Sur Systems Software $-$ Time to Open a U$.$S$.$ Subsidiary?

The French company Sur System Software manufactures and sells software solutions to corporations for managing customer databases and coordinating communications with them. Commonly referred to as CRM systems $($customer relationship management systems$),$ Sur developed a successful niche strategy targeting corporate foundations. With success in their home market, Sur began to expand throughout the European Union, taking advantage of the free trade zone between the $27$ member countries.

The next major market for Sur was the United States, which would provide a gateway into North America. Being unfamiliar with the U$.$S$.$ market, Sur developed partnership with Epic Distribution, a U$.$S$.-$based distribution company. Sur worked with Epic to train their sales force and customer service staff, and to develop English language and culturally appropriate content marketing materials such as brochures, print and social media advertising, and landing pages.

Epic was able to generate steady volume and revenue growth for the first five years of the partnership. However, sales growth has slowed, and is significantly lower than what Sur has experienced in its European markets where it operates its own marketing and sales subsidiaries. Management is considering ending the Epic Distribution partnership and investing in a U$.$S$.$ sales and service office.

Epic purchases each unit from Sur for $$10,000.$ After adding a $33\mathrm{.}3\%$ margin, Epic sells the Sur solution to corporate end$-$users for $$18,000.$ Management believes $$18,000$ is the right price for the U$.$S$.$ market.

Sur management estimates the cost of goods sold if they establish their own operations will be $$12,000.$ This cost includes the software, customer training, and one$-$year service support costs. They approximate that Epic spent $$500,000$ annually on Sur$-$related selling, general, and administrative costs. As such, they expect their annual costs of operating their own U$.$S$.$ subsidiary will be the same amount.

Sur management has asked you to evaluate the pros and cons of shifting their U$.$S$.$ entry strategy from the foreign distributor to a local marketing and sales organization. To do so$,$ you prepare a report that answers the following questions:

What are the advantages of a company owned and operated marketing and sales subsidiary compared to working with a foreign distributor?

How many units will the U$.$S$.$ subsidiary have to sell each year to justify the investment?

Recognizing that Epic Distribution sold $89$ units in the most recent year, the Sur Systems management team fully believes that an integrated U$.$S$.$ subsidiary would surely grow sales. Given the recent sales underperformance they estimate that low double$-$digit growth is reasonable and have set a target of $12\%,$ or $100$ units for year $1.$ Should they make the investment?