External allaences for international business

EXTERNAL ALLAENCES
FOR INTERNATIONAL
BUSINESS
Rajendran Ananda
Krishnan

https://www.facebook.com/ialwaysthinkprettythi
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SYLLABUS
 Using external parties to help grow a business
 franchising, advantages and limitations investing in a
franchise
 joint ventures- types
 Acquisitions and mergers

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GROWTH STRATEGIES USED BY BUSINESS
 Penetration strategy : focuses on firms existing
product in existing market and entrepreneur attempts
to penetrate this product or market by encouraging
existing customers to buy more of the firms current
products.
 Market development strategies : involves selling
firms existing product to new group of customers
who can be categorized in terms of geography,
demography and based on new product use.

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 Product development strategy : for the growth involves
developing and selling new products to people who have
already purchased firms existing products.
 Diversification strategies : involves selling new product
to new market. Even though both knowledge bases
appear to be new, some diversification strategies are
related to the entrepreneurs knowledge. There are three
types of diversification strategies :
 Backward integration : it refers to taking step back in
the value added chain towards raw material.
 Forward integration : step forward on value added
chain towards the customers.
 Horizontal integration : occurs at the same level of the
value added chain but simply involves a different but
complimentary, value added chain.
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IMPLICATIONS OF GROWTH ON COMPANY
 Pressure on existing financial resources : growth
involves capital investment in form of expenditure in
technology, hiring new human resource for company,
development of infrastructure. This poses a question
mark on companies as to whether company will yield
profits for the present investment or not.
 Pressure on human resource : when companies
go in for expansion of business it increases work
load on employees which may lead to employee
stress, burnout due to which employees may have to
leave organization leading to increased employee
turnover in the company.

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 Pressures on the management of employees :
expansion of business increases workload as well as
expectation of employees towards business, in terms
of decision making style, compensation plan in
business which has to be managed by employees at
workplace.
 Pressure on entrepreneurs time : in terms of
expansion strategies entrepreneur if required to
follow effective time management, as there should
be minimum gap between product idea and bringing
product in market.

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FRANCHISING
 Franchising is an arrangement where by the
manufacturer or sole distributor of trade mark
product or service gives excusive rights of local
distribution to independent retailers in return for their
payment of royalties and conformance to
standardized operating procedures.

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ADVANTAGES OF FRANCHISING ( franchisee )
 Product acceptance : franchisee enters into a
business that has an accepted name, product,
service etc. Franchisee does not have to spend
resources trying to establish credibility of the
business.
 Management expertise : franchisee enjoys
managerial assistance from management expertise
of franchisor. As new franchisee often require
training on all aspects of operating franchise.

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 Capital requirement : franchisor finances the initial
investment to start franchisee operations. The initial
capital requirement to purchase a franchise
generally reflects fee for the franchise construction
cost, and the purchase of equipment.
 Knowledge of market : established franchise
business offers entrepreneurs experience in
business and knowledge of market. This knowledge
is usually reflected in plan offered to franchisee that
details profile of the target customers and strategies
that should be implemented during beginning of
company operations.

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 Operating and structural controls : refers to
specification in terms of maintaining quality, service
and establishing effective managerial controls.
Franchisor will guide franchisee in all these
dimension for effective establishment of business.
ADVANTAGES TO FRANCHISOR
 Expansion risk : franchising helps entrepreneur to
quickly expand business with minimum capital and at
later time some extent of responsibility is borne by
franchisee so level of risk is reduced on part of
entrepreneur.
 Cost advantage : franchising helps in gaining as if
company units are operating on large scale than
materials have to be ordered in bulk quantity which
will help entrepreneur on cost cutting.
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DISADVANTAGES OF FRANCHISING
 Disadvantages from a Franchisor’s point of view:
 Considerable capital allocation is required to build the franchise
infrastructure and pilot operation. At the beginning of the franchise
program, the franchisor is required to have the appropriate resources
to recruit, train, and support franchisees.
 At the beginning of the franchise program there is a broader risk that
the trade name can be spoiled by misfits until such time the
franchisor is capable of selecting the right candidate for the business.
 There is a risk that franchisees exercise undue pressure over the
franchisor in order to implement new policies and procedures.
 The franchisor has to disclose confidential information to franchisees
and this may constitute a risk to the business

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 Disadvantages from a Franchisee’s point of view:
 The requirement to pay the franchise fees and royalty to
the franchisor, which in some cases can be exaggerated.
 The transfer of all goodwill built in the local market to the
franchisor upon expiration or termination of the franchise
contract.
 The necessity of abiding by the franchisor’s operating
systems, standards, policies and procedures.
 Reduced corporate profit margin due to payment of
royalties and levies

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TYPES OF FRANCHISES
 Dealership franchising : it is found in automobile sector.
In this manufacturers use franchises to distribute their
product lines. These dealership act as retail stores for
manufacturers E.g. Hedrick Honda Daytona
 second type of franchising involves using of name ,
image , way of doing business example subway, Mc
Donald's, Dukin Donuts etc.
 Third type of franchising involves offering of service
which comprises of personal agencies such as income
tax preparation companies, real estate agencies etc.

