Business and Management (Prof. Deandreis)

The financial plan should examine:

• How much capital is needed, particularly if external funding is sought

• The interest Rate of Return

• The security it is possible to offer to lenders

• How to repay any borrowings

• Sources of revenues and income

• Entrepreneurs should also include their personal finances as part of the plan at this stage

• Forecasts should run for at least the next three (or even five) years and their level of complexity

should reflect the sophistication of the business. However, the first 12 months’ forecasts should be

the most detailed. 13

Lecture Three – 26th April

Trade off in market entry strategies:

Firms generally build their presence in new markets incrementally, following different degrees of impact in

terms of:

• Market penetration effectiveness

• Cost to be paid for having a good knowledge of the new market and control over local operations

The expansion of firms to new markets (domestic and international) can be seen as an incrementally

learning oriented process based on many steps and in two main factors:

• Expected benefits from different market penetration options

• Incremental costs to be paid for the different market penetration

For instance: regular export activities, Export independent representative, licensing, franchising,

establishment of a branch or subsidiary, strategic alliance, joint venture rill merger and acquisitions.

Market entry strategies with low level of market commitment and low level of control over local

operations:

1. Exporting: selling aboard directly or via independent representative

2. Licensing: to give/receive the right to use manufacturing, trade marks or other skills (more for

manufacturing industry)

3. Franchising: to give/receive the right to distribute products, techniques and trademarks (more for

retail sector)

All the most important and well know companies have their “Head of Licensing manager”.

For licensing, if a company (1) gives a written and legal permission for another company (2) to use

manufacturing trademark or know how or other skill of its property. Licensee companies assume a legal

obligation to pay an amount of money or other non-monetary payment (i.e. Disney, Warner Bros, football

and sports team).

For franchising, company (1) give the right to distribute products etc, to company (2) in exchange of a

percentage of gross monthly sales and a royalty fee. Company (1) make available tangibles, intangibles to

the operator in order to have the same standards, quality and image of the brand all over the world.

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Disadvantages:

1. Potential returns from marketing and manufacturing may be lost: licensing and franchising

agreement normally a limited duration because partner develops know-how.

2. Licensees become competitors

3. Requires considerable fact finding, planning, investigation and interpretation.

Advantages:

1. Good way to start in foreign operations;

2. To start low risk business relationships;

3. Low level of marketing effort;

4. Low level of capital required;

5. Options to buy into partner exist or provision to take royalties in stock.

Market entry strategies with high level of market commitment and control over local operations are:

1. Strategic Alliance: it is a formal relationship between two or more parties to pursue a set of agreed

upon goals or to meet a critical business need while remaining independent organizations. Partners

may provide the strategic alliance with resources such as products, distribution channels,

manufacturing capability, project funding, capital equipment, knowledge, expertise or intellectual

property. The alliance is a cooperation or collaboration which aims for synergy where each partner

hopes that the benefits from the alliance will be greater than those from individual’s efforts. The

alliance often involves technology transfer (access to knowledge and expertise), economic

specialization, shared expenses and shared risks.

a. Non-equity strategic alliance: is an alliance in which the two or more companies develop a

contractual relationship to share some of their unique resources and capabilities in order to

create a competitive advantage. Global strategic alliances build partnerships between

companies (often more than two) across national boundaries and increasingly across

industries. Sometimes formed between company and a foreign government, or among

companies and governments.

b. Equity strategic alliance: is an alliance in which two or more firms own different

percentages of the company they have formed by combining some of theirs resources and

capabilities to create competitive advantage (NB just a minority quota otherwise it is an

acquisition).

c. Joint venture strategic alliance: is a strategic alliance in which two or more firms create a

new legally independent company to share some of theirs resources and capabilities so as

to develop a competitive advantage and to share for example, markets, intellectual

property, assets, knowledge and of course, profits. A joint venture differs from merger in

the sense that there is no transfer of ownership in the deal.

