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Licensing, Strategic Alliances, FDI
The non-exporting modes of entry The Licensing Options, including Franchising Strategic Alliances, including Joint Ventures. FDI and Wholly Owned Subsidiaries Marketing Strategy and Optimal Entry Mode Foreign Expansion and Cultural Distance Waterfall and Sprinkler Strategies Takeaways
Non-exporting modes of entry
Three main non-exporting modes of entry
Licensing (including franchising) Strategic Alliances Wholly owned manufacturing subsidiaries
Three modes of entry
Host Country Home country LICENSING
Blueprint : “how to do it”
A replica of home
Host County STRATEGIC ALLIANCE (J.V.)
A “joint effort”
The Impact of Entry Barriers
The non-exporting modes of entry basically represent alternatives for the firm when entry barriers to a foreign market are high. These entry barriers involve not only artificial barriers such as tariffs, but also involve lack of knowledge of the foreign market and a need to outsource the marketing to local firms with greater understanding of the market.
LICENSING refers to offering a firm’s know-how or other intangible asset to a foreign company for a fee, royalty, and/or other type of payment Advantages for the new exporter The need for local market research is reduced The licensee may support the product strongly in the new market Disadvantages Can lose control over the core competitive advantage of the firm. The licensee can become a new competitor to the firm. 6-7
Definition: franchising is a licensing option where the franchisor offers a local franchisee the use of the business model. The local franchisee: raises the required capital to establish the business, obtains real estate and capital investment hires local employees, and establishes a place of business. The franchisor: offers the use of a well-known brand name, contractual promises of co-op advertising and promotion, assistance in finding and analyzing promising locations, training and a detailed blueprint for management.
Franchising pros and cons
The Franchisor: Pro: The franchisor typically gets income as a royalty on gross revenues. Con: The franchisor needs to establish controls over the use of the brand name and the level of quality provided by the local operation. The Franchisee: Pro: The franchisee can start a business with limited capital and benefit from the business experience of the franchiser. Con: The franchiser’s ability to dictate many facets of business operation limits local adaptation.
Close-up: Fast Food Franchising
E.g. McDonalds, Wendy’s, Dunkin Donuts, Yum (Pizza Hut, KFC, Taco Bell) • Has been growing in the last two decades • Mitigates risk of financial exposure in other country markets • Common method of penetrating new markets, leveraging existing brand names • Firms provide pre-planning tools to entice local investors, including location advice. • Coop advertising of the brand name 6-10
Franchising a la McDonalds: Pros and Cons
Advantages The basic “product” sold is a well-recognized brand name (50-50 split on advertising costs). The franchisor provides various production and marketing support services to the franchisee (potatoes in Russia). The local franchisee raises the necessary capital and manages the franchise (not in Moscow). Disadvantages Careful and continuous quality control is necessary to maintain the integrity of the brand name (Paris problem).
Original Equipment Manufacturing (OEM)
A company enters a foreign market by selling its unbranded product or component to another company in the market country Examples:
Canon provides cartridges for Hewlett-Packard’s laser printers Samsung sells unbranded television sets , microwaves, and VCRs to resellers such as Sears, Amana,...