The main goal of any business is to gain more customers than its competitors. Choosing an entry mode into international markets is the key competitive competencies for that company. Penetrating and then developing an international market is always difficult. Companies often follow new business opportunity with a focus on minimizing risk maximising sales of existing products in international markets. There are five different ways of entering a foreign market. These are exporting, licensing, franchising, joint venture, and setting up a wholly owned subsidiary. When corporations go international, it is important that they carefully look for an appropriate control level over their foreign operations. “The central managerial trade-off between the alternative modes of market entry is that between risk and control.” (Arnold, 2003).The factors that should be considered when chosing appropriate entry mode include legal, competition, political environment, economic, and the company's international market experience. Financial risk is usually the main consideration on the market entry, and this is minimized by low level of market participation. In fact marketing risk is higher when a local partner making all the important marketing decisions.
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Exporting/importing is particularly appropriate for companies with little international experience. All international operating functions like bills-of-lading, customs clearance, and invoice and collection are always carried out by the partner. Nevertheless, as well as the low control level, a couple of additional cons should be considered. First, agents such as these operate on the basis of economies of scope, seeking to act as concilator for as many traders as possible they are servants of many masters. In many cases, therefore, the international trader will be only a small piece of the agent's business, so the trader may start feeling underserved by the agent, who, if acting rationally, will at any time devote the greatest attention to the trader that offers the greatest total margin in a given period. Second, agents often operate on a commission basis, and they do not actually buy the goods from the international trader, so there is a credit and cash flow risk that is not present in distributor arrangements.
Licensing is a common method of international market entry for companies with a distinctive and legally protected asset, which is a key differentiating element in their marketing offer. This might include a brand name, a technology or product design, or a manufacturing or service operating process. Licensing is a practice not restricted to international markets. Disney, for example, will license its characters to manufacturers and marketers in categories such as toys and apparel even in its domestic market while it focuses its own efforts on its core competencies of media production and distribution. But it offers a particularly effective way of entering foreign markets because it can offer simultaneously both a low-intensity (and therefore low risk) mode of market participation and adaptation of product to local markets. Continuing with Disney as an example, its many licensing arrangements in China allow its characters to adorn apparel or toys suited to local taste in terms of color, styling, or materials this is because, as is usual in licensing agreements, the local licensee has considerable autonomy in designing the products into which it incorporates the licensed characters. The other major advantage of licensing is that, despite the low level of local involvement required of the international licensor, the business is essentially local and is in the shape of the local business that holds the license. As a result, import barriers such as regulation or tariffs do not apply. As always, there are disadvantages, and two in particular should be factored into any decision on licensing. First, although it facilitates the creation of localized product, licensing is characterized by very low levels of marketing control. The licensee usually has to obtain approval from the international vendor for product design and specification, but it usually enjoys almost total autonomy over every other aspect of the marketing program (even if the contract includes constraints such as minimum price levels or promotional budgets). This is because the licensee is not a representative of the international vendor and, compared to a distributor or franchisee, is much more of an independent business that licenses only one specific and closely defined aspect of the marketing offer rather than acting as the de facto marketing arm of the international vendor. Second, and perhaps most importantly, licensing runs the risk of creating future local competitors. This is particularly true in technology businesses, in which a design or process is licensed to a local business, thus revealing "secrets," in the shape of intellectual property that would otherwise not be available to that local business. In the worst case scenario, the local licensee can end up breaking away from the international licensor and quite deliberately stealing or imitating the technology. This might arise from malicious intent or simply a breakdown in relations, as is not uncommon between an international company and its local partner.
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Franchising is an under explored entry mode in international markets, but it has been widely used as a rapid method of expansion within major developed markets in North America and Western Europe, most notably by fast food chains, consumer service businesses such as hotel or car rental, and business services. At heart, franchising is suitable for replication of a business model or format, such as a fast-food retail format and menu. Since the business format and, frequently, the operating models and guidelines are fixed, franchising is limited in its ability to adapt, a key consideration in employing this entry mode when entering new country-markets. There are two arguments to counter this. First, the major franchisers are increasingly demonstrating an ability to adapt their offering to suit local tastes. McDonald's, for example, is far from being a global seller of American-style burgers, but it offers considerably different menus in different countries and even different regions of countries In such cases, the format and perhaps the brand is internationally consistent, but certain customer-facing elements such as service personnel or individual menu choices can be tailored to local tastes. Secondly, it must be recognized that there are product-markets in which customer tastes are quite similar across countries. A business installing and maintaining swimming pools, for example, is a prime candidate for franchising, as sourcing and operations remain key success factors and are more or less universal. This is an example of a business, like fast food, that is not culture bound and in which marketing knowledge (i.e., the product- or service-specific knowledge involved in marketing this particular offering) is at least as important as local market knowledge (i.e., the knowledge required to operate successfully in a particular territory). It is also important to note that in such businesses, the local service personnel are a vital differentiating factor, and these will obviously still be local in orientation even if they operate within an internationally consistent business format.
