Business Plan in a Organisation

Introduction

Any new organisation or an organisation which wants to grow requires a business plan. Planning is an essential part of any organisation which provides structure, long term goals and objectives for management and employees. Any organisation must perform planning as well to determine the suitability of the market which they operate in.

We need to evaluate the following statement: “With a good business plan, we are tools; we’ll be able to succeed” to determine what a business plan is and what the benefits of having a business plan are. The evaluation of this statement covers the following sections:

1. What is a business Plan?
2. What are the elements of a Business Plan?
3. Why Write a Business Plan?
4. With a good business plan, we are tools; we’ll be able to succeed
5. What are the benefits of having a business plan?
6. The five critical ingredients of a successful Business

 

What is a business Plan?

(Venter, et al., 2012) defines a business plan as a written exposition of a venture’s goals and plan of action for the subsequent three to five years. In the case of a start-up, the plan is a written statement of the proposed venture: its purpose positioning, and ambitions. (Du Toit, et al., 2010, p. 157)

A written Business plan is a document which describes the planned interactions with the Micro and the Macro environment for a new or an existing business venture. The business plan provides a road-map (short term and long term) for the entrepreneur to define what are the actions to start up the new venture or to enhance the existing organisation.

A Business plan is prepared by the entrepreneur, but can use the assistance of external sources e.g. expert consultants in the relevant industries.

A business plan defines what the venture is and contains the following elements:

1. Written Document
2. Explanation of the nature of the business
3. Strategy, Vision, Mission and goals of the organisation
4. Who is the management team
5. What products or services will the organisation trade in the marketplace
6. Describing the opportunity
7. Describing of the context
8. Identifying the required resources
9. Indicates the envisaged financial return, and a financial proposal of what financial aid the organisation may need
10. Alignment tool for the new business venture
11. Environmental analysis
12. Incorporates the quantitative and qualitative data and information and
13. Demonstrates the implementation plan for the organisation or new venture

 

Why Write a Business Plan?

(Nieman, et al., 2003) provides the following reasons why a business plan must be compiled:

1. To obtain investment funds – Most banks and shareholders require a business plan as it is seen as vital for approaching and capturing financial resources
2. To serve an inside purpose – The business plan provides: focus, objective, platform and tool where performance can be measured, marketing tool to obtain finance, road map for the business, and identification of the potential risks for the venture.
3. Reduces Risk – Enables the stakeholders to identify the potential risks and put mitigation plans in place to manage the risks (Nieman, et al., 2003, p. 91)

A Business plan is an essential tool for the stakeholders to obtain investment funds, providing goals and objectives for the venture and finally a way to start formalizing the risks and mitigation plans.

 

Who are Primary Stakeholders of the Business Plan?

There are several Stakeholders for the Business Plan:

1. Entrepreneur – Planning document for the Entrepreneur for the venture,
2. Investors/ Financiers – People or organisations who will provide funding for the venture
3. Marketers – Employees or external resources which will market the organisation

 

What are the elements of a Business Plan?

A Business Plan contains the following elements of the business story according to (Du Toit, et al., 2010)

1. Background -  Describing the current as-is situation, the characters and the problem statement,
2. Challenge – Describing the challenges and conflicts that impede a coherent plan to solve the problem
3. Resolution – Portraying of a solution to the challenges and the problem and how the venture will succeed by resolving the problem (Venter, et al., 2012, p. 157)

 

A Business plan must contain the following sections:

1. Introduction – Venture details e.g. company name, contact details, summary of requirements,
2. Executive Summary – Summary of the complete business plan
3. Environmental and Industry Analysis – Analysis of the Macro Environment, e.g. industry trends, competitors, technology requirements, resource requirements
4. Operations Plan – Road Map containing how the operations including the manufacturing of the products or services will be done,
5. Marketing Plan – Marketing plan indicating which target markets the venture will be marketed in, and a plan of action of how the marketing will be done,
6. Organisation Plan – Containing details around the ownership, stakeholders, partnership details (if any) Stock and Board details, and an organisation chart
7. Appendix -  Inclusion of secondary information to support the details of the business plan

