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?

Diverging interests Signup and view all the answers

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

To fulfill their own interests and achieve personal utility Signup and view all the answers

What is a common motivation behind vertical integration in mergers?

To reduce costs associated with external suppliers Signup and view all the answers

Which of the following best describes contractual agreements?

Do not involve an exchange of shares Signup and view all the answers

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

Response to industry trends or pressure groups Signup and view all the answers

Under which condition is cooperation likely to be less effective?

When partners are direct competitors Signup and view all the answers

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

Opportunity to replace the management team Signup and view all the answers

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

Costs in negotiation and surveillance Signup and view all the answers

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

To maximize benefits while minimizing risks Signup and view all the answers

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

Operational complexity Signup and view all the answers

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

Eligibility for tax breaks Signup and view all the answers

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

Franchise Signup and view all the answers

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

Multi-partner agreements Signup and view all the answers

What is primarily necessary for effective cooperation in strategic alliances?

Complementarity of activities Signup and view all the answers

What is a defining characteristic of strategic alliances among firms?

Voluntary cooperation without subordination of partners. Signup and view all the answers

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

Intrinsic benefits of cooperation Signup and view all the answers

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

Complementarity of resources and capabilities Signup and view all the answers

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

Retention of the original firm's culture, values, and identity Signup and view all the answers

What is the primary advantage of forming a strategic alliance?

The ability to combine resources to achieve goals more efficiently. Signup and view all the answers

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

Political connections of each firm Signup and view all the answers

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

Different management and leadership styles Signup and view all the answers

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

Difficulty in distinguishing between the activities of the partners. Signup and view all the answers

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

A potential mass exodus of key employees Signup and view all the answers

What potential risk do strategic alliances carry?

They can undermine competitive positioning with shared resources. Signup and view all the answers

What role do networks play in competitive positioning for firms?

They provide support in confronting dominant competitors. Signup and view all the answers

What does cultural fit in a strategic alliance refer to?

The core values and organizational culture of partners Signup and view all the answers

What is included in evaluating the organizational fit process?

Integration of production systems Signup and view all the answers

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

Maintaining complete autonomy in all activities. Signup and view all the answers

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

To avoid risks associated with full organizational integration. Signup and view all the answers

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

The necessity for staff reductions Signup and view all the answers

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

The decision to choose cooperation Signup and view all the answers

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

Competition or anti-trust laws Signup and view all the answers

What is a consequence of interdependence in strategic alliances?

Dependence on each other to fulfill the alliance agreement. Signup and view all the answers

What is a potential impact of networks in strategic alliances?

They can hinder the formation of other alliances. Signup and view all the answers

What is one purpose of strategic alliances?

To strike a balance between performance and flexibility. Signup and view all the answers

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

Communication systems Signup and view all the answers

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

Managing the relocation of activities Signup and view all the answers

What is a key characteristic of managing the agreement effectively?

Active trust, commitment, and flexibility among partners Signup and view all the answers

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

Periodic performance reviews of all partners Signup and view all the answers

What role does flexibility play in the partnership agreement?

It facilitates adaptation to partners' characteristics and behaviors Signup and view all the answers

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

Support from top management Signup and view all the answers

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

Mechanisms for identifying expected returns Signup and view all the answers

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

The attitudes maintained by each partner Signup and view all the answers

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

Specific duties and responsibilities Signup and view all the answers

How can partners ensure effective monitoring and control of results?

By implementing formal monitoring and control systems 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 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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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.