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Customers and the two businesses

If the company’s were to merge it would be a horizontal integration because the two businesses are rivals and they are both at the same stage of the production chain. The advantages of horizontal integration are that the formed business might be able to achieve more internal economies of scale and hold a bigger market share. The advantages of achieving internal economies of scale are generally reducing the average cost on producing at a large scale.

This could be done in many ways in internal economies of scale like, purchasing economies which is when a large company buy in bulk to get discount, small businesses might not be able to do this because they can not afford to buy in bulk or do not have enough space to store the stock. For example if boots and alliance UniChem merged they would have more money to buy in bulk and more buildings or shops to store the products in so they would be saving money.

Another way is to have marketing economies this means that the cost of an advertising campaign would be less per unit sold, although the company, if made bigger might want to increase the advertising campaign to gain customers.

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If two businesses merge this could mean that the formed business could be able to afford specialist managers like lawyers and accountants this is called managerial economies.

Achieving financial economies is when a large business will be able to lend more money because the banks would know that the business could pay the money back also the bank would lower the interest rate. Technical economies happen when the business can afford more advance technology which can increase productivity, productivity is total output divided by number of workers. For example the “law of increased dimensions” means that if the machinery is twice as advanced it doesn’t necessarily mean that it will cost twice as much.

The final economy of scale is risk-bearing economies, this is when a firm can afford to sell products in a range of different markets, this is good for a business for example: if one type of product goes out of fashion, the business can carry on selling another product, where as if the business was just selling the product that went out of fashion the business could risk going bankrupt as they have no other way to make profit. Another result of the merger is that the two businesses have different types of product so together they would have more products which could attract new customers into the shop.

There are other types of takeovers and merges like backward vertical integration this would be when a firm takes over or merges with their supplier. For example Boots buying their supplier, the advantages of this would be the firm would have a greater control over it supplies and the business might be able to obtain better quality and cheaper raw materials. This can happen both ways for example Boots supplier taking over Boots, this is called forward vertical integration the advantages of this are the firm will have greater access to customers making it easier to sell their products.

Another merge is lateral/conglomerate this is when two businesses merge or get taken over that are in different markets for example Alliance UniChem buying Ryanair, the advantages of this are that the risk is reduced because then the business is not just relaying on a certain range of products to sell. A disadvantage is that one of the businesses might have no experience in the other market which leads to the business being run badly and may result in bankruptcy.

There are also diseconomies of scale this means there are disadvantages to two big businesses (like Boots and Alliance UniChem) merging for example, if the business gets to big it could be very hard to manage and result in failure, also the decisions made take time to reach everybody in the company and could make people at the bottom of the hierarchy (pecking order) feel insignificant. Other problems are there would be a board of directors from each company so if the business merged they would not need two boards so jobs would be cut.

If a whole of a board was cut this could be bad for the business as that board would only know how to manage the staff in its previous business. Figures show that one thousand jobs would be cut which would save a substantial amount of money, although in Alliance boots this could affect the business a lot as these workers may be very experienced and leave the individual shop understaffed, the customer service in individual shops could drop which would drive away customers from the whole business.

The public will be affected by the merge by a few reasons, including if Boots and Alliance UniChem merge there will be less competition on the market so the business could raise their product’s prices as the customer might be forced to buy the product because they can’t purchase the product from other stores. At the moment the businesses have not merged so they are competing by lowering prices to gain customers. This is a problem with the two businesses merging but a result will be the business merged will most likely sell a bigger range of products which is an advantage to the customer.

The office of fair trading (OFT) is a government run organization that deals with anti-competitive practises of business, this means that they will refer cases to government ministers, then the whole industry can be research ed if it is thought a business to have a monopoly share (25%) of the market. A few years ago the OFT might have done this because Boots and Alliance UniChem merged together would of probably had a monopoly share, but now there is stiff competition in the market from supermarket giants Tesco’s and Asda who now each hold a large share of the market.

If the merge happened the business might not be able to grow anymore because of the risk of holding a monopoly share of the market, a solution to this is to expand the business abroad where they can grow with out having any worry of the OFT interfering, but a problem could be finding a country with a gap in the market for the merged company (Alliance Boots) to sell their range of products. Conclusion

I think that the merge between Boots and Alliance UniChem resulting in “Alliance Boots” will be successful because both companies are in the same market which means it is only horizontal integration the result of this is that the managers of the company both have experience of this market. Other factors are the two businesses both already have customers who regularly buy products from both different stores.

I think the main advantage for the businesses if they where to merge is that they could achieve economies of scale which would lower the average cost on producing at a large scale. A disadvantage of the businesses merging is that they might take for granted the decreased competition and raise the prices too high, so high that many customers might choose to shop elsewhere.

Bibliography www.bbc.co.uk

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