 

With a good business plan, we are tools; we’ll be able to succeed

Business Plan as a Tool

(Wickham, 2001) defines the following four ways in which a business plan can assist and guide the performance of the organisation:

1. Tool for Analysis – Business plan contains the plans and disciplines as a guide for the entrepreneur to gather the correct information,
2. Tool for Synthesis – The Business Plan synthesises the vision and a definite strategy and implementation plan,
3. Tool for Communication – The business plan is a tool to assist in the communication between the entrepreneur, potential investors and the employees to provide them with the financial information and required road-map to achieve the vision,
4. Call of Action – The business plan provides an action plan and acts as a road map for all the stakeholders of all the activities which must be undertaken(Wickham, 2001, p. 191)

 

(Entrepreneur, 2006) defines the following reasons why the organisation requires business plan as a tool for the organisation to succeed:

1. Set specific objectives for managers
2. Share your strategy, priorities and specific action points with your spouse, partner or significant other
3. Deal with displacement
4. Decide whether or not to rent new space
5. Hire new people
6. Decide whether you need new assets, how many, and whether to buy or lease them
7. Share and explain business objectives with your management team, employees and new hires
8. Develop new business alliances and deal with professionals
9. Sell your business
10. Valuation of the business for formal transactions related to divorce, inheritance, estate planning and tax issues
11. Create a new business
12. Seek investment for a business, whether it's a start up or not
13. Back up a business loan application
14. Grow your existing business

 

What are the benefits of having a business plan?

(Du Toit, et al., 2010) indicates the following eight reasons for an entrepreneur to write business plan:

1. To sell the business to him/her - The most important stakeholders in any business are its founders. First and foremost, the entrepreneur needs to convince him/herself that starting the business is the right thing for him/her, from both a personal point of view and an investment viewpoint
2. To obtain Bank financing -  Banks require entrepreneurs to include a written business plan with any request for loan funds
3. To obtain investment funds - For many years the business plan has been the “ticket to admission” to venture capital or “:informal” capital from private investors
4. To arrange strategic alliances -  Joint research, marketing and other efforts between small  and large companies have become increasingly common in recent years, and these require a business plan
5. To obtain large contracts -  Entrepreneurs must have a business plan to respond to large tenders
6. To attract key employees - One of the biggest obstacles that small growing companies face in attracting key employees is convincing the best people to take the necessary risk, and to believe that the company will thrive and grow during the coming years
7. To complete mergers and acquisitions -  No matter which side of the merger process the entrepreneur is on, a business plan can be very helpful if he/she wants to sell the company to a large corporation
8. To motivate and focus the management team -  As smaller companies grow and become more complex, a business plan becomes an important component in keeping everyone focussed on the same goals (Du Toit, et al., 2010, pp. 87-88)

 

(Venter, et al., 2012) defines the following benefits of having a business plan:

1. Enforces Discipline – The business plan forcers discipline in the entrepreneur by forcing him to plan every facet of the plan and to obtain all the relevant information,
2. Scrutinize the strategies - This process allows critical and impartial scrutiny of the strategies to secure the long-term future of the business
3. Visibility to Investors – have a visual plan for the investors to scrutinize
4. Benchmarking – Enables the stakeholders to track the progress of the business plan,
5. Self-Evaluation – Entrepreneurs can use the plan for self-evaluation
6. Early Warning System - so that entrepreneurs may turn threats into opportunities
7. Communication Tool – Enables the entrepreneur to communicate with investors and stakeholders of the venture

 

The five critical ingredients of a successful Business

(Coke, 2002) defines the following five critical ingredients of s successful business plan:

1. Simple Language - Simplify definitions and use words in plain business language.
2. Demonstrate Relationships - Clearly demonstrate the relationships among planning elements.
3. Link the connections - Successfully link the connections between your strategic, operational, organizational, resources, and contingency plans.
4. Single Planning Model - Incorporate all functions into a single planning model.
5. Employee Involvement - Achieve total employee involvement by taking the business plan to all levels. (Coke, 2002, p. xxviii)

 

Conclusion

A business plan is more than just a document, it is a method for the entrepreneur to obtain funding, but more importantly it is a tool which enables the entrepreneur to understand how to put the organisation together. Stakeholders and the entrepreneur can measure the success of the venture against the business plan via the milestones placed inside the business plan.  The most important part of the business plan is that it drives the organisation into the future and to attract the correct talent to the business to enable the venture to reach its goals.

