10. Licencing and franchising
FM : FM : Anis Gunawan, MBA,MM,SP
Anisg @pmbs.ac.id
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International business
V. Functional Area excellence
10. Licencing and
franchising
IV. Entering and operating in
International Markets.
III.Strategy and opportunity
assessment
II.The environment of International Business
I.Foundation concepts of
International
business
International Business:
Strategy,
Management, and the New Realities
Chapter 16
International Business: The New Realities, Global Edition, 3rd Edition
by
Cavusgil, Knight, and Riesenberger
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Foundation Concepts
Cross-border Contractual Relationship:
Entering a formal agreement with a distributor, joint
venture firm, or other partner abroad. Often
involves granting permission to use intellectual
property to a foreign partner.
IP
Intellectual property:
Ideas or works created by firms or individuals, such
as patents, trademarks, and copyrights. Includes
such knowledge-based assets of the firm or
individuals as industrial designs, trade secrets,
inventions, works of art, literature, and other
IP
‘creations of the mind’.
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Novartis
Two Types of Contractual Relationships
1. Licensing: an arrangement in which the owner
of intellectual property grants another firm the
right to use that property for a specified period
of time in exchange for royalties or other
Licencing
Disney
compensation.
2. Franchising: arrangement
in which the firm allows
another the right to use an
entire business system in
exchange for fees, royalties,
or other compensation.
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Franchising
House of bread
Examples of Contractual Relationships
1. Bristol-Myers Squibb entered a cross-licensing
agreement with IMCOR Pharmaceutical Co. to produce
BM
medications for ultrasound patents. Pharmaceutical
firms enter countless such cross-licensing agreements.
2. Japanese company Sanrio has licensed ‘Hello Kitty’ to
many manufacturers of cosmetics, food, calendars, toys,
clothing, and numerous other products.
3. 7-Eleven has some 26,000 stores in 18 countries.
While the parent firm in Japan owns most of the
stores, several thousand in Canada, Mexico, and the U.S.
operate via licensing or franchising agreements.
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Unique Aspects of Contractual Relationships
1. Governed by a contract that provides the focal firm a
moderate level of control over the foreign partner. Control
reflects the ability of the firm to influence the decisions,
operations, and strategic resources of a foreign venture.
2. Typically involve exchange of intangibles (intellectual
property) and services. Examples include technical
assistance, know-how, and trademarks.
3. Can be pursued independently or with other foreign
market entry strategies, such as FDI and exporting.
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Typical Types of Intellectual Property
1. A patent provides the right to prevent others
from using an invention for a fixed period. It
is granted to anyone who invents a new
process, product, or useful improvement.
2. A trademark is a distinctive design or
symbol that identifies a product or service.
E.g., Nike’s swoosh symbol.
3. A copyright protects original works of
authorship. Typically covers works of music,
art, literature, movies, or software.
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Intellectual Property Rights
1. The legal claim through which the proprietary
assets of firms and individuals are protected
from unauthorized use by other parties.
2. Provide inventors with a monopoly advantage
for a specified period of time, so they can
exploit their inventions and create commercial
advantage.
3. Without legal protection and the assurance of
commercial rewards, most firms and
individuals would have little incentive to invent.
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Market Entry Strategy
100 %
Ownership
Ownership &
Strategic
Alliances
Equity
Joint Venture
Licensing
0%
Franchising
Management
Contract
100 %
0%
Controll
Designing Entry Strategy
High
Time
Branch Export / Subsidiaries
Sole
Venture
Joint Venture
Licensing
Low
Agent/distributor export
Indirect export
Low
Risk
High
A.Licensing as a Foreign Market Entry Strategy
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International Licensing is Fairly Common
1. Planters and Sunkist are owned by U.S. firms and
sold in Britain and Japan via licensing agreements.
2. Coca-Cola has a licensing agreement to distribute
Evian bottled water in the U.S. on behalf of the
brand’s owner, French company Danone.
3. A review of 120 of the largest multinational food
companies revealed that at least half are involved in
some form of international product licensing.
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Sk
1.Trademark Licensing
1. Involves a firm granting another firm permission to use its
proprietary names, characters, or logos for a specified period
of time in exchange for a royalty.
2. Trademarks appear on clothing, food, toys, home furnishings,
and numerous other goods and services. E.g., Coca Cola,
Harley-Davidson, Laura Ashley,
HD
Disney, Michael Jordan, and your favorite university!
3. A trademark like Harry Potter generates millions for the owner
with little effort. U.S. firms derive trademark-licensing
revenues exceeding $100 billion annually.
