Unit 7

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Questions and Answers

What is the best way to overcome an entry barrier into an industry or country?

Merging with a firm owning the required capabilities (correct)

Investing heavily in marketing campaigns

Forming strategic alliances with local firms

Internal development of necessary skills

What is one result of a horizontal merger between direct competitors?

Greater market power for the merged firm (correct)

Immediate access to new markets

Increase in overall competition

Reduction in product quality

Which reason is associated with the replacement of the management team in the target firm?

To fulfill top managers' personal interests

If the target firm is underperforming (correct)

To gain control over industry regulations

To achieve tax breaks from the government

What advantage does vertical integration provide?

Improved economic performance and market position Signup and view all the answers

What may pressure firms to adopt merger strategies?

Response to industry trends or external pressures Signup and view all the answers

Why might top managers engage in empire building during mergers?

To increase their remuneration and power Signup and view all the answers

What is often an alternative approach to mergers and acquisitions?

Forming strategic alliances Signup and view all the answers

What potential benefit might firms gain from mergers due to government policies?

Possible tax breaks for larger entities Signup and view all the answers

What is essential for managing an agreement effectively among partners?

Trust, commitment, and flexibility among partners Signup and view all the answers

Which aspect is NOT part of the characteristics of the agreement?

Social media marketing strategies Signup and view all the answers

What is necessary for the planning stage of an agreement?

Clear planning timeframe and milestones Signup and view all the answers

How should partners adapt their behaviors towards each other during the agreement's execution?

Adapt based on mutual characteristics and attitudes Signup and view all the answers

Which mechanism can help ensure the success of an agreement?

Ongoing monitoring and control systems Signup and view all the answers

In the context of managing the agreement, why is trust important?

It fosters beliefs in integrity and commitment Signup and view all the answers

What role does top management support play in the effectiveness of an agreement?

It is essential for providing resource allocation and authority Signup and view all the answers

What should not be expected as a return from the agreement?

Personal gains of one partner over others Signup and view all the answers

What is a key advantage of external development compared to internal development?

It reduces risks and uncertainty associated with major investments. Signup and view all the answers

Which statement accurately describes a merger?

At least one of the firms loses its legal personality. Signup and view all the answers

What effect does merging with a firm already operating in a target area generally have?

It reduces the risk of growth and facilitates entry. Signup and view all the answers

What characterizes a vertical relationship between firms?

Firms are at different stages of the product exploitation cycle. Signup and view all the answers

Which type of external development involves firms maintaining their legal and operational independence?

Strategic alliance Signup and view all the answers

Which type of merger leads to one party losing its legal identity?

Horizontal merger Signup and view all the answers

Entering mature industries through external development generally allows for which advantage?

No overall change to the industry's size. Signup and view all the answers

Which of the following is NOT a potential pitfall of external development?

Slower market entry compared to internal development. Signup and view all the answers

What is the main characteristic of internal development?

Investing in the firm's own structure and capabilities. Signup and view all the answers

How does external development primarily affect the economic system?

It does not increase the overall output capacity of the economic system. Signup and view all the answers

What is one of the strategic reasons for pursuing external development?

Gaining new resources and capabilities from the other firm. Signup and view all the answers

What is the impact of economies of scale in external development?

They allow for the reduction of transaction costs. Signup and view all the answers

Which statement best describes the nature of internal development?

It denotes growth through investments in existing capabilities and facilities. Signup and view all the answers

How does external development differ from internal development in terms of output capacity?

Internal development creates new output capacity, while external may not. Signup and view all the answers

Which of the following is an example of external development?

Acquiring an existing company to enhance market reach. Signup and view all the answers

What is a common misconception about external development?

It guarantees a definite increase in market share. Signup and view all the answers

What is the primary purpose of a license agreement?

To grant another firm rights to use its industrial property in exchange for compensation Signup and view all the answers

Which of the following best describes subcontracting?

It is the process of one firm commissioning another to perform specific tasks while retaining financial liability. Signup and view all the answers

What characterizes a consortium?

It is a contract integrating multiple partners into a long-term arrangement. Signup and view all the answers

What is a potential drawback of cooperation in business alliances?

Difficulty in establishing trust Signup and view all the answers

What is the main intent of a minority shareholding?

To support the affiliate’s business project actively. Signup and view all the answers

What does it mean when cooperation acts as a 'Trojan horse'?

It allows exploitation of skills by one partner Signup and view all the answers

What does a joint venture primarily involve?

A partnership formed by two or more companies to pursue a common objective. Signup and view all the answers

What is one of the types of agreements based on the strategic goals to be achieved?

Vertical agreements Signup and view all the answers

Which option best describes a share swap or exchange?

It involves parties subscribing to each other's shareholder capital without losing control. Signup and view all the answers

How do inter-organizational networks function?

They combine cooperation and competition among firms for mutual support. Signup and view all the answers

What type of agreement involves a franchise relationship?

Contractual agreement Signup and view all the answers

Which of the following is a consequence of diverging interests among partners?

Hindered joint strategy implementation Signup and view all the answers

What is an aim of shareholder agreements?

To facilitate the formation of a joint venture. Signup and view all the answers

What is a characteristic of contractual agreements?

They do not involve capital investment Signup and view all the answers

What might result from a lack of trust among partners in an alliance?

Reduced effectiveness of the agreement Signup and view all the answers

Which of the following refers to the displacement of power within organizational alliances?