 

Bibliography

Louw, L. & Venter, P., 2009. Strategic Management - Winning in the Southern African Workplace. 3rd ed. s.l.:Oxford - Southern Africa.

Nieman, G., Hough, J. & Nieuwenhuizen, C., 2003. Entrepreneurship: A South African Perspective. 1st ed. Pretoria: Van Schaik.

Du Toit, G., Erasmus, B. & Strydom, J., 2010. Introduction to Business Management. 8th Edition ed. s.l.:Oxford University Press.

Wickham, P. A., 2001. Strategic Entrepreneurship. A Decision Making approach to New Venture Creation and Management.. 2nd ed. s.l.:Prentice-Hall.

Coke, A., 2002. Seven Steps to a Successful Business Plan. 1st ed. s.l.:American Management Association.

 

 

Difference between Organic and Inorganic Growth

Introduction

Growth Strategies enable organisation to follow an expansion route to boosts the profitability of the firm, or to develop new skills and markets. IMI decided to growth because of their high profit margins and excess cash available. There are two primary sections of growth which will be discussed in this section:

• Why do organisations grow?
• What is Organic Growth?
• Advantages and Disadvantages of Organic Growth,
• What is Inorganic Growth, and finally
• What is the difference between Organic and Inorganic Growth?

Why do organisations grow?

There are a myriad of reasons why an organisation wants to grow, and one of the primary reasons is to bring wealth to its shareholders via increased profits. Some of the other reasons why an organisation wants to grow are:

•   Maximization of Profit (maximizing profit for shareholders),
•   Providing a unique service which pertains to a ”gap” in the market,
•   Expansion into new markets due to the current market becoming saturated with their product, or too many competitors (to survive),

Growth strategies are based on market structure and current state of market

What is Organic Growth?
(Louw & Venter, 2009) Defines the term as: Internal Growth as: Organic Growth (growth from within) or intensive growth, internal growth expands sales of existing products. The primary aim of organic growth is to retain the current customer base by providing them with new products or services, and seeking new customers. (Louw & Venter, 2009, pp. 215-216)
Ansoff’s matrix identifies the following growth areas: Market Penetration, Market Development, Product Development and Diversification.
Thus organic growth can be classified as the strategies which the organisation employs to grow from within the organisation. When an organisation uses organic growth as a growth strategy then it usually re-invests profits to increase production or operations capacity, which enables them the ability to sell more products to customers

What is Inorganic Growth?(Louw & Venter, 2009) Defines the term as: through diversification (external growth), an organisation adds new businesses to its current stable. A diversified business is synonymous with a multi-business organisation operating in two or more industries. Supplying new products, venturing into new markets or franchising other companies products are examples of diversification. (Louw & Venter, 2009, pp. 217-218)
Inorganic growth is growth factors from the external environment, which the organisation can do when they merge or acquire another firm.

Inorganic Growth can be accomplished in three ways:

• Acquisitions: Acquisitions entail the purchase of assets and skills of a takeover target.
• o (Smit, et al., 2011) States “When one organisation takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. The buyer organisation ‘swallows’ the other and the buyer’s shares continue to be traded (Smit, et al., 2011, p. 119)
• Mergers: Mergers entail the pooling of resources between two or more organisations of equal size
• o (Smit, et al., 2011) States a merger takes place when two organisations – of then of about the same size- agree to operate as a single new organisation.” Example of this the merger of Daimler-Benz and Chrysler to form DaimlerChrysler  (Smit, et al., 2011, p. 119)
• Intraprises: Internally funded ventures (Intraprises) launched to exploit mew markets, products or services.

What is the difference between Organic and Inorganic Growth?

