Expansion and Mergers - Essay Example

? Expansion and Mergers Expansions and Mergers Government Regulation The basic reason why governments regulate business is in situations whereby natural monopolies exist. According to Carroll and Buchholtz (2011), “A natural monopoly exists in a market where the economies of scale are so large that the largest firm has the lowest costs and thus drives out other competitors” (p. 356). In this regard, a natural monopoly may have adverse effects on the market economy once organizations engage in anticompetitive practices aimed at locking out their competitors out of business. In addition, the monopoly may engage in other practices like fixing prices of goods, which is not the ideal situation in a free market. On the contrary, government regulation is crucial in dealing with excessive competition practices in the market economy (Carroll & Buccholt, 2011, p. 358). In this case, firms will engage in setting prices below unprofitable levels forcing some firms out of business while the remaining firms will raise their prices resulting to products that are too expensive for the consumers. Government regulation is important in controlling negative externalities in a market economy (Carroll & Buchholtz, 2011, p. 357). By definition, Hackette and Moore (2011) defined “a negative externality as an uncompensated harm to others in a society that is generated as a by-product of production and exchange” (p. 61). It is evident that production of good has many by-products with some being harmful while the manufacturer does not pay for the harm caused. In effect, the manufacturer produces more products and earns more profits without catering for the harmful effects of the by-products. In this case, governments will always regulate such industries in order to ensure businesses do not risk the lives of others while making more profits. Rationale for the Government Intervention in the US Market Process As earlier indicated, governments regulate businesses to ensure that there was no market dominance by a monopoly. According to Geroski and Jacquemin (1985), dominance of a business firm goes hand-in-hand with the ability of the firm to exploit a strategic advantage to gain a large share of the market at the expense of its business rivals (as cited in George & Jacquemin, 1992, p. 150). In this regard, it is possible for business firms to use anticompetitive strategies and try to edge out their competitors. Although the US is a free market, it is important for the government to intervene and ensure that all businesses engaged in ethical business practices. Since the US is a free market, it is important for the forces of demand and supply to determine the market price of goods and services. In this case, it is important for the government to regulate businesses in industries that fixed prices below the profit making levels in order to get rid of their competitors, in the US. In this regard, the government's failure to regulate makes the businesses eliminate their competitors and only raise the price of goods once their competitors are not in the market. In effect, these unethical practices do not provide for a competitive market environment. Therefore, this emphasizes the importance of government intervention in the form of regulation to ensure the forces of demand and supply remained as the important factors in determining the prices of goods and services. Self-Expansion Complexities on Capital Projects The underlying complexity currently facing any capital project in the US is obtaining capital required for expansion after the recent recession. According to LaBonte (2009), the weak economy and competition from other manufacturers led to decreased market share of the US automobile industry. In addition, the recession had an effect on credit facilities in the country. In this regard, LaBonte (2009) noted, “The recession had made credit facilities less available, which may have limited the ability of auto manufacturers and suppliers to finance their businesses” (p. 278). As a result, obtaining the necessary credit for self-expansion is a complexity. In addition, Conerly (2007) noted a tendency by banks to ask for stringent conditions to finance businesses during or after a recession, which he further noted that these conditions are hard to meet especially after a recession. On the other hand, self-expansion will result to direct competition of these firms in the automobile industry. In effect, the direct competition will lead to manufacturing of many products to consumers whose marginal propensity to consume, especially high-end products like those in the US' automobile industry, after recession is low (LaBonte, 2009). In this regard, the consumers may look for cost effective products implying that the foremost undertaking for the US' automobile industry will engage in manufacturing of cost effective vehicles. In effect, this entails engaging in research and development, which is expensive for an industry that is seeking self-expansion (Gallasch, Grafe, Hans, & Salter, 2004). Converging the Interests of Shareholders and Managers According to Siems (2007), company founders, managers, and shareholders are the most important stakeholders in any business entity. However, each of this group of stakeholders has interests, which might be divergent. In effect, it is important to find a convergence of the interests of the managers and the shareholders in order to ensure success. According to Sage Publications (2011), one fundamental way of ensuring managers identified with shareholders’ economical interests is by enacting a shareholders’ ownership option in an organization. Therefore, a risky investment will ensure that managers and shareholders balance these risks based on their portfolio in the organization. On the other hand, Sage Publications (2011) identified another approach of aligning the interests of the shareholders with those of the managers by attaching compensation of managers to shareholders’ returns. Since a company's performance has a direct link with the decisions made by managers, attaching the performance of the managers to the market share returns will ensure a convergence of interests between shareholders and managers. Conversely, Sage Publications (2011) identified another approach of converging interests related to the “competitive labor market for corporate executives” (p. 103). In this regard, managers compete amongst themselves within and outside the firm with their evaluation based on corporate performance in terms of market share and efficient accounting. In effect, the self-interests of managers to compete in the labor market ensure that they were efficient in their performance, which is essential for the performance of a company and fulfilling the interests of the shareholders. Implications for the Goals of a Firm on Maximizing Profits or Creating More Shareholder’s Value Creating more shareholder value appears to be the most conceivable objective the industry will result to during self-expansion or a merger. According to Reynolds, Schultz, and Hekman (2006), the stakeholders’ theory argues that the organization has relationships with many constituent groups and that it can engender and maintain the support of these groups by considering and balancing their relevant interests. Based on the foregoing, it is of the essence for the industry to create shareholder value in an industry characterized by a declining market share because of the ever-increasing competition resulting from globalization. On the other hand, the immediate objective of mergers and self-expansion is enlarging an organization’s market share in an industry. In view of this factor, a larger market share aims at strengthening the organization by gaining a foothold in the industry. In effect, this enables an organization to create value for its shareholders in the short-run. On the other hand, the long-term goal for the organization will be to maximize profits once it attains the creation of shareholder value. References Carroll, A. B., & Buchholtz, A. K. (2011). Business & Society: Ethics, Sustainability, and Stakeholder Management. Mason, OH: Cengage Learning. Conerly, W. B. (2007).Businomics: From the Headlines to Your Bottom Line---How to Profit in Any Cycle. Avon, MA: Adams Media. Gallasch, A., Grafe, J., Hans, R., & Salter, B. N. (2004). Challenges for the automotive industry in an on demand environment. IBM Business Consulting Services. Retrieved from http://www-935.ibm.com/services/us/imc/pdf/g510-3956-challenges-automotive-on- demand.pdf George, K., & Jacquemin, A. (1992). Dominant Firms and Mergers. The Economic Journal, 102(410): 148-157. Hackett, S. C., & Moore, M. C. (2011).Environmental and Natural Resources Economics: Theory, Policy, and the Sustainable Society. Armonk, NY: M. E Sharpe. LaBonte, M. (2009). Recession, Depression, Insolvency, Bankruptcy, and Federal Bailouts. Alexandria, VA: The Capitol Net Inc. Reynolds, S. J., Schultz, F. C., & Hekman, D. R. (2006). Stakeholder Theory and Managerial Decision-Making: Constraints and Implications of Balancing Stakeholder Interests. Journal of Business Ethics, 64(3): 285-301. Sage Publications. (2011). Sage Brief Guide to Corporate Responsibility. Thousands Oak, CA: Sage Publications. Siems, M.M. (2007).Convergence in Shareholder Law. Cambridge: Cambridge University Press. Read More