Mergers and Acquisitions as an Efficient Way for Firms to Grow - Assignment Example

? Final Exam Questions Final Exam Questions Question Are mergers and acquisitions an efficient way for firms to grow? Yes. Mergers and acquisitions is an effective way through which businesses can expand and grow by acquiring or merging with other running corporate organizations. This is critically important for business growth because it helps break trade barriers, improved competitive advantage, and enhanced globalizations of businesses as well as free flow of capital. An Acquisition or merger occurs when two separate companies working separately decide to operate as one to increase profitability and value (Maksimovic, 2011). Although mergers and acquisitions are always used in the same breath, the two terms have different implications. Generally, the main difference between mergers and acquisitions is based on how the purchase is articulated and communicated or received by the concerned parties. For example, unlike acquisitions, mergers occur when two companies agree to join and operate as one. In this regard, the merged companies can operate as equals or through laid down agreements. On the other hand, acquisitions involve a company taking over another company and establishing itself as the owner through a purchase. A fundamental characteristic of many acquisitions is that the acquiring company always takes over the management and ownership of the other companies they have acquired and eventually combine their operations. In this regard, the controlling power of one company is transferred from one shareholder group to another. One of the ways through which mergers and acquisitions contribute to business growth and expansion is that they offer quicker methods for companies to grow and reorganize their assets portfolios. They allow companies to acquire assets across many industries. It allows them to establish and penetrate new markets depending on the objectives of the company; acquired assets may be sold or retained (Maksimovic, 2011). The dominant company reorganizes and restructures the management and the company structure. Resource utilization is also made efficient and effective increasing productivity. Staff reductions lower operation expenses increasing profitability, sustainability and more resources for further investments. In an acquisition, the acquiring company establishes sustainable positive results by spreading its risks through many different industries (Ross, 2005). Another important contribution of mergers and acquisitions related to business growth is that they enable companies take advantage of economies of scale. They increase the purchasing power of equipment’s and office supplies saving costs. This is due to increased negotiation power due to increased company size. The new entities, can access new technologies which gives them a competitive edge over their competitors. Expenses related to information and intelligence logistics are also reduced due to a shared infrastructure. This makes the cost of production per unit output to decrease increasing profits (Maksimovic, 2011). Question 4: How can a firm create the conditions for innovation? There are a diverse number of ways through which firms can create enabling conditions for innovation. Innovation is crucial to the growth and sustainability of modern companies because. Increased innovation leads to more products in the market generating more sales. The top companies in the world are leading in innovations. Creating a culture of innovation is one of the best ways that companies can create favorable conditions for innovation. For example, a culture of risk aversion is one of the critical barriers to innovation. As a result, to ensure continued innovation, firms should move from risk aversion organizational culture to a culture of calculated risk taking. Similarly, firms should also create organizational cultures that promote curiosity and tolerance of mistakes and wish to experiment with new things. This includes giving the employees the freedom to experiment, promotion of open communication as well as leaving room in the organization budgets. Developing a culture of innovation can also be achieved by constantly questioning the existing status quo structures in the organization and rewarding innovation and flexibility. According to Manget (2010), a company can also create conditions for innovation through effective leadership. For example, Top level managers must set the pace for innovation. They must approach innovation as a critical business objective and demonstrate willingness to take calculated financial risks. They must develop business strategies that turn good ideas into profitable innovations. The leadership team must effectively allocate resources to priority projects. High value projects must be prioritized because of the high returns they promise. They must be able to balance long term projects and short term projects (Cooper, 2001). Additionally, leaders must be taught how to drive innovations by inspiring creativity and encouraging experimentation. The ability of a company to regularly conceive, develop and launch new products in the market is dependent on the talent available and the environment, in which they work. Leaders must be able to nurture creativity and develop ideas into new innovations. They must be committed to research and development by availing the necessary resources and incentives. They must be able to articulate and communicate the company’s broad objectives to the innovation team. Everybody involved in the innovation activity must share a common purpose for exemplary results (Capitalizing on Complexity 2010). Another important way through which companies can create conditions that favor innovation is by developing a business process and strategy for innovation. A company must develop an innovation strategy .The product innovation strategy should guide the business product development efficiently and effectively. It facilitates the selection of new projects and allocates resources accordingly. The business strategy must enable the engagement and maintenance of capable people. The Innovation strategy must reinforce the primary business objectives through a plan of action which focuses on markets, industrial sector and technologies which the innovation is intended. This creates a defined boundary for the innovation saves cost and time and increases the number of new products in the market (Zakaria, 2011). Question 6: Does a firm need to diversify across different businesses in order to benefit from economies of scope?  