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World has truly become a global village now. So there are more free market economies in the world. Each and every country has opened its gates for the foreign firms to enter and do the business which brings diverse kind of benefits to the countries such as new employment opportunities, revenue generation, progress and many more. Different organisations too remain always in search of the opportunity in their home country or in foreign countries to serve the market. So there is much intended competition between the firms which results in the scarce of resources and the risk. The global business decisions are being made very differently in comparison with what it used to be in the past. It is because to the changes to the global market brought by the developments in the field of technology, transportation and the communication. For instance communication has become very speedy due to the developments in the information technology which results in the different approach to the international business decisions which has the significant impact on the results. Organisations all over the world use different methods for marketing and to enter the market to spread their legs such as exporting, licensing, joint venture, manufacturing, direct investment, sourcing and acquisition. The decision of which methods should be chosen depends on the different factors such as the vision of the firm, financial resources and how much risk firm is willing to take?
From above mentioned foreign market entry methods, licensing has been the revolution. Licensing is a business development tool which can best be described as granting permission to a business or an individual to do something that, without the licence, would be an infringement of Intellectual Property rights.
The firm which provides the license is called the licensor and the firm which gets the license is called the licensee. In actual, a permission is given by the licensor to the firm in the targeted market for the use of the property which is most of the time used to be intangible such as patents, trademarks, copy rights and production process. In return of that a fee is being paid by the licensee to the licensor. There could be more than one licensor or licensee. It depends.
Below are the topics that are typically the subject of negotiations leading to the conclusion of the licence contract and that require special attention in drafting its provisions. These provisions are discussed from the point of view of the licensing of patents but they also apply to other forms of IP.
Identification of party
Limitation of the license and the anti competitive practice
Duration of the license contract
Licensing offers both advantages and the disadvantages. But if you look at the advantages than one can find that advantages are much greater and influential than the disadvantages. Though disadvantages are needed to be considered very seriously. For licensing to be successful, it is very necessary for it to be successful to the both parties.
But it also offers the disadvantages which are given below.
Limited form of participation – to length of agreement, specific product or trademark
Potential result from marketing and manufacturing may be lost
Partner develops know-how and so license is short
Licensees become competitors - overcome by having cross technology transfer deals and
Licensee may exploit company resources
Requires considerable fact finding, planning, investigation and interpretation.
The motive of the licensor for licensing is to maximise profit and the motive of the licensee is to start the business with low risk and established technology. It offers a licensor a chance to expand market opportunity with lower initial investment. It gives a quick and direct entry into the new market. It illuminates the brand image of the licensor. With the quick and low risk access into the other market, it saves time and reduces the cost. It gives the attractive return on investment to both licensee and licensor as licensor could penetrate into the other market with low cost and licensee is benefited in terms of the ready to use technology, production process and the brand image.
India has become the hot spot for the licensing as it has the population of over 1 billion in which almost half the population is from middle class. In addition retail is the largest industry of India. Looking at these facts, Walt Disney Company’s segment of consumer products which is called Disney Consumer Product is doing licensing business in India across various merchandise categories such as home decor, toys, foot wear, interactive games, comic books, apparel, animation and electronics. Furthermore it expects new opportunities to arise in India very quickly in coming future.
As of now China is the fastest growing country of the world. It has reached the GDP (Gross Domestic Product) rate of double digit. Moreover it is the world largest market in terms of the consumers. The world largest and leading food retailer McDonald also wants to make the most out of the Chinese economy. It is famous for the foods such as fries, chicken, big Mac and many other items. China has proved as the most profitable after the home country of US for McDonald. Development strategy of McDonald has been focused on opening more and more stores in China utilising the licensing strategy which will help them to increase their brand equity.
Company A- Walt Disney (In India)
Mickey Mouse is the character created by the Walt Disney which is worldwide popular among all age groups. They are exploiting the popularity of this character as the business strategy. The Disney Consumer Goods, the wing of Walt Disney comes to mind as the most effective licensing co. from USA into India. In fact character merchandising is symbolic with Disney and virtually anything from paper cups to food carries its licensed marks.
It sees India as a fastest growing in the retail market in the Asia Pacific region. India has the potential to grow very fast in the future and it is the biggest market after China. The Retail sector of India is booming and still going through the developing stage. But it is still made of uncomputerised family run business. It has been seen as one of the most attractive business market of the world and it contributes very significantly to the Gross Domestic Product (GDP). So The Walt Disney is thinking its branded products to put up for sale by signing a licensing deal with the local company.
Another credible factor in the prospects of the retail sector in India is the increase in the young working population. In India, hefty pay-packets, nuclear families in urban areas, along with increasing working-women population and emerging opportunities in the services sector. These key factors have been the growth drivers of the organized retail sector in India which now boast of retailing almost all the preferences of life - Apparel & Accessories, Appliances, Electronics, Cosmetics and Toiletries, Home & Office Products, Travel and Leisure and many more. With this the retail sector in India is witnessing a rejuvenation as traditional markets make way for new formats such as departmental stores, hypermarkets, supermarkets and specialty stores.
