SUBMITTED BY RIDA KHAN

SUBMITTED TO MISS. ZAINAB EJAZ

M.COM SEMESTER 3

ROLL NO. MCM-S20-421

INTERNATIONAL BUSINESS

QUESTION:
You are the international manager of a U.S. business that has just developed a
revolutionary new personal computer that can perform the same functions as
existing PC’s but costs only half as much to manufacture. Several patents
protect the unique design of this computer. Your CEO has asked you to formulate
a recommendation for how to expand into Western Europe. Your options are
1. to export from the United States.
2. to license a European firm to manufacture and market the computer in Europe, or
3.to set up a wholly owned subsidiary in Europe. Evaluate the pros and cons of
each alternative, and suggest a course of action to your CEO.

ANSWER:

1. To export from the United States:

When discussing exporting from the United States to Western Europe there are two major forms of
exporting that can be applied that is direct and indirect exporting. The two have minimal differences
hence prompting us to evaluate the advantages and disadvantages of exporting on a general basis.

The advantages includes:

  Ownership advantage, exporting retains the control on the company to determine their
competitive advantage and their products marketing strategies. In this case the company can
decide to use the low cost strategy to penetrate the market since the manufacturing cost of
the PC’s is low.
 Increase the sales and profits margins of the company. Exporting provides the company with
an opportunity to target a wide range of customers with their PC products hence increasing
their profit margins.
 Exporting provides the business with an opportunity to manage its risks. Expanding into other
markets ensures that in the company will have an opportunity to spread the risks that may
occur in one market hence ensuring that they get minimal negative impacts to the business.

The disadvantages includes:

 The fluctuations in exchange rates, trade barriers and tariffs will have a major impact on the
sales that the company does expect to make. In other words it does increase the cost of doing
business by the business in the international market which will affect the sales strategy set by
the company.
 Exporting provides the company with a limited opportunity to carry out a comprehensive
analysis of the market when compared to foreign direct investments. This means that the
company is working on assumptions and limited research that may make it difficult to
perceive the threats and opportunities in Western Europe.
 Financial risks are quite prominent in the export market. The reason for the statement being
that the mode of payments that are used to collect finances are complicated, time consuming
and the business may end up losing if they are not very careful.

2. To license a European firm to manufacture and market the computer in Europe:

License refers to a contract that will give the company an opportunity to sell their products through a
selected European firm.
The advantages include:

 Ease entry into the foreign market. The licensee has a comprehension of the market and they
are therefore better placed to be able to guarantee the firm ease penetration. The European
firm will also facilitate the company in navigating the trade barriers and tariffs instituted in
Western Europe.
 The capital outlay required to launch into this type of trade is minimal hence making it
affordable for the company to inaugurate their PC’s in the international market.
 There is a high expected return on investment which can be received much faster when
compared to the other methods used in international trade.
  Low risks on the company since them already have an established product and some of their
risks are being absorbed by the foreign European Company that will be marketing their
products.

The disadvantages includes:

 Reduced control on the marketing and sell of the products by the company. The company will
be giving the rights to market and sell their products to the European firm despite their being
a contract to govern the relation. The control is divided where by the franchisor has to consult
the licensee and vice versa before making a decision.
 The licensee may at the end of the contract become a competitor of the firm. The European
firm has understanding of the products and the intricate nature of its design, the success of
the product in Western Europe may transform them into the company’s competitors.
 Failure of the European firm to handle the marketing of the product and its distribution
effectively may damage the brands reputation in other territories that the company may want
to venture into.
 The period for licensing is limited hence not guaranteeing the company an extended period of
increase in their sales and establishing mutual relationship with the licensee.

3. To set up a wholly owned subsidiary in Europe:

A wholly owned subsidiary refers to a company where the parent company does own all its voting
stocks. In this instance the company in USA will own all the voting stocks of the company they set up
in Europe to sell their products hence maintain control.
The advantages include:

 The wholly owned subsidiary provides the company with an opportunity to study the new
European market hence enabling the company to easily circumvent the threats and
challenges that they may face in the new market.
 It enables the company to retain their intellectual property with respect to the PC’s and
prevents the duplication of their products by their competitors. The option is safe compared
to licensing where the licensee can duplicate their products after the expiry of the contract.
 The company has control of the operations of the subsidiary companies. The aspect enables
them to protect their brand quality and reputation in the market.
 The company is set to earn high returns in the long run, because when they establish the
subsidiary companies the contracts are long term in nature. Additionally, the company does
firsthand information on the analysis of the operations and competition in the market. The
aspect gives them a chance to increase their returns with time.
The advantages includes:
 The wholly owned subsidiaries have higher operational risks that arise as results of
uncertainty that they face in establishing the running of the entities. The parent company is
operating in a new territory and they have to hire employees from the local area who may
not blend with the culture of the company.
 The subsidiaries under the parent company are exposed to multiple taxations since they are
regarded as single separate entities.
 Higher cost is required to set up the subsidiary this makes the method expensive to the
company when compared to the other means of international trade.