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There are several options available to a firm to choose a market-entry method when they decide to enter the foreign markets. There are plenty of factors to take into consideration when entering the global market like the total costs, the amount of risk and the level of power, which can be employed over them. The most basic type of the market-entry approach is export the products or services with the use of direct or indirect methods like appointing agents or using countertrades. While the export processing zones or joint ventures are more complex methods. There are other market-entry strategies as well like licensing, contracting, starting manufacturing plant overseas and franchising, etc. In this assignment, we will focus on the franchising and discuss various aspects of this market entry strategy.
Any organization who wants to expand and do business abroad has to have a good plan on three fundamental issues.
The first and foremost is Marketing, i.e., in which country the firm wants to go, which type of market segment it wants to enter, how they are going to handle and execute their marketing strategies, and using which type they will enter the market, for example, going directly or with the support of mediators using what kind of information?
The second important issue is how they will source the products, i.e., to make product, buy it from the manufacturer, or get it from the supplier?
The third one is the issue about the control and the amount of investment. Acquiring the whole business, forming partnership globally, and joint ventures are examples of that.
Once the planning on fundamental issues is done and the firm decides about entering a specific country market, it's the time for them to take into consideration the following factors:
The organization also needs to research on the payback time. What is the timeframe when the company wants to regain the expenses when entering the market? Is there any barrier to profit within a particular timeframe?
Expenses- How much cost will the firm has to bear when entering the market?
The flexibility of entering and exiting the market.
Speed - The firm needs to decide on how fast they want to enter the market.
What kind of risks associated with the market, i.e., competitors, political environment, what are the trends in the market, etc.
Future aims - What is the goal of the organization for future while entering the international market? Are there any chances of progress and then moving to other markets?
Generally, when organization wants to expand their business, they consider either increasing product line or change geographic position and do business in different country or they do both. Therefore, it is very important to notice that when company is expanding or changing its geographical location, there will be increased complexity in the management of the business. Expansion may give new opportunities, but sometimes the risk associated with the expansion is greater than the opportunities itself. In today's global business, it is significant to choose the correct market-entry method because if the selected method was not appropriate for the business, then they are having the risk of losing the market with great loss. There is not a market entry method which is suitable for all businesses because every organization has different goals and objectives, priorities, resources, and different kind of workforce, which vary from business to business. So, according to the specific needs and goals of the organizations, there are some basic market-entry methods, which are commonly used. They all had their own advantages and disadvantages. So, it is up to the organization to consider all of that and choose the method, which gives the best return on the resources employed by the firm and which could lead the firm to better position.
The most commonly used methods are as below.
This is the most common method of entering foreign markets, where the domestically-produced goods are being marketed and sold in the foreign markets. It is the most conventional form of working in overseas markets. There is no need of direct production in the foreign country is required, but a great amount of money needs to be employed for the marketing of the product. There are generally four players, whose coordination is necessary in the process, which are exporter, importer, transporter, and government.
The main benefits of exporting can be described as follow:
Home-based production of goods involves less risk than producing goods abroad.
Exporting provides an opportunity to study foreign market before investing in big projects there.
Exporting provides quick way to enter foreign market
Exporting creates more market for the domestic product
Competing in international market with other big firms makes the organization more effective in the domestic market
While there are many benefits of the exporting, there are some disadvantages also.
Sometimes the foreign government put tariffs and trade barriers on overseas business. This kind of situation adds into the cost of the product.
With the use of exporting, the organization cannot get the full information of the local market.
The firm might be seen as an outsider by the foreign country
So, the firm should decide after looking on risks v/s benefits of the exporting option and then they should try this option. Exporting is generally suitable for the businesses, which are totally new to the foreign country. It is like launch pad for the business activities in the new market.
The most common definition of the licensing can be described as "the method of foreign operation whereby a firm in one country agrees to permit a company in another country to use the manufacturing, processing, trademark, know-how or some other skill provided by the licensor for specified money." Licensing allows to immediately taking the benefits of the current production, distribution and marketing systems that the other firms may have developed during several years. In return, the licensor gets share from the profits of the licensee. It involves very less cost and participation.
THE ADVANTAGES OF LICENSING:
It is a very good option to enter the foreign markets, where there is very low risk of loss.
Licensing is a speedy way to enter the foreign market.
Licensing minimizes the amount of risk and investment.
THE DISADVANTAGES ARE:
Lack of control over utilization of resources.
Firm can get more revenue by producing and marketing the products.
Risk of giving all the information to other company.
