Global Risk Assessment: New Alcohol Beverage Venture
Fundamentally, risk assessment entails identification and analysis of potential hazards that may occur in an organization and their resultant effects. The occurrence of risks often results in disruption of normal operations and performance of the affected entity. Before the formulation of a risk assessment strategy, due considerations must be given to nature as well as the causing agents. Risk assessment is essential for the success of an organization. Identification of potential hazards helps in determining the necessary and effective measures to be used in controlling them. Besides, protection of employees and the entire business enterprise is a state requirement in most countries. Thus, it is necessary for business organizations to conduct a risk assessment and take control measures to prevent risk occurrence which can be attributed to political, ethical, financial, and cultural factors. In this paper, a critical risk analysis for new alcohol beverage business in China will be conducted, and some risk management strategies will be suggested.
Analysis
Political, legal, and regulatory risk
Political stability is among the facets that determine the success of business activities in a country. There is political stability in the mainland of China following the implementation of 2000’s growth strategies (Reuvid, 2011). However, some regions such as Xinjiang Province are significantly exposed to terrorism. Thus, effective business operations do not take place. Additionally, most investors are scared away from areas with political instabilities. Considering the legal aspect of government policy regarding alcohol consumption, a new venture in alcohol beverage will thrive well in most parts of China because the government has not legally enforced drinking age and there are no regulations on places and time for the sale of alcohol. In some countries, consumption of alcohol is not allowed by the law. As such, establishing a venture in alcohol would not be possible due to state’s regulations.
Exchange and currency risk
Exchange risk entails the risk of loss associated with exports and imports; it is the loss that businesses established in foreign countries with a weak currency suffer. If foreign investors do not analyze the relative value of currencies between their country and the new country where they intend to invest, they stand high chances of suffering from this type of risk. The exchange risk may also occur due to fluctuations in exchange rates. Thus, foreign investors must consider the stability of the exchange rates before making an investment.
Competitive risk assessment
Competitive risk relates to the marketing of products and the percentage of market share that the products of a particular company can command. Production for the global market is usually carried out by the principle of comparative advantage. Countries with low technological endowments tend to incur high production costs compare to those with advanced technology. As a result, countries where technology is less developed have low competitive power in the global market; hence, they suffer high competitive risk.
Taxation and double taxation risk
Companies are expected to comply with the taxation policies in the country; they pay corporate tax as well as other taxes associated with their activities. Foreign companies abide by local government’s tax policies and those of the mother country. As a result, they end up being under double taxation, implying that investing in a foreign country increases the risk of double taxation.
Social, ethical, and cultural risk
Industrial activities in a country normally have both benefits and negative outcomes. Social risk entails the negative social impacts of business activities. It involves the resultant effects on the business from the actions taken by the society against such businesses. Most production activities result in social problems such as pollution and environmental degradation. Societies view such actions as unethical and enact measures to regulate them. Some cultural activities may hamper effective business as some beliefs discourage consumption of some commodities such as drugs and alcohol. Therefore, venturing in businesses that are not favored by people’s culture increases the risk of loss. Also, production activities that produce extremely high levels of negative externalities result in high social risk exposure.
Cyber or Technology risk
Technology risk entails exposure to hazards that disrupt business operations by threatening assets and as well as processes that are necessary for normal business operations. The occurrence of this risk affects the compliance of business with set regulations, reduce profitability, and damage the reputation of the company in the market. This risk may occur due to factors such as system defects, network failure, unauthorized computer use, and human error.
Tariff and non-tariff barriers
Tariffs entail restrictions to importations or exportations of goods or services imposed by the governments in the form of duties to regulate external trade. Such restrictions may cause financial loss to the business if they are not critically analyzed (Cultural Barriers, 2016). On the other hand, non-tariff barriers entail the imposition of physical ban such as prohibitions and use of other forms of technical barriers to restrict trade. Where these barriers exist, the risk of financial loss is highly prevalent as companies have limited markets for their products.
Roles of international financial institutions
International financial institutions play a significant role in sustaining participation of developing countries in the international trade. In these countries, production costs tend to be relatively high due to the lack of adequate technology and human capital. In relation to risk assessment and control, these institutions assist countries by providing them with funds and advice on how to manage possible risks.
Developing countries lack resources and the necessary technology to produce goods and services at competitive prices in the global market. As a result, they face high competitive risk and marketing risk. Additionally, these countries do not have efficient fiscal as well as monetary policies, and there is a poor implementation. International financial institutions thus help these countries to formulate effective policies hence enabling them to alleviate financial risks.
Description
Risk Analysis for New Alcohol Beverage in China
Alcohol consumption is increasing at a higher rate in China than in other countries. The dramatic increases in alcohol production and consumption are noted since early 1980 when the country experienced fast economic growth and increase in income level (Hao, 2005).
Alcohol drinking in China is accepted especially during events like wedding ceremonies, the celebration of birthdays, and other major festivals. Thus, running an alcohol business venture would be highly profitable in China due to drinking culture and high population. However, there are risks that such enterprise would suffer despite the wide range of benefits
Political risk
Political stability has contributed significantly to the success of business activities in China. Most entrepreneurial activities thrive well due to favorable political climate and high population, which approximate to 1.38 billion (Torrens, 2010). The introduction of a new alcohol beverage will prove highly profitable in most parts of China because the government has not legally enforced drinking age and there are no regulations on places and time for the sale of alcohol.
