AnyCo is a US consumer product company enjoying broad distribution and dominant

Question

AnyCo is a US consumer product company enjoying broad distribution and dominant market share in its domestic market. An opportunity exists to penetrate and perhaps dominate an offshore market, PseudoLand, worth an estimated $20 million in sales per year. Domestically, however, each dollar of revenue consistently produces the following income statement (P/L):

Sales   $1.00

    Delivered Cost of Goods      .55

   Gross Profit   $ .45

   Selling Expns      .06

   General & Admin Expns       .30

   Operating Profit   $ .09

AnyCo has already begun exporting to PseudoLand and, as expected, commissions (selling expenses) are higher overseas. AnyCo’s board of directors is committed to maintaining the company’s current capital costs, and is attracted to this opportunity because it returns nearly the same operating profit (as a % of sales) as its current business in the US. However, the company’s managers want to diversify the offshore distribution strategy in order to maximize penetration. Three modes of distribution have been identified:

1. An export company has taken charge of the effort to date, but this arrangement is not exclusive.

2. Selling directly to PseudoLand consumers over the internet

3. Using a local distribution company to sell products in PseudoLand

Through research, Anyco has come to believe that the current export company can, at best, effect 50% penetration of the PseudoLand marketplace. The internet could add an additional 20%. A local distribution company would be a bit more powerful, capturing as much as 30%. Selling expenses are 7% for the export company and 4% over the internet. However, the local distributor has balked at Anyco’s standard 6% commission, and is demanding 10%. Negotiations with the local distributor look inevitable.

Determine the best alternative to a negotiated agreement (BATNA) and a reservation sales commission above which, the company would walk away without an agreement. Using not more than one typed page (single spaced) and one spread sheet, explain your findings.

* Please elaborate reasoning!

Explanation / Answer

Expected operating profit from sales in pseudo land -

$20 Million x 0.09 = $1.8 Million

AnyCo has an operating profit of 9% per unit of sales with a standard commission rate of 6%.

If Anyco chooses local export company, company will acquire 50% market with 1% lower operating profit ( because commission demand is 7% which is 1% higher than the standard 6% rate for Amyco).

So, net profits - $20 Million x 50% x (0.09 - 0.01) = $0.8 Million

If anyco chooses internet, it will have 20% additional market share with 2% lower commission costs ( because 4% commission is charged by the internet)

So, net profits with internet -

$20 Million x 20% x (0.09+0.02) = $0.44 Million

If anyco chooses local distribution, company will get 30% market share but will have 4% additional costs.

Do, net profit with local distribution -

$20 Million x 30% x (0.09 - 0.04) = $0.3 Million

Which is lower than the internet, so internet is the best alternative right now with profit of $0.33 Million

Minimum profit expected for a 30% market share is -

0.44 Million / ($20 Million x 30%) = 0.073

Difference in profits from that with standard commission -

0.09 - 0.073 = 0.016

So, the company should not pay commission which is more than - 0.06 + 0.16 = 0.0716

Hence, as per BATNA, Anyco should not agree for commission beyond 7.16% to local distributor because the company can achieve same profit of $ 0.44 Million choosing internet, which although has lower penetration of 20% but lower costs (4% commission) too.

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