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JOINT VENTURES
 A joint venture (JV) is a business agreement in which
parties agree to develop, for a finite time, a new entity
and new assets by contributing equity. They exercise
control over the enterprise and consequently share
revenues, expenses and asset. E.g. Virgin Mobile India
Limited is a cellular telephone service provider company
which is a joint venture between Tata Tele service and
Richard Branson's Service Group.

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TYPES OF JOINT VENTURES
 Traditional equity joint-venture :Two parents from two
different countries. A company created by other
companies, with each owning a proportion of the
shares
 Trinational :Two parents from two different countries,
set up a venture in a third country
 Intra firm : Two foreign subsidiaries of the same MNE
 Cross-national : Two parents of same nationality,
venture located in a different country

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ADVANTAGES OF JOINT VENTURE
 Provide companies with the opportunity to gain new
capacity and expertise
 Allow companies to enter related businesses or new
geographic markets or gain new technological
knowledge
 Access to greater resources, including specialised
staff and technology, sharing of risks with a venture
partner
 Joint ventures can be flexible. For example, a joint
venture can have a limited life span and only cover
part of what you do, thus limiting both your
commitment and the business' exposure.
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 In the era of divestiture and consolidation, JV’s offer
a creative way for companies to exit from non-core
businesses.
 Companies can gradually separate a business from
the rest of the organisation, and eventually, sell it to
the other parent company. Roughly 80% of all joint
ventures end in a sale by one partner to the other.

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DISADVANTAGES OF JOINT VENTURE
 It takes time and effort to build the right relationship
and partnering with another business can be
challenging. Problems are likely to arise if:
 The objectives of the venture are not 100 per cent
clear and communicated to everyone involved.
 There is an imbalance in levels of expertise,
investment or assets brought into the venture by the
different partners.

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 Different cultures and management styles result in
poor integration and co-operation.
 The partners don't provide enough leadership and
support in the early stages.
 Success in a joint venture depends on thorough
research and analysis of the objectives.

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ACQUISITION
 Acquiring control of a corporation, called a target,
by stock purchase or exchange, either hostile or
friendly. also called takeover. Acquisition is entire
purchase of company or part of company is
completely absorbed . Acquisition can take many
forms depending on the goals and position of parties
involved in transaction.

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ADVANTAGES OF ACQUISITION
 Established business : the most significant
advantage is that the acquired firm has an
established image and track record.
 Location : new customers are already familiar with
location.
 Established marketing structure : an acquired firm
has its existing channel and sales structure. Known
suppliers , whole sellers, retailers, and
manufacturers are important assets to an
entrepreneur.
 Cost : the actual cost of acquiring a business can be
lower than other methods of expansion.
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 Existing employees : employees of existing business
can be an important assets to acquisition process.
They know how to run the business and can help
ensure that the business will continue in successful
mode.

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DISADVANTAGES OF ACQUISITION
 Marginal success record : success of acquisition may prove to
be a question if status of acquired company in market is not
good.
 Overconfidence in ability : some entrepreneurs may be
overconfident that acquiring of poor market company is
challenging and may lead to success.
 Key employee loss : employees may not be comfortable with
change in management of company due to which they may
quit organization resulting in key loss of employees.
 Over valuated : purchase price of company may get inflated
due to established image, customer base etc. If entrepreneur
has to pay high price for a business , return on investment
may not be up to expectation.

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MERGER
 The combining of two or more entities into one,
through a purchase acquisition or a pooling of
interests. Differs from a consolidation in that no
new entity is created from a merger. It is one of the
method of expanding venture or business.

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ADVANTAGES OF MERGER
 A merger lets the target (in effect, the seller) realize the
appreciation potential of the merged entity, instead of
being limited to sales proceeds.
 A merger allows the shareholders of smaller entities to
own a smaller piece of a larger pie, increasing their
overall net worth.
 A merger of a privately held company into a publicly held
company allows the target company shareholders to
receive a public company's stock, despite the liquidity
restrictions of SEC Rule 144a

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 A merger allows the acquirer to avoid many of the
costly and time-consuming aspects of asset
purchases, such as the assignment of leases and
bulk-sales notifications.
 Of considerable importance when there are minority
stockholders is the fact that upon obtaining the
required number of votes in support of the merger,
the transaction becomes effective and dissenting
shareholders are obliged to go along

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DISADVANTAGES OF MERGER
 Diseconomies of scale if business becomes too large, which
leads to higher unit costs.
 Clashes of culture between different types of businesses can
occur, reducing the effectiveness of the integration.
 May need to make some workers redundant, especially at
management levels - this may have an effect on motivation.
 May be a conflict of objectives between different businesses,
meaning decisions are more difficult to make and causing
disruption in the running of the company.

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THANK YOU

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External allaences for international business

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