Exit Strategies in International Business

Exit Strategies in International Business

When a company starts a venture nationally or internationally, it needs to have a plan of how it would enter the new market, capture the market and exit when the task is completed. The last part is also known as an exit strategy which is defined as, 'The written goals for the succession of a businesses' ownership and control, derived from a well thought out and properly timed plan that considers all factors, all interested parties, and the personal goals of the owners in a manner and time period that is accommodative to the business, its shareholders, and potential buyers.' (Leonetti)

Exit strategy is important because it allows a firm to decide how it would end the project once the value from investment has been derived. Exit strategy may also be needed in case of failure of the venture. In both cases, there are multiple ways in which a company can make an exit after having been either successful or not in the international market. For example a successful U.S. company decides to enter the Chinese market. This apparel company wants to enter the children's clothing sector in China. For this reason, it will need an action plan which can also be called a business plan for that specific venture. Now after the company has entered and started the implementation of its plan, two possible scenarios can emerge. The company will be either able to meet its objectives in the given time frame or it will not be able to do so. In both cases, it might look for an exit strategy. In the case of success, this exit strategy helps in turning the company into a bigger entity or removing the presence of the company from the new market because the company no longer wants to invest in that market or needs its resources for some other venture. In the case of failure, the reason for exit strategy is simple and that is the company no longer wants to waste its resources on a thankless venture.

Types of Exit strategies:

We shall now discuss some of the most common exit strategies in the international market and focus on the advantages and disadvantages of each.

Merger with another company

A company can decide to merge with another company as its exit strategy. This is not the same thing as acquisition because the company joins resources with another firm and is involved with operations but now it has become a bigger entity. This would the right strategy for a firm when it has been successful or when it had been successful but is currently facing financial crunch or crisis.

Advantages:

The original company doesn't vanish all together. It is still very much involved in operations and continues to receive cash and stock. Its resources are joined with that of the other firm thus making it a bigger and more formidable force in the industry. The management may not change completely and it will be up to the company to retain some of its senior management when merge materializes. Hence not everyone loses their job and the company still has some semblance of control over decisions and operations.

Disadvantages:

Culture conflict can emerge as two companies with entirely different ways of doing business come together. The existing employees may no longer feel as empowered or powerful as before and employee turnover may become a problem. Problems like this were seen with the merger of HP and Compaq and also CNN and Time warner.

Acquisition:

Acquisition occurs when a firm decides to sell its assets and resources and ownership to another existing firm (Hawkey, 2002). This is unlike merger because the original firm completes removes itself from the venture. It is no longer part of the operations. Example of this would be Walls ice cream Company's acquisition of Polka Ice cream company in Pakistan.

Advantages:

The company will receive cash and stock for the sale. An agreement may be reached between two companies on retention of some of the employees as well as the management.

Disadvantages:

The new company may not be the right fit for the venture. The product or services of the original firm may lose value and later disappear completely.

Sale of the company:

The company may choose to sell its business completely to a new owner. This happened in the case of Burt's Bees that knew from the very beginning that once it reached $25 million turnover, it will exit by selling the company to a new owner. That is what it did and that is called sale of the company. It may happen in both cases whether a company has been successful or not.

Advantages:

The company will receive cash immediately upon sale of the business or in parts over a period of time.

Disadvantages:

The company may not find the right kind of buyer and the employees may not feel comfortable with the change in management and ownership. Employees may lose their jobs as the new owner may want new management and new workforce according to its own plan.

Franchise:

Another exit strategy comes in the shape of franchise but this is limited to when the company wants to expand and grow. This is when a business idea is replicated through various owners and each owner keeps a percentage of the profits while a small percentage goes to the original firm.

Advantages:

The company earns from the revenues of all its franchise outlets. The company can grow without using its own capital or resources.

Disadvantages:

The only problem with this strategy is that not all owners may be able to understand the concept as clearly as the original firm. Quality control issues may emerge. There may also be many conflicts of ideas and interests with franchisees after a certain period of time.

Employee Buyout:

This happens when a company decides to sell its business to its employees. Some key employees may choose to buy the stock of the firm and eventually own the firm.

Advantages:

Employees understand the business and culture. There are fewer conflicts and operations are expected to go on more smoothly than with other options.