That is why Disney Consumer Products is on the road of signing a licensing deal with the many of the fast moving consumer goods producer and the supplier which will bring the additional revenue generation and it will be a force multiplier for the company. So it is quite evident that the Disney consumer products’ licensing strategy in India holds the bright future to be proved as the effective move towards the unexpected and infinite growth. In addition, Disney encompasses the goodwill, reputation and the prestige to deliever the high quality products which will enable them to get the higher sales figure and market share in the retail market of India.
Dabur India, a fast moving consumer goods company, and Disney Consumer Products have entered into a character licensing agreement. In line with this, Disney's Winnie the Pooh character will feature on Dabur Honey's 'eazee squeezee' pack.
Walt Disney is quite popular among the kids all over the worlds because of its cartoon charecters and it goes on becoming more popular as the time passes. It is expected that the merchandising and licensing industry will grow quickly in the near future. Children are very crazy about the cartoon character of the Disney whether it is Mickey Mouse or Donald Duck, so they will buy the product which are associated with their favourite characters. So realising these fact, Disney is signing the deal with the Indian firms under its licensing strategy to put the toys with the symbol with its character. Moreover it is also emphasizing on the fact that children very much love to read the comic books. The Walt Disney also wants to take up the advantage of the fact with its strong brand equity which will take them into the new era of the growth.
Disney Consumer Products India is expecting 30 percent growth in its toy business in the country, following the signing of MY Baby Excel to roll out a new line of soft toys. My Baby Excel is a subsidiary of Excel Home Videos, the licensee for Walt Studios Home Entertainment in India. It will import the products from Disney’s vendors in Hong Kong and distribute and market them in India as a third party.
Disney Publishing Worldwide (India), a division of Walt Disney Company (India), has announced a licensing agreement with local publisher Junior Diamond to publish Disney comic books, both in English and Hindi. Disney also plans to launch comic books on its proprietary character of Princess, which includes titles such as Snowhite & Seven Dwarfs, Cinderella among others. “While we are not producing content from India, we won’t rule out the possibility in near future to localise the comics’ content for our readers,” said Bakshi. Also on the cards are comic books in regional languages for the south India market.
Company B- McDonald (In China)
McDonald is US based company which delivers the fast food of the customers’ choice at the affordable price, at the same time maintaining quality. The company used to run fast service restaurant and franchises across the world. They are targeting China with the different strategy for marketing and tools to enter the biggest economy of the world. It has done the partnership deals with the different Chinese organisations for that.
As the Chinese culture suggests, people are very gourmet and used to have different kind of tastes. Food is the very important part of the life here in China. Recent trends have suggested that people have become more heath conscious and they want to have the quality and hygienic food. McDonald is very keen to exploit that opportunity by delivering the quality fast food. People are very much inclined towards the western fast foods and they seem to be ready to pay more for the food.
Food retailing is undergoing significant changes from wet markets and corner shops to that of hypermarkets, supermarkets, departmental stores and convenience stores. Foreign retail chain giants such as Wal-Mart, Carrefour and Metro are now well established in China. Food consumption through hotels, restaurants and institutional food outlets is booming. This rapid growth is driven by the emergence of large middle class 2-income families and the Chinese tradition of hospitality and dining out. There are tremendous opportunities in the area of processed food as only a small proportion of the food production in China is processed. China currently processes about 25% of its food production compared to 90% in developed countries such as Australia and US. The average Chinese spends more than 40% of disposable income on food and beverages. It is forecast that the Chinese food and beverage market in 2005 will be valued at approximately a$350 billion and will increase at a rate of more than 10% per year for the next decade. The affluence of the Chinese consumer is increasing rapidly as millions of Chinese join the middle class each year. Even the poor will spend the equivalent of months or years of salary to try food that is considered new, unique, exotic or have significant health benefits.
These facts have forced McDonald to go for the more and more licensing deals in China which will boost the performance of the company to a large extent. It looks as the great opportunity of the McDonald to go ahead. As people are very much inclined towards the western fast food and it is known for the quality and cheap fast food, it is going to be a great deal.
In 2006, McDonald’s signed a licensing agreement with the Chinese state oil company, Sinopec, granting it the right to open McDonald’s stores at any of Sinopec’s new and existing gas stations – all 30,000 of them. The very first one, opened in July, 2006, in a surprisingly run-down neighbourhood outside Beijing.
McDonald is not only trying to get the benefit of the fast food market of the China, but it also attempts to enter into the other market such as communication and Information technology. China is the hardware superpower in the world. It is targeting the urban class to provide them comfort by giving them opportunity to shop online as it is more convenient and effective.
But it has to think about the kind of strategy it has to put in to enter the new market because it is very important for any organisation to get their foot hold in the new environment as early as possible or it will create a negative impact on organisation’s future and the financial performance. As the matter of the fact, McDonald has got its brand reputation which it can use to create the initial push and the competitive advantage over the others as brand acts as the wealth generators and the stepping stone for the organisation in the new marketing environment. Brand names and identity may also be used in other ways. Once a brand name has built up a high level of recognition among consumers, it may be sold or leased to other manufacturers to provide them with an immediate entry into another sector of the market.
McDonald’s launched an online shop on Alibaba’s Taobao, China’s top online auction site, to promote its Super Value meal. The fast-food giant wasn’t selling burgers. Instead, for two months it sold popular and fashionable products such as mobile phones, digital cameras and MP3 players on its virtual store, along with the more-predictable gift vouchers. Many gifts were sold at promotional, discounted prices.
China has registered the double digit growth rate for so many years now, and it is the most attractive place for investment according to some of the biggest multinationals. So it is very important for the MacDonald to get their foot hold in China. In addition, it has lowered its price to increase the demand of its products. It is using this tactic as the promotional tool which will help them to penetrate into the new sector.
McDonald’s sharply lowers the price of the Filet-O-Fish sandwich and double cheeseburger in China, although the company reported that sales had continued to climb during the last three months of 2008, when nearly every other industry reported a sharp downturn.
Licensing And The Marketing Environment
But before that Walt Disney and McDonald need to consider the marketing environment of the country where they want to go and that country is India. Marketing environment consists both macro and micro environmental factors. Macro factors such as political, economical, social, technological, legal and ecological vary from country to country which is needed to be understood very carefully as they have significant effect on the market which organisation wishes to serve? Furthermore they both should put more emphasis on the micro factors which relates with the internal environment of the organisation which are very crucial for the organisation to run smoothly. Therefore we can say that the success and failure depends on the marketing environment very heavily, so it needs to be considered very seriously before establishing the agreement.
As shown in the figure below, the Macro environment consists the whole set of factors that can indirectly affect an organisation’s relationship to its market. The macro environmental factors cover a wide range of nebulous phenomena. They represent general forces and pressure than institution with the organisation relates.
The Micro environment by contrast, is concerned with actual individuals and organisations (such as customers, suppliers and intermediaries) that a company deals with. It may currently deal directly with some of these, while other exist with whom there is currently no direct contact, but could never the less influence its policies. An organisation’s competitors could have a direct effect on its market position and form part of its microenvironment.
(Palmer A. & Hartley B., 2006)
Other Alternative Methods
Organisation should choose appropriate entry methods to penetrate into the new economy considering all these above mentioned environmental factors. They can choose any of the methods from exporting, licensing, joint venture, manufacturing, direct investment, sourcing and acquisition. Licensing is the unique methods which gives revenues without doing anything but just selling the brand equity and reputation of the organisation which automatically decreases the risk factor as organisation do not have to do anything but just take the profit margin as per the earlier decided agreement between the licensor and the licensee. So there is no fear of loose. But minus point of the licensing is that organisation never has the full control of the business.
Licensing plays a quite important role in the overall success of the organisation since it gives the right to the licensee to use the brand name of the licensor and established successful procedure to follow which prove quite helpful to get a foot hold in the new market. But apart from that organisation could go for the any of the above mentioned methods but they are more risky in comparison with the licensing because if they do not get the expected sales of volume then they will have to suffer the loss. As the result of that their brand name might be damaged.
Having discussed all the positive and negative aspects of the licensing methods, I would like to conclude as below.
Licensing is the unique tool to provide the opportunity to spread the business without talking much risk. Licensing area is full of opportunities for the person who is visionary. How marketing strategies could be used, it should be taken great care of. It is the best option for the business with limited initial finance. Disney Consumer Products and MacDonald both are using licensing to enter into the new economies. It has benefitted them to a large extent. But at the same time they should be careful in choosing the right partner. Increase in the brand equity is the additional advantage. Strong brand can be extended to the different products. The recent trend suggests that the method of licensing is expected to be continued in the future by both the organisations. But it actually also depends on the situation of the organisation both externally and internally. Last but not the least, I would strongly recommend to the management of both the organisations to keep persisting with the licensing methods without ignoring the other methods.
As I have reviewed all advantages and disadvantages of licensing, I would like to recommend some suggestions to the marketing manager of Disney Consumer Products and MacDonald which are as below.
Be careful in choosing the right partner because a wrong choice can spoil the brand image.
Set the standards to be followed by the licensee to provide the safeguards to the organisation and the brand image.
Do not only and over rely on licensing and try to look for the other entry methods.
Each and everything should be decided before hand to avoid the dispute between licensee and the licensor.
Keep the duration of the contract shorter which will enable the licensor to review the overall outcome of the contract and give him a chance to think again.
Just look after the overall operation of the licensee and make sure that it does not use the resources of the licensor
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Palmer A. & Hartley B., 2006, The Business Environment, Fifth Edition, McGraw Hill Education, London, Page 5