Analysis of each of the alternatives: *Within In the United States competition was Intense with a total of sixteen companies competing In the automotive lift market In North America. The Industry was dominated by two large U. S. Firms, BAH Lifts and Berne Manufacturing who together held approximately 60% of the market. * Licensing option: While the licensing option would allow CASH to sell its existing products in Europe through an established and renowned dealer: Bar Masses, Cash’s reputation and brand image would be at stake, since Bar Mashie’s was not well known across the transatlantic in the U.
S. Furthermore, Bar Masses was prepared to pay a royalty rate of only 5% of gross sales, which In my opinion is a nominal portion that would not equate to high profits. *A Joint venture had many “profitable” qualities, such as, allowing CASH to enjoy a higher/greater rate of return, heightened position with respect to decision making, in turn allow CASH to expand its market share in Europe in the future and generate higher revenues and maximize profits.
Furthermore, a Joint venture could also help mitigate potential risks, primarily market risk, and returns over the two companies. However, the success of a Joint venture depend on the extent to which underlying assumptions are taken into consideration, such as, Cash’s ability to interpret European markets and increase market share accordingly. Similarly, poor decision making could adversely affect CASH. * The main advantage of a direct investment is that such an investment would allow the firm to maintain full control over its operations, sales and profits.
However, the main limitation of such an entry option lay in the huge one-time, start-up costs ($450,000 for capital equipment and incremental costs), and additional carrying costs f $1 and annual maintenance costs of $80,000. Each of the options above has its own set of advantages and limitations, and while the first two entry options in Europe could allow CASH to utilize Bar Mashie’s strengths as a market leader and expertise, the ability to maximize profits by benefiting from synergy costs had to also be taken into consideration.
Furthermore, a Joint venture or a licensing option also posed other concerns, such as, earnings forecast and ability to generate sufficient profits. While the third option (direct investment option) could rove to be expensive in the short term, in the long term it could prove to be fruitful as CASH expands its operations and enjoys full control over ownership, decision making and profits. Also, the data available relates to past sales data and such data cannot be used to forecast future sales.
With the availability of more quantitative data, such as, future free cash flow data for each of the entry and investment options available to CASH, this could in turn allow CASH to use discounted cash flow (DOC) analysis for each of the investment options, as well as, net present value (NP) analysis for the second investment option. Recommendation and Implementation: I strongly feel that CASH should weigh each of the entry options in Europe using financial data, such as, data on future free cash flow, to calculate DOC and NP.
I also feel that CASH should forecast its future sales revenue power in the United States and its ability to do so. While my analysis weighed each of the options primarily using qualitative data, quantitative data (forecast data) would, in my opinion, allow CASH to make more informed decisions on whether it should expand existing sales in the United States or exploit market opportunities in Europe.