Business plan
The firm’s management has unanimously agreed to inject a new lease of life into the waning firm’s business life; this comes after carrying out a successful market research. This comes in the wake of the emerging trend of the declining pace of the firm’s growth over the past year. As was established by the research team, one of the ways of saving the firm’s falling business life is through expanding the firm’s business operations internationally. The reasons for expanding the operations of the firm internationally include:-
The firm intends to reach out to the market that is readily available in other countries (U.S. CB, 2013). Based on the findings, the research team established that the domestic market is saturated by the commodity supply. This is due to the establishment of other firms that deal in the supply of substitute commodities for the product.
Other firms equally supply other brands of the same commodity. This, as a result, reduces the total sales by the firm which translates to reduction in the net income. Increase in the costs of factors of production, such as land over the past one year, has forced the firm to increase the price of the commodity in order to take care of the extra cost. This has scared most of the potential buyers away, thereby, reducing the sales volume.
The firm intends to set up additional branches in other countries in order to take advantage of cheap labor and reduced duty charges in other countries. In the research findings, the firm also established that the international labor market harbor laborers with lots of skill and technical know-how.
The firm, therefore, intends to establish its branches in these countries that boast cheap but skilled labor in order to reduce the cost of production. The firm looking to set up its business operations under favorable government policies that will allow it to maximize the profits accrued.
Some of the countries like Germany have favorable market policies that include reasonable duties charged on the commodities available in the market. The firm intends to take advantage of comparably low duty charges on commodities produced locally amongst various countries worldwide, by expanding its operations internationally. This may invariably impact the price of the goods produced by lowering the selling price; as a result, the firm will be able to sell an additional quantity.
The firm also intends to increase its financial base, through initiating trade partners in most countries by expanding its operations internationally. There are a lot of firms in the international market, with greater financial base that are willing to enter into partnership with other firms in order to expand their operations. The firm, therefore, will look for such firms in order to take advantage of the capital that they are willing to inject into the business operations.
There are various methods of expanding the firm operations internationally. These methods can be adopted by the firm depending on the risks involved, nature of the market, and the urgency to expand the firm’s operation (Lord, 2012). These methods include foreign direct investment approach and strategic alliance approach.
Strategic alliance refers to a business partnership in which two or more firms work together on agreed business activities, so as to expand their operations. The associated firms, however, remain independent business entities within the coalition. Foreign direct investment, on the other hand, involves the buying of an already established firm in another country or injecting capital to expand the operations of another firm in the target country by a foreign firm.
These methods of expanding business operation internationally have different advantages and shortcomings depending on the prevailing circumstance (Hisrich, 2010). Therefore, a firm should conduct thorough research and evaluation before choosing on which method to employ.
A firm can employ foreign direct investment through different ways. A firm may decide to buy shares in the associated company, in order to gain control over the associated firm’s operations. A firm can also effect foreign direct through forming a joint venture in which both firms participate equally. It may also do so by forming a merger with another firm that deals in the production of a unique product.
This method of business expansion allows a firm to reduce the risk associated with any given investment by allowing the firm to diversify their investments in the overseas countries. It is also associated with an increment in the total revenue collection through increased sales volume; this is as a result of increased market outreach by expanding the scales of operation internationally. Foreign direct investment also allows a firm to use the market channels that have already been developed by the associated firm (Andrew, 2013).
This helps save on the cost of conducting market research, aggressive marketing and even losses owing to prolonged promotion periods. Additionally, such moves grant the investing firm with an opportunity to concentrate on other sectors of production with a view of increasing the total revenue income. In some situations, firms get the advantage of inheriting a competitive pool of workers with vast knowledge of the market that helps in the launching firm’s operation at initial stages of production.
Firms can effect strategic alliance arrangement through different ways; for example, such an arrangement can be made by creation of a totally independent business entity by two or more firms, which combine their resources in order to fuel the operations of the new entity while still keeping their respective objectives in check. Such arrangement is referred to as a joint venture.
Additionally, two or more firms may decide to come together and join their resources in different ratios, by offering factors of production according to their capabilities in order to take advantage of the prevailing market situation by reducing the cost of production and maximizing profit, a practice known as equity strategic alliance (Andrew et al, 2009).
Strategic alliance also occur, when two different companies occurring in different countries, agree to form an arrangement to share their strengths and supplement their weaknesses in order to aid their operations in a foreign country over a given period, after which the arrangement seize to exist. This arrangement is known as a global strategic alliance.
Like foreign direct investment, strategic alliance equally has advantages. Strategic alliance allows the associated firms to focus on their competitive strengths within the partnership arrangement in order to increase their overall sales volume. The associated firms also reduce the political risk that is common with extending operations internationally through forging strategic alliance. Practicing firms also get the opportunity to learn from their partners in areas where the associated partners are doing well.
Pooling of resources among the practicing firms allows for the creation of a sound capital base by the associated firms, thereby allowing the firms to have a greater bargaining power in the market. It also saves the firm the agony of tightening up the legalities of operation with the foreign authorities especially in countries where the procedures for procuring such documents are so cumbersome, thereby, allowing the firm to focus on other more productive initiatives.
As expected, these two methods of firm expansion also have their shortcomings. To start with, strategic alliance requires proper supervision to ensure that both the investing firms serve equally according to the agreement. Most of the strategic alliance arrangements are not fully legally tied; therefore, they lack proper documentation that helps in conflict resolution, in case of misunderstanding amongst the associated partners (Raphael et al, 2013).
In some cases, one of the associated firms may lag behind in providing the necessary support as spelt out in the agreement. This may force other associates to pump in more resources a process that may cause deviation from the firm’s initial set objectives. This may also strain the firms independent undertakings since the firm may have to reallocate some of resources from other areas of production.
Foreign direct investment, on the other hand, requires tedious and involving research about the prospective partner. This may prove costly and erroneous especially where the prospective partners do not keep clear financial records.
Lack of proper financial records may equally spur legal battles between the firm and other business associates, mainly where the missing records contain the debt records involving the absorbed firm and other enterprises. Inheriting a firm may also impact the firm’s image negatively especially where there is discrimination against foreign investors in a given country.
Based on this understanding, it is advisable for a firm to expand its operations internationally through the strategic alliance approach. This method offers the firm an opportunity to extend its operations internationally through associating with other companies but still permits the firm to hold on to its profound objectives (Landström, 2012).
It is also worth noting that, with this arrangement, the firm may decide to withdraw from the joint venture any time it feels like, as long as there is a breach of the terms of the agreement; therefore, strategic alliance is the best risk management approach of expanding the firm’s business operations internationally.
References
Andrew, H. (2013). Business Environment in a Global Context. Oxford: Oxford university press.
Andrew, S., Gerald, Y., Hung, G. (2009, June). Ping An’s Overseas Expansion: Financial Uncertainties and Risk Management. Hong Kong daily, 24, 20-21.
Hisrich, R. D. (2010). International Entrepreneurship: Starting, Developing and Managing a Global Venture. Thousand Oaks: SAGE Publications Inc.
Landström, H. (2012). Handbook of Research on Venture Capital, Volume 2. Cheltenham: Edward Elgar Publishing.
Lord, Y. (2012). A Guide to Starting and Developing a New Business. London: HM government.
Raphael, L., Luis, V., and Donald, L. (2013, January, 6). Building Your Company’s Capabilities Through Global Expansion. Cambridge: MIT Sloan Management Review, 234.
United States Census Bureau. (2013). U.S. and World Population Clock. Web.