Outsourcing

Outsourcing is when a business hires an external party to perform non-core activities, such as building the goods or delivering the services. This allows a business to increase their capacity, with minimal investment.

There are many advantages to outsourcing:

• The external provider will be skilled in the production. For example, if a crisps company outsources the packaging to another company, they will be able to manufacture the packaging in an efficient way.

• It may be cheaper to outsource. Instead of a business having to implement new capital, as well as training their employees, the outsourced company can cheaply produce the product.

• The outsourced business may be more efficient and can produce the goods/services in a shorter time.

There are many disadvantages to outsourcing:

• The business may lose control, over the quality of the goods and services, that the outsourced firm produces.

• If the outsourced company employs young workers and gets them to work, in places like sweatshops, the business can face public backlash, which can reduce sales and profit.

• In the contract, there may be some hidden costs, that the company, being outsourced applies. This may give an incorrect impression to the business, who might end up paying a lot of money.

Acquisitions

An acquisition involves one business taking possession over another. These can be hostile or done by the willing consent of the shareholders/owners of the business.

There are many advantages to an acquisition:

• The business, who acquired the other, has access to more resources, such as land, labour, capital and enterprise.

• The new firm may benefit from economies of scale, thus reducing costs.

• The firm will earn greater profit and can spend this extra profit on research and development. This can lead to further profits.

There are many disadvantages to an acquisition:

• It can be very expensive for the business. If the acquisition is not successful, the business may go into debt.

• The acquired business’ staff may not be happy with the way the new business operates. As a result, they may become demotivated and less efficient.

• There may be disagreements about ideas from either party. This can waste time when making decisions and they may end up losing certain contracts.

Mergers

A merger is an agreement that allows two or more existing businesses to form a larger business entity. There are 3 types of mergers:

• Horizontal – This occurs when two businesses in the same industry join. For example, two manufacturers join with each other. Heinz and Kraft joined together and this is an example of horizontal integration.

• Vertical – This occurs when a company merges with its suppliers, distributors or retail locations (or vice versa). An example would be Pepsi and KFC. Pepsi bought KFC, and began selling their drinks there.

• Conglomerate – This occurs when two businesses with completely unrelated business activities join together. For example, Samsung runs a Korean-based theme park.

There are many advantages to a merger:

• The companies can benefit from economies of scale, lowering the average cost of production.

• The new company can share ideas and can develop new products. This way, they can receive more revenue.

• A merger can reduce competition, allowing them to get more market share.

There are many disadvantages to a merger:

• There may be disagreements between both parties.

• As the firms gain more market share, they may not be willing to innovate. This leads to less choice for the consumer.

• There can be gaps in communications and can delay the decision-making process.

Joint Ventures

A joint venture is an alliance, where the businesses involved start up an independent company. The company is formed using the resources from existing parties. It's important to remember that these are different to mergers, as both parent companies in a joint venture remain independent.

There are many advantages to joint ventures:

• The companies can share their ideas. Through collaboration, a better business can be formed.

• They can save costs, as instead of hiring new staff and purchasing new equipment, they can use existing resources.

• If two overseas business form a joint venture, they can access new markets. This can lead to higher revenue.

There are many disadvantages to joint ventures:

• There may be vague objectives in the business, as they may have contrasting ideas.

• In-depth analysis will be needed when deciding what resources to use and objectives to set. This may be expensive for the new business.

• There may be unequal involvement between the two firms and this can lead to arguments.