Business management - economia e direzione delle imprese english version

IS WRITTEN

9. THEY SHOULD ONLY BE WRITTEN WHEN A COMPANY NEEDS TO RAISE

CAPITAL, also to assess for the management itself the performance of the company

A BUSINESS PLAN should include:

• EXECUTIVE SUMMARY, brief description of the business, succinct but detailed,

with description of the products and services offered and of the new ones, new

customers, new markets and trends.

• BACKGROUND INFORMATION:

1. customers , their decision and the strategy used to attract them

2. markets, sales, annual growth, seasonal fluctuations…

3. products, enhancing differences between what you offer and what is already on

the market

4. legal form, start up, joint venture, merger, new investment….

5. potential market share, why we eliminate competition

6. competitors, their strength and weaknesses

• MARKETING PLAN

1. pricing policies

2. adv and promotion

• OPERATIONAL PLAN

1. Location, adv and disadv.

2. Facilities, also how they are acquired

3. strategy and plans, production, cost volume strategy, quality control and

customer care

4. management team, CV or small paraghaph

• FINANCIAL PLAN

1. how much capital is needed 5

2. internal rate of return

3. security to offer to lenders

4. how to repay borrowing

5. sources of revenues and income

6. personal finances of entrepreneurs

7. forecast for at least 3 yrs and the first 12 months must be the most detailed ones.

DIFFERENT DEAL TYPES AND MARKET ENTRY STRATEGIES

The internalization of firms is a learning oriented process based on:

1. Market knowledge

2. Market commitment

Firms generally build their presence in the market incrementally:

1. regular export activities

2. licensing and franchising

3. sales subsidiary

4. FDI, joint ventures and strategic alliances

EXPORT, LICENSING AND FRANCHISING are entry strategies that involve a low level of

market commitment and a low level of control over local operations.

EXPORTING

Goods produced in a certain country and sold in another.

• Passive exporting, not a real strategy, I only receive and fulfil orders

• Aggressive exporting, development of marketing strategies, it also includes the need

for agents so this is another problem.

ADVANTAGES DISADVANTAGES

• •

Goods are produces in the home You have to rely on agents, so

country so there’s no need for there might be lack of control

buying facilities abroad.

• You can learn about those

markets before making an

investment. LICENSING

• A firm, licensor, in a country, gives another firm in another country, licensee, the permission

to use manufacturing processes, skills, know how, trademark in exchange for a monetary or

non monetary payment.

• The document that establishes the agreement.

FRANCHISING

The franchisor gives the franchisee the permission to distribute its products, techniques, trademarks

in exchange for gross monthly sales and a royalty fee.

The agreement lasts from 5 to 30 years. Previous cancellations are forbidden.

It is a good strategy for those firms who are easy to duplicate and with a broad geographical appeal.

6

ADVANTAGES DISADVANTAGES

Good way to start The partner becomes a competitor after the

contract is ended because of the know how that

has been transferred

Not needed to make a lot of marketing effort Potential returns may be lost

and to have a lot of capital Considerable facts finding, investigation,

interpretation…

STRATEGIC ALLIANCES, JOINT VENTURES AND FDI are entry strategies that require a

high level of commitment and a high level of control.

STRATEGIC ALLIANCE

An alliance between companies that want to pursue together the same goals, sharing resources

while remaining independent from each other.

1. EQUITY STRATEGIC ALLIANCE: each company owns different percentages of the

company they have formed.

2. NON EQUITY STRATEGIC ALLIANCE: sharing of resources, also made across national

boundaries or different industries or between companies and governments, also foreign gov.

3. JOINT VENTURE STRATEGIC ALLIANCE: firms together create a third legally

independent company. Different from a merger because here we do not have a transfer of

ownership.

To create a successful alliance some factors are needed:

• Management commitment

• Sensitivity to the company’s culture

• Sensitivity to national culture

• Mutual trust

• Wide dissemination of information

• Good dispute resolution mechanism

• Congruent goals JOINT VENTURE

Companies producing the same goods can decide to join together to penetrate a certain market that

they would not be able to penetrate alone.

Why forming an alliance or a JV?

1. INTERNAL REASONS, reduction of costs and risk that are both split and possibility to

learn new managerial practices

2. COMPETITIVE GOALS, being stronger towards competitors

3. STRATEGIC GOALS, transfer of technology, skills improvement

Reasons of failure of these alliances are :

• Too many people have to decide

• Incongruent goals

• Lack of trust

• Only one partner works 7

• Only one partner puts the money in

• Changing macroeconomic scenario

How to choose the partner?