Franchising is a system for expanding a business and distributing goods and services and an opportunity to operate a business under a recognized brand name. Franchises begin when a business licenses its brand name and operating system to a person who agrees to run their business according to the conditions of the contract, referred to as the franchising agreement. The franchiser holds the power to exercise some control over the way the franchise conducts business using the brand name.
Franchising has become an increasingly popular foreign market-entry mode and the use of franchise systems for expansion into international markets is expected to continue and perhaps intensify. Franchisors have began to seek less developed countries that are neither culturally nor physically proximate to the franchisor's own home country. (Arthur Anderson) Cultural elements are especially important to firms that need to develop strong and continuous business ties, as in the case of franchising. Culture impacts contract negotiation, daily operations, and personnel management. It also affects managerial and operational business practices, communication, performance evaluations and market acceptability.
Quick start: As practiced in retailing, franchising offers franchisees the advantage of starting up a new business quickly based on a proven trademark and formula of doing business, as opposed to having to build a new business and brand from scratch (often in the face of aggressive competition from franchise operators). A well run franchise would offer a turnkey business: from site selection to lease negotiation, training, mentoring and ongoing support as well as statutory requirements and troubleshooting
Expansion: After their brand and formula are carefully designed and properly executed, franchisors are able to expand rapidly across countries and continents, and can earn profits commensurate with their contribution to those societies. Additionally, the franchisor may choose to leverage the franchisee to build a distribution network.Also with the help of the expertise provided by the franchisers the franchisees are able to take their franchise business to that level which they wouldn't have had been able to without the expert guidance of their franchisors.
Training: Franchisors often offer franchisees significant training, which is not available for free to individuals starting their own business. Although training is not free for franchisees, it is supported through the traditional franchise fee that the franchisor collects.
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The main drawback of franchising is the difficulty of adapting the franchised asset or brand to local market tastes even experienced corporations like McDonald's or Marriott, which have managed to thrive on this trade-off as discussed above, have taken several decades and some false starts to get to this point of advanced practice. A key indicator that franchising carries this constraint is the fact that marketing budgets at local levels are usually restricted to short-term promotions rather than market development. This is consistent with the concept that franchising is a rapid replication strategy.
Control: For franchisees, the major disadvantage of franchising is a loss of control. While they gain the use of a system, trademarks, assistance, training, marketing, the franchisee is required to follow the system and get approval for changes from the franchisor. For these reasons, franchisees and entrepreneurs are very different. The United States Office of Advocacy of the SBA indicates that a franchisee "is merely a temporary business investment where he may be one of several investors during the lifetime of the franchise. In other words, he is "renting or leasing" the opportunity, not "buying a business for the purpose of true ownership." Additionally, "A franchise purchase consists of both intrinsic value and time value. A franchise is a wasting asset due to the finite term, unless the franchisor chooses to contractually obligate itself it is under no obligation to renew the franchise."
Price: Starting and operating a franchise business carries expenses. In choosing to adopt the standards set by the franchisor, the franchisee often has no further choice as to signage, shop fitting, uniforms etc. The franchisee may not be allowed to source less expensive alternatives. Added to that is the franchise fee and ongoing royalties and advertising contributions. The contract may also bind the franchisee to such alterations as demanded by the franchisor from time to time.
Conflicts: The franchisor/franchisee relationship can easily cause conflict if either side is incompetent (or acting in bad faith). For example, an incompetent franchisee can easily damage the public's goodwill towards the franchisor's brand by providing inferior goods and services, and an incompetent franchisor can destroy its franchisees by failing to promote the brand properly or by squeezing them too aggressively for profits. Franchise agreements are unilateral contracts or contracts of adhesion wherein the contract terms generally are advantageous to the franchisor when there is conflict in the relationship.
Franchising is certainly not for everyone, and every business model has its 'pros and cons.' But if you have always desired to own your own business, cant return to your old career, or just want to escape the 'corporate rat race,' franchising may offer the solution youve been looking for. Franchising has many appealing and practical elements, and it just might be the best path for you to regain control of your future.