Country Risk and Strategic Planning Essay
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In Order to remain more competitive on a global scale, often companies today are deciding to globalize their markets by taking their businesses to outside countries. Successful implementation of products and services into a foreign market requires the business to conduct a necessary analysis of all the risks involved and create any applicable strategic plans addressing these issues. In this paper, a risk analysis will be conducted to help Playa Frente successfully open and run a hotel in Mexico.
Political, Legal and Regulatory Risks The political, legal and regulatory risks of opening a hotel in Mexico vary.
Playa Frente’s plan is to acquire an existing hotel and move it under its own brand. Playa Frente is in no way threatening to the political climate in Mexico. Legally, the risk associated with opening the hotel could be good and the company must make sure in compliance with rules and regulations regarding the opening and operation of the property. Playa Frente must also make sure that the business being acquired has not had any illegal irregularities in the past. Customers might always associate the company with the new hotel and risk a loss of business.
Exchange and Repatriation of Funds Risks Exchange rates and repatriation of funds needs to be considered with Playa Frente opening a store in Mexico. By acquiring a hotel already in existence, Playa Frente could possibly inherit its distribution channels and suppliers and reduce exporting costs. Pricing will also be a factor. If the company bases pricing by US standards then the possibility of products being high in Mexico are tremendous. The exchange rate on US dollars to Mexican Pesos needs to be factored in.
Competitive Risk Assessment Playa Frente’s key competitors are already conducting business in Mexico and creating a strong and profitable presence. Hilton and Marriott have been doing business in Mexico for many years. Playa Frente’s entrance into the market will give people more options and make the market more competitive. These companies have done very well in Mexico and have opened the door for companies, such as Playa Frente.
Taxation and Double Taxation RisksThe US-Mexico tax Treaty sets the standards regarding taxation and double taxation. The agreement outlines what taxes are covered, defines who the parties and the context of the agreement and itemizes what is covered under the agreement. The agreement outlines the rules under which a business’ profits are taxed and when double taxation comes into play. The agreement defines the establishment of permanent residence, which Playa Fente would seek to have by opening a hotel in the country on a permanent basis. This treaty details how the permanent resident is taxed and under what circumstance double taxation applies. Based on the information contained in the agreement, could be possible that Playa Frente may be double taxed.
Market Risks (4 P’s)Marketing decisions are based on four areas sometimes referred to as the “Marketing Mix.” These areas consist of product, price, place and promotion. These areas are parameters that a marketing manager can control, subject to the internal and external constraints of the marketing environment (NetMBA, 2008).
Service and accommodations are the products. The price must remain competitive with other resorts in the area. The resort is located in a designated tourist area and therefore, is an advantage in marketing the resort. Promotion will be conducted by internet, travel agencies, magazines and word of mouth from satisfied customers.
Distribution/Supply Chain Risks Supplies require for a resort are common items such as furniture, décor, linens, food and beverages. These types of supplies will be easily obtained in Mexico either locally at more affordable prices or may be imported from the United States if not available in Mexico. Larger items such as furniture and decorating items will be an occasional purchase rather than an ongoing supply need reducing supply chain risks.
Physical and Environmental Challenges The resort will be located on the beach so weather will be a factor. The resort will be all inclusive and must provide enough activities at the resort to provide guests with a relaxing and pleasurable vacation experience even if the weather deters visitors from beach activities Sales will be seasonal due to the changes in the weather. Prices will need to be adjusted to accommodate these types of environmental
and physical changes.
The hotel will follow American environmental standards to promote a “green” philosophy. This will protect Mexico’s resourced and send the politically a correct message to the resort’s guests from other countries.
Social and Cultural Risks Guests visiting foreign countries want to experience the culture and have an opportunity to try something new and exciting. Mexican and American cultures will be combined to provide the guests with a pleasing cultural experience. Labor will be provided locally by Mexican residents and will allow a friendly interface of cultures with the visitors. Menus will feature local cuisine and offer a variety of American entrees to provide guests with enjoyable dining experience. Staff will be trained in multiple cultures to provide a better understanding of the needs and expectations of the resort’s guests.
Cyber/Technology President Vicente Fox launched a $400 million, 6 year program called E-Mexico in 2001 (Tomzap, 2008). This initiative has been very beneficial to the residents and businesses of Mexico. Internet and cell phone service availability has increased during the last few years. Computer access and internet service should not be an issue to the management team of the resort or the resort’s guests.
How to Manage these Risks Risk management involves planning or strategizing how to deal with a likely future event that will cause harm to ones business in some form. Managing the risk will set a plan that enables the business to enhance safety, meet regulatory compliance standards, minimize lawsuits, enhance management and make better business decisions. Risk management will help control any physical injury, security breaches, customer satisfaction and public relations to all guests at the resorts and staff.
Define and Clarify Mission and Objectives The mission and objective of Playa Frente, Inc. is to offer and provide excellent service to the guests staying at the resort, a friendly and safe astrosphere, occasional hotel special rate for weekend stays, free internet assess and cable TV. The hotel will provide a multitude of social and entertainment environment for guests. A variety of events such as trade shows, day spas with salons and message therapists, medical spas and doctor office will be provided at the resort.
