Slides 16 Flashcards
What is the definition of a merger?
When two companies agree to join together.
Mergers are a type of transaction that combines two businesses into a single company.
What is the definition of an acquisition?
One company purchases another company (friendly or unfriendly).
Acquisitions can involve purchasing competitors or moving into new industries.
What are the two types of vertical acquisitions?
- Forward Integration
- Backward Integration
Forward integration involves purchasing a company further down the supply chain, while backward integration involves purchasing a company further up the supply chain.
What is the main goal of a strategic alliance?
To create a business arrangement that is mutually beneficial to both parties.
Alliances help assign ownership and control of relationship-specific assets.
What factors influence a firm’s decision on the level of integration?
- Level of cooperation required
- Number of relationship-specific assets needed
- Strictness of government regulations
These factors help firms determine how closely they need to work together.
Fill in the blank: Alliances are an arrangement between two independent companies to fulfill _______ together.
[complex business transactions]
What does high asset specificity imply about agency costs?
Increases agency (transaction) costs with external suppliers.
High asset specificity can lead to more complex and costly negotiations.
What is the spectrum of integration?
- Arms-Length Contracting
- Long-Term Contract
- Equity Alliance/Joint Venture
- Acquisition
The spectrum ranges from low to high integration.
What is the relationship between asset specificity and costs in a make-or-buy decision?
At low asset specificity, it is cheaper to ‘buy’; at high asset specificity, it may be cheaper to ‘make’.
This trade-off affects the decision-making process in vertical integration.
True or False: Vertical integration is desirable when one firm’s investment in relationship-specific assets significantly impacts value creation.
True
What are non-equity alliances?
Collaborative arrangements that do not involve ownership stakes.
These alliances typically allow for flexibility and lower commitment.
What is a long-term contract?
Formal contracts where a buyer and supplier fulfill a transactional agreement over an extended period.
These contracts involve relatively few relationship-specific assets and maintain a high degree of independence.
Example of a long-term contract: Microsoft and Constellation Energy’s agreement for clean power until _______.
[2054]
What is the trade-off between agency and technical efficiencies?
High asset specificity increases agency costs, while low asset specificity allows for more competition and lower costs.
Firms must balance these efficiencies to minimize overall costs.
What are the challenges of writing contracts in buyer-supplier tasks?
Some tasks require too much uncertainty to write a complete contract.
Complex and non-routine transactions often lead to difficulties in contract enforcement.
What is the main purpose of alliances?
To fulfill complex business transactions where contracts are difficult to write or enforce.
Alliances can help mitigate risks associated with uncertainty.
What is tapered integration?
A mix of internal production and external sourcing strategies.
This approach allows firms to benefit from both integration and market transactions.
What type of power company is Constellation Energy?
A nuclear power company.
It provides electricity until 2054.
Which nuclear power plant is Microsoft buying power from?
Three Mile Island.
It was the site of America’s only nuclear meltdown.
What are Non-Equity Alliances?
Collaborative agreements where firms share resources, knowledge, or technology.
Contracts specify resource supply and output sharing.
What is critical for Non-Equity Alliances to be successful?
Trust and alignment of strategic objectives.
What does the Open Skies Agreement allow?
An airline can only fly flights that begin and/or end in their country of registration.
What are two problems created by government regulations in the airline industry?
- Airlines flying passengers to distant destinations
- Airlines flying passengers to foreign destinations that are too small for direct flights.
What do science professors at universities often lack?
Enough money to fund all of their research projects.
What is a Joint Venture?
A new, jointly-owned company created by two or more firms to pursue a specific objective.
What characterizes the relationship in a Joint Venture?
Very high levels of integration and coordination between the two companies.
What was required of foreign auto manufacturers in China after the late 1970s reforms?
To form 50% joint ventures with local Chinese manufacturers.
What is Tapered Integration?
A mixture of vertical integration and market exchange.
Why do firms use Tapered Integration?
It helps a firm expand its output more quickly than if it was producing or selling the product solely on its own.
What is a franchise?
An independent business that licenses its branding, products, and business knowledge from a franchisor.
What advantage do franchisees gain by buying a brand image?
They can attract customers much faster.
Which franchise model requires a minimum investment of $1,000,000 by the franchisee?
McDonald’s franchise model.
What type of franchise retains ownership of the restaurant and assets?
Chic-fil-A franchise model.
How much is the royalty fee paid by Chic-fil-A franchisees on gross sales?
15%.
Which franchise model allows franchisees to sell their franchise with approval?
McDonald’s franchise model.
True or False: Joint Ventures are easy to end if unsuccessful.
False.
What are relationship-specific assets?
Assets that are specifically tailored to the partnership between the companies.