 

The primary differences between organic and inorganic growth is:

• Organic is on the basis of internal growth, while inorganic is bases on external factors(mergers, acquisitions),
• Organic especially prevalent during the early stages of a firm when new markets are built and products are being developed, while inorganic growth is usually prevalent during the later stages of the product life cycle,
• Organic Growth is usually often safer than inorganic (externally generated) growth because it can be more difficult and riskier to acquire and integrate another existing business into an existing company
• Organic Growth is usually a slower option compared to inorganic growth

Conclusion
An organisation must choose organic growth or inorganic growth for its growth strategies, based on where it is in the product life cycle. If the product is in its infancy stage then it is better to establish an organic growth strategy. But if the product is in the later part of the product life cycle then it is better to choose an inorganic growth strategy via diversification.

Bibliography
Louw, L., & Venter, P. (2009). Strategic Management - Winning in the Southern African Workplace (3rd ed.). Oxford - Southern Africa.
Smit, P. J., Cronje, G. J., Brevis, T., & Vrba, M. J. (2011). Management Principles (5th ed.). Juta.
Wilinson, N. (2005). Managerial Economics, A problem solving approach (1st ed.). Cambridge University Press.

What is international expansion strategy?

According to (Czinkota, et al., 2011) an international expansion strategy is based on the decision to diversify the market and client base to gain greater profits. The strategic decision revolves around a “greenfield investment” which entails building a firm from the ground up, or purchasing an existing firm via mergers and acquisitions. (Czinkota, et al., 2011, p. 88)

The internationalisation strategy is based on obtaining additional profits by expanding into a foreign country via Greenfields investment or via mergers and acquisitions. There are several advantages and disadvantages of these strategic decision implementations.

Diebold decided that it will focus on Acquisitions as their international expansion strategy.

Choosing a Strategy

(Hill, 2013) contents that an organisation could be faced with a situation where it cannot serve the global marketplace from a single low-cost location, producing a globally standardised product, and marketing it worldwide to attain the cost benefits associated with experience benefits. (Hill, 2013, p. 435)

Based on this (Hill, 2013) defines that there are four basic strategies to be able to be able to compete successfully internationally:

• Global Standardization Strategy
• Transnational Strategy
• International Strategy
• Localization Strategy  (Hill, 2013, p. 435)

What is Global Strategy?

(Hill, 2013) argues that the focus for the Global Standardization strategy is to focus on increasing the profitability and profit growth by reaping the cost reductions that come from economics of scale, learning effects, and location economies. The strategic goal is to pursue a low-cost strategy on a global scale (Hill, 2013, p. 436)

Globalisation Standardisation Strategy focuses on the dividing of the organisation into several favourable locations, for example to move the production capabilities to a county with lower labour and production costs.

The organisations following the Global Standardization strategy do not favour customisation of their products, but rather focuses on the production of the same product for multiple markets to reap the maximum benefit of economics of scale.

(Hill, 2013) argues that the Global Standardization strategy are mostly used when there are strong pressures for cost reductions and demands for local responsiveness are minimal, and where there are a global requirement for the product to suit multiple markets. (Hill, 2013, p. 436)

What is multi-domestic strategy?

(Hill, 2013) argues that a multi-domestic strategy is the same as a Localization strategy. The localisation strategy focuses on the increased profitability by customizing the firm’s goods or services so that they provide a good match to tastes and preferences in different national markets. (Hill, 2013, p. 437)

(Hill, 2013) Argues that Localisation Strategy is mostly used when there are substantial differences across nations with regard to consumer tastes and preferences, and where cost pressures are not too competitive (Hill, 2013, p. 437)

The organisation can benefit from customisation of products to serve the local demand by providing kinds of products which serves the local culture and local flavour. The organisation will as well have an increase in cost of production, as the products needs to be modified for each kind of market it serves.

What is transnational strategy?

(Hill, 2013) A Transnational Strategy is used when the organisation faces both strong cost pressures and strong pressures for local responsiveness. A transnational strategy try to simultaneously achieve low costs through location economies, economics of scale, and learning effects; differentiation of their product across geographic markets to account for local differences.  (Hill, 2013, p. 437)

A Transnational Strategy enables the organisation to compete on multiple markets where local responsiveness is required. This will add additional constraints onto the organisation due the conflicting demands being placed onto the organisation, which can in turn raise the cost of production. Few organisations perfected this approach.

