Source Based Questions - Enterprise Growth Strategies | Entrepreneurship Class 12 - Commerce PDF Download

Question.1. Our firm focuses on consumer-related businesses. Our client, Prime Line, is in the business of making products that have other companies’ logos on them and selling through a North American network of distributors. You may have a coffee cup or a pen or pad with a company logo on them or a fidget spinner as in the picture above. That’s exactly the kind of product they make. It’s a family business, now in its second generation. The acquirer, a company called alphabroder, was in the same promotional products industry but the products alphabroder sold through their network of distributors were typically apparel products like  shirts, sweaters, jackets and hats that are suitable for having logos put on them.
Alphabroder is many times the size of Prime Line. More important, alphabroder is a mature business. It is one of a very small number of competitors, all of whom are pretty large, in a market that is growing but not very rapidly.
Very often, acquisitions arise because companies are in the mature phase of their life cycle. As good as they may be at what they do, there’s no way for them to grow substantially once the business is mature. The only way to grow at all is to take market share from a competitor. That’s a lot harder than it is during the growth phase where all the market participants can grow. In the growth phase, a business can grow even if it’s losing market share. It’s that good a time for companies.
That’s the situation I believe alphabroder found itself in. It is a very well run, successful company but it was not in a growing market. Its competitors were likewise stymied and would defend their client relationships tooth and nail making it even harder for alphabroder to grow. If alphabroder ever intended to have a liquidity event, that is to say if it ever wanted to sell or go public so that its owners could cash out, it needed to find a way to extend its growth in spite of being in the mature phase of its lifecycle. In addition, the two companies together would be able to increase efficiency in the way they served customers; there would be one source for a range of products that was broader than either one of them could offer on their own. The increase in scale and efficiency would enable the next owner of alphabroder to justify paying a high price when alphabroder was sold.
Thus, begat alphabroder’s acquisition strategy.
Prime Line was in the same business but in a different segment. Hard goods is a different market than soft goods. More important, hard goods had many  more fragmented competitors than soft goods. By acquiring Prime Line, alphabroder could extend its time in the growth phase, making its lifecycle chart look more like the dotted line in the chart below, putting off its own maturity and decline.

Explain the need for acquisitions and mergers for an enterprise.

Acquisitions and Mergers happen for certain strategic business reasons. Some of them are listed below:

1. Increase in capabilities: It may come from various opportunities that gets generated with the merger. Some companies may want to merge to reduce the manufacturing costs on their products. By acquiring other companies, they increase their capabilities to grow and expand the business.
2. Gain a larger share of the market and a competitive advantage: Some companies may adopt merger as their strategy to gain a larger market share or the market network. A company also want to expand  its operations in a different market, where it can compete with other products.
3. Diversity in products and services: Two firms may combine their services and products in order to increase the diversity in products. Combining two products and services gives a competitive advantage to the firms over others in the same marketplace.
4. Reduction in costs: Reducing costs is one of the most common strategy of a firm. When two companies merge, having same products and services, may create a large opportunity of reducing costs. With the reduction in cost and increase in volume, the company maximizes profits.
5. Survival: No company wants to give its identity and name to another company, but sometimes, it is the only option with them to survive in the market.

Question.2. “Aggressive entry of Reliance Jio has launched a big price war. With its free services, Jio has upset the bigger players. The Vodafone-Idea merged entity will only add fuel to the fire. Since the merged entity will have more resources, the telecom price war is going to get messier. Idea-Vodafone merger may lead to more consolidation. Reliance Communications, Tata Teleservices and Aircel are already in talks for merger. Airtel has bought India operations of Telenor. Reliance is surely going to face stiff fight from the new biggies. The consumer will be the king.”

Identify and explain the type of merger stated in the above article.

Horizontal merger is the type of merger stated in the above article.

A horizontal merger is a merger or business consolidation that occurs between firms that operate in the same industry. Competition tends to be higher among companies operating in the same space, meaning synergies and potential gains in market share are much greater for merging firms.