10. Market structure and competition

 24. Market leaders, challengers and followers


Read the following text and write short headings for each paragraph.


1 ………………………………….

In most markets there is a definite market leader: the firm with the largest market share. This is often the first company to have entered the field, or at least the first to have succeeded in it. The market leader is frequently able to lead other firms in the introduction of new products, in price changes, in the level or intensity of promotions, and so on.

2 ………………………………

            Market leaders usually want to increase their market share even further, or at least to protect their current market share. One way to do this is to try to find ways to increase the size of the entire market. Contrary to a common belief, wholly dominating a market, or having a monopoly, is seldom an advantage: competitors expand markets and find new uses and users for products, which enriches everyone in the field, but the market leader more than its competitors. A market can also be expanded by stimulating more usage: for example, many households no longer have only one radio or cassette player, but perhaps one in each room, one in the car, plus a Walkman or two.

3 …………………………..

            In many markets, there is often also a distinct market challenger, with the second-largest market share. In the car hire business, the challenger actually advertises this fact: for many years Avis used the slogan ‘We’re number two. We try harder.’ Market challengers can either attempt to attack the leader, or to increase their market share by attacking various market followers.

4 …………………………..

            The majority of companies in any industry are merely market followers, which present no threat to the leader. Many market followers concentrate on market segmentation: finding a profitable niche in the market that is not satisfied by other goods or services, and that offers growth potential or gives the company a differential (distinctiv, deosebit) advantage because of its specific competencies.

5 ……………………………

            A market follower, which does not establish its own niche is in a vulnerable position: if its product does not have a ‘unique selling proposition’ there is no reason for anyone to buy it. In fact, in most established industries, there is only room for two or three major companies: think of soft drinks, soap and washing powders, jeans, sports shoes, and so on. Although small companies are generally flexible, and can quickly respond to market conditions, their narrow range of customers causes problematic fluctuations in turnover and profit. Furthermore, they are vulnerable in a recession when, largely for psychological reasons, distributors, retailers and customers all prefer to buy from big, well-known suppliers.


·         Vocabulary

Find words in the text which mean the following.


1 a company’s sales expressed as a percentage of the total market

2 short-term tactics designed to stimulate stronger sales of a product

3 the situation in which there is only one seller of a product

4 companies offering similar goods or services to the same set of customers

5 a short and easily memorized phrase used in advertising

6 the division of a market into submarkets according to the needs or buying habits of different groups of potential customers

7 a small and specific market segment

8 a factor which makes you superior to competitors in a certain respect

9 a business’s total sales revenue

10 a period during which an economy is working below its potential



25. Takeovers, mergers and buyouts


·         Vocabulary

Match up these words with the definitions below.


Backward integration  to diversify (diversification)     synergy

Forward integration    horizontal integration  to merge (a merger)

to innovate (innovation)                      a raid   a takeover bid

vertical integration


1 designing new products and bringing them to the market

2 to expand into new fields

3 to unite, combine, amalgamate, integrate or join together

4 buying another company’s shares on the stock exchange, hoping to persuade enough other shareholders to sell to take control of the company

5 a public offer to a company’s shareholders to buy their shares, at a particular price during a particular period, so as to acquire a company

6 to merge with or take over other firms producing the same type of goods or services

7 joining with other firms in other stages of the production or sale of a product

8 a merger with or the acquisition of one’s suppliers

9 a merger with or the acquisition of one’s marketing outlets

10 combined production that is greater than the sum of the separate parts


·         Reading


Leveraged buyouts

One indication that the people who warn against takeovers might be right is the existence of leveraged buyouts.

            In the 1960s, a big wave of takeovers in the US created conglomerates – collections of unrelated businesses combined into a single corporate structure. It later became clear that many of these conglomerates consisted of too many companies and not enough synergy. After the recession of the early 1980s, there were many large companies on the US stock market with good earnings but low stock prices. Their assets were worth more than the companies’ market value.

            Such conglomerates were clearly not maximizing stockholder value. The individual companies might have been more efficient if liberated from central management. Consequently, raiders (persoană agresivă, acaparatoare) were able to borrow money, buy badly-managed, inefficient and under-priced corporations, and then restructure them, split them up, and resell them at a profit.

            Conventional financial theory argues that stock markets are efficient, meaning that all relevant information about companies is built into their share prices. Raiders in the 1980s discovered that this was quite simply untrue. Although the market could understand data concerning companies’ earnings, it was highly inefficient in valuing assets, including land, buildings and pension funds. Asset-stripping – selling off the assets of poorly performing or under-valued companies – proved to be highly lucrative (avantajos, profitabil).

            Theoretically, there was little risk of making a loss with a buyout, as the debts incurred (datoriile făcute) were guaranteed by the companies’ assets. The ideal targets for such buyouts were companies with huge cash reserves that enabled the buyer to pay the interest on the debt, or companies with successful subsidiaries that could be sold to repay the principal, or companies in fields that are not sensitive to a recession, such as food and tobacco.