What is an international strategy?

(Hill, 2013) Argues that an International Strategy is taking products first produced in their domestic market and selling them in the international markets with minimal customizations (Hill, 2013, p. 438)

The base products produced would serve a wider audience, as the products are modified for use in the foreign market. These organisations usually face little competition and by using this strategy the organisations are not faced with the same cost structure challenges as Globalisation organisations.  Product development is usually centralized in one place and manufacturing and marketing operations are usually performed in each major country where they perform business.

Market Entry Modes

Entry Mode	Description
Exporting	Exporting of Goods and services to a foreign country Initial method of gaining market share Challenge: High import tariffs can cause the product to be sold at a higher premium Acceptance: Widely accepted practice
Turnkey Projects	The contractor agrees to handle every detail of the project for a foreign client, including the training of operational personnel Challenge: The firm has no long term interest into the country and may prove disadvantageous if it want to expand operations, Acceptance: Widely accepted practice
Licencing	Licencing agreement, which transfers the rights, production technologies and operating procedures to another organisation, Challenge:  High licencing costs, and production/product details unknown in target country. Support can be inefficient due to time zone differences or language barriers, Acceptance: Widely accepted practice
Franchising	A organisation which grants a secondary party the rights to perform business via its brand (this includes as well the operational guidelines to maintain business) Challenge: Franchising costs can be high, and foreign countries does not necessarily know the demographics of a secondary country, Acceptance: Widely accepted practice
Joint Venture	Sharing of ownership between multiple organisations to gain market penetration (Foreign and Local), Challenge: Loosing the original companies core brand and operating model which made them successful, Acceptance: Widely accepted practice
	Strategic Alliances Sharing of production facilities by foreign and local organisations, or to develop new products together under the local company’s umbrella
Wholly owned subsidiary	Greenfield Establishing a totally new organisation (manufacturing from scratch). This can be in the form of a new wholly owned subsidiary in a foreign country, Challenge: Huge amount of setting up costs involved and risk of brand not being accepted, Acceptance: Accepted practice
	Acquiring Existing Firm Purchasing an existing firm with an existing product and market base, Challenge: risk of new brand not being accepted, Acceptance: Widely accepted practice

Entry mode Advantages and Disadvantages

(Hill, 2013) states the following advantages and disadvantages of the Entry Modes:

Entry Mode	Advantages	Disadvantages
Exporting	Ability to realize location and experience curve economics	High transport costs Trade barriers Problems with marketing agents
Turnkey Projects	Ability to earn returns from process technology skills in countries where FDI is restricted	Creating efficient competitors Lack of long term market presence
Licensing	Low development costs and risks	Lack of control over technology Inability to realize location and experience curve economies Inability to coordinate global strategy coordination
Franchising	Low development costs and risks	Lack of control over quality Inability to engage in global strategic coordination
Joint Ventures	Access to local partnets knowledge Sharing development costs and risks Politically acceptable	Lack of control over technology Inability to engage in global strategic coordination Inability to realize location and experience economies
Wholly owned subsidiaries	Protection of technology Ability to engage in global strategic coordination Ability to legalize location and experience economies	High costs and Risks

(Hill, 2013, p. 499)

Some additional benefits for Mergers and Acquisitions include:

• Increased Market Share – Ability of an organisation to increase its market share by acquiring an existing firm,
• Reducing Costs – Foreign market may have lower resource costs,
• Diversification – Being able to produce new products based on the knowledge gained from the acquired firm,
• Greater Value Generation – May lead to increased value generation for the company,
• Market Penetration – Allows the firm to penetrate the market via existing relationships and customer base.
• Synergies - take advantage of each other’s core competency, and
• Acquiring Customers – Acquisition of existing customer base of acquired firm

 