Yes. Diversification across businesses is one of the most important ways through which businesses can be able to achieve economy of scope. Generally, economies of scope refers to the cost advantages that companies often achieve by producing a variety of products as opposed to specializing in the production of a single product. Another important way through which economy of scope can also be achieved when a business firm is able to produce a particular level of product output at cheaper rates than a combination of other firms within the market share that are each producing a given output level for each of the product lines. On the other hand, other companies and business firms have also successfully achieved economies of scale through sharing or joint utilization of certain inputs to help reduce the unit costs. Achieving economies of scope can significantly help individual businesses to reduce their cost of operation. Diversification particularly increases economies of scale by allowing resource utilization to be spread across all enterprises. Several resources and skills can be shared by related enterprises. The strategy of diversification is often operationalized when business firms are able to extend and build upon their existing resources, capabilities and areas of expertise in order to enhance their competitive advantage. According to many experts, diversification of production across different businesses is an important corporate strategy that allows companies to effectively cut costs by exploiting the economies of scope between their various business units. For example, the business units can share the same expertise, existing assets, equipment and corporate core competence in order to maximize limited constraints. In multiple product production, storage, preparation and customer service facilities can be shared reducing the average costs per unit output due to the increase in the number of goods produced. Related business allows many cost reducing opportunities through internal organization. This reduces operation costs and gives the business firms more resources to invest. On the other hand, individual business can still enjoy economies of size where fixed costs are spread over several units of production in the enterprise lowering operational expenses. When offering different related services, businesses enjoy economies of scale by using the same infrastructure reducing costs as opposed to other businesses using different infrastructures for related services. This gives firms with economies of scope a competitive edge because of higher profits (Palich, 2000). Diversification allows related enterprises to share both tangible and intangible assets in the production of multiple products resulting in reduced costs of production per unit of output (Panzar and Willig, 1981). Despite the products being different they come from a shared input thus enjoying a fixed factor of production, not fully exhausted in the production of a single product. The businesses also find it easier to enter new product and markets due to existing infrastructure. New products can also penetrate existing markets easily (Penrose 1995). Extra Question A. Describe the ideal manager/leader for 2020 In the year 2020, a number of trends are going to play a critical role in the concept and practice of leadership. Future managers and leaders will play an important role in a company’s profitability and achievement of overall objectives. Although the contemporary leadership competencies will still be valued, business organizations are going to be presented with diverse challenges arising from increased globalization and internalization, technological advancements as well as new ways of thinking regarding the concept of leadership particularly in the corporate world. One of the qualities of an ideal leader or manager in the year 2020 is ability to conceive strategies on a global basis. For example, the increased globalization and internalization will require future leaders to be conversant with the international trends, complex effects of an increasingly globalized world on their businesses and the resultant wide range of issues that are likely to affect businesses. Another important attribute of an ideal leader/manager in the year 2020 is being techno-savvy. Clear understanding and comfort with various communication technologies will be a necessity for leadership by the year 2020. This is particularly attributed to the expected technological advancement in the near future. Concepts such as leadership virtuality will be common in the management world in the year 2020. Lastly, just like today, the future ideal leaders and managers must have a mission. They will be required to charismatically direct the work force to achieve a company's objective. They must be able to influence their workforce to work collectively to achieve a shared purpose. They must be creative, innovative and decisive. They must be able to communicate, organize and negotiate efficiently and effectively. The other important requirements of the future leaders/managers by the year 2020 include the requirement that they must possess problem solving skills and provide a supportive working environment for all employees. They must be able to identify and utilize special skills in the workforce by creating an open and friendly atmosphere (Jacobsen, 2001). Lastly, according to Boatman and Wellins (2011), an ideal future leader or manager will also have to recognize and reward successful employees and any progress made in the workplace. This would ensure they maintain their competitive advantage even in the face of increased competition arising from globalization. Additionally, such leadership traits will help organizations to reduce their operation costs, improve quality as well as achieve high profits. B. What did you learn from this class that has enhanced your skill and knowledge set? Throughout the class, I have learnt that success in management and leadership requires much more than is conventionally provided by books. The modern business atmosphere is changing and business owners need to be conversant with the changing business models to be ahead of competitions. Continuous learning is a must for all leaders to be able to steer their companies in the future. Innovation is the key to future business success and must be embraced by all leaders. Competition and advanced technology can only be beaten by new products and new innovations as major businesses can utilize technology as it emerges. References Boatman, J., Wellins, R. (2011) Global Leadership Forecast 2011: Time for a Leadership Revolution. Bridgeville, PA: Development Dimensions International. Capitalizing on Complexity. (2010). Insights from the global chief officer study. Somers, NY: IBM Corporation. Cooper, R. (2001). Winning AT New Products: Accelerating the Process from Idea TO Launch. New York, NY: Harper Collins. Jacobsen, C. (2001). Dynamics of charismatic leadership: A process theory, simulation model, and tests. Leadership Quarterly 12, 1, 75-81. Maksimovic, K. (2011). Post-merger restructuring and the boundaries of the firm. Journal of Financial Economics 12, 3, 34-41. Manget, A. (2010). Innovation 2010: A Return to Prominence and the Emergence of a New World Order. Boston, MA; Boston Consulting Group. Palich, C. (2000). Curvilinearity in the diversification–performance linkage: an examination of over three decades of research. Strategic Management Journal 21, 2, 155–174. Penrose, M. (2005). The Theory of the Growth of the Firm (3rd edn). Oxford University Press: New York. Ross, W. (2005). Corporate Finance 7th Ed. New York: McGraw-Hill/Companies publishers Ltd. The Conference Board CEO Challenge 2011: Fueling Business Growth With Innovation And Talent Development. New York , NY: The Conference Board. Zakaria, F, (2011).The Future of Innovation: Can America Keep Pace? Time, 177, 23, 78-86. Read More