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A2 Business > Size of Business > Flashcards

Size of Business Flashcards

1
Q

Internal (organic) growth

A

occurs when a firm expands its existing capacity by extending its premises from its own resources

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2
Q

External growth

A

happens when 2 or more businesses integrate via a merger/takeover

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3
Q

Merger

A

where 2 or more firms agree to come together under one board of directors

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4
Q

Takeover (or acquisition)

A

where 1 firms buys the majority of shares to take full control.

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5
Q

Overview of the integration process

A

1 - Target identification & choice
2 - Valuation & offer
3 - Due diligence & completion
4 - Post-acquisition integration

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6
Q

3 types of integration:

A

Vertical integration
Horizontal Integration
Conglomerate Integration

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7
Q

Vertical integration

A

the coming together of firms in the same industry but at different stages of the production process (backwards and forwards integration)

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8
Q

Advantages of Vertical Integration

A
  • Removes the uncertainty of dealing with external suppliers and retailers
  • Cost savings in technical, distribution and marketing areas
  • Builds barriers to entry for new competitors
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9
Q

Example of Vertical Integration

A

L’oreal buying a body shop

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10
Q

Horizontal integration

A

the coming together of firms operating at the same stage of production in the same market

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11
Q

Advantages of Horizontal Integration

A
  • Economies of scale – e.g. buying EOS
  • Lower Unit Costs
  • Reduced Competition
  • Increased Market Share
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12
Q

Examples of Horizontal Integration

A
  • Adidas buying Reebok
  • Mercedes buying Chrysler
  • Lloyds buying HBOS
  • Co-op buying Somerfield
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13
Q

Conglomerate Integration

A

the coming together of firms in unrelated markets

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14
Q

Advantage of Conglomerate Integration

A

Can share good practice between different areas of the business

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15
Q

Example of Conglomerate Integration

A

Procter and Gamble (household goods) bought Gillete

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16
Q

Hostile Takeover

A
  • where a company’s intention is not welcome and the target company may reject the move.
  • A limited time to persuade the shareholders to accept the bid.
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17
Q

Friendly Takeover

A

the purchase is welcome and shareholders will accept the bid

18
Q

Process of Friendly Takeover

A
  • Buyer approaches target Board with offer
  • Target Board negotiates & agrees price / terms
  • Shareholders of both firms approve the deal
  • Legal completion of takeover
19
Q

Process of Hostile Takeover

A
  • Buyer approaches target Board with offer
  • Target Board rejects offer
  • Buyer makes offer direct to target shareholders
  • Target Shareholders decide whether to accept
20
Q

Common problems with hostile takeovers

A
  • Senior management in the target often leave en masse = loss of experience & expertise
  • Resentment amongst target stakeholders (local community, employees)
  • Increased risk that the buyer pays too much for the takeover
21
Q

Mergers and takeover strategies (motives)

A
  • Growth/Market share
  • Source of finance: Asset stripping
  • Technical expertise
  • Brands are expensive to develop
  • To exploit patents
  • Diversification
22
Q

Growth/Market share

A

To control the market (gain monopoly power)

23
Q

Source of finance: Asset stripping

A

To buy a business then breaking them up and selling off the profitable sections

24
Q

Technical expertise

A

Sony bought smaller software producers to gain skilled workforce when developing the PlayStation

25
Q

Brands are expensive to develop

A

Nestle’s takeover of Rowntree

26
Q

To exploit patents

A

in the pharmaceutical and computing industries

27
Q

Advantages of acquisitions

A
  • Quick access to resources & skills the business needs
  • Overcomes barriers to entry
  • Helps spread risk (wider range of products and greater geographical spread)
  • Revenue growth opportunities
  • Cost saving opportunities
  • Reduces competition
  • May enable economies of scale
28
Q

Merger/takeovers general drawbacks

A
  • Can lead to management problems.
  • Possible conflict between the two teams of managers
  • Conflicts of culture and business ethics
29
Q

Impact of a merger on the various stakeholders:

Horizontal integration

A
  • Consumers have less choice

* Workers may lose jobs

30
Q

Vertical Forwards integration

A
  • Workers have greater job security as business has secure outlets
  • More varied career opportunities
  • Consumers may resent the lack of competition in the retail outlet because of the withdrawal of competitor products.
31
Q

Vertical Backwards integration

A
  • Greater career opportunities for workers
  • Consumers may obtain improved quality and more innovative products
  • Control over suppliers may limit competition and choice for consumers
32
Q

Conglomerate

A
  • Greater career opportunities for workers

* More job security because risks are spread across more than one industry

33
Q

Synergy

A

Means ‘the whole is greater than the sum of parts’

34
Q

Any mergers/takeovers fail to gain true synergy because:

A
  • Firm is too big to manage and control (diseconomies of scale)
  • Business and management culture may be so different to work effectively and cooperate together
35
Q

Ways to avoid integration problems

A
  • Detailed due diligence – focused on the likely areas of risk (e.g. IT systems, impact on customers etc)
  • Careful integration planning – a detailed action plan based on pre-takeover due diligence
  • Act quickly: the first 100 days are often considered vital for the overall success of the takeover or merger
  • Clear communication about the objectives of the transaction and the honesty about the implications for key stakeholders (particularly employees)
  • Respect the culture of the target business
36
Q

De-mergers

A

This could follow a takeover that has not been successful
65% of mergers/takeovers fail to benefit shareholders
May be due to:
• the expected economies of scale have not happened
• DEOS will occur when the merger/takeover involves significant cultural, political, and geographical differences
• Or benefits of integration do not occur

37
Q

Retrenchment/downsizing

A
  • This is the process of making a business smaller (negative organic growth).
  • This means the cutting back of an organisations scale of operations.
38
Q

Causes of Retrenchment:

A
  • Changes in tastes/fashions
  • Technological developments make products obsolete
  • Lack of planning for change in economic conditions
39
Q

Joint ventures

A

form of external growth between two or more firms, where they agree to work together and to create a separate business (e.g. Sony Ericsson)

40
Q

Strategic Alliances

A

agreements between firms in which each agrees to a set amount of resources to be used to achieve an agreed set of objectives.

A2 Business (3 decks)

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