No delegation of power to supervising personnel Signup and view all the answers

Study Notes

Methods of Development

Internal Development (Organic Growth): A firm grows by investing in its own facilities, hiring staff, and acquiring equipment. This improves output capacity and utilizes existing competencies to expand current or create new businesses.
External Development: A firm increases size through buying, associating with, or controlling other firms/assets. This involves incorporating the output capacity of those entities (or sometimes entering new markets). It doesn't increase the overall economic system output, but it does change ownership for the firm and internal operations.

Justifying External Development

Economic Efficiency:
- Reduction in Operating Costs: Economies of scale from synergies between businesses, especially complementary ones, can achieve cost reduction.
- Reduction in Transaction Costs: Internalized commercial dealings (mergers/acquisitions) and trust-based relationships decrease transaction costs compared to external transactions.

Exploiting Surplus Funds

Acquisition of another firm: This can happen when a company's surplus funds are higher than its current business' needs during an investment opportunity.

Strategic Reasons for External Development

Gaining New Resources and Capabilities: This occurs when the other firm has resources or capabilities that complement the acquiring firm's strengths. This is especially relevant when tacit knowledge, or complex resources are involved.
Overcoming Entry Barriers: Merging facilitates entry into new industries or difficult markets, allowing existing firms to utilize pre-existing capabilities or systems.
Reducing Industry Competition: Mergers between direct competitors effectively reduce competition in that sector which increases industry-level market power.
Vertical Integration: Acquiring a firm involved in a different production stage (e.g. suppliers or downstream customers ) improves performance and market positioning.
Becoming a Larger Competitor: The external approach can rapidly enable competitive scale advantages in a market efficiently.
Responding to Industry Trends/Government Pressure: Following industry trends or complying with government demands for certain merges/acquisitions are vital.

Advantages and Pitfalls of External Development

Faster Growth: Acquire output capacity immediately without long waiting periods.
Facilitating Diversification/Internationalization: Faster entry into new markets via acquisition.
Better Timing for Entry: External development can give a company a more favorable entry time for better competitive advantage.
Economies in Mature Industries: Easier to enter mature markets as the total output market size already exists (or at least the basic structures exist).
Difficult/Unfavorable: Poor management or incompatibility can lead to worse performance.

Types of External Development

Mergers: Combination of two or more firms into one new entity.
- Pure Merger: All firms involved form a new entity.
- Takeover/Acquisition: One firm absorbs another.
- Partial Assets Transfer: One firm transfers specific assets to another existing firm.
Strategic Alliances: Cooperation between independent firms.
Spin-offs or Demergers: Splitting a part of existing businesses into new, independent entities.
Subcontracting: Dividing manufacturing tasks or services to another business
Consortium: Collaboration with other businesses forming a new entity to complete a specific project.

Types of Mergers and Acquisitions

Horizontal Merger: Firms operating in the same market compete.
Vertical Merger: Firms from different stages of supply or product chain join.
Concentric Merger Two firms that provide competing but related products in the same industry group together.
Conglomerate Merger Two seemingly unrelated businesses that combine.

Types of Acquisitions

Tender Offer (TOB): Purchase of a firm's stock outside of the firm's management.
Friendly Acquisition: The target firm's management supports the takeover.
Hostile Acquisition: The target firm's management resists the takeover.

Investing in or Taking Over Companies

Acquisitions/Investments Acquisitions or investments in other firms help firms expand their operational capacity or gain control over existing businesses.
Public Takeover Bid: An attempt to purchase a target firm's shares through a public announcement (if no other solutions are possible due to organizational factors).

Managing Mergers and Acquisitions

Due Diligence: Thoroughly investigating the target firm for potential risks or liabilities.
Setting a Price: Determine valuation based on market factors and liabilities.
Financing: Determine appropriate funding (debt, equity, etc.)
Organizational/Cultural Integration: Merge firm cultures and organizational structures.

Cooperation Between Firms

No Dominance of One Firm: Firms entering into cooperation are equal partners.
Coordination: Firms coordinate future actions and activities in order to attain shared objectives.
Organizational Loss of Independence: The involved companies lose some independence to agree and collaborate.
Interdependence: Partners depend mutually on each other for success in their collaborative projects or investments.
Achieving Goals: Cooperations can attain objectives that would be difficult or impossible if executed individually.

Types of Agreements

Contractual Agreements: Cooperation exists without any share/investment exchange i.e. different activities within the value chain, by contract or agreement.
Shareholder Agreements: Involve exchange of shares to increase influence.

Managing Strategic Alliances

Agreement Success: Requires appropriate attitudes from all participating entities (especially regarding trust and commitment). This ensures the project's smooth execution.
Management Procedures and Decisions: The process and decisions made during the agreement need to efficiently support its success (taking into account all potential issues or conflicting interests).

Outcomes of Cooperation

Strategic Objectives: successful alliances achieve their predetermined objectives. However, each partner may have conflicting agendas.
Measurement: Assess the success/failure of cooperation from different perspectives (joint, individual)

Evaluating Partnership Success

Indefinite Continuity: Long-term partnerships indicate success; an early termination often indicates failure.
Partner Assessment: Individual partner outcomes are compared to expectations.
Outcomes-Contributions Parity: Returns earned should reasonably equal the contributions to the project for fairness.

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Description

This quiz explores the concepts of internal and external development within a business context. It covers the implications of organic growth and the strategic reasons behind mergers and acquisitions. Understand the economic efficiencies gained through these methods.