Week 10 Flashcards
(42 cards)
why do businesses grow?
Neoclassical economics suggests reason for firm growth ultimately the objective of profit maximization.
-In the long run, the relationship could be positive. A growing firm may take advantage of new market opportunities and may achieve greater economies of scale and increased market power. On the other hand, a rapidly growing firm may embark on various risky projects or projects with a low rate of return.
what is ansoff matrix?
the Ansoff Model helps marketers identify opportunities to grow revenue for a business through developing new products and services or “tapping into” new markets.
1. Market Penetration: How to sell more of your existing products or services to your existing customer base?
2. Market Development: How to enter new markets?
3. Product and Development: How to develop existing products or services.
4. Diversification: How to move into new markets with new products or services, increase your sales with your existing customer base as well as acquisition.
describe market penetration and market development of ansoff’s matrix?
- Market penetration: all about gaining market share by either Improve quality or productivity.
it depends on (i) the Nature of Market and (ii) Position of Competitors:
- If the market is growing: it may be easier to penetrate - Existing firms may not have capacity or space for growth.
- If the market is static (e.g. mature market) Market penetration will be more difficult - Established firms have incumbent advantages (the experience curve effect to reduce cost). - Market development takes the SAME PRODUCT to DIFFERENT MARKETS
- New markets can mean international markets. A common way of doing this is to EXPORT
- Can also mean new market segments – and can go hand-in-hand with product development.
STRATEGY OFTEN USED IN CAPITAL INTENSIVE INDUSTRIES WHICH PRODUCE ONLY ONE PRODUCT
- Can’t easily or cheaply) transfer from one product to another, therefore, firm has to find new markets for it.
describe the product development and diversification of Ansoff’s matrix?
- Product Development: produce additional products because:
(i) changes in the needs of customers e.g. retailing
(ii) the company may be good at R&D and can bring out new products e.g. consumer electronics.
(iii) Particularly important when product life cycles are short.
- However, product development as a strategy is expensive, risky & potentially unprofitable.
= Success may therefore be due to managerial approach rather than particular activity of product development. - Diversification: MOVES AWAY FROM PRESENT PRODUCT AND
FROM PRESENT MARKETS
it CAN BE:
- RELATED DIVERSIFICATION (e.g. Unilever) or UNRELATED DIVERSIFICATION (e.g. Virgin Group)
what 2 ways can diversification be?
RELATED diversification in SAME INDUSTRY by either:
- HORIZONTAL INTEGRATION: the acquisition of a business operating at the same level of the value chain in the same industry—that is, they make or offer similar goods or services.
- Economies of scale or scope across greater output
- VERTICAL INTEGRATION: A business growth strategy that involves expanding within an existing market, but at a different stage of production. Vertical integration can be ‘forward’, such as moving into distribution or retail, or ‘backward’, such as expanding into extracting raw materials or producing components.
- Economise on transactions costs & scope between complementary production stages
- Co-ordination benefits
- Increased Market power by raising barriers to entry
- CAN cause PROBLEMS of inflexibility & higher production co
what is unrelated diversification?
UNRELATED DIVERSIFICATION is diversification
BEYOND firm’s PRESENT INDUSTRIES
what is the ability for a business to grow affected by?
Constraints on business growth include: (i) financial conditions, (ii) shareholder confidence, (iii) the level and growth of market demand and (iv) managerial conditions.
describe the constraints on business growth further?
(i) Financial conditions determine the business’s ability to raise finance.
(ii) Shareholder confidence is likely to be jeopardised if a firm ploughs back too much profit into investment and distributes too little to shareholders.
(iii) A firm is unlikely to be able to grow unless it faces a growing demand: either in its existing market, or by diversifying into new markets.
(iv) The knowledge, skills and dynamism of the management team will be an important determinant of the firm’s growth.
which two ways can a business expand?
A business can expand either internally or externally.
- Internal expansion involves one or more of the following: expanding the market through product promotion and differentiation; vertical integration; diversification.
- External expansion entails the firm expanding by merger/acquisition or by strategic alliance.
what are the advantages and disadvantages of internal expansion?
ADV:
- Develops resources specifically tailored to firm’s competencies & strategy.
-Maintains control
DISADV:
- Must build supply & distribution infrastructure from scratch.
- Can be time consuming.
- The firm also takes on all of the risk.