2. Joint venture: companies with identical products and services can also use joint venture for pooling

forces to penetrate markets they would not or could not consider without investing tremendous

resources. Furthermore, due to local regulations, some markets can only be penetrated via joint

venturing with local business (e.g. china). In some cases, a large company can decide to form a joint

venture with a smaller business in order to quickly acquire critical intellectual property, technology

or resources otherwise hard to obtain, even with plenty of cash at their disposal. Joint Venture

generally refers to the purpose of the entity and not a juridical type of entity. Therefore, a joint

venture may be a corporation, a limited liability company, a partnership or other legal structure,

depending on a number of considerations such as tax legislation.

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3. Acquisition: when a company A is acquiring the control of another national or international

company B via a majority or minority stake ownership and there are two options then:

a. The company acquired still remains juridical independent but is now under the

management and governance control of the company that makes the acquisition.

b. The company acquired merged into the company acquiring.

4. Merger: when two company A and B normally of a similar size, decide to merger to better pursue a

business common goals, forming a NEW LARGER size Company.

5. Foreign Direct Investment FDI: is the direct ownership of facilities in a target country. It involves the

transfer of resources including capital, technology and personnel. FDI may take many different

forms, such as a merger, a direct acquisition of a foreign firm, construction of facility or investment

in joint venture or strategic alliance with a local firm with attendant input of technology, licensing

of intellectual property. In the past decade, FDI has come to play a major role in the

internationalization of business. Direct ownership provides a high degree of control in the

operations and the ability to better know the consumers and competitive environment. However, it

requires a high level of resources and a high degree of commitment. The existence of a direct

investment relationship may be indicated by a minimum range of the ordinary shares or voting

power owned by the foreign investor or by a combination of other factors such as:

a. Representation in the board of directors;

b. Participation in policy-making processes;

c. Material inter-company transactions;

d. Interchange of managerial personnel;

e. Provision of technical information;

f. Provision of long-term loans at lower than existing market rates.

FDI importance from micro (company) point of view:

• Competitive advantages: low production costs, growing economy, know how, labour skills, fiscal

policies.

• Labour cost advantages: for example, labour-intensive production can be made in a country where

labour cost is low;

• Know-how advantages: for example, labour-intensive production can be made in a country where

the cost of high-skilled workers is not too high, such as India;

• Market advantages: in order to grab the market benefits of a growing company – also in

neighbouring countries of the target-country such as in BRICS and in Mediterranean countries;

• Tax and fiscal advantages: attractive fiscal policies and business environment.

FDI importance from macro (countries) point of view:

• All countries have strong interest in encouraging foreign direct investment in order to ease their

national development strategy. FDIs bring investments, growth, employment and know-how.

• Thanks to FDIs inflows, host countries can better integrate their economy into the global market.

• Developing Countries try to attract foreign export-oriented companies’ investments in order to

reduce the deficit of trade balance (that is a structural characteristic of developing Countries).

• Countries offer a wide range of incentives with the purpose to attract foreign investments:

o Creation of special economic areas;

o Improvement of business climate;

o Lowering corporate taxes;

o Lowering all fiscal burdens (wage and corporate taxes);

o Support of the entire investment process.

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th

Lecture Four – 7 May

Capital Management to support strategic investment via Leverage Buyout:

A leverage buyout occurs when a financial sponsor acquires a controlling interest in a company’s equity

and where a significant percentage of the purchase

price is financed through leverage (i.e. bank). The

assets of the acquired company are used as collateral

for the borrowed capital, sometimes together with

assets of the acquiring company.

Companies of all sizes and industries have been the

target of leveraged buyout transactions.

THE KEY POINT is the ability of the acquired firm to

have a net profit generation and to make regular loan

payments after the acquisition.

Business Technology Management (BTM):

BTM seeks to unify business and technology decision-making at each different level in an enterprise.

Business Technology Management delivers a set of guiding principles, known as BTM Capabilities. These

capabilities are combined to form BTM Solutions, around which a company’s practices can be organized

and improved.

This structured approach is used by enterprises to align, synchronize and even converge technology and

business management for the purpose of ensuring better execution, risk control and profitability.

Alignment:

From a BTM perspective, the state of alignment can be defined as a state where (the current) technology

supports, enables, and does nor constrain the company’s current and evolving business strategies.

When the company is not in the state of alignment it produces its goods and services without using existing

technology properly for its business needs, and consequently it fails to maximize economic