Surf Mode: Entering the U.S. Market

Executive summary

Surf mode is an Australian enterprise that deals in the manufacture and marketing of sporting apparels with a leading share of the sporting industry market in Australia, Europe and Asia. The company is headquartered at Sydney where its main factories are located but has subsidiaries in London, Frankfurt, Tokyo, Shanghai and New Delhi. There have been changes in the sporting arena through the increased affinity for water sports and this has led to the increased competition among the manufacturers as a result of increased formation of sporting gear manufacturing companies and the expansion of the already existing ones. In an effort to maintain the competitive edge, surf mode has developed a revolutionary new surf ski that can outperform all existing surf skis and can be produced at a much lower cost, and has protected the surf ski together with the surf material. In an effort to expand the market, surf mode is eying the United States market hence this report aims at showing the different market entry techniques and how applicable they would be to the surf mode in the US market entry.

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The use of a wholly owned subsidiary would be the best bet to still have the full ownership of the invention as the subsidiary is a part of the parent company. This method is expensive due to the high costs of setting up a fully operational subsidiary. The exporting option is where the goods are produced outside the geographical borders of the country where they will be marketed. This works well if the costs of production and transportation are low and the barriers to exportation are minimal. Licensing, on the other hand, is where the surf mode could give another company the rights to use the invention and produce surf skis to be sold in the US market. The licensee would pay the surf mode a given amount of money as royalties. Licensing removes the owner of the invention: surf mode from the direct risks of having to invest its money in the expansion effort.

Introduction

Surf mode is an international organization based in Sydney Australia and it deals with design, production, distribution and marketing of sporting gear. The company has been facing problems as a result of increased competition and has had a need to tap the American market.

The new model of the surf ski could not have come at a better time hence the company is going to use it to launch itself into the American market. This report is of a study that was carried out to determine the best ways to enter the market while limiting the company’s expenses but ensuring successful entry.

Since the Australian and the American government trade is governed by the free trade agreement they signed in 2005 the implications of that to the expansion strategy needed to be looked at. A surf ski is a kayak that has an open top and is controlled using a foot pedal. They are a subset of the kayaks and the surfboards in the way they are made and are at times referred to as surf canoeing. They are paddled in water especially in the warmer areas but are also common in the cooler areas

Subsidiary

A wholly owned subsidiary is a company that has all its common stocks belonging to another single corporation. The subsidiary is under the direction of another organization. Subsidiaries are given a separate corporate identity from the parent company for legal reasons. Subsidiaries are formed because they serve different purposes or they are beneficial to the parent corporation in different ways (Swiggart and Von Taube, n.d).

Starting up a subsidiary

The surf mode can enter the American market by starting up a wholly surf mode owned subsidiary in the United States that would deal with the manufacture and distribution of the advanced model of the surf ski it invented. This would be more time and resources consuming than acquiring control of an already existing firm due to the costs of registration and building up the company together with the problem of coming up with the work force best suited for the job. The subsidiary would also be unknown in the market hence stiff competition as it tries to make its name (Swiggart and Von Taube, n.d).

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The economic climate in America

As a result of the economic meltdown in the recent years the economies of the world are still struggling in an effort to find the right answers that would bolster their economies once again. In this, America is no exception. With debts amounting to trillions an effort to cut the debt has led to more taxes being charged on the tax payers including the multinationals. These will in return increase the costs of running the business hence lower returns on investment (Sullivan, 2010).

Australia and the US are large scale trade partners whose trade relations depend on each other. The US lead the list by being the largest investor by volume in Australia while in turn Australia is 10th in the US. The trade agreement signed between the two in 2005 binds their investment and trade acts hence the surf mode entering the American market would be facilitated by the agreement (Crescent, 2010).

Pros and cons of using subsidiaries

Forming subsidiaries is cheaper and easier in terms of time and money to the parent company. Subsidiaries are given a separate corporate identity from the parent company for legal reasons.

Since the subsidiaries are separate legal entities from the parent company, in case the venture turns to be a bad investment, the parent company is protected legally from being considered liable for actions of the subsidiary (Licensing vs. Manufacturing N.d)

A wholly owned subsidiary is a part of the larger parent company hence the inventors have total control over their invention

Forming subsidiaries is a very expensive form of expanding markets and they are connected with the high risk of dealing with new markets which are different from what the organization is used to (Licensing vs. Manufacturing, n.d).

Exporting

Exporting is the trading of goods and services produced in a given country to other countries. Exporting is the movement of goods and services from one country referred to as the country of origin to another country or countries referred to as the country of destination in a legitimate way.

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When deciding to start exporting or to expand exports to another area the organization should be sure it has an idea of the operating costs, rules and regulations, available alternatives, channels of distribution and the prospective markets abroad (Palestinian American chamber of commerce, n.d).

For the surf mode to expand into the United States through exportation of the surf it will need to access the most convenient distribution channels that are available. The two ways of exporting are direct and indirect selling. In the indirect selling there is the use of export Management Company (EMC), export trading company (ETC), and the export/import merchant (Entrepreneur, 2010).

The EMC services are sought by a domestic producer who wants to export while the ETC does a market research to determine what the customers are interested in and finds the manufacturers who have the goods and wants to trade. The import/export merchant buys goods and trades them as his own (Entrepreneur, 2010).

