BU491 Study Guide - Final Guide: Legal Personality, Franchising, Brand Management
BU491 – Final Exam Study Guide
Strategies for Entering into a Country
Exporting
Export: products are shipped and sold in foreign markets
▪ Advantages
o Increased Sales and Profits → Selling goods and services to a market the
company never had before boosts sales and increases revenues
o Diversification → Selling to multiple markets allows companies to diversify their
business and spread their risk
o Gain New Knowledge and Experience → Going international can yield valuable
ideas and information about new technologies, new marketing techniques, and
new knowledge of foreign competitors
▪ Disadvantages
o Product Modification → When exporting, companies may need to modify their
products to meet foreign country safety and security codes, and other import
restrictions
o Financial Risk
→
Collections of payments using the methods that are available
(open-account, prepayment, consignment, documentary collection, and letter of
credit) are not only more time-consuming than for domestic sales, but also more
complicated
o Market Information
→
Finding information on foreign markets is unquestionably
more difficult and time-consuming than finding information on and analyzing
domestic markets; in less developed countries reliable information on business
practices, market characteristics, and cultural barriers might be unavailable
Licensing
Licensing: arrangement in which one company gives another company permission to
manufacture/sell its product for a specified payment
• Advantages
o Instant/guaranteed Revenue for the Licensing Firm → The license agreement can
require several types of payments including a guaranteed license payment or
variable payments based on the profits of the licensee
o Promotion of Brand Recognition → The licensing company should consider
retaining the right to market the fact that the licensee has obtained a license
from them
o Low Risk
→
Entering with an established product, and taking fewer financial and
legal risks by having the licensee conduct operations and rights to manufacture
and distribute the product or service in a foreign nation
• Disadvantages
o Creates Competition → The license places your competition (the licensee) on a
level playing field because the competitor now has the right to use the same
production processes you use
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o Risk of Confidentiality
→
The production process is a valuable property right, and
the risk with a license is that it increases exposure of your confidential,
proprietary, production process
o Limit and Control
→
The Licensee may have more control in most situations, and
the poo ualit aageet a daage ou ads eputatio i othe
licensing territories
Joint Venture
Joint Venture: similar to a partnership; exists when two or more entities form a single joint
enterprise; several companies and individuals enter into a contractual agreement and
contribute capital to form the business
• Advantages
o Access to new markets and distribution networks
→
Joining together with a
foreign business allows a local firm to access both foreign and domestic markets,
and provides the partnering business access to these markets as well
o Increased capacity
→
When the two entities form the single joint enterprise
(usually happens with a foreign entity and a local), they have the increased
capacities of their joint resources
o Sharing risks and costs with a partner
→
the risks of entering a foreign market
alone are shattered when you partner and share them with another company;
shared knowledge can eliminate risks and increased resources reduces costs
• Disadvantages
o Different cultures and management styles result in poor integration and
cooperation
→
Both the firms coming together will bring different visions,
alues, ad goals, that ae ot % i lie ith the othe fis, leadig to
conflict, poor integration and cooperation, in management
o The partners don’t provide suffiient leadership and support in the early stages
→ Focusing on the premise for the joint venture (sales and growth) causes the
partners to forget about integration, cooperation, and efficiency between the
different cultures and management styles being combined in the joint venture
o Imbalance in levels of expertise, investment, or assets, brought into the venture
by the different partners
→
One firm may bring more to the table than another
(the reason why they may have reached out to the partner for a joint venture in
the first place)
Fully Owned Subsidiary
Fully Owned Subsidiary: A business enterprise can establish smaller, separate entities called
subsidiary companies. Corporations often form subsidiaries particularly when they produce a
number of different products and services. The subsidiary focuses on a specific area of the
business or a specific line of products or services.
• Advantages
o Operational and strategic control that the parent company can exercise over its
subsidiary
→
AKA Vertical Integration where a companies in a supply chain are
under control of a common owner
o Diversification
→
Less risk of losing intellectual property/processes to
competition
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o Cost synergies
→
Parent company controls the assets of its subsidiaries and can
invest these assets as it sees fit, using common financial systems, sharing
administrative services, and joint marketing programs
• Disadvantages
o Establishing a subsidiary is an expensive and tedious process
→
Takes time and
money to establish relationships with suppliers, customers, and building
networks
o Parent company takes on all risk of its subsidiaries
→
They can face potential
lawsuits and bear all financial losses
o Operational flexibility
→
A company entering foreign markets through this
strategy has to rely on the subsidiary to develop a distribution channel, sales
force, and customer base – i othe ods, etiel o the susidias
execution. The operational risk is concerned with one company rather than
spread across multiple entities (such in a joint venture)
Franchising
Franchising: A continuing relationship in which a franchisor provides a licensed privilege to the
franchisee to do business and offers assistance in organizing, training, merchandising,
marketing, and managing in return for a monetary consideration (a percentage of sales or
profits). Franchising is a form of business by which the business owner (franchisor) of a product,
service or method obtains distribution through affiliated dealers (franchisees)
• Advantages
o Strength in Numbers
→
Economies of scale in buying materials, supplies and
services, such as advertising, as well as in negotiating for locations and lease
terms
o New franchisees can avoid mistakes that start-up entrepreneurs typically make
through using franchisors perfected daily operations
→
Reputable franchisors
odut aket eseah efoe sellig a e outlet, so thees geate
confidence for a demand
o Low costs and risks
→
The entrepreneur must invest in the franchise (the
franchisee must invest), and this provides the capital to start-up the franchise in
the foreign entity, and at the same time, the owner(franchisor) has a vast control
of the operations and infrastructure
• Disadvantages
o Cultural Differences
→
Overcoming cultural barriers is an issue with franchising
as ell; just eause soethig is popula i oe out doest ea it ill e
elsewhere (careful tailoring before expanding)
o Financial Risks due to Regulations and Exchange Rates
→
Exchange rates
between currencies could lead to unfavourable ROI and there may be a hard
time getting access to supplies and products that you may need in any other
country – additionally, tariffs and fees for shipping products in could make the
business less profitable
o Conflicts between franchisee and franchisor
→
Although the franchisee has
limited restrictions on products or services offered, