners in an alliance.

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Clearly defined objectives and goals in Alliances

The clear and specific goals established for the alliance, serving as a roadmap for success.

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Resource Allocation in Alliances

The careful allocation of resources (e.g., financial, human) among partners to ensure they have the means to fulfill their responsibilities.

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Top Management Support in Alliances

The support provided by top management within partner organizations to the alliance, demonstrating commitment and ensuring resources are available.

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Delegation of Authority in Alliances

Delegating authority and responsibility to individuals within each partner organization who are tasked with overseeing the alliance.

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Return on Investment in Alliances

Mechanisms designed to identify the benefits (information, learning) gained by each partner through their participation in the alliance.

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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 improve output capacity. It focuses on expanding existing businesses or creating new ones within the same industry or a new one.

  • External Development: A firm increases its size by acquiring, associating with, or controlling other firms or their assets. This includes acquiring output capacity from other firms, potentially expanding into new businesses or industries. It does not necessarily increase the overall aggregate production of the economy as the existing output capacity is simply transferred.

Justifying External Development: Economic Efficiency

  • Reduction in Operating Costs: Synergies between firms merging create economies of scale, reducing individual firm operating costs. Complementary firms benefit from each other's efficiencies.

  • Reduction in Transaction Costs: Internalization of commercial dealings (M&A) or strong trust relationships reduces transaction costs between firms. This avoids opportunistic behaviors in alliances.

Strategic Reasons for External Development

  • Gaining Resources and Capabilities: Acquiring resources (tangible or intangible) from another firm, when there is a good fit. Tacit knowledge and complex capabilities are better acquired by merging than trying to develop them independently.

  • Overcoming Entry Barriers: Acquiring existing firm capabilities may be a faster way to enter a new industry or country and compete in a specific environment, rather than developing them from scratch.

  • Reducing Competition: Merging direct competitors reduces competition in the industry, potentially increasing the market power of the resultant firm.

  • Vertical Integration: Merging firms operating at different stages of production can improve economic performance and market positioning, by controlling various portions of the production process.

  • Exploiting Surplus Funds: Using excess funds for a good investment through firm acquisition.

  • Responding to Industry Trends and Government Pressure: Firms may merge to meet pressures from industry trends or from governmental policies.

Advantages and Pitfalls of External Development

  • Faster Growth: Immediate incorporation of existing output capacity, compared to longer internal development timelines.

  • Facilitating Diversification/Internationalization: Acquiring firms already operating in target industries or countries reduces risk and facilitates entry.

  • Entering Mature Industries: Faster entry into mature industries where internal methods of expansion might be too slow or costly.

  • Becoming Larger Competitors: Acquisition of other firms can speed up a firm's expansion into a larger-sized global competitor and facilitate access to new markets.

Types of External Development (Methods)

  • Firm Merger: Two or more firms integrate, and at least one of the original firms no longer exists after the merger.

  • Firm Acquisition: One firm acquires the shares of another, potentially a significantly smaller business, and the acquired firm may or may not continue operating.

Justifying Internal Development

  • Internal Development implies growth for the firm itself and for the economic system (new output capacity is generated).

  • External approach means the firm grows, but not the economic system (the resulting output capacity is the same as each individual firm had beforehand).

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Methods Of Development: Internal vs External PDF

Description

Explore the differences between internal and external development in businesses. This quiz covers key concepts like organic growth, acquisition, and economic efficiency. Test your understanding of how companies expand and optimize operations.

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