The major political risk in China that would affect new investment is the constant conflict between the national government and other governments such as local governments within the country over the observation and application of some laws (‘Political risk’, n.d).
Cultural risk
The business culture of the Chinese is that relationships and permissions to do business can be granted through contact rather than contract. Additionally, foreign companies that invest in China get their contracts through bribes (China research, 2015). Therefore, a new venture would be at a higher risk of loss due to following wrong procedures of obtaining a business permit. To manage this type of risk, investors should ensure that they get business licenses through a formal process.
Financial risk
Financial risk entails losses caused by unfavorable changes in financial activities of the business organizations or the government. In China, financial stability is disrupted by factors like inflation and exchange rates. Also, fluctuation of labor and material prices which is frequent in China represents a potential financial risk
Ethical risk
Ethical risk entails hazards that result from unethical actions. A national survey conducted recently to investigate drinking behavior in China showed that about 56% of men and 14% of women were alcohol consumer (Wei at al., 1994). The consequence of excessive drinking is viewed unethical in many societies. As such, a new alcohol beverage would be more hazardous to the society. To manage this risk, the government should set drinking time and limit the amount of alcohol to be sold to reduce the level of immorality.
Summary of Strategic Planning
Objectives and Mission
The objective and mission of a new venture in alcohol beverage will be to become the leading alcohol producer and distributor and to command the largest market share in the global market.
Role of marketing in new alcohol beverage venture
One of the primary roles of the marketing function in the business is to connect customers to the product. The marketing agents ensure that customers are well served with the new beverage and any complaint from them is taken to the management for necessary action. Besides, marketing promotes effective interactions with the public, which help the business managers in adjusting their strategies of operations to serve best the public. Also, marketing facilitates the development of distribution system for the product to ensure access by many customers.
SWOT Analysis
The new venture targets countries with strong alcohol markets and drinking culture like China. Over 60% of Chinese are alcohol consumer hence a great market for the new alcohol beverage. The greatest weakness of the new venture is the capacity to compete with existing alcoholic beverages on the market. For example, a luxurious alcohol producer Louis Vuitton Moet Hennessy (LVMH) exports over 40% of its alcohol to China (Chow, 2015). Thus, the new product will face stiff market competition.
The large population of alcohol consumers in China creates an excellent opportunity for the new alcohol product. Additionally, consumers are more attracted to new products hence the new alcohol beverage venture will prove more profitable. The major threat to the new alcohol beverage is the cut-throat competition in the market. Many alcohol brands are already in the market, and the prices are very competitive.
Strategy selection
The marketing strategy will be to target men who contribute over 50% of the market demand for alcoholic products (Nelson, 2011). Using marketing skills the new beverage will be thoroughly advertised to reach as many consumers as possible which will help in acquiring significant market share and fighting competition. Besides, large capital investment helps in growing the reputation of business. Therefore, business owners should link with financial institutions to get appropriate funding for the new venture.
Mode of market entry for the global product
Having gained high reputation in the global market, the most appropriate mode of entry for the new alcohol beverage is direct exportation. Direct export would help in setting higher margins because of consumer awareness of the new product created through advertising (Tradestart, 2016). Establishing franchise or obtaining the license to set production plant in China would be more expensive because of additional charges and expenses.
Contingency plan
In events of unpredicted failures of the business, a contingency plan will help in recovering operations. When devising the plan, all possible risk will first be identified and listed in the order in which they are likely to occur. Secondly, the timeline for the possible occurrence of risk is set, and the capacity of the business to meet the risk is determined. Finally, the methods to be used in mitigating the risks are stated. For a new venture to continue with operations in future, the central pillar of the contingency plan should be insurance covers for the risks that are most likely to cause operations breakdown.
Conclusion
Indeed, China has the largest market for alcoholic beverages; places, as well as time for the sale of alcohol, have not been set to regulate alcohol consumption. Additionally, there is excellent political and economic environment for alcohol business in the country. Despite various challenges that one may encounter in production and marketing of new alcoholic beverage, it is still highly profitable to venture considering the market offered by the large population of alcohol consumers in China.
References
Cultural Barriers and Business Customs of Doing Business with China | Fresh Business Thinking. (2016). Retrieved from http://www.freshbusinessthinking.com/cultural-barriers-and-business-customs-of-doing-business-with-china/
Chow, J. (2015). Sales of luxury alcohol rising again in China. Retrieved from http://www.wsj.com/articles/sales-of-luxury-alcohol-on-the-rise-again-in-china-1445005152 .
Hao, W. (2004). Drinking and Drinking Patterns And Health Status In The General Population Of Five Areas Of China. Alcohol and Alcoholism, 39(1), 43–52.
Nelson, C. (2011). Opportunities in China's Alcoholic Beverage Market. Retrieved from http://www.chinabusinessreview.com/opportunities-in-chinas-alcoholic-beverage-market/
Political Risk - China Risk Retrieved April 13, 2016, from http://www.chinariskmanagement.com/Political.html
Reuvid, J. (2011). Business insights: China: Practical advice on operational strategy and risk management. United Kingdom: Kogan Page.
Torrens, C. (2010). Doing business in china: A guide to the risks and the rewards (economist books). London: Profile/The Economist, London.
Wei, H., Derson, Y., Shuiyuan, X., Lingjiang, L., & Yalin, Z. (1999). Alcohol consumption and alcohol-related problems: Chinese experience from six area samples, 1994. Addiction, 94(10), 1467–1476.
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