International Diversification Strategies Essay
Part 1
An unrelated diversification strategy can create value through internal financing and limiting assets. Internal funding through shareholders, investors, and loans are used to develop or further a product that has the promise to excel in the market, thus raising its value. The second way diversification creates value is through asset control, where a firm might relocate assets or seize them to monitor cash flow (Chapter 13).
Companies may pursue international diversification due to the following reasons. Firstly, it allows the firm to confidently invest in a product as the risk reduces with the partnership since financing comes from two sources. Secondly, a firm can generally expand or specific departments such as production, which increases presence in the markets and raises future sales. (Chapter 13).
International diversification presents some benefits. The first one is that it allows a firm to enter a new market with minimum risks through an established firm. The second upside is that it allows a firm to invest in a new product that could raise its earnings. Thirdly, diversification permits a firm to have a project they can develop that varies from the main product a company produces. Finally, information dissemination is possible with international diversification as firms can legally share knowledge on market particulars and trends (Chapter 13).
Part 2
Top Gear should license McTaggart as agreed. As sandy stated, the agreement serves to benefit both companies. It appears the flexible couplings are selling well in the UK market, and the license allows Top Gear to enter a new market through McTaggart. Otherwise, Top Gear would have to establish a plant in the UK and firm to sell the couplings. Other benefits, such as reduced taxes, shipping fees, and the different rates of money exchange, save money for both companies. Hence, it is in Top Gears Interest to proceed with the licensing (Chapter 12).
McTaggart is the right choice for a licensee for the following reasons. The company already has an established profile in the local market, with buyers ready to purchase flexible couplings. Thus, Top Gear need only supply the merchandise. Additionally, the company is prepared to invest in the venture as much as Top Gear in ensuring that they have the correct data of manufacturing the product. The contract signed limits the use of Top Gears patented product which means the technology is safe from exploitation. Thus, the contract George Smith signed presents new opportunities for both Top Gear and McTaggart (Chapter 13).
Part 3
The alternatives to licensing include methods such as exporting and international franchising. International exporting is the current model Top Gear uses to reach the foreign market, but it is costly in time and money as shipping modes interfere. International franchising is when one firm operates in the name of another through trading and marketing for a fee. It affords the franchisor to expand at a low cost they only have to provide the patent to the franchisor although all profit is shared and product integrity might differ (Chapter 12).
The terms for the royalties were appropriate for Top Gear. A fee of 3% for the first million sales is an excellent way to test the profit the market awards the licensing contract. Royalty fees provide Top Gear with a way of bringing in extra money, meaning that the more sales grow at McTaggart, the more money Top Gear gets. Thus, royalties are appropriate for this contract (Chapter 12).
However, I believe that Smith should have asked for a higher percentage due to the popularity of the product and the benefit that licensing brings to McTaggart. Sandy claims that the flexible couplings would do well in the market and wants to be a source for the UK. Hence, this aspect gives Top Gear the power to ask for a more significant percentage. Smith should have reviewed other factors such as market expansion rate and product uniqueness before agreeing to the deal. Thus, Top Gear left money on the table by accepting a royalty of 3%.