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Trademark Licensing
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2.Copyright Licensing
1. A copyright gives the owner the exclusive right to
reproduce art, music, literature, software, and other
such works, as well as prepare derivative works,
distribute copies, or perform or display the work
publicly.
2. The term of protection varies by country, but the
creator’s life plus 50 years is typical.
3. Many countries offer little or no copyright protection.
4. Thus, it is wise to investigate local copyright laws
before publishing a work abroad.
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3.Know-How Licensing
1. Involves a contract in which the focal firm
provides technological or management
knowledge about how to design, manufacture,
or deliver a product or a service.
2. The licensor makes its patents, trade secrets,
or other know-how available to a licensee in
exchange for a royalty.
3. The royalty may be a lump sum, a “running
royalty” based on the volume of products
produced from the know-how, or a combination
of both.
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Leading Licensors Ranked by Licensing Revenues
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Main Advantages and
Disadvantages of Licensing
1.
2.
3.
4.
5.
Advantages for licensor
Low investment
Low involvement
Low effort, once established
Low-cost initial entry strategy
6.
7.
8.
9.
Disadvantages for licensor
Performance depends on the foreign licensee
Licensor has limited control over its asset(s) abroad
Runs the risk of creating a future competitor
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Disadvantages of Licensing
Brb
Licensors run the risk of creating competitors, as Mattel discovered when
it granted a license to a Brazilian firm to market Barbie dolls. The latter
firm went on to create a competitor to Barbie, the Susi doll.
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B.Franchising
1. Most typical arrangement is business format
franchising in which franchisor transfers to the
franchisee a total business method -- including
production and marketing methods, sales systems,
procedures, training, and the use of its name.
2. More comprehensive and longer-term than
licensing.
3. Master franchiser: an independent company
authorized to establish, develop, and manage the
entire franchising network in its market. E.g.,
McDonald's in Japan.
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2.Franchising as an Entry Strategy
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Examples of Leading International Franchises
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Advantages and Disadvantages of Franchising
Advantages for franchiser:
1. Low investment;
2. Can internationalize quickly to
many markets;
3. Low effort, once established;
4. Can leverage franchisees’ local knowledge
Disadvantages for franchiser:
1. Maintaining control over franchisees may be difficult;
2. Franchiser has limited control over its assets abroad;
3. Risks creating a future competitor.
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Franchising in Emerging Markets
1. China and India are home to more than 2.5 billion people
and are promising markets for fast-food franchising. E.g.,
KFC and Pizza Hut are big in China.
2. Most residents of developing economies and emerging
markets lack sufficient income to patronize restaurants.
3. Most do not live in the major urbanized areas where
international franchisors are concentrated.
4. Laws in such countries vary and often evolve quickly.
5. Food and eating habits are rooted in national culture.
6. Successful franchisors carefully study economic,
demographic, legal, and cultural dimensions before
targeting foreign countries them with franchises.
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Other Contractual Arrangements
1. Turnkey contracting: arrangement where a firm plans,
finances, organizes, manages, and implements all phases
of a project abroad and hands it over to a foreign country
after training local personnel. Typical
in the construction and engineering services industries.
2. Under a management contract, a contractor supplies
managerial know-how to operate a hotel, resort, airport,
hospital, or other facility in exchange for compensation
3. With international leasing, the lessor rents out
machinery or equipment to clients abroad, often for
several years at a time. E.g., airlines lease aircraft.
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Example Turnkey Projects
The spectacular Petronas Twin Towers complex in Kuala Lumpur,
Malaysia was a seven-year turnkey project built by Bovis Lend Lease,
one of the world’s leading project management and construction
companies. Among the firms with offices in the Towers are Accenture, Al
Jazeera English, Huawei Technologies, Microsoft, and Reuters.
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Management of Licensing and Franchising
1. Licensing and franchising are complex undertakings,
requiring skilful research, planning, and execution.
2. The firm must research in advance the host country's
laws on intellectual property rights, repatriation of
royalties, and contracting with local partners.
3. Key challenges include: establishing whose national
law takes precedence for the contract; deciding
whether to grant an exclusive or nonexclusive
arrangement; and determining the geographic scope
of territory to be granted to the foreign partner.
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Counterfeiting
1. Total value of counterfeit and pirated goods traded
internationally exceeds U.S. $600 billion, which is
roughly 5% of U.S. GDP.
2. Typical knockoffs include clothing, fashion
accessories, watches, medicines, and appliances.
3. While companies such as Rolex, Louis Vuitton and
Tommy Hilfiger are well-known victims, counterfeiting
is widespread even in industrial products.
LV
4. Other examples: pharmaceutical products, medical
devices, car parts.
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