Strategic alliances & Financial risks - Chapter 6

BME

Rationale and benefits for strategic alliances

1. Outsourcing

2. Acquisition

3. Merger

4. Joint venture

5. Franchising

Strategic alliances

Two or more partners get together to create a win-win situation

Outsourcing

Organization contract with another company to perform a business function

• Non core to the business

• Australian companies can

  • focus on core competencies

  • More efficient using specialist in the field

  • Cost effective

Acquisition

A business buys another business that has been operating by buying the majority of shares

• acquire target business as a growth strategy because it can create a bigger, more competitive and more cost efficient company

Benefits:

• Increased financial benefit

• Reduced competition

Mergers

shareholders of 2 companies become the shareholders of a newly merged company, combining 2 companies

• both companies almost in similar size and agreed to combine and form a new company

• May involve new name, new logo, new slogan and new identity

Benefits:

• Increased financial benefit

• reduced competition

Types of mergers

1. Horizontal

   • produce a similar product in the same industry

2. Vertical

   • two firms each working at different stages in the production of the same good combine

3. Conglomerate

   • take place when the 2 firms operate in different industries

Joint venture

cooperation of 2 or more individuals or businesses

• each agree to share profit, loss and control in a specific enterprise

• each partner owns a percentage of joint venture companies

• can be long/short time arrangements

• Joint decision making

Joint venture usually takes one/two forms

1. combine resources (separate joint venture business)

2. Contractual arrangements (share resources, networks and marketing without creation of new company)

Benefits of joint ventures

• spreading costs and risks to minimise the impact on the business

• Gain a competitive advantage by reducing the number of competitors

Difference between mergers, acquisition and joint venture

Merger - two companies come together permanently

Acquisition - one company buys another company, may or may not be doing well

Joint venture - 2 companies come together temporarily

• mutual gains for a particular project

Franchising (definition and benefits)

The owner of the business (franchisor) gives permission to another person to use their business model, trademark, trade name, business systems and processes to produce and market a good or service according to certain specifications

Benefits for franchisee:

• less risk

• training and support

• brand recognition

• access to funding

Franchising

• pays one time franchise fee, percentage of sales revenue

• A franchisor able to expand into new markets without having to invest its own capital

What does the franchisee gain

• access to well established, proven business model and brand awareness which makes it a lower risk business venture

International financial risk

Global business - supplier and customers around the world (lots of risks involved

Secure and reliable transfer of money

Types of financial risks

Currency fluctuations

Non payment of monies

Currency fluctuations

The change in the dollar value of one countri’s currency relative to another country’s currency

• Appreciation of currency

• Depreciation of currency

Appreciation of currency (AUD)

Importer will gain:

• imported goods from the UK will become cheaper for Australian consumers

• Goods using imported components from the UK will become cheaper

Exporters will lose:

• difficult to compete with other countries with comparatively cheaper exchange rate

• UK businesses wont buy from Australia

• Fewer exports, Australia business will reduce output, which will lead to unemployment

Depreciation of AUD

Importer will lose

• imports will become expensive

• Products which use imported products will become expensive

Exporters will gain

• Australia exporters will become more competitive in the international market due to cost advantage

• As exports rise, more goods will be produced and thus more jobs will be created

Non payment of monies

Not being paid for the goods or services supplied to the export market

• take longer to get paid for exports than sales to domestic customers

• May not be paid in full until the products or service have been delivered and the delivering is time consuming to another country

• The longer the delay the higher the risk of non payment

Strategies for minimising financial risk in export market

1. Hedging - currency fluctuations

2. Insurance - non payment of monies

3. Documentation - non payment of monies

Documentation

Documentary letter of credit

Documents against payment

Documentation: Documentary letter of credit

• form of gurantee from customer bank that the money will be paid

• Letter of credit will detail terms that must be met before payment is made such as

  • goods arrive as ordered

  • goods is not damaged and reach within certain time

• If terms are met, the bank will transfer money to exporter’s bank

• If the customer does not have enough funds, the bank will make the payment to the exporter, then chase the customer for reimbursement

Documentation: Documents against payment

• the exporter uses their bank to send a bill and any documents that will allow the customer to collect them from the customers bank

• The customers bank will give the documents to the buyer only after payment is made

• The customer makes payment to their bank and it is forwarded to the exporters bank

Insurance

used to cover the unexpected happenings

Export credit insurance

• to protect their accounts receivable from loss due to credit risks such as protracted non-payment or bankruptcy

• allows exporter to increase export sales by limiting the international risk

Benefits:

• Reduces non payment of monies risk

• Enables exporters to extend competitive credit terms to buyers

• Helps exporters to export to new markets with more confidence

Political risk insurance

protect the policyholder from the risk that a foreign government will significantly alter its policies or other regulations so it results in a loss for one’s investment

Transit or shipping insurance

• covers property against loss or damage while it is in transit from one place to another or being stored during a journey

• Covers theft, loss, damage caused by accidents, other damages during transit, delay

Hedging (Types of hedging)

Currency fluctuation - financial risk for international business and may be managed through hedging

• forward hedging

• option hedging

Forward hedging

• Requires the purchase or sale of currency at a future date at the contracted exchange rate

• The exporter and the customer sign a contract that sets an exchange rate for the transaction. When payment is made, the agreed exchange rate will apply

Option hedging

• gives the holder the option of buying and selling currency units at a future date at the contracted “strike” price

• an exchange rate is set which can be used instead of the current exchange rate at the time of payment

• If the current exchange rate is better for the business it can be used in the transaction instead of the agreed rate