3.2.2 merges and takeovers Flashcards
inorganic growth definition
a business growth strategy that involves two or more businesses joining together to form one much larger one
backward vertical integration definition
joining with a business in the previous stage of production
forward vertical integration definition
joining with a business in the next stage of production
horizontal integration definition
the joining of businesses that are in the exact same line of business
conglomerate integration definition
the joining of two unrelated businesses
Drawbacks and benefits of backward vertical integration:
+allows businesses to obtain control over suppliers and improve supply chain efficiency
+ gain a competitive advantage=prevents other businesses from using the same resources
+ guaranteed income from the students
- initial high costs for the business to purchase part of the supply Chane.
- too safe
Drawbacks and benefits of forward vertical integration:
+allows businesses to obtain control over suppliers and improve supply chain efficiency
+ gain a competitive advantage=prevents other businesses from using the same resources
+ guaranteed income from the students
- initial high costs for the business to purchase part of the supply Chane.
- too safe
(same points for backwards and forwards)
Drawbacks and benefits of horizontal integration:
+ increase in market share
+ sharing expertise between businesses
+ more facilities/resources
- Communication issues
- clash of culture- confusion over which firms culture should be adopted in some areas
- costly to begin with
- duplication of roles- have to cut the roles down
Drawbacks and benefits of conglomerate integration:
+more income
+more customers
+diversifies business, spreading risk into different markets
- potential failure to understand target company as it will be an unfamiliar market.
merger definition
where two firms of similar size agree to join forces permanently creating a company that is twice the size of each predecessor
takeover definition
when firms buy a majority of the shares in another and therefore achieves full management control
reasons for merges and takeovers
- Cost benefits-
economies of scale- raw materials are cheaper because they can buy materials in bulk for both businesses so it would be cheaper (discounts) - no need to duplicate job rolls because they have the other business as a service instead
- Market power- Ability to force down the price of raw materials & Ability to charge a higher price because as they become a bigger business they can afford to charge higher prices
-Speed of growth- Merging with another business means that they would become more well-known and grow much quicker
Entering new markets-
They can be able to sell their products without having to manufacture them themselves
risks of merges and takeovers (financial risks)
- resistance from employees to merge or takeover could lead to employees going on strike or leaving.
- if unsuccessful= lots of money to replace
- the economy determines the success of merges and takeovers
rewards of merges and takeovers
- presents opportunities for the business to compete across a wider range of locations
- increase market power: ability to force down the price of raw materials, ability to charge higher prices
- increase in speed of growth: merging with a business means that they would become more well known and grow much quicker
problems of rapid growth
Mergers and takeovers require significant finance. If a company grows too rapidly, it may stretch financial resources and impair other aspects of the business.
• Significant resources are also required, such as raw materials and staff. This may drive prices
up for those resources.
• Loss of control- communication becomes very complex as more layers of management are added to the business.
