Académique Documents
Professionnel Documents
Culture Documents
1.0
Vertical integration
An organization should vertically integrate when costs of making the product inside the
company are lower than the costs of buying that product in the market.
A firm should consider whether moving into new industries would not dilute
its current competencies.
New activities in a company are also harder to manage and control.
The answers to previous questions determine if a company will pursue none,
partial or full VI.
a) Forward integration
b) Backward integration
a) Forward integration
b) Backward integration
The ownership of supply and distribution channels may lead to lower quality products
and reduced efficiency because of the lack of competition
Higher potential for legal repercussion due to size (An organization may become a
monopoly)
New competencies may clash with old ones and lead to competitive disadvantage
2.0
Horizontal Integration
in size,
increase product differentiation,
achieve economies of scale,
reduce competition
access new markets.
When many firms pursue this strategy in the same industry, it leads to industry
consolidation (oligopoly or even monopoly).
b) Increased differentiation.
The larger company has more power over its suppliers and
distributors/customers.
c) Reduced competition.
The result of industry consolidation is fewer companies operating in the industry and less
intense competition.
M&A rarely add value to the companies. More often M&A fail and destroy
the value of the companies involved in it because expected synergies
never materialize.
b) Legal repercussions.
c) Reduced flexibility.
Large organizations are harder to manage and they are less flexible in introducing
innovations to the market.
3.0 LICENCING
Licensing is a contractual agreement between two parties which gives permission to
one party to lease a legally protected entity, such as a name, likeness, logo or
character from the other.
Generally, licenses are contracts that allow a person or entity (the "licensee") to use
the property of another (the "licensor").
Licenses often involve intellectual property, and, when they do, their characteristics
include the following:
a limited right to use the intellectual property;
little access to the knowledge source (i.e., the licensor); and
the application of a "packaged solution," rather than a customized one.
Licensing works by the licensor (brand owner) fixing a royalty rate of usually
about 5% to the sales of products using its name.
The licensee, therefore, pays the licensor a percentage of its sales income
above the pre-agreed minimum.
There is also usually an upfront fee paid to the brand owner.
Licensing rates (royalty rates) are essentially profit sharing mechanisms between
brand owner and licensee. To determine an appropriate royalty rate a number of
factors need to be considered: benchmarked royalty rates already in existence;
operating profitability of the brand; the amount of turnover that can be attributed to
the brand alone; brand strength and potential revenues the license will generate.
Advantages
1. A licence allows a company to take a product to market without the expense
of setting up locally and all the risks and costs associated with that.
2. A larger and more powerful licensee in a new market can provide instant
market access and deter competitors and imitators.
3. A licence can be used to enable products to be supplied locally where there is
no opportunity to manufacture in the locality.
4. It is possible with the right kind of licence and overseas business partner to
create an extensive market presence very early on in the products life cycle.
This will help make maximum profits for the licensor.
5. In certain circumstances it is possible to divide up a particular market so that
different companies can licence the same product but apply it in different
areas. For example, it is possible to take disinfection kits and divide up the
market into human and animal markets then find different companies with
the right market presence.
6. It is possible to work with a licensee in a foreign market and learn from them.
For example, it may be possible to improve products or to adjust them so that
they meet local market needs. This can often be done early on in the
products life cycle to help achieve better market coverage.
7. An overseas licensee may well save a lot of expense in terms of research and
development. For example, reciprocal licensing in the car and
telecommunications industries enables companies to exploit the fruits of
research carried out by one company alone.
8. Where well known brands are licensed overseas, the local licensee can take
advantage of an established brand with a known name and goodwill. It is very
important for the licensor to ensure that brand standards are maintained in
an overseas market.
9. It is possible to negotiate further income streams from support services and
training.
Disadvantages
1. It is important for the company to find the right partner to licence with in a
local situation. Understanding what an overseas partner can do is essential to
making licensing a success.
2. It is important to ensure that there are proper control provisions in the
licence. It is especially important with licensing to have a well-drafted licence
drawn up by experts. The licence should contain things such as full audit
provisions and as licensor it may be important to police those audit
provisions.
3. In the long term, royalty payments from a licence may not provide the
maximum for a licensor. It could be that setting up locally can generate
better profits in the long run.
4. It is absolutely key to the success of the licence for it to be properly
negotiated and drafted. Licensing can be a complex arrangement and it is
important for a licensor to be properly guided in terms of royalty payments,
audit provisions and minimum sales.
5. The licensor is often required to provide technical assistance and training in
brand standards etc. depending upon where the licensee is based. This will
need to be factored into the licensing arrangements.
6. The licensor must be satisfied that the licensee can make a local market from
the products. Some products are more popular in some cultures than in
others.
When two or more companies agree to combine their operations, where one
company survives and the other loses its corporate existence, a merger is
affected.
The surviving company acquires all the assets and liabilities of the merged
company.
