Strategies Licensing - Strategic Management

Licensing

  1. The company has its main strengths in its reputation for quality, its technical skills, and its leadership position in the specialist ventilating field. One of the main areas of expansion will be the further exploitation of these strengths. There are opportunities in Europe and the specialist ventilating market is expanding at 10 per cent per year.
  2. To fully exploit this opportunity and attempt to obtain a higher share of the market by the traditional methods would involve major capital expenditures (£500,000), would run at a loss for two or three years, and would have a high degree of risk.
  3. The alternative of licensing has therefore been chosen, and negotiations are in an advanced stage with the XYZ Company of Paris to license this company to produce for the French market. This will involve the conversion of our current business in France to the new arrangement, but as these sales have been at a loss this in itself is a means of profit improvement.
  4. In return for technical assistance, specifications, the use of brand names and marketing advice, and all rights in France, we will receive a royalty of 71⁄2 per cent of turnover – which will yield an immediate profit of £50,000 in the first year of the plan, rising to £250,000 by year 5.

Operational improvement

  1. All current production activities will be rationalised into one factory. This will bring a reduced unit cost and thereby improve the profitability of all contracts.
  2. The personnel implications of this move are still under study, but are unlikely to be severe because of the new use that will be made of the factory which will be released in this way .
  3. A deliberate short-term reduction of general building business will be sought and no break-even contracts will be entered into. The effect of this policy on turnover is forecast as:

Operational improvement

4. Domestic market concentration will be on the area of greatest strength – the specialist market. Sales forecasts are:

Sales forecasts

  1. These forecasts will be achieved through an improved marketing approach (the subject of a separate report), and the results of a continued R & D effort. Profits from this area of our business (net of a continuing £100,000 per year expenditure on R & D) will rise from just over £200,000 this year to £500,000 by year 5.

Organisation and management

  1. The marketing department is being strengthened and reorganised under a product management concept. Full supporting services will also be provided. The detailed organisation is the subject of a consultant’s report.
  2. Increased emphasis will be placed on management development to support the company’s intention to expand (see consultant’s report). A nucleus of young graduates will be built up, trained in the company, and thus be available for the major diversification discussed below.
  3. An information technology strategy will be developed next year, and the first stages of this will be implemented immediately. Training will be provided to managers and secretaries to enable an electronic environment to be operative by the end of next year.
  4. Diversification:
    1. Anticipated improvement in the efficiency of current operations as outlined above will enable the company to give adequate attention to a major diversification into the home air-conditioner market.
    2. Initial products will be based on the technology of an American firm from whom a licence has been obtained, the agreement including technical assistance. Production will be carried out in the factory released from normal production
    3. The immediate impact of this strategy will be a reduction of profits in years 1 and 2. Thereafter the project will be profitable and by year 5 will be contributing £250,000. There will be no sales in year 1, the loss in that year being due to initial expenses. Turnover will develop to:

Diversification

  1. The project is subject to different risks from those of our present business and should therefore have a stabilising effect on profits.
  2. Finance:
  3. Full financial implications are developed in the Financial Plan. All requirements can be met if dividends are held to current levels and if shortterm needs are met by bank overdraft (£200,000 ceiling) in years 1 and 2.
  4. By year 3 the success of these strategies will have been proved. At this point the shareholders may consider ‘going public’. It is because there is doubt over this intention that earnings per share objectives have not been set.

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