Question 3: Entry Modes Flashcards
Define Licensing, Exclusive Licensing, Non Exclusive Licensing, Cross Licensing
- Used for intangible propery
- Practice where one company (the licensor) grant another (the licensee) the right to use that property for a specified period of time
- Licensors earn from:
- Royalty payments
- One-time fee
- Grants companies the right to use process technologies inherent in particular goods
Exclusive Licensing
- Exclusive right to produce and market a property
- Specific geographic region
Non Exclusive Licensing
- Licensee does not sole access to a market, several other companies can be licensees of the same property
Cross Licensing
- Practice by which companies exchange intangible properties with each other through license agreements
- Can lower production costs
- Parties may still pay royalties due to difference in asset value
List and define the Advantages of Licensing
Financing of International Expansion
- Agreements usually requires licensees to contribute financing
- Advantageous to licensors who want to expand but lack resources
- Eliminates time spent on construction and setting up of facilities
- Licensor can earn revenue earlier than expected
Low-risk Method of International Expansion
- Licensor is shieled from risk in hard-to-read or unstable markets
Reduces Likelihood of Products being on Black Markets
- Bootleggers are avoided by licensing local markets to sell products at competitive prices
- Royalties will be lower than generate profits, but is better than no profits at all
List and define the Disadvantages of Licensing
Restriction of Future Activities
- Exclusive licensee markets product, but does not meet licensor’s expectations
- Licensor is unable to directly sell the products nor grant rights to another licensee
- Good products and lucrative markets cannot gurantee success
Reduction in Global Consistency of Quality and Marketing
- Licensor may find that former licensee is producing and marketing a better version of its own product
- Development of a coherent global brand image is difficult; promotion takes time and money to correct misconceptions
Accidental Lending of Property to Future Competitors
- Dangerous when licensor sells assets based on their comparative advantage
- Licensee becomes highly competent at producing the property over time
- When the agreement expires, former licensee can emerge as a competitor
- Contracts should restrict licensees from competing in the future wih products based strictly on licensed property
Define Franchising
- Practice by which one company (the franchisor) supplies another (the franchisee) with intangible property and other assistance over an extended period
- Franchisees earn from flat fees, royalties, or both
- Company’s brand and trademark is important
What are the Differences between Licensing and Franchising?
- Franchising gives greater control over product sales
- Franchisee must comply to strict guidelines on business conduct
- Licensing is common in manufacturing industries; Franchising is common in service industries
- Licensing involves a one-time property transfer; Franchising requires ongoing assistance
- Franchisors typically offer start-up capital, training, location and advertising advice
List the Advantages of Franchising
Low-cost, Low-risk Entry Mode
- Allows consistency of companies following a global strategy
- Many franchisees will make small modification to suit local buyers
Entry Mode Allowing Rapid Expansion
- Firms benefit from first-mover advantage
Benefit from Cultural Knowledge
- Franchisers benefit from know-how of local management
- Helps lower risk of business failure in unfamiliar markets
List the Disadvantages of Franchising
Cumbersome to Manage Large Number of Franchisees
- Product quality and promotional messages are inconsistent
- Greater control is established through a ‘master franchisee’, who is respnsible for monitoring operations of individual franchisees
Loss of Organisational Flexibility
- Contracts restrict franchisees’ strategic and tactical options
- Some are forced to promote products owned by the franchiser’s other divisions