The company that survives is generally the buyer and it either retains its
identity or the merged company is provided with a new name.
Horizontal Mergers
Vertical Mergers
Conglomerate Mergers
a) Horizontal Mergers
This type of merger involves two firms that operate and compete in a similar
kind of business.
The merger is based on the assumption that it will provide economies of scale
from the larger combined unit.
b) Vertical Mergers
8
Financial Conglomerates
Managerial Conglomerates
Concentric Companies
Financial Conglomerates
These conglomerates provide a flow of funds to every segment of their operations, exercise
control and are the ultimate financial risk takers. They not only assume financial responsibility
and control but also play a chief role in operating decisions. They also:
Reduce risk
Managerial Conglomerates
9
Concentric Companies
5.0 ACQUISITIONS
The term acquisition means an attempt by one firm, called the acquiring firm, to gain a majority
interest in another firm, called target firm.
The effort to control may be a prelude
To a subsequent merger or
10
There are broadly two kinds of strategies that can be employed in corporate acquisitions.
a) Friendly Takeover
b) Hostile Takeover
11
Demerits of Mergers
1. Higher Prices.
A merger can reduce competition and give the new firm monopoly power.
With less competition and greater market share, the new firm can usually
increase prices for consumers.
2. Less Choice.
3. Job Losses.
4. Diseconomies of Scale.
The new firm may experience dis-economies of scale from the increased size.
After a merger, the new bigger firm may lack the same degree of control and
struggle to motivate workers.
If workers feel they are just part of a big multinational they may be less
motivated to try hard.
12
6.10 Introduction
A strategic alliance is a form of collaboration between two or more companies, which can take
Technology transfer.
Each partner in the alliance usually retains their independence while contributing towards a
mutual shared goal.
A joint venture
A joint venture involves a potentially long-term investment of funds, facilities and resources by
two or more companies to a combined venture, which benefits all companies. All involved will
have an equity stake in the new venture.
A joint venture may be formed to:
Joint ventures can also be used to get around country trade barriers. In some cases a joint venture
with a local company may be required to enter some overseas markets.
6.20 The risks of joint ventures
the objectives of the venture are not totally clear and communicated to
everyone involved
13
different cultures and management styles result in poor integration and cooperation
the partners don't provide sufficient leadership and support in the early
stages
1.
2.
By engaging with a foreign collaborator, the products and services can be marketed
in a foreign country.
One partner may have the new and improved technology but do not have
the resources.
Other partner may have resources like capital but do not have the
technology.
In such causes joint venture can fetch new and improved technology as
well as great resources. By engaging a foreign partner, improved foreign
technology can be availed from it's foreign collaborator.
In joint venture the different venturers may be having different skills and
experience.
The benefit of their common wisdom will be available to the venture.
4. Spreading of Risk
The co-ventures agree to share the profits and losses in a particular ratio.
The implies that the risk is also borne by them in that ratio.
5. Shared knowledge
Sharing skills (distribution, marketing, management), brands, market
knowledge, technical know-how and assets leads to synergistic effects, which
result in pool of resources which is more valuable than the separated single
resources in the particular company.
6. Opportunities for growth
14
9. Access to resources
Partners in a Strategic Alliance can help each other by giving access to
resources, (personnel, finances, technology) which enable the partner to produce
its products in a higher quality or more cost efficient way.
10.Economies of Scale
When companies pool their resources and enable each other to access
manufacturing capabilities, economies of scale can be achieved. Cooperating
with appropriate strategies also allows smaller enterprises to work together
and to compete against large competitors.
15
The partner in a Strategic Alliance might become a competitor one day, if it profited
enough from the alliance and grew enough to end the partnership and then is able
to operate on its own in the same market segment.
3. Opportunity Costs
Focusing and committing is necessary to run a Strategic Alliance successfully but
might discourage from taking other opportunities, which might be benefitial as well.
4. Uneven Alliances
When the decision powers are distributed very uneven, the weaker partner might be
forced to act according to the will of the more powerful partners even if it is actually
not willing to do so.
5. Foreign confiscation
If a company is engaged in a foreign country, there is the risk that the government
of this country might try to seize this local business so that the domestic company
can have all the market on its own.
7. Limited Life
A joint venture forms for a limited time period.
The venture comes to an end automatically when the company fulfills the
purpose for which it was formed.
The death or withdrawal of a partner may cause the automatic termination of
a joint venture.
This will put the other partners of the joint venture at a disadvantage if they
want to continue the business.
8. Liability
One of the biggest disadvantages of a joint venture is that the structure
offers no liability protection to the parties involved.
This means a partner in a joint venture has a personal obligation for at least
his portion of the companys obligation, as explained by the Lawyers.com
website.
16
If the joint ventures assets do not cover the companys debts and
obligations, partners of the business may lose their personal assets up to the
point where the debt becomes satisfied.
In the case of a corporation, the company may lose assets as a result of the
ventures obligations
17