Chapter 6 - Strategic Alliances and Financial Risk

strategic alliance

when two or more businesses form a partnership to create a win win situation by sharing resources, customers, staff etc

advantages of strategic alliance

• quick access to market

• reduce competition by forming alliance with competitor

• gain new expertise

• e.o.s

• increased financial benefit

disadvantage of strategic alliance

• may take on weakness of partner

• increased conflict over decisions

• loss of control over operations

forms of strategic alliances

• outsourcing

• acquisition

• mergers

• joint venture

• franchising

outsourcing

• organization contract with another company to peform a business function that is not a core activity

• advantage: cost effective, allow business to focus on core competencies, more efficient

• disasvantage: employment lost in Aus as the bsiness move functions offshore

acquisition

• business buys another business that has been operating, by buying majority of company’s share

• business acquires target business as a growth strategy to create bigger, more competitive company

mergers

• shareholder of 2 companies become the shareholder of a newly merged company, combining the 2 companies

• both companies must be similar size and agree to combine

• may use new name, logo, slogan

joint venture

• cooperation of 2 or more individuals or business

• agree to share profit and loss, joint decision making

franchising

• owner of a business gives permission to another person to use their business model, trademark, trade name and business system and processes to produce and market a good or service according to certain specifications

• pays one time franchise fee and gets percentage of sales revenue

• franchisor can expand into new market without investing its own capital

• franchisee gets access to well established, proven business model, hence low risk

financial risks involved in international transactions

• currency fluctuations

• non payment of monies

currency fluctuations

• change in dollar value of one country’s currency relative to another country’s currency

• directly impact imports and exports

non payment of monies

• not being paid for the g/s supplied to export market, may take longer to get paid for exports compared to with domestic

• longer the delay=higher risk of non payment

how to minimise financial risk in export market

• hedging(for currency fluctuation)

• insurance

• documentation(for non payment of monies)

hedging

• if a payment received in foreign currency and theres movements in ER, it may affect the amount of money received and profit margin

• forward hedging: req purchase of currency at future date at contracted exchange rate, exporter and customer sign contract that sets an exchange rate for the transaction when payment is made

• option hedging: gives holder option of buying currency at future date at contracted ‘strike’ price, exchange rate that is set is used if better for business compared to instead of current exchange rate

insurance

• used to cover unexpected happenings

• export credit insurance: protects accounts receivable from loss due to credit risks like non payment, allow exporter to increase export sales by limiting international risk

• political risk insurance: protect policyholder from risk that if foreign government alter its policies or other regulations, it will lead to loss in investment

• transit insurance: covers property against loss/damage while in transit, covers loss from accidents

documentation

• documentary letter of credit: letter of credit details terms that must be met before payment is made(eg: goods arrive as ordered, without damage), form of guarantee from customers bank that money will be paid, if customer not enough fund then bank will make payment to exporter and chase customer for reinbursement

• documents against paymet: exporter uses their bank to send a bill and any documents that will allow the customer to collect them from customer’s bank, customer bank will give documents to the customer only after payment made, customer make payment to bank and then money is forwarded to exporters bank