business unit 3 part 2 Flashcards
what is a horizontal merger?
A horizontal merger of two or more business that offer similar products or services and work in the same industry.
what are the advantages of a horizontal merger?
-merged company bring economies of scale by reducing the overall cost of the business.
-does enable the new entity to offer a wide range of products and services to their customers in the most efficient way.
-Both the companies will be able to function more efficiently and cut down on the economic crisis.
what are the advantages of a horizontal merger?
-economies of scale
-increased market power or market share
-reduction of production costs
-reduction of competition
-increase in other synergies ( benefits are greater than fro the separate individuals).
what are the disadvantages of horizontal merger?
investigation by competition and market authority
expected economic gains might never be realised
culture cash
reduction is flexibility diseconomies of scale
potential of destroying value rather than creating it
what is a vertical merger?
A vertical merger is a merge between two or more entities who operate in the same industry but at the different levels of the production process. These entities produce similar finished good or services.
what is a vertical merger?
A vertical merger is a merge between two or more entities who operate in the same industry but at the different levels of the production process. These entities produce similar finished good or services.
what are the advantages of a vertical merger?
-some economies of scale such as risk bearing economies, financial economies could lead to lower prices for consumers.
-the firm not subject to loosing control or supply e.g they cant be held to ransom by suppliers demanding higher price at a critical time.
-maybe some overlap of technology and expertise e. ga bookshop may know books so well so they can develop the right kind of paper and attractive design.
what are the disadvantages of vertical integration?
-vertical mergers will have fewer economies of scale as most of the products are at different stages of production. There is still scope for monopoly power.
-A vertical merger can lead to monopsony power e.g tied pubs can charge a higher price to consumers and they have less choice of beer
what are the disadvantages of vertical integration?
-mergers can often create new problems of communication and coordination within the bigger more disparate firm. It can lead to diseconomies of scale where the new bigger firm is more inefficient. For example if a new firm is quite profitable there could be less accountability further down the supply chain.
-discourage entry. If supermarket owned a large share of diary production in the uk it could charge high prices to any firm trying to enter the supermarket industry. control over different stages of production becomes a barrier to entry.
what are examples of vertical integration?
-brewing merging with chains of pubs
-software supplier merging with computer firm
-coffee grower merging with a coffee retailer such as Nescafe
-car firm Renault merging with a tyre producer
how does a horizontal integration occur?
it does occur when a company decides to merge, acquire or take over another company in the same industry and the same stage of production. Disney acquisition of pixar or the merger of exxon and mobil are examples of horizontal integration both examples two companies of similar size and operation operating in the same industry, combined to form a stronger company
what are the advantages of horizonal integration?
-economies of scale and economies of scope
-increased market power or market share
-reduction of production costs
-reduction of compeition
-increased in other synergies
what happens when a company can achieve the advantages of horizontal integration?
when a company can achieve the advantage of a horizontal integration the company can diversify its product or service, sell those products or service to a larger market, reduce the costs to produce its newly diversified products or service and reduce the amount fo external competition.
what are the disadvantages of horizontal integration?
-invesitgation by compeition and market authority
-expected economic gains might never be realised
-culture cash
-reduction in flexibility diseconomies of scale
-potential of destroying value rather than creating it.
what the worst disadvantage a company can have when they incur horizontal integration?
when horizontals integration hampers a company the worst disadvantage the company can face is a reduction in overall value to the firm because the expected synergies never materialise despite the costs of horizontal integration. Other disadvantages can include legal repercussions if the horizontal merger results in a company that could be considered a monopoly and a reduction in flexibility due to the fact that is now a larger organisation.
what are the advantage of vertical integration?
some economies of scale such as risk bearing economies Finacial economies lower costs could lead to lower prices for consumers.
the firm not subject to loosing control of supply for example they cant be held to ransom by suppliers demanding higher price at a critical time.
what are the advantages of vertical integration?
maybe some overlap of technology and expertise for example a bookshop could know what kind of books sell well so they can develop the right kind of paper and attractive design.
arguably the splitting up of the rail network created more confusion and less incentive to look after the track. it would make more sense for train operating companies to be responsible for the track as they would have greater interests in maintain its satisfactory.
what are the disadvantages of vertical mergers?
-vertical mergers will have fewer economies of scale because most of the production is at different stages of production. There is still scope for monopoly power.
also a vertical merger could lead to monopsony power e.g tied pubs can charge a higher price to consumers and they have less choice of beer.
what are the disadvantages of vertical integration?
-mergers can often create new problems of communication and coordination within the bigger more disparate firm. It can lead to diseconomies of scale where the new bigger firm is more inefficient. For example if the new firm is quite profitable there could be less accountability further down the supply chain.
-discourage entry. If a supermarket owned a large share of dairy production in the uk it could charge high prices to any firm trying to enter the supermarket industry. control over different stages of production becomes a barrier to entry.
how is vertical integration defined?
it is the merging of two firms at different stages of production. This can be forward vertical integration or backward vertical integration.
what are the benefits that are seen to come from vertical integration?
- Security of supplies and control of suppliers’ prices.
- Improves supply chain co-ordination.
- Can guarantee the quality of its raw materials.
- Security of distribution outlet for products.
- Can determine standard of outlets/shops.
- Use of outlets to determine brand image.
- Keeps all profit – no middlemen – increased profit
margins means not having to buy raw materials from a
third-party outlets. - Control over quality.
