Critically analyse the advantages and disadvantages of using licensing as a market entry tool
When an organisation decided to enter into foreign market, there are several alternatives available to it. These alternatives vary with cost, risk and degree of control which can be exercised over them. The purpose of this report is to examine licensing as a foreign market entry strategy and analyse advantages and disadvantages of using licensing as a market entry tool. The report also discusses the two specialised form of licensing, contract manufacturing and franchising. The report also discusses the suitability of using licensing as a foreign market entry tool and other modes of foreign market entry. The report covers how Coca Cola and Honda using licensing as a market entry strategy to enter into global market.
Companies want to expand globally need to understand how they can enter in different country's market by minimising the risk of investment and adopt the appropriate strategy to enter into the market and sustain their future on long run. The choice of market entry strategy of a company or firm will depend on the vision of the company executives, attitudes towards risk, how much investment capital is available and how much control is desired. It also depends on market size and growth, government regulation, competitive environment, local infrastructure, country characteristics, internal resources, assets and capabilities. "A market entry strategy is an institutional arrangement that a company uses to market its product in foreign market in the beginning years, which is generally the length of time it takes a firm to completely enter a foreign market. The choice of an appropriate entry mode in a foreign market can have significant and far-reaching consequences on a firm's performance and survival. For example, an inappropriate entry mode may block opportunities and substantially limit the range of strategic options open to the firm; it may result in substantial financial losses to the firm, including exit from the foreign market, as Federal Express, Allianz (the German insurance giant) and McKinsey learned the hard way in Europe. Merrill Lynch failed in its first attempt to enter the private client services market in Japan in the 1980s largely because of using a mode of entry that was at odds with the restrictive regulations in Japan at that time" (Ekeledo & Sivakumar, 2003). Therefore, it is very necessary to understand country's characteristics from different perspectives and possible environmental issues before entering to the foreign market. When deciding to expand internationally, the first issue facing the company is whether to export or produce locally. In many emerging market, national policy requires local production which resolves this issue. So any company or firm trying to enter such a country must source locally. In developed or high income countries, local production is not usually required, so the choice is up to the company. If a firm decide to source locally, it has a choice of buying, building or renting its own manufacturing plant or signing a local contract manufacturer. A contract manufacturer may be in position to add production to an existing plant with less investment than the manufactures would require achieving the same volume of production. If this is the case, the contract manufacturer is in position to quote an attractive price.
1. Sourcing: Home, third or host country? Cost, market access, country of origin factors 2. In-country or in-region marketing organisation? Cost, market impact assessment. If choice is to establish own organisation, must decide who to appoint to key position. 3. Selection, training and motivation of local distributors and agents. 4. Marketing mix strategy: Goals and objectives in sales, earnings and share of market: positioning: marketing mix strategy5. Strategy implementation
Various modes of market entry: exporting, licensing, contract manufacturing, joint venture and direct investment form a continuum as shown in figure 1.1, the level of involvement, risk and return increases as a company moves from licensing to direct investment.
Licensing can be defined as a contractual arrangement whereby one company (licensor) makes an asset available to another company (licensee) in exchange for royalties, license fees, or some other forma of compensation. The licensed asset may be a patent, trade secret, or company name. (Keegan, 2002) Licensing is a global market entry tool and expansion strategy with considerable appeal. A company with advanced technology, expertise or a strong brand image can use licensing agreements to increase profitability with little initial investment. Licensing can offer an attractive return on investment for the life of the agreement, providing necessary performance clauses are in the contract. The cost is only limited to signing the agreement and policing its implementation. In licensing, the main disadvantage is that the company has the limited form of participation. When a company licensing its technology to another company, licensee who does not know can put it at risk. Potential returns from marketing and manufacturing may be lost and an agreement may have a short life if the licensee develops its on technology and capacity to stay ahead of technology in the licensed product area. It is possible that the licensees may tern themselves into competitors or industry leaders. In Japan, Meiji Milk produced and marketed Lady Borden premium ice cream under a licensing agreement with Borden Inc. Meiji Milk learned important skills in dairy product processing. As the licensing agreement comes near to expire, Meiji Milk introduced its own premium ice cream brands. If a company fail to license in time may lead to dire consequences. In the-mid 1980s, Apple Computer decided against licensing its operating system. Such action would have allowed other manufacturer to produce Macintosh-compatible units. Meanwhile, Microsoft has developed dominant operating systems and application windows with graphical interface like Mac. Apple then reverse its direction and licensed its operating system first to Power Computing Corporation in December 1994 and then to IBM and Motorola. The Mac clones have been very popular; Power Computing shipped 170,000 Macintosh clones in 1996 and in 1997 the Mac clones had captured over 25 percent of the Mac market. Despite these actions, the global market share for Macintosh and Mac clones has slipped below 5 percent. Apple failed to license its technology in the pre-Windows era ultimately cost the company over $125 billion dollars. (Keegan, 2002) There are two special licensing arrangements; contract manufacturing and franchising. In contract manufacturing licensor provides technical specification to a subcontractor or local manufacturer. The licensing firm take responsibility in product design and marketing and contractors accept responsibilities for manufacturing. Franchising is a licensing strategy whereby a franchisor permits its name, logo, cultural design and operations to be used in establishing a new firm or store. Franchising gave opportunities to local entrepreneurs' to apply western-style marketing techniques. Franchising strategy has been widely used in fast-food industry. Mac Donald's global expansion is built on franchising.
The licensing strategy must ensure ongoing competitive advantages such as export market opportunities, low-risk manufacturing relationships, and diffusion of new products.
In this report we will see how Coca Cola (USA) and Honda (JAPAN) using licensing as a foreign market entry tool.
3. Main Body:
As seen in introduction, for any company, there are various modes of foreign market entry are available to choose from. Companies can use various modes at the same time or may use single mode to expand internationally. Suitability of any mode of foreign market entry mode depends on type of business the company involved in, risk associated with the modes of entry and resources available. Following paragraphs will show how Coca Cola and Virgin have used licensing as foreign market entry strategy to market their products globally.
3.1. Coca Cola in the beginning:
Coca Cola, a soft drink, was founded by Dr. Pemberton, a pharmacist, in 1886 at Jacob's pharmacy in Atlanta, Georgia. Coca Cola Company is world's leading manufacturer, marketer and distributor of non-alcoholic beverage concentrates and syrups, used to produce more than 230 beverages brands. Coca cola is today global brand and company. Coca cola has been marketed from Atlanta to other states of America. In the 20th century, Coca Cola first manufactured its signature contour bottle to differentiate from imitator and securing its coca cola brand. To increase profitability, ensure consistent return and enlarge its customer base Coca Cola wanted to reduce its dependence on USA and stay ahead in competition with strong competitor Pepsi-cola in USA. Therefore, Coca Cola has decided to increase its global market share by entering various countries' market. Today Coca Cola has about six billion customers globally and developed its business around 200 countries. Coca Cola has done great work in marketing internationally. Through market segmentation, effective advertising and branding Coca Cola company has marketed its products successfully at global level.
3.2 Coca Cola expand globally using licensing strategy:
Coca Cola Company entered into the global market using various modes of entry. The most common modes are exporting, licensing and franchising. Besides exporting beverages and its special syrups, Coca cola also exporting its merchandises to foreign distributors and companies. The company has also started licensing with bottlers around the world and supplying its special syrup necessary to produce the product. Coca cola works with more than 300 bottlers internationally to produce, deliver, market and sell products around the world. In 1984 a candy store owner Joseph A Biedenham began bottling coca cola to sell using common glass called Hutchinson. Benjamin F. Thomas and Joseph B. Whitehead have made first bottling agreement with Coca cola. During 1900-1909, three main bottlers divided the country into territories and sold bottling rights to local entrepreneurs. In 1916, a distinctive bottle called contour bottle has been designed to distinguish from imitator. The contour bottle became trademark status by U.S patent office. During 1920s more than 1000 coca cola bottlers were operating in U.S. Between 1920s and 1930s, company leader Robert W. Woodruff began expand internationally through establishing bottling operation outside U.S. In 1940, before World War II, 64 bottling plant were setup around the world. During 1970s and 1980s many small and medium-sized bottlers consolidated to better serve huge amount of global customers. Strong licensing relationship with bottlers became the base for Coca Cola's entire business growth. Franchising is a special type of licensing strategy. There is various type of franchising. The type used by Coca Cola is manufactured-sponsored wholesalers franchise system. In franchising the finished products and sold to the retailers in local market. In case of Coca Cola Company licensing proved most suitable mode of market entry. Other market entry mode such as exporting also proved useful in expanding globally.
