International Business: market entry modes
International business expansion can be achieved through five common market entry modes. They include, exporting, licensing and franchising, partnering and strategic alliances, acquisitions, and establishing new, wholly owned subsidiaries also known as greenfield ventures. The market entry mode a firm chooses depends on the firm’s size, financial strength, as well as the economic and regulatory conditions of the target country. In particular, Licensing and franchising are the most common market entry modes. The two market entry modes including their advantages and disadvantages.
Licensing
Licensing is a business arrangement in which one company gives another company permission to manufacture its product for a specified payment. Additionally, numerous items can be part of a licensing agreement. The items such as a trademark, a patent, or even branding. The rights of the licensee are clearly outlined in the agreement for the license. In addition, licensing allows them to sell items, use a trademark, or take advantage of a specific brand message. There are advantages and disadvantages to licensing for both parties to consider before finalizing their agreement.
Advantages
- It creates an opportunity for passive income.
- offers new business opportunities.
- reduction of risks for both parties.
- It is also an easier entry into foreign markets.
- creates self-employment opportunities.
- It as well offers the freedom to develop a unique marketing approach.
Disadvantages
- It increases opportunities for IP theft.
- Encourages dependency upon the licensor.
- Increases competition in the marketplace.
- limitation of time
- Might cause damage the reputation of both parties.
- Delay of royalty payments .
- It may also lead to royalty litigation.
Franchising
Franchising is a market entry mode of distributing products or services involving a franchisor, who establishes the brand’s trademark or trade name and a business system, and a franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system. Technically, the contract binding the two parties is the “franchise,” but that term more commonly refers to the actual business that the franchisee operates.
For these businesses, franchising can be a better alternative because the franchises are set up in locations near to the people that are demanding their products or services. This allows the international business owner to focus on supporting the franchisees from one location and ensures that all their customers’ needs are met. The following are advantages and disadvantages of franchising market entry mode :
Advantages |
Disadvantages |
|---|---|
| International business expansion can be faster as franchisees provide the labor and their sales provide the growth | Franchisees cannot be managed as closely as employees and they may have different goals to the franchisor |
| Franchisees are responsible for their company’s success so they are more motivated | Franchise recruitment can be slower and less efficient than employee recruitment |
| Franchisees may be more talented at growing the business and turning a profit than employees would be | Franchisors earn royalties from sales. Franchisees earn money from profits. Achieving growth in both isn’t always possible, potentially causing conflict |
| The franchisor puts relatively little money into new locations as this comes from the franchisee | Franchisees don’t always work together like employees might, thus losing any potential collective benefit |
| Successful locations can return high royalties | The upfront investment (time and money) can be huge ,for instance, a pilot operation may need to be tested |
| Consistent operations across the business consequently means improved efficiency and higher quality levels. | Selecting even one wrong franchisee can ruin the reputation of the whole franchise |
| Franchisees should be fully committed due to the investment they put in | franchisees access confidential information which is risky if they are not fully committed to the business |
However, according to Carlos Garcia, the franchisor of Total Clean, franchising is not an easy way to grow international business.