- Possible benefits of economies of scale
how is horizontal integration defined?
The merging of firms which are at the same stage of production. often the firms are both providing the same service and are selling similar goods.
what are the benefits of horizontal integration?
-removes some of the competition possibly for defensive reasons
-may benefit from increased economies of scale
-increases market power to compete with the market leaders by spreading the brand
-synergy, the two companies joined together may form an organisation that is more powerful and efficient than the two companies operating on their own. It’s a quick way for a business to expand the business as opposed to growing it internally
-increased capital of merged businesses
-opportunity to cut costs, for example combining hr/ ict service
-combination of new ideas/ innovation
what is the type of integration that is vertical backwards?
it is when a business takes over another business back down the chain of production
what is a type of vertical forward?
when a business take over another business further up to the chain of production
what is lateral integration as a type of integration?
lateral is when a business takes over a firm in the same sector but in a similar industry.
What is investment appraisal?
an investment occurs when a business uses either internal or external sources of finance to purchase capital goods in order to help them meet their objectives.
appraisals are a tool used to weigh up the strengths and weaknesses of a project.
what happens as time goes on in relation to sources of finance?
if the source of finance of use is external they do requires a quicker payback period, than internal sources of finance.
As time goes on there is less chance of payback as there is more risk of external politics. The shorter the produce life cycle the quicker the pay back period should be.
what areas can business invest in?
plan and machinery
transport
buildings
human resource training
marketing strategies
ict systems
why do business invest money?
They often meet their objectives this could include sales growth increase profitability expansion to new markets relocation or training its existing workforce. whatever the reason a business will at some time have to spend money in an attempt to take the business forward. A business may also need to invest just to keep up with its competitors, they may have no choice but to invest otherwise they may well fall behind and start loosing customers.
Large amounts of money are often invested in the hope that this will give a profitable return on the investment however there is a risk with investment as there is no certainty that the investment will result in increased profits and could even result in a reduction of future revenue.
where is investment appraisal is a technique?
investment appraisal is a technique used to evaluate planned investment by a business and measure its potential value to the business.
what are the advantages of cost benefit analysis?
- Considers a wide range of benefits and costs.
- Impacts on society and the community are included.
- Puts a value to external benefits and costs that would
normally be ignored by private sector businesses. - Can be used to rank possible major projects in order of
public cost. - It shows that a firm cares about the local community
and the environment, which can be good for public
relations
what are the disadvantages of cost benefit analysis?
- The valuation of intangibles will be difficult – how
do you put a value on the effect of pollution or the
improved traffic flow of a new road? - Valuations will often include value judgements – one
person’s or manager’s calculation of an intangible
benefit is likely to differ from another person’s
calculation, who has a different set of views on what is
important for a business. - If the social costs and benefits are incorrectly
calculated, then the wrong choice could be made. - Will all stakeholders be included in the calculation of
social costs and benefits?
what is cost benefit analysis?
definition - : Cost benefit analysis (CBA) is a method for
measuring, in financial terms, the costs and benefits of
an investment project. It includes a consideration of the
external costs and benefits to society as well as the costs
and benefits to just the business
Cost benefit analysis is often used by governments when
they are considering a public project, such as the building
of a new motorway, rail bridge or hospital. Many different
options can be ranked in order
When carrying out a cost benefit analysis there are a wide
range and variety of costs and benefits to be identified and
given a value. These can be divided into two groups:
* Private Costs and Benefits
* Public Costs and Benefits.
what are public costs?
These are costs external to the business making the
investment.
* A building company will have an environmental impact
as it builds houses – increased traffic, noise etc.
* A farm extracting water from a river to irrigate its crops
leaves less water further downstream for fishing.
* A new factory may involve the loss of open space,
increased traffic congestion and so on.
what are public benefits?
- These are benefits external to the business that result
from making the investment. - An obvious external benefit from a large-scale
investment would be jobs created by the business. - Other public benefits include further jobs created
outside the business as a result of increased business
activity and an increase in tax paid by employees to the
government. - In areas where unemployment is high, crime and social
problems might be reduced.
what are social costs and benefit?
Social Benefit (private benefit + public benefits)
– Social Cost (private costs + public costs)
* If the social benefits are greater than social costs, then
go ahead with proposal.
* If the social costs are greater than social benefits, then
do not go ahead with proposal.
what are private costs?
These are costs that the business making the
investment must accept.
* They include training and recruitment costs,
the p
what are private benefits?
- These are benefits that the business gains from as a
result of making the investment. - These benefits will include things such as increased
productivity, increased sales, brand values and
increased profits
what are the different investment appraisal methods that are used to compare projects that could be competing for a business investment capital?
payback
average rate of return ( arr)
discounted cash flow ( dcf)
what is payback?
Before an investment is agree an investor ( external or internal) will require assurances that they will actually get their investment back and within a favourable timescale. We call this the ‘ payback period’.
A business has to calculate the length of time that an investment project will take to ‘ pay back’ it initial investment before they agree to whether or not is should take place.
what is an example of a payback period?
For example if a project costs £20000 and the net cash flows generated by the project are £10000 each year the project costs will be covered after two years. so the payback period is 2 years.
Where there are a number of different investment options for a business the payback period method will select the one that returns the initial costs of the investment in the shortest time frame. In other words this is the amount of time taken for the net cash flow resulting from an investment to match or equal the initial costs of the investment.