            Takeovers using borrowed money are called ‘leveraged buyouts’ or ‘LBOs’. Leverage (raportul dintre creanţe şi capital) means having a large proportion of debt compared to equity capital. (Where a company is bought by its existing managers, we talk of a management buyout or MBO.) Much of the money for LBOs was provided by the American investment bank Drexel Burnham Lambert, where Michael Millken was able to convince investors that the high returns on debt issued by risky enterprises more than compensated for their riskiness, as the rate of default (rata neonorării plăţii) was lower than might be expected. He created a huge and liquid market of up to 300 billion dollars for ‘junk bonds’ (obligaţiuni cu risc). (Millken was later arrested and charged (a fi acuzat) with 98 different felonies (crime, acte penale), including a lot of insider dealing (operaţiuni ale unui iniţiat, a unei persoane angajate în respectiva firmă), and Drexel Burnham Lambert went bankrupt (a da faliment) in 1990.)

            Raiders and their supporters argue that the permanent threat of takeovers is a challenge to company managers and directors to do their jobs better, and that well-run businesses that are not undervalues are at little risk. The threat of raids forces companies to put capital to productive use. Fat or lazy companies that fail to do this will be taken over by raiders who will use assets more efficiently, cut costs, and increase shareholder value. On the other hand, the permanent threat of a takeover or a buyout is clearly a disincentive (mijloc de intimidare) to long-term capital investment, as a company will lose its investment if a raider tries to break it up as soon as its share price falls below expectations.

            LBOs, however, seem to be largely an American phenomenon. German and Japanese managers and financiers, for example, seem to consider companies as places where people work, rather than as assets to be bought and sold. Hostile takeovers and buyouts are almost unknown in these two countries, where business tends to concentrate on long-term goals rather than seek instant stock market profits. Workers in these companies are considered to be at least as important as shareholders. The idea of a Japanese manager restructuring a company, laying off (a concedia temporar) a large number of workers, and getting a huge pay rise (as frequently happens in Britain and the US), is unthinkable. Lay-offs in Japan are instead a cause for shame for which managers are expected to apologize.

·         Summarizing

Complete the following sentences, which summarize the text above.


1 The fact that many large conglomerates’ assets were worth more than their stock market valuation demonstrated that …

2 Raiders bought conglomerates in order to …

3 Raiders showed that the stock market did not …

4 Raiders were particularly interested in …

5 Investors were prepared to lend money to finance LBOs because …

6 Raiders argue that the possibility of a buyout …



26. Profits and social responsibility


In the 1920s, many large American corporations began, on a wide scale, to establish pension funds, employee stock ownership, life insurance schemes, unemployment compensation funds, limitations on working hours, and high wages. They built houses, churches, schools and libraries, provided medical and legal services, and gave money to charities (acte filantropice). Since this is fairly surprising behavior for business corporations, there must be a good explanation.

            In the Generous Corporations, Neil J. Mitchell argues that the reason for many of these actions, most of which clearly did not bring immediate cash benefits, was that large corporations had a legitimacy problem. The existence of large corporations showed the classical economic theory of perfect competition to be inadequate. Consequently large corporations introduced ‘welfare capitalism’ (capitalism social) as a way of creating favorable public opinion. Rational capitalists starting with Henry Ford, also realized that a better paid work force would be more loyal, and would be able to buy more goods and services, and that a better educated work force would be a more efficient one.

            Of course, pure free market theorists disapprove of welfare capitalism, and all actions inspired by ‘social responsibility’ rather than the attempt to maximize profits. Since the benefits of such initiatives are not confined to (a se limita la) those who bear the costs, Milton Friedman has criticized them for being unbusinesslike, and for threatening the survival not only of individual corporations but also the general vitality of capitalism. In a newspaper article titled ‘The social responsibility of business is to increase its profits’, he argued that:

In a free enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible, while of course confirming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.

            Thus executives should not make expenditures on reducing pollution beyond the amount that is required by law or that is the best interest of the firm. Nor should they deliberately hire less-qualified, long-term unemployed workers, or workers from ethnic minorities suffering from discrimination. To do so is to be guilty of spending the stockholders’ (or the customers’ or the employees’) money. Friedman does not consider the possibility that stockholders might prefer to receive lower dividends but live in a society with less pollution or less unemployment and fewer social problems.

            An alternative view to the stockholder model exemplified by Friedman’s article is the stakeholder (cei care deţin un interes) model, outlined, for example, in John Kenneth Galbraith’s book, The New Industrial State. According to his approach, business managers have responsibilities to all the groups of people with a stake in or an interest in or a claim on the firm. These will include suppliers, customers, employees, and the local community, as well as the stockholders. A firm which is managed for the benefit of all its stakeholders, will not, for example, pollute the area around its factories, or close down a factory employing several hundred people in a small town with no other significant employers, and relocate production elsewhere in order to make small financial savings. Proponents of the stakeholder approach suggest that suppliers, customers, employees, and members of the local community should be strongly represented on a company’s board of directors.


·         Vocabulary

Find words or expressions in the text which mean the following.


1 institutions or organizations that provide help for people in need

2 acceptability, according to law or public opinion

3 the situation when there are a large number of sellers and buyers, freedom to enter and leave markets, a complete flow of information, and so on

4 a condition of general well-being (and government spending designed to achieve this)

5 menacing, endangering

6 liveliness, health, energy, strength

7 an economic system in which anyone can attempt to raise capital, form a business, and offer goods or services

8 complying with or following (rules, etc.)

9 expressed, given a material form

10 supporters, people who argue in favour of something