Question

Consider why a firm should enter a market via a wholly-owned subsidiary. What are the advantages and disadvantages of this type of strategy?

Answer 1

What is wholly owned subsidiary?

A wholly-owned subsidiary is a separate company that is completely owned (100 % stock owned by parent company) by another company rather than forming integrated division, franchise, branch or unit of the main company. The company that owns the subsidiary is called the parent company. Consequently, the parent company has the right to appoint the board of directors of the subsidiary company and indirectly controls the subsidiary company

Wholly owned subsidiaries may be part of the same industry in which the parent company operates or may operate in an entirely different industry such as a computer company entering into printer manufacturing division.

For Instance, Coffee tycoon "Starbucks Japan" is a wholly-owned subsidiary of Starbucks Corp.

Advantages and disadvantages of having a wholly-owned subsidiary

Advantages

Following are the advantages of a wholly-owned subsidiary

1.  Parent Company shares  Vision and provides Guidance
One of the primary advantages wholly-owned subsidiary is that the parent company can mentor, guide, direct and support to its subsidiary. Moreover wholly-owned subsidiary will have access to the parent company’s resources that includes talent pool of experienced executives and assets of parent company.

2. By establishing wholly-owned subsidiaries, parent company can diversify and manage risk. Diversification is a strategy of reducing risk by developing different types of businesses. Consequently, if one business or industry is running in losses, other businesses may keep the company profitable. For example, a computer company may enter into the television business, and the tablet business by establishing wholly-owned subsidiaries.

3.  Companies that must depend/rely upon suppliers and service providers in a supply chain can take control of it by establishing wholly-owned subsidiaries. This phenomenon is caled vertical integration where companies in a supply chain are under the control of a common owner. For Instance a car manufacturing company can own several wholly-owned subsidiaries in its supply chain by establishing a tire company and several different auto parts companies.

Disadvantages of a wholly-owned subsidiary

1. Subsidiary Can Be Expensive
One of the major especially in case of a foreign-owned subsidiary is that establishing this business can consume the financial resources of a parent company which is hard-earned. Many parent companies does not conduct feasibility studies while establishing a wholly-owned subsidiary and take a wild risk rather than a calculated risk.

2. New challenges - Political and Cultural
Establishing a wholly-owned subsidiary especially in new place (for instance foreign country) can face many political and cultural challenges. For Instance, in Saudi Arabia, women were not permitted to drive until June 2018. This posed a great challenge for ride-sharing business planning to set up a wholly-owned subsidiary in Saudi Arabia.

3. Disadvantages of Monopoly to consumer

If one company owns an entire supply chain, it might misuse this situation by charging high prices from consumers.