A franchise is a right approved to an individual or group to sell an organization's products or services within a certain territory or location. Domino's Pizza, McDonald's, Subway, and the UPS Store are the known examples of franchising. There are more than 120 different types of franchise businesses operating today, which include automobile, health and fitness, banking and insurance, cleaning and maintenance, etc.
BENEFITS OF FRANCHISING
Franchising gives better chances of success
More profit with less involvement
Relatively low investment in starting business
Joint venture is a business where two or more investors share possession and power over assets, rights and procedures. Joint ventures are a more broad structure of contribution than either exporting or licensing.
Overcome cultural distance
Combined monetary power
Fastest and effective way to increase sales and profits
Maximum utilization of resources
Not a centralized control over management
Different partners have different thoughts on benefits.
Upon reviewing all methods, organization should think about the best option available for them because all methods have their own advantages and disadvantages. After careful inspection of all the factors and company position, the firm should go ahead entering the new foreign market because this is very critical issue for the future of the firm.
So, we can say according to different situation, company needs to consider different market entry strategies.
Franchising is a common method of entering services markets abroad. What is the special attraction of international franchising to both partners?
Although manufacturing industries has been the primary source of interdependence and integration of the world economy, services have experienced phenomenal growth in international markets. The private sectors in most economies is comprised of small scaled businesses; however, nearly one-third of the businesses failed during the first year, with less than half of them surviving the third year. Managerial competence is mainly cited as the main reason for the failure of the business. Thus, establishing new business appears to be fraught with risks and uncertainties with numerous skills required of small business owner-managers. One response to minimize the risk of small business management has been the development of franchising. In recent years, entrepreneur or former executives have turned to franchising as an attractive alternative to traditional forms of organization.
Franchise gives two-way benefits to both franchisee as well as the franchisor, where the franchisee gets the right to sell product or services of a well-known brand name, which is already well established in the market, so he has the minimum risk of failing in the market and the franchisor, who gets the opportunity to promote, manage, and sell his product or services without investing great amount of money and time and still gets a good amount of revenue from the franchisee. What is so attractive about the franchise? Here are some facts published by the U.S. Department of Commerce, which shows the booming success of franchise business in all aspects of business, particularly in the services industries.
Almost 50% of the all retail business is done through the franchises in the U.S.
There is a high success rate of franchises against the independent business, where 94% of franchises do survive after the 5 years of the business while the rate for independent business is just 20%.
65% of the franchisees said that they would buy the same business franchise again.
Franchising is one of the best methods for the development of business. Plenty of organizations have grown tremendously from a few units to thousands of unit in a short period of time. In the history, there is no other method, which has created such an amazing marketing possibility and growth as did the franchising.
The service industry is the best example of the franchising. Service industry offers great opportunities and best chances of success for the both parties in the business. The McDonalds, Domino's Pizza, UPS are the examples of the successful franchise business. There are two-way benefits for both parties, which are as follows, and which makes it more attractive for service industries. These are some of the most successful service industries franchises operating in the world today.
Subway, which does business in Sandwiches and Salads
McDonald's, which is famous for hamburgers
7-Eleven Inc. is a Convenience Stores
Hampton Inns & Suites operates in hotel business
Supercuts is a successful Hair Salons chain
H.R. Block, whose business involves Tax Preparation and e-Filing
Jani-King is a Commercial Cleaning business, another good example of service industry franchising
Servo-Pro is an Insurance and Disaster Restoration and Cleaning company.
BENEFITS FOR THE FRANCHISOR
Develop the business more quickly than growing it through company owned outlets.
The franchisees contribute to an advertising fund, which you control, so franchisor can work on creating brand awareness with no monetary obligation on your part.
The franchisees invest in expansion, helping franchisor to a high degree of financial leverage.
The company shares minimum risk because the expenses on the unit are carried out by the franchisee.
Franchisees are far more motivated to maximize sales and profits than salaried branch managers.
Franchisees are more receptive to home markets than employees and can quickly get local public awareness of the business.
Franchisees are significant source of new marketing and product concepts to help your whole network and increase the revenue you get.
BENIFITS TO THE FRANCHISEE
The franchisee buys into an already proven business concept - he does not have to invest time, money, and resources to develop it.
Franchisee gets an already worked out plan of action on which he sets his business in the form of training and day-to-day tasks literature.
He can get the expertise and help of the franchisor when there is any problem in the unit.
With the development of the franchise network, the franchisee gets the advantage of increased brand awareness.
Franchising is one of most easy way available to expand the business more effectively with minimum investment in the form of resources, employees, and cost. So, this concept is growing rapidly and this century will see the progress of this concept especially the service industries.