Acquisitions

(Smit, et al., 2011, p. 119) states “When one organisation takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. The buyer organisation ‘swallows’ the other and the buyer’s shares continue to be traded”   Acquisitions is when a organisations purchases another country to gain control over the management and assets of the purchased company

Advantages of Acquisitions

(Hill, 2013) identifies the following Advantages of Acquisitions:

• Quick to execute – A firm can rapidly build its presence in the target foreign country
• Pre-empt their competitors – The need for pre-emption’s particularly great in markets that are rapidly globalizing, where a combination of deregulation within nations and liberalization of regulations governing cross-border FDI has made it much easier for foreign enterprises to enter the market through acquisitions
• Less Risky than Greenfields – When a firm makes an acquisition, it buys a set of assets that are producing known revenue and profit stream. In contrast the revenue and profit stream that a greenfield venture might generate is uncertain as it does not exist

(Hill, 2013, pp. 501-502)

 

Disadvantages of Acquisitions

(Hill, 2013) identifies the following disadvantages of Acquisitions:

• Erode Stakeholder Value - Often produce disappointing results of the acquired firm (acquired firm providing lower than expected profits)
• Loss of Market Share – The existing customer base may be loyal to the original brand, and by changing the brand, the market share may be eroded
• Overpaying - Acquiring firms often overpay for the assets of the acquired firm
• Clash of cultures – After a acquisition, many acquired organisations experience a high management turnover, possibly because the original firm does not like the new firms culture or way of doing business
• Failed Synergies - Attempts to realize synergies by integrating the operations of the acquired entities often run into roadblock and take much longer to forecast
• Inadequate pre-acquisition screening – many firms decide to acquire other firms without thoroughly analysing the potential benefits and costs

(Hill, 2013, pp. 501-502)

Mergers

What are mergers?

(Parkin, et al., 2005) Identifies a merger as when the assets of two or more firms are combined into a single new firm (Parkin, et al., 2005, p. 319)

(Smit, et al., 2011) States “A merger takes place when two organisations – of then of about the same size- agree to operate as a single new organisation.” Example of this the merger of Daimler-Benz and Chrysler to form DaimlerChrysler (Smit, et al., 2011, p. 119)

A Merger is a transaction whereby two companies combine to become one company or a new company is formed.

According to (Wilinson, 2005) There are several types of Mergers:

• Horizontal merger – occurs when two companies engaged in the same stage of production of the same good come together.
• Vertical merger – occurs between two firms in the same industry but engaged in different stages of the production of the good. The merger can be either forward (towards the end customer) or backward (towards the supplier of raw materials).
• Conglomerate merger – occurs between companies that operated in different markets
• Market Extension merger -> Merging of two companies/organisations selling the same kind of products in different geographical markets,
• Product-extension merger -> Merging of two companies/organisations selling related products in the same market,
• Purchase Mergers -> One company/organisations is purchased by another at a reduced rate (paid less for than its assets is worth) to expand its product base,
• Consolidation Mergers -> Two companies/organisations merge to form a total new company/organisation. (Wilinson, 2005, p. 493)

 

Some additional disadvantages for Mergers and Acquisitions include:

• Difficult to control – The acquired firm may be hard to control due to its size and different culture,
• Increased Costs – The additional operations costs of the acquired firm may add an additional burden on the host

Some additional benefits for Mergers and Acquisitions include:

• Increased Market Share – Ability of a organisation to increase its market share by acquiring a existing firm,
• Reducing Costs – Foreign market may have lower resource costs,
• Diversification – Being able to produce new products based on the knowledge gained from the acquired firm,
• Greater Value Generation – May lead to increased value generation for the company,
• Market Penetration – Allows the firm to penetrate the market via existing relationships and customer base.
• Synergies - take advantage of each other’s core competency, and
• Acquiring Customers – Acquisition of existing customer base of acquired firm
• Some additional disadvantages for Mergers and Acquisitions include:
• Difficult to control – The acquired firm may be hard to control due to its size and different culture,
• Increased Costs – The additional operations costs of the acquired firm may add a additional burden on the host

The following threats are present when companies merge:

• Competitiveness -> Due to core business focus change or loss or due to changing markets due to merger,
• Job losses -> Due to cost cutting, re-engineering of business or product focus changes,
• Cultural Differences -> Differences between Organisational Behaviour, country specific against global culture differences

Mergers can be used when both companies agree on the merging of it to gain a positive market share. Acquisitions form part of the hostile takeover of a company/organisation, when the second company/organisation does not give its consent in the acquisition.

