Cameron Auto Parts Case Study
Cameron Auto Parts was founded in 1965 after the signing of the U. S. and Canada Auto Pact. The main consumers were the Big Three automotive manufacturers and the company prospered in this new business environment. In 2000, problems started to occur in the company. First, a consequent drop of the sales of more than 50% happened. Second, the Japanese were great competitors and took advantage of the market opportunities in Canada. Alex took the control in 2001 in order to implement a process of modernization of the company.
His “operation survival” consists of cutting the production costs by being more focused on the workforce (mainly lay-offs). Although is it difficult to manage a financial problem, Cameron faced serious “gaps” in this function. In 2003, the situation of Alex familial company is stabilized, even if there is a need to invest in another plant. As Cameron was not financially ready to make such a progress, the first option was, on one end, to wait and generate more profits leading to more financial stability through exports.
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On the other end, the company can choose to license the production of the flexible coupling with McTaggart.
In this case, Cameron is the licensor and McTaggart, the licensee. The licensor shares patents, copyrights or trademarks and gets royalty fees in return. In 2004, Alex signed a five years licensing agreement with McTaggart. Following this agreement, McTaggart had to pay $100,000 fee in advance in order to help Cameron to recover and a royalty of 3% on the first $1 million of sales and 2% on the second. In case McTaggart reached a higher level of technology, it would also have the obligation to share at least one of them with Cameron.
Alex realized that the plant cannot afford both systems because the costs of expanding the activity were too high and required too many of the company’s resources. Moreover, the company’s financial situation could not permit Cameron to implement a plant expansion. The potential in the European market is a great way to expand a business although the culture is different. It is difficult to adapt a North American business system to a European system. Exporting to the European market means that the average European customer will have to pay the international fees (about 20 per cent more than North Americans because of taxes).
By granting McTaggart a license, Alex ensures a quick and minimize the risks while penetrating the U. K and European markets. Although there are many advantages when licensing, there are other consequences such as sharing not only profits, but also knowledge, and so Cameron’s intellectual property. The advantages of licensing McTaggart are numerous. The low investment costs, reduced financial risks, and economies of scope are very interesting when implementing an activity’s expansion. Cameron is concerned about its financial situation and licensing provides them a higher security.
It is a quick market entry with a minimized risk of poor performance from the licensee, McTaggart, which is already and directly running operations in the U. K. On the contrary, the risk of image loss, the distance between both countries leading to communication losses, the lack of revenue, and the shared profits are some disadvantages to take into account when implementing a license strategy. Exporting also has its advantages and disadvantages. First, it provides independence, a higher control over the quality of final products, economies of scale, and a higher, non-shared profit. In this case, disadvantages are numerous.
The lack of capacity of Cameron limits its ability to expand its business through exports. Plus, the different currency represents a risk as currencies’ value varies greatly on the short term. There are also high investment costs, a limited knowledge of the U. K. and European market, the costs of transportation and the trade barriers. Considering the company’s financial situation, the costs and risks of penetrating a new market, we think that Alex should license McTaggart. It is clear that McTaggart is the perfect business partner. This company owns all the tools necessary to concretely produce and sell the flexible couplings.
They are able to sell the product very fast and build a strong and sustainable relationship with Cameron. McTaggart is experienced in this business and Cameron can benefit from it to increase production capacities. They have a solid reputation and a great financial situation. The sales persons are very involved concerning the marketing and selling of the products. They have high manufacturing capacities and are willing to invest and develop the manufacturing capability to efficiently produce the flexible couplings. Additionally, their client base is essential. Licensing McTaggart is the best choice Cameron can do to improve its situation.