According to Carl Schramm, business owners have to carry out adequate research on the target market, pricing policy, production, and the demand for their products to succeed. (Berry, 2017). The acquisition of Chang Dow Trading Co. by Zip-6 will have many benefits compared to its limitations. Purchase of the subsidiary of Lotse Tsangsung will involve using its existing trade strategy for Zip-6 in South Korea. It will allow a cut on prices and keep its client base to increase its sales, which will lead to improving profits. This will also maintain the production area with the familiar environment that may otherwise not sustain the business in a different locality. With functional location economies, Zip-6 having been produced and sold successfully in South Korea in the past 7 years. The company having been established for a number of years, certain location externalities have been established including appropriate skilled labor from the population which will be hard and time-consuming to put up in a different location. There could have also been established manufacturers for the production of the raw materials needed for the manufacture of Zip-6 around the region. Relocating the company will therefore mean that raw materials for the production will need to be outsourced another time. This also comes with the costs for transportation of these materials to the production unit of the company. Another trade barrier in case of relocation could be the varying regulations on foreign direct investment that may cap the company’s operations like sourcing certain production components from a different country/region.
It will also be prudent to acquiring Chang Dow Trading Co. subsidiary for the continuation of Zip-6 production by considering the technology needs for production. With the existing location of the company and that it has been around for some time, it would be assumed that there are fixed costs of technology that is efficient in scale unlike relation to other territories where the technology may not be as flexible.
Relocating the company may indulge it into further marketing costs as the product may be unfamiliar to their new population who may be potential customers. There should also be consideration to the wage rates of its workers compared to the standards of those living in the potential new location of the company.
However, selling the licensing agreement to Zip-6 and allowing the establishment of a new subsidiary through Greenfield ventures and consequently a new production and sales strategy. This poses a variety of advantages to the new company. It can be considered risky with a company aligning to the same strategy for a long time due to the fluid nature of a country’s political, social and economic stability that all affect the operations of a company as well, and their marketing environment. This nature may alter labor costs, production and sales unlike in a diverse geographical area having different variables that may favor a company with multiple subsidiaries. Relocating the company, can also be advantageous in case of an altered country’s exchange rate within appreciation impacting into high production rates for the company. It also be appropriate another subsidiary and a new strategy for Zip-6 in case it does not serve universal needs and that significant differences on the product does not affect its sales. (Rust, 2017)
With varying location externalities, expected volatile exchange rates in different countries, possibility of an inflexible production technology, difference in another country’s socio-economic and political stability as well, costs in production with varying regulations; I would choose the first option that Lotse Tsangsung sells its subsidiary, Chang Dow Trading Co. to Zip-6 consequently retaining it to the Korean market unlike acquiring the licensing agreement and formulating a new strategy for Zip-6.
Berry T. (2017): Wall Street Journal on Business Planning, Bplans. Retrieved from https://articles.bplans.com/wall-street-journal-on-business-planning/
Rust R. (2017) International Journal of Research in Marketing, Official Journal of the European Marketing Academy, Elsevier Publishers. Retrieved from https://www.journals.elsevier.com/international-journal-of-research-in-marketing/