• Same culture, size and structure

• Commitment to alliance

• Low cost production

• Sales and service expertise

• Possession of trademark

• Opportunistic location( near)

After choosing it, you have to sign the STRATEGIC INTENT, that contains:

1. amounts and forms of resources

2. detailed business performance criteria

FDI needs a very high market commitment and control and resources but at the same time gives

the opportunity to better know the environment.

FOREIGN DIRECT INVESTMENT

A business decides to invest in a foreign country by establishing in this country the factors of

production, including various facilities.

The most common forms are:

• Direct acquisition of a foreign firm, with the acquisition of majority or minority stakes

• Construction of a facility

• Mergers, Joint venture or alliances, between companies from different countries

Government usually incentives FDI.

Being involved in a FDI allows to :

• Have a representation on the board of directors

• Participate in policy making processes

• Do material inter company transactions

• Interchange managerial personnel

• Have technical info

• Get loans at lower than normal market rates

So, why choosing FDI among all the strategies?

• COSTS ADVANTAGES, labour intensive production can be made where the labour

costs are low ( China)

• KNOW HOW ADVANTAGES, knowledge intensive production can be made where the

cost of high skilled workers is not high ( India)

• MARKET ADVADVANTAGES, benefits of a growing economy

• ATTRACTIVE FISCAL POLICIES AND BUSINESS ENVIRONMENT, low taxes,

efficient infrastructures, bureaucracy, suppliers….

There are also advantages for the country in which the company invests:

• More development

• Entering into the global market

• Reduce deficit

That’s why many countries propose incentives for FDI. 8

CASE

TURKEY MOROCCO

• •

Higher population Lower population

• •

Higher GDP Lower GDP

• •

th th

Italy 4 trading partner Italy 6 trading partner

• •

Italy has less companies than Germany, Italy has less companies than France, but

but higher turnover higher turnover

Other deal types:

• Business acquisition: company x acquires a specific unit of another company

• Business launch: start up

• Capital management ( share buy back) : x is involved in a capital management transaction

• Group structure restructuring : the company modifies structure

• Closure and sales

• Staff lay off: fires workers

To finance their investments abroad, normally firms ask for a loan from financial sponsors, this

is what we call LEVERAGED BUYOUT. For the loan, sponsors ask for interests. It is

convenient to the firm to get money from them only if the IRR resulting from having acquired

the new company, is higher than the interest they have to pay to the banks.

Each of the strategies has got a degree of RISK, so a RISK MANAGEMENT is required:

1. IDENTIFICATION OF THE RISK

2. PLANNING

3. MAPPING OUT

• Social scope of risk management

• Identity and objectives of stakeholders

• The basis upon which the business will be evaluated

4. DEFINING FRAMEWORK OR AGENDA

5. DEVELOPING AN ANALYSIS

6. MITIGATION OF RISK

After the risk has been assessed, the management can decide to use one of these formulas:

• AVOIDANCE, elimination, also eliminating an opportunity to make profit

• REDUCTION, mitigation, outsourcing trying to reduce loss

• SHARING , outsourcing, insuring, giving the risk to the third party, the insurance, but in

case of bankrupt it comes back to the first party

• RETENTION , accepting and budgeting, the best strategy if the risk is so small that the cost

of insuring would be greater than the loss given by the risk. 9

BIG OR SMALL, WHICH IS THE BETTER SIZE FOR BUSINESS?

There is not the best one for all firms, it depends on the kind of firm and it can also change

within the firm over time.

From the microeconomic point of view, the best size is the one that assures to have the highest

per unit profit( economies of scale).

Economies of scale : according to this theory, as the volume of production increases, the cost

per unit decreases. Because there are fixed costs, economies of scale first increase , but then

decrease that’s why we represent this situation in a graph cost-quantity with a U shaped curve.

In Europe, 90 % of firms are SMEs ( small medium enterprises) and only the 5% is big firms.

This shows that limits to grow are higher than the possibility of economies of scale.

However, after the crisis, SMEs encounter some problems:

• Difficult access to credit

• Excess of production

• Need for research

• Need for new markets penetration

• Need for reducing costs

•

In Northern Italy for example, SMEs have joined together and they have formed an industrial

district.

There are 3 main SMEs models:

1. traditional artisan, 50s 60s

2. dependent subcontractor, decentralization, many SMEs working for one big firm,

50s 60s

3. industrial district, textile, furniture, footwear, 70s

• small locally owned firms

• low scale economies

• intra district trade

• decisions made locally

• long terms contracts

• low degree of cooperation with external firms

• flexible labour market

• workers committed to districts rather than firms

• specialised sources

• patent capital

In Italy also: