The choice of the strategy in this situation can be essentially described as the decision of prioritizing either profits or stability. The option of staying within the familiar grounds and being able to utilize the company’s major strong points secures the stable but low income. This is what was the reason for the change in the first place. Furthermore, the effects of the recession can possibly disrupt all the revenues in the end, so relying solely on playing it safe is probably not an option. The expansion into the unfamiliar territory, on the other hand, poses more risks which are medium to high in nature and offers little predictability.
This uncertainty is the first primary reason against the option. The second major reason is the possible external threats, like the unanticipated interventions of other governments and the demand for the completely new infrastructure and logistics, which is also prone to unpredicted malfunction. Third reason is the human factor of the developing markets, which can be unusually high and may result in the reputation damage. Finally, the legal aspect of the question comes into play and offers additional difficulties in licensing, contract misinterpretations, and the infamous copyright infringements when dealing with the developing markets. Thus, the second option, while much more tempting, can be deemed risky to the extent of unacceptable.
Thus, the preferred strategy is still the first option, but with one important feature: the expansion should be conducted through acquisitions, not through creating the new venture. The acquisitions offer the benefits of faster financial and geographical growth, further reduction of competition, and possible strategic alliances that can open new possibilities. Another major reason for this strategy is the possible partial introduction to the new field without taking the radical change of direction in policy.
Finally, the acquisitions are usually cost effective compared to the rest of the options, which aligns well with the company’s current financial state (low cash reserves and relatively high debt). The risks associated with this variant, both short-term and long-term, are low to non-existent, as the activities involved are either familiar to the management or can be circumvented by applying the previous experience.
The only factor that remains relatively unaccounted for in this case is the unionized nature of the small competitors, which will present many difficulties when it comes to the acquisitions: the liabilities will most likely be passed with the assets (Kaplan par. 1), and the company will have to deal with them. This drawback, however, is acceptable when compared to much more numerous and serious risks of venturing into the new territory.
Despite the cost efficiency of the selected strategy, it requires the large investments early in the process. The funding options are thus either going to the debt markets to issue out bonds or go to the equity markets and issue out stock. The second variant is tempting, as it offers possible high return which the company desperately needs. On the other hand, the stock market is more volatile and less predictable, which may result in a net loss of profits (Lasher 29). Additionally, unlike the debt market, it depends little on the company’s reputation, which discards one of the company’s strong points.
Still, the selected strategy itself is highly dependent on the initial investment, which is possible only by issuing stock. Besides, the business strategy poses fewer risks overall, so the ones presented by the equity markets are acceptable when the viewed on a larger scale (Keim and Ziemba xvi). The debt markets, despite being more reliable, will most likely prove insufficient for financing the initial stage of acquisitions, and can be reserved for the later phase, when the profit growth will allow the prioritizing of the stability over revenue.
The policy that involves entering a market that is familiar to the company evidently poses fewer risks than venturing into the new one. Still, some risks persist. Most of them are grounded in the way the expansion will be conducted. In case the management decides to expand through acquisitions, the primary risks are the issues of the post-merger integration and the employee attrition. Both reasons are often cited as the main causes of failed growth through acquisition.
On the other hand, such problems are fairly predictable and, when timely addressed, can be minimized or not emerge at all. In the case of acquiring the companies of the familiar industry, the predictions are likely to be accurate, so this is a low risk. As the attrition and integration issues happen during the first year, this is a short-term risk. Another short-term risk involves the damage to the company’s public image after an acquisition of a business with low reputation. However, in the case of the corporation with the dominant market share position acquiring smaller competitors, this is also unlikely and can be timely fixed, so this is also a low risk.
Finally, there is a risk of acquisition of a company in distress and having a backlash of dealing with its problems later. Such adverse effects can be long-term but are easily avoided and thus regarded as a lowest of risks. It is also important to note that the corporation does not have the experience of previous acquisitions, so it will need a specialist to handle the matters and avoid the said risks.
The other way of expansion is through the new start-up venture. This poses little to no risks at all, as this is a familiar ground.
The risks of entering the new market are numerous (Noorderhaven, Sorge, and Koen 370). The first one lies within the nature of the predicted hurdle rate. As it is relatively inaccurate and often result in miscalculations, the IRR hurdle provided by the VP is of little help when making the decision (Graham and Smart 259). The practice of contracting with low-cost manufacturers of the developing markets poses the long-term risks of the product quality issues and the disruption of the established supply chain, which is currently one of the strong points of the corporation. As the company has no experience in this field and the contracts will play the key role in the new business plan, this is definitely the highest risk involved.
The cash requirements is another factor. The current financial state of the company suggests clinging to the lowest expenses possible, which is consistent with the short-term projections. However, in three to four years the situation may or may not change. This short-term risk is a relatively controlled one, so it can be deemed medium. Finally, the seemingly competitor-free situation may and probably will change after the first major player enters the new market. Besides, the competing companies may or may not have the required skill and experience which our corporation lacks, so this long-term risk can be estimated as medium.
Graham, John and Scott Smart. Introduction to Corporate Finance: What Companies Do, Cengage Learning, 2012. Print.
Kaplan, Alan. Mergers & Acquisitions – Union Due Diligence. 2013. Web.
Keim, Donald and William Ziemba. Security Market Imperfections in Worldwide Equity Markets, Cambridge, UK: Cambridge University Press. 2000. Print.
Lasher, William. Practical Financing Management, New York: Thomson, 2008. Print.
Noorderhaven, Niels, Arndt Sorge, and Carla Koen. Comparative International Management. London, UK: Routledge, 2015. Print.