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!

Answer 1

Answer:
Current sales =		$20,000,000
Cost-benefits of alternatives:
Alternative-1
An export company
Sales	$30,000,000
Delivered cost of goods	$16,500,000
Gross Profit	$13,500,000
Selling expense	$2,100,000
General and admin exp	$9,000,000
Operating profit	$2,400,000
Alternative-2
Selling directly to PseudoLand consumers over the internet
Sales	$24,000,000
Delivered cost of goods	$13,200,000
Gross Profit	$10,800,000
Selling expense	$960,000
General and admin exp	$7,200,000
Operating profit	$2,640,000
Alternative-3
Using a local distribution company to sell products in PseudoLand
Sales	$26,000,000
Delivered cost of goods	$14,300,000
Gross Profit	$11,700,000
Selling expense	$2,600,000
General and admin exp	$7,800,000
Operating profit	$1,300,000
The best alternative to a negotiated agreement (BATNA) is Alternative-2