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MGT602 - Entrepreneurship - Lecture Handout 43

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NEW VENTURE EXPANSION STRATEGIES AND ISSUES

LEARNING OBJECTIVES

  1. To explain the methods for expanding the venture.
  2. To discuss the types of joint ventures and their uses.
  3. To discuss the concepts of acquisitions and mergers.
  4. To discuss the appropriateness and uses of leveraged buyouts.
  5. To discuss the different types of franchises.
  6. To identify the steps in evaluating a franchise opportunity.

JOINT VENTURES

with the increase in business risks, hyper-competition, and failures, joint ventures have increased. A joint venture is a separate entity involving two or more participants as partners. They involve a wide range of partners, including universities, businesses, and the public sector.

Historical Perspective

Joint ventures are not new. In the U.S. joint ventures were first used for large-scale projects in mining and railroads in the 1800s.The largest joint venture in the 1900s was the formation of ARAMCO by four oil companies to develop crude oil reserves in the Middle East. Domestic joint ventures are often vertical arrangements made between competitors allowing economies of scale. The increase in the number of joint ventures has been significantly throughout the 1990s.

Types of Joint Ventures

The most common type is that between two or more private-sector companies. Some joint ventures are formed to do cooperative research. Another type of joint research for research development is the not-for-profit research organization. Industry-university agreements for the purpose of doing research are also increasing. Two problems have kept this type venture from increasing even faster. A profit corporation wants to obtain tangible results-such as a patent-from its research investment, and universities want to share in the returns. The corporation usually wants to retain all proprietary data while university researchers want to make the knowledge available. Joint ventures between universities and corporations take many forms, depending on the parties involved and the subject of the research. International joint ventures are increasing rapidly due to their relative advantages. Both companies can share in the earnings and growth. The joint venture can have a low cash requirement. Also, the joint venture provides ready access to new international markets. Such a venture causes less drain on a company’s managerial and financial resources than wholly owned subsidiary. There are drawbacks in establishing international joint ventures. The business objectives of the partners can be quite different. Cultural differences can create managerial difficulties. Government policies sometimes can have a negative impact on the venture. The benefits usually outweigh the drawbacks.

Factors in Joint Venture Success

One critical factor for success is the accurate assessment of the parties involved and how best to manage the new entity. A second factor involves the symmetry between the partners. Another factor is that the expectations about the results of the joint venture must be reasonable. The final factor is the timing. A joint venture should be considered as one of many options for supplementing the resources of the firm.

ACQUISITIONS An acquisition is the purchase of a company or a part of it in such a way that the acquired company is completely absorbed and no longer exists. Acquisitions can provide an excellent way to grow a business and enter new markets. A key issue is agreeing on a price. Often the structure of the deal can be more important to the parties than the actual price. A prime concern is to ensure that the acquisition fits into the overall direction of the strategic plan.

Advantages of an Acquisition

  1. Established business.
  2. The acquired firm has an established image and track record.
  3. The entrepreneur would only need to continue the existing strategy to be successful.
  4. Location is already established.
  5. Established marketing structure
  6. An important factor that affects the value of a firm is its existing marketing channel and sales structure. With this structure already in place, the entrepreneur can concentrate on expanding to new target markets.
  7. The total cost of acquiring a business could be lower than trying to buy a franchise.
  8. Existing employees
  9. The employees of an existing business can be important assets. They know the business and can help the business continue. Employees already have established relationships with customers, suppliers, and channel members.
  10. More opportunity to be creative-More time can be spent assessing opportunities to expand or strengthen the business.

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