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Mergers, Takeovers and Product Differentiation

This resource is designed specifically for Unit 29 of the Edexcel BTEC National qualification, 'Business and Markets'.

Aim:

The aim of this resource is to enhance your understanding of integration in business. By the end, you should be able to:

• Identify the types of integration that takes place in markets
• Understand the difference between horizontal and vertical integration
• Identify the main types of economy of scale

Resources:

• PowerPoint Presentation - Mergers and Takeovers [55K]

Activity:

There is over-capacity in the global car industry. This means that there are too many firms with factories producing too many cars for which there is insufficient demand from consumers to buy. In the face of such market conditions, car manufacturers have to decide how to operate. Should they cut production and rely on strong branding or reputation to survive, or should they become more aggressive in the market, perhaps buying up rival companies in an effort to be 'the last one standing'?

In this Activity we look at the strategy of General Motors, as they attempt to retain their status in the market.

General Motors' (GM) Expansion Strategy

GM is a mass market car producer and US multinational. The company owns Saab, a Swedish upmarket car maker which, when they wanted a new small car without the development time and cost that is usually involved, turned to Subaru, a Japanese manufacturer. GM also owns 20% of Fuji Heavy Industries, who are the owners of Subaru.

Now that's what you call 'globalisation'. The upshot is that the Saab model that came out in 2004 was produced in record time. But then, the new Saab was expected to be a very similar car to the Impreza, Subaru's rally-inspired saloon.

This has been the deliberate policy of GM: to buy up small stakes in rival car producers' businesses. In fact GM have spent nearly $5 billion in recent years, following this strategy. The following table illustrates the policy in detail:

Image: The Subaru Impreza STi. Copyright: Tim Spence, stock xchng

Company	Date	Strategy
Suzuki (Japan)	1998 onwards	Long-standing links with GM who bought a 3, then 10, then 20% stake
Isuzu (Japan)	1998	Long term alliance led to GM paying $420 m for business
Subaru (Japan - Fuji Heavy Industries)	1999	20% stake worth $1.5bn held in Subaru's parent company
Fiat Auto (Italy)	2000	20% stake bought for $2.4 bn
Daewoo Motor (S Korea)	2003	42% stake held by GM

In addition, GM bought Saab outright. It had previously owned 50% of the Swedish firm.

Why has GM embarked on such a strategy? What are the benefits that the company expects to flow from building strategic alliances with smaller competitors? Here we list some of the key advantages:

• Joint production of engines and new models saves costs
• Production economies of scale
• Managerial economies of scale
• Technical economies of scale
• Speedier development times

GM is not alone in this strategy; many of the other large car makers have started similar projects.

• Daimler-Benz took over Chrysler and also control Suzuki and Mitsubishi
• Renault and Nissan merged in 1999 and bought Samsung in 2001
• Ford owns Volvo cars and Land Rover

But these have tended to be outright takeovers or mergers, involving greater cost and commitment from the predator firm. GM's policy has been to acquire parts of smaller competitor car makers. Their aim has been to achieve a better 'fit' between themselves and the smaller firm. These so-called 'synergies' between the two companies in a merger/takeover enable the predator firm to broaden the base of its product range, so that it has a car for every segment, or type of customer, in the market. These products can then be given the merged company's 'brand' (reputation for quality, status in the marketplace and so on), and can therefore appeal to the different target customers. This process of 'differentiation' is one of the key ways in which firms compete in oligopoly markets.

The advantages that can flow from GM's plan are not guaranteed, though. There can be big problems that acquisitive firms can have with mergers and takeovers. This is recognised by GM. Their chairman and chief executive, Rick Wagoner, was quoted as saying that it only needs a few successful results to prove the value of their strategy. Out of 30 joint projects between GM and Subaru, 20 didn't work out, he estimated.

Conclusion

There has been significant structural change in the car production industry in recent years. The EU certainly expects this to continue in the near future. On its Europa Web site, the EU reckons that the six existing global car manufacturing companies (GM, Ford, DaimlerChrysler, Toyota, Volkswagen, and Renault-Nissan-Samsung) are likely to become stronger, as they continue to extract savings from their strategic alliances with the likes of Fiat, Mitsubishi, Subaru, Isuzu and Suzuki. The analysis goes on to assert that three other car firms are likely to continue outside these alliances: BMW, Honda and PSA (Peugeot and Citroen).

Related Web sites for Research:

• EU analysis of the automotive industry (http://europa.eu.int/comm/enterprise/automotive/pagesbackground/sectoralanalysis)
• Biz/ed notes on Economies of Scale (http://www.bized.co.uk/learn/economics/firms/economies/notes.htm)