Although slow, in the long run can be more effective.
what are the advantages and disadvantages of external expansion?
ADV:
- Can be fast – quickly expand productive capacity;
- Access to established management team and system;
- May not need to raise additional cash;
- Purchase of existing assets could be cheaper than building new productive capacity (e.g. new factory).
- International M&As (or at least a joint ventures) may be essential if need to acquire local “know-how”.
- May enhance market power.
- May promote a less aggressive response than greenfield
entry.
DISADV:
- Compatibility - can be difficult to meld firms together.
- Potential loss of identity with mergers
- May also be difficult to find a suitable acquisition target.
what are most mergers?
horizontally integrated
what is a strategic alliance?
A strategic alliance is agreement between two (or more)
firms to share resources/ knowledge for joint benefit.
what is joint venture? and its drawback?
A joint venture involves the creation of a new enterprise jointly owned by the venture partners.
- Commonly used to gain access to missing competencies eg:
- Know-how regarding local business practices
- Access to political decision-making
- Prevalent in large scale, risky extractive industries.
Two major drawbacks to joint ventures:
1. How to resolve disagreements under joint decision-making
2. Risk of divulging confidential information.
what is equity alliances and ‘cross-shareholding’? and its benefits?
Equity alliances or ‘cross-shareholding’ – a firm (or both firms) acquire a minor equity stake in another
- Companies therefore become stakeholders, share profits and common goals (competition between firms is reduced).
- they can be horizontal or vertical
Benefits to firms:
- Reduced competition
- Leads to complex network structures, especially when several companies are involved. Makes take-overs by other companies more difficult.
what is non-equity forms?
can involve sharing customer information, joint supplier
agreements, to shared information, technology or R&D.
- Cooperation can either be contractual or informal alliance.
what is basic trade off?
- alliances that involve less commitment and are easier to enter and exit, but give less control.
Common forms: - Franchising, Licensing, Outsourcing and Affiliate Marketing
what is the basic premise for a merger or acquisition to take place?
The basic premise is that for some reason the assets
must be worth more to the buyer than the seller for the
merger/acquisition to take place.
what is a merger?
A merger is a situation in which, as a result of mutual agreement, two firms decide to bring together their business operations. A merger is distinct from a takeover in so far as a takeover involves one firm bidding for another’s shares (often against the will of the directors of the target firm). One firm thereby acquires another.
what is a horizontal, vertical and conglomerate merger?
Horizontal merger: Where two firms in the same industry at the same stage of the production process merge.
Vertical merger: Where two firms in the same industry at different stages of the production process merge.
Conglomerate merger: Where two firms in different industries merge.
what is a takeover?
Where one business acquires another. A takeover may not necessarily involve mutual agreement between the two parties. In such cases, the takeover might be viewed as ‘hostile’.
why do companies merge?
- Merger for growth: Mergers provide a much quicker means to growth than internal expansion. Not only does the firm acquire new capacity, but it also acquires additional consumer demand. Building up this level of consumer demand by internal expansion might have taken a considerable length of time.
- Merger for economies of scale: Once the merger has taken place, the constituent parts can be reorganised through a process of ‘rationalisation’. The result can be a reduction in costs.
- Merger for monopoly power: Here the motive is to reduce competition and thereby gain greater market power and larger profits. With less competition, the firm will face a less elastic demand and be able to charge a higher percentage above marginal cost.
- Merger to reduce uncertainty: Firms face uncertainty in their own markets. The behaviour of rivals may be highly unpredictable. Mergers, by reducing the number of rivals, can correspondingly reduce uncertainty. At the same time, they can reduce the costs of competition (e.g. reducing the need to advertise).
what are the theories on M&A?
- VALUATION DISCREPANCY HYPOTHESIS
- VALUATION RATIO
- MARKET POWER
- ECONOMIES OF SCALE
- MANAGERIAL THEORIES
what is valuation discrepancy hypothesis as a M&A theory?
Essentially - a company is worth more to aquire after costs of aquisition.
DIFFERENT INVESTORS HAVE DIFFERENT EXPECTATIONS BECAUSE of RAPID:
- TECHNOLOGY CHANGE, MARKET CONDITIONS CHANGE and SHARE PRICE CHANGE
EVIDENCE:
* Gort (1969); Andrade et al (2001)
CONCLUSION:
* Provide some validity to the theory - but NOT ENOUGH insight