Joint Venture

(Levi, 2005) Identifies a Joint Venture as an alternative technique for reducing the risk of expropriation is to share ownership with foreign private or official partners from the very beginning.. Joint ventures as a means of reducing expropriation risks rely on the reluctance of local partners, if private, to accept the interference of their own government. When the partner is the government itself, the disincentive to expropriate is the concern over the loss of future investments. Joint ventures with multiple participants from different countries reduce the risk of expropriation, even if there is no local participation, if the government wishes to avoid being isolated simultaneously by numerous foreign powers. (Levi, 2005, p. 388)

Joint ventures allow a foreign company to partner with a local country to perform services into the local marketplace, where the local partner carries the knowledge of the local
 

Advantages of Joint Venture

(Hill, 2013) states the following advantages of Joint Ventures:

• Knowledge - A firm benefits from a local partners knowledge of the host country’s competitive conditions, culture, language, political systems and business systems,
• Cost  Saving - When the development costs and/or risks of opening a foreign market are high, a firm might gain by sharing these costs and/or risks with a local partner,
• Political Environment - In many countries, political considerations make joint ventures the only feasible mode of entry

(Hill, 2013, p. 497)

 

Disadvantages of Joint Venture

(Hill, 2013) states the following disadvantages of Joint Ventures:

• Loss of Control - As with licensing, a firm that enters into a joint venture risks giving control of its technology to its partner
• Loss of Control of Coordination - A Joint venture does not give a firm the tight control of subsidiaries that it might need for engaging in coordinated global attacks against its rivals
• Conflict of Objectives - The shared ownership arrangement can lead to conflicts and battles for control between the investing firms if their goals and objectives change or if they take different views as to what the strategy should be (Hill, 2013, pp. 497 - 498)

 

What is a wholly owned subsidiary?

(Hill, 2013) defines a wholly owned subsidiary as: When a firm owns 100% of the stock of another firm. Establishment of the wholly owned subsidiary can be done in two ways:

• Greenfield – Setting up of a new venture, or
• Acquisition – Acquiring of an existing firm in the host country (Hill, 2013, p. 498)

 

Advantages of a wholly owned subsidiary

(Hill, 2013) states the following advantages of a wholly owned subsidiary:

• Keeping Control - When a firms competitive advantage is based on technological competence, a wholly owned subsidiary will often be preferred because it reduces the risk of losing control over that competence
• Operational Control - Gives a firm tight control over operations in different countries
• Location and experience curve economics  - May be required if a firm is trying to realize location and experience curve economics
• 100% Profit - Gives a firm 100% share in the profits generated in the foreign market (Hill, 2013, p. 498)

 

Disadvantages of a wholly owned subsidiary

(Hill, 2013) states the following disadvantages of a wholly owned subsidiary

• Costly investment - The most costly method of serving a foreign country from an investment standpoint
• Increased cultural risk - Risks associated with learning to do business in a new culture are greater (Hill, 2013, p. 499)

Bibliography

Czinkota, M. R., Ronkainen, I. A. & Moffett, M. H., 2011. International Business. 8th ed. s.l.:John Wiley & Sons, Inc..

Hill, C. W., 2013. International Business: Competing in the Global Marketplace. 9th ed. s.l.:McGraw Hill Eductions IRWIN.

Levi, M. D., 2005. International Finance. 4th ed. s.l.:Routledge.

Parkin, M., Powell, M. & Matthews, K., 2005. Economics. 6th ed. s.l.:Pearson.

Smit, P. J., Cronje, G. J., Brevis, T. & Vrba, M. J., 2011. Management Principles. 5th ed. s.l.:Juta.

Wilinson, N., 2005. Managerial Economics, A problem solving approach. 1st ed. s.l.:Cambridge University Press.