3.3 Honda's first global move: Honda motor company has been founded in 1946 in Japan by Sichiro Honda who has keen interest in motor vehicle from childhood. The company has started its journey from manufacturing motorcycles to power equipment. By 1955 the company became top motorcycle manufacturer in Japan. Increasing sales figures year by year lead company to think expand globally in 1959. The company realized that America was becoming presence in the global market place. In 1959, general manager of Honda officially introduced Honda motor company to American public.
3.4 Honda's foreign market entry modes:
Honda has secured around 20 million customers worldwide with its basic product lines on motorcycle, automobile and power equipments. Honda has developed 6-region global structure to expand the firm globally. The six region included in the structure are Japan (head quarter), North America, South America, Europe/middle east/Africa, Asia/Oceania and China. In six-region program Honda has created its brand image as quality, affordable, safe and environment-friendly brand to achieve and sustain competitive advantage. This strategy helped the firm to create value added components and brand loyalty to customers. This makes the brand more competitive in all sectors and industry. Honda-Europe is responsible for the European, Middle East, and African market and other marketing activities. The region is facilitated with research & development and most offices in the region have the capacity to make marketing decision. During 2004, sales have increased by 17.6%. Honda-civic, motorcycles and Jazz are distributed from Asia/China plants in the region. From China high quality and affordable prices scooters will be exported to African/Middle East region. Asian/Oceania region included the joint- venture between Honda and Indonesian and Indian firms which makes them biggest manufacturer of motorcycle in Honda's global expansion with 3 million units annually. In Vietnam the firm has granted a license to produce automobiles and Korean sales subsidiary was also established. In summary, Honda using mixes of different entry strategies to expand internationally. In America and European region the firm has established subsidiaries to market its products in the region, in Asia/China the firm has use direct investment in manufacturing its products. In Vietnam the firm has used licensing mode to market, in India the firm used joint- venture entry mode to enter into the market. The choice of entry mode the Honda has decided upon the risk, control, return and particular region or countries characteristics. The establishment of subsidiaries, regional offices and joint-venture made it possible for exports and licensing grants to be possible due to location advantage. Overall Honda's expansion activities can be considered as optimal with greatest amount of risk. In case of Honda's global expansion different modes of entry modes complementing each other for its overall success. Honda's licensing market entry mode becomes the integral part of the different entry modes.
Licensing is useful mode of mode of market entry if an organization wants to invest little capital and enter quickly in the foreign market. It is also good alternative to foreign production and marketing in an environment where there is shortage of skilled labor and more government restriction and regulation. Licensing the technology can be proved dangerous if the licensee learned the technology and become strong competitor in the market. In case of Coca Cola Company licensing seems very useful and quick way to enter in to foreign market. For Coca Cola licensing is more useful mode of market entry than other mode. In case of Honda licensing does not seem very suitable mode of market entry because the technology licensed to manufacture can put the company at risk. Overall licensing is easy and quick way of market entry but not always suitable for all type of organizations if they have other modes of market entry available to choose from. Licensing strategy will remain useful in the future because it has lower risk factor and faster entry in the foreign market.
- Before deciding upon any market entry strategy a marketing manager need to understand three factors: control they need over the operation, risk associated and how useful the return for the further future growth.
- Marketing managers can use different modes of marketing entry in coordination of each other.
- Marketing manager associated with manufacturing company might find licensing more suitable and easy mode of market entry as they do not need more control over production but want to expand quickly in the market. Marketing manager should be very careful while selecting any particular mode of entry through analyzing advantages and disadvantages associated with various entry modes.
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