In the direct selling the producer is involved in every deal that goes on between the production and the consumption. He or she takes care of all the activities of the exportation to make sure that the customers or consumers are well taken care of (Daley and Scott, 2000, p.19).

Pros and cons of exporting the surf skis into the US

Exportation leads to the saving of resources that would otherwise have been used to set up subsidiaries or new business ventures within the American borders. The costs of setting up new operations is very high and the need for cheaper and more applicable alternatives to the need for expansion (Rosales, 1993, p.2).

Centralized production will result in the company enjoying the benefits of large scale production. The company can manufacture offshore meaning that it can base its operations in areas where labor and cost of manufacture is lower and then export from there. If this offshore point is near America, the costs of transportation would be cut (Rosales, 1993, p.2).

Exportation is not appropriate when the targeted market can produce at a lower cost. This is because the models in the markets will be way cheaper than the new model and this may be a problem to the establishment of the exported brand. Transportation costs can make the exported commodities very expensive hence uneconomical as can tariffs and barriers to exportation.

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Licensing

Patents are restrictions to other people from producing, using and trading in an invention. It therefore protects the need for the inventor to be the only one who can make decisions regarding the application and the usage of the invention

Licensing is where an inventor sells his rights over an invention to a manufacturer in return gets a royalty payment. This is especially helpful to the inventor if he or she does not have the necessary skills, experience, and resources to produce the product or if the direct manufacture of the products by the inventor may not be as economical hence the need to source a kind of partnership somewhere else (Don Boshears, Boshears & Boshears Consulting, n.d).

Licensing allows the inventor to gain from the agreement with the manufacturer. In this case all the rights to the property belong to the surf mode enterprise as it has patents to both the design and the shell material, meaning that the company has the exclusive property rights to the design and the raw materials (Pedreira, 2010).

Licensing may be exclusive or non exclusive. In a nonexclusive license the surf mode enterprise which is the inventor may enter into a business agreement with different or more than one licensee. This means that in the process of expanding into the US, different companies may be given the rights to produce and trade in surf ski inside the US. Exclusive licensing, on the other hand, is the process of licensing an invention and the extent of the rights surrendered is limited by area to be covered or the field use. This means that the surf mode can license the invention to a company that will only trade in the surf ski in the United States only but that does not limit the company from licensing the invention to other companies who are based in other geographical areas like Europe, Africa or Asia. (Don Boshears, Boshears &Boshears Consulting, n.d).

When licensing, surf mode may opt for another company that is strategically placed and has the resources and the capability to handle the manufacturing and distribution of the more advanced model of the surf ski. Due to the increased transportation costs and the problems associated with exporting and importing in the form of barriers and tariffs, surf mode can choose to partner with a company already situated in US.

The license can be limited by time or the products limited to a certain area as agreed on the contract and when the time expires, the rights to the invention revert to the inventor because the licensed patent rights are no longer enforceable (Pedreira, 2010; Lennon, 2008, p.53).

Pros and cons of using licensing

The surf mode would not be required to put up capital as the licensee is liable for the risks and the costs of production. This will protect the surf mode from the market forces (Licensing vs. Manufacturing, N.d). Licensing may be more economical especially when the competition is high and the licensee is strategically placed within the target market and has a wide market for its products (Licensing vs. Manufacturing, n.d).

Applicable if surf mode does not want to engage in the production of the surf ski itself due to legal, moral or any other reason.

Disadvantages of licensing include lose of control over the invention and low loyalties to the inventor in proportion to what the manufacturer gains.

Recommendations and conclusion

For surf mode to profit from its entry into the US market, it should enter by either exporting or having a subsidiary there. This is because the US is a trade partner of Australia and through the 2005 trade agreement there is free trade between the two. This shows that the barriers to trade have been eliminated hence increasing competition and profitability

The invention is of high quality and can be produced economically and this will drive down the consumer prices. The lowering of the prices will increase the competitiveness of the surf ski against the other models from other producers. This will drive up the demand therefore increasing profitability

Due to the concessions given to the Australian firms, the business can operate well without being restricted by the bottlenecks to international companies hence the company’s return on investment will go up. Therefore it is advisable that the surf mode manufactures and markets the surf skis on their own so that they can exploit the trade agreement

References

Crescent, J. M. (2010) Australia-United States free trade agreement. Web.

Daley, W. M. and Scott D. T. (2000). A Basic Guide to Exporting Washington: Diane Publishing. Web.

Don Boshears, B. & Boshears Consulting. How to license your product. Web.

Entrepreneur. (2010). How to Start an Import/Export Business. Web.

Licensing vs. Manufacturing. Licensing vs. Manufacturing: The pros and cons, advantages and disadvantages of choosing to license or manufacture your invention. Web.

Lennon, M. J. (2008). Drafting technology patent license agreements. NY, Aspen Publishers. Web.

Palestinian American chamber of commerce. Import-Export Procedures with the United States. Web.

Pedreira, T. (2010). Licensing agreements. Web.

Rosales, M. A. (1993). Breaking into the trade game: A small business guide to exporting. Washington: DIANE Publishing. Web.

Sullivan, M. (2010). Fair or foul? Web.

Swiggart, W. F. and Von Taube A. Corporate & international law: A Guide to Incorporating a United States Subsidiary. Web.

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