Buying Small Firms for Development Means

Exam Preparation 4. 2

Question Info:

Sometimes within an industry, a firm buys a smaller rival that uses similar factors of production. At other times a firm buy another organization that supplies it with the raw materials and other inputs for its production.

Question a)

Explain what is intended by the factors of development.

There are 4 factors of creation. Land, Labour, Capital and Business. All of these are scarce resources a firm needs in order to produce goods and services. Land is the natural resources involved, e. g. essential oil. Labour is the labor force and staff included, e. g. pilot. Capital is the man-made machinery involved, e. g. planes. Finally, Organization will be the decision makers and risk takers that make the business enterprise run, e. g. Allan Smith. Similar factors of development mean they are employing the similar scarce resources to make their business run.

Question b)

Discuss the reasons why some firms continue to be small.

There are 4 main reasons why some firms remain small. First of all, is the size of their market is small, they will remain small. For example, if there are just a few number of consumers ready and able to buy their product, expanding the company would be pointless. Also, because their market plus they themselves are small, they can offer a better and much more personal service to their consumers. This allows them to execute better. Furthermore, some small firms produce luxury goods and services for a small market. The marketplace is small because only consumers with high incomes could be willing and able to pay such a higher price for these luxury or 'exclusive' goods and services. Types of this may be, a sports vehicle, developer clothes, jewellery and luxury holiday seasons.

Another reason why firms remain small is because of the fact that their usage of capital is bound. What this means is that they don't have many possessions and therefore remain small. For example, a bank will not loan to a sole trader who has access to limited capital because the sole trader might not have collateral to provide, they compete keenly against many larger firms and because they could not have the ability to create enough income to repay the loan. However, many governments realise that providing subsidies and help to these sole stock traders in the form of maybe providing grants is actually best for the economy. This is because most small companies have to think of very progressive things and new suggestions to compete with the other organizations in the same line of production and to help enhance trade.

Moreover, the intro of new technology has reduced the scale of development needed. What this means is that small firms that have access to technology can use this to provide goods and services to consumers all around the world without becoming too large.

Finally, everything comes down from what the business enterprise owners decide to do with the firms. A few of them may simply just want to stay small. You can find many reasons because of this but one of the key ones is the fact that by expanding a company, business owners must spend more time on their business and this can become very difficult. Others might lack the skill had a need to manage larger companies that employ much more people plus much more capital.

Question c)

Identify the types of integration in the 2 2 situations detailed above.

There are 3 types of integration. There may be vertical backwards/forwards integration, there is certainly horizontal integration and finally there exists lateral or conglomerate integration. Conglomerate integration is not brought up in the problem above but it is the integration of two organizations that are completely unrelated, however vertical and horizontal integration are. Buying a smaller rival that uses similar factors of creation is also called horizontal integration because they're neither in advance or behind along the way of production of the good or service (vertical) but are actually in the same line of development (horizontal). At other times a company buy another organization that supplies it with the recycleables and other inputs for its production. That is known as vertical integration because the organization is either in advance or back of in the type of production of a good or service. An example is Shell or BP. They both control every step of creation from the extraction of crude petrol to the consumer. If, for example, Shell was only distributing oil to others that sold it to consumers but then decided to choose the organizations that sold it to consumers, this might be vertical forward integration. If, however, they decided to buy the company that extracts crude oil, this is recognized as vertical backward integration.

Question d)

Discuss whether such integration is actually beneficial.

There are both pros and cons of merging with another company, whether it is vertical or horizontal integration. Firstly, vertical forwards/backwards integration can be very beneficial. By integrating vertically, the purchase costs become lower because of the fact that after the integration, the business becomes a subsidiary company of the organization meaning they may have central management and the same communication systems meaning that the entire costs can be managed and lowered never to only make the expenses of development cheaper but also to help make the final good or service cheaper for the consumer. Furthermore, after integration, the company can rest assured of the quality of every step of creation, guaranteeing a well-designed and close to perfect end good or service. Another positive thing for the company itself is the actual fact that by extending through vertical integration, they become more able to turn into a monopoly in their market. This is because by managing the start to finish of an good or service they can also control how well their competition will if they provide them the starting resources in the first place (possibly by nurturing price).

One disadvantage of vertical integration could be the idea that by widening their organization size, they also increase their costs since there is more to manage. Another drawback is to the competitors and perhaps the consumers. By controlling all levels of production, the company becomes a monopoly which means that competitors will likely fail in doing business which is not good for the productiveness of the current economic climate. Also, because the organization is now a monopoly, they can charge higher prices because demand becomes more inelastic and at exactly the same time give you a smaller variety of products.

Horizontal integration can also be very beneficial. Principally, by integrating horizontally, the company has lower costs which contributes to more profits and the likelihood of lower prices on goods and services. Also, by integrating horizontally, the joint organization can have more to provide in conditions of the amount and different features of goods and services. Additionally, by integrating horizontally, the company will now have a larger market share, making it contend better against rival or other companies in the same type of production. Therefore results, however in less competition from these other companies and allow the integrated organization to execute better. Finally, by integrating horizontally, the organization will now have access to new markets. That is extremely good for companies that desire to expand abroad and desire to do this immediately and without paying all the bills.

Along with advantages, horizontal integration also offers its drawbacks. For instance, a major disadvantage for some economies and something discouraged by many government authorities is the creation of an monopoly for this reason horizontal integration. This means, as stated in vertical integration, that not only will other competition perform worse but also the company will now be able to set their prices higher for the consumers will also providing a smaller variety of goods and services. In addition, because the company has now extended, it will are more difficult in managing and can not add many new enhancements which would be good for the overall economy. Finally, the merging or acquisition of one company with another can lead to lower synergy and therefore the company will be less fruitful. Also, it is hard to rely upon the newly merged firm to interact loyally and have good chemistry increasing efficiency. Thus, the merger could backfire instead of helping the organization.

In summary, merging or the acquisition of one firm with another can be beneficial but to answer the question, it is not always beneficial and therefore should be thought over carefully before deciding to just do it with the merger.

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