SWOTT Analysis of Target Country Strengths Tourism is Mexico’s greatest strength According to the World Tourism Organization; Mexico has one of the largest tourism industries in the world. In 2005, Mexico was the seventh most popular tourist destination worldwide receiving over 20 million per year. Low unemployment rate, growth of the stability of the currency, relative stability, member of the General Agreement on Tariffs and Trade (GATT). Mexico is currently the country with more free-trade agreements in the world. Economic ties to the United States provide a strong market for goods produced in Mexico, near to the large American market and best transportation network in Latin America (Wikipedia, 2008).
Weaknesses While the government respects the human rights of most citizens, serious abuses of power have been reported in security operations in indigenous communities and poor urban neighborhoods. 40% of the population is below the poverty line. Low GDP, limitations on foreign investments. High tariffs and duties, questionable economic stability, bureaucracy and administrative barriers to trade still prevalent. Corruption, the big difference between rich and poor and low high-skilled know how (Wikipedia, 2008).
Opportunity The demand for new technology, bright future prospects and arises of new markets. Growth in GDP over the last several years, growth of political stability in the last years. Rapidly emerging middle class with income to afford products. Inflation has reached a record low of 3.3% in 2005 and interest rates are low, which have spurred credit-consumption in the middle class. Mexico has experienced in the last decade monetary stability: the budget deficit was further reduced and foreign debt was decreased to less than 20% of GDP (Wikipedia, 2008).
Trends Approximately 90% f Mexican trade has been put under free trade agreements, of which the North American Free Trade Agreement remains the most significant. Almost 90% of Mexican exports go to the United States and Canada and close to 65% of its imports come from these two countries. As such, Mexico has become a major player in international trade and an export power (Wikipedia, 2008).
Threats The paved-roadway network in Mexico is the most extensive in Latin America. However, Mexico’s territory is crossed by high-altitude ranges of mountains, which have led to difficulties in creating an integrated transportation network. Mass transit in Mexico is modest. An extensive bus network serves most of the domestic passenger transport needs with several dozen companies operating by regions. Train passenger transportation between cities is limited (Wikipedia, 2008).
Make Strategy Selection If Playa Frente, Inc. is going to enter into the Mexican market and invest in the hotel business; the best strategy selection would be to watch out for weaknesses and threats. The best thing for Playa Frente, Inc. to do is to hire a local consultant to guide the company through the whole process.
Mode of Entry One of the key decisions in the internationalization process of hotel firms is the choice of the mode of entry into a foreign country. In selecting a mode of entry Playa Frente, LLC would select a mode of entry that is compatible with the company’s strategy and core competencies. Playa Fente, LLC for example, may decide to enter into a joint venture with an existing hotel owner in Mexico. This would mean sharing equity ownership in the foreign hotel with another partner. The investment would be ideal for Playa Fente, LLC since the North American Free Trade Act (NAFTA) between the U.S., Canada and Mexico removes most of the barriers on the cross-border flow of services, allowing financial institutions unrestricted access to the Mexican market (Hill, 2009).
Control and Evaluation In order for Playa Frente, LLC strategic plan to be most effective, will be vital to monitor the plan and make necessary adjustments as needed. Playa Frente, LLC will evaluate and control the plan by first defining and measuring the following parameters: number of hotel rooms, number of network installations, number of guests requesting rooms, and the amount of repeat business. Playa Frente, LLC will then compare actual results to the defined target values established for each of the parameters. Playa Frente, LLC will then make the necessary changes to the strategic plan to achieve the desired results.
Devise Contingency PlanA contingency plan is necessary to deal with the rapidly changing and growing business hotel industry in Mexico. History has shown that even the best laid plans can go wrong. If Playa Frente, LLC is unable to execute successfully its business plan and achieve expected growth and profitability even after attempting changes to the plan, the company will devise an exit strategy and inquire about selling the hotel to a local investor.
Conclusion Risk exists with any investment or business venture. Unforeseen issues may arise that are beyond management control. These types of risks cannot be managed or prevented in most cases. Playa Frente, LLC understands this concept and has conducted a risk analysis to identify and plan for the risks that are within management’s control and responsibility. Understanding these risks before making the initial investment will allow the company the best opportunity to be successful.
Dacher, Paul (1993, January 11). New U.S.-Mexico tax treaty will benefit businesses in bothsides of the border. Retrieved July 26, 2008, from BNET Web site: http://findarticles.com/p/articles/mi_m1052/is_n1_v114/ai_13687368Hill, C. (2008). International business: Competing in the global marketplace (7th ed.). BostonMcGraw-Hill Irwin (Hill, 2009).
Mexico. Wikipedia (2008). http://en.wikipedia.org/siki/Mexico/EconomyNotes on Internet Access in Mexico. Retrieved July 27, 2008 from the Tomzap website athttp://www.tomzap.com/internet/htmlThe Marketing Mix (The 4 P’s of Marketing). Retrieved July 22, 2008 from the NetMBAwebsite at http://www.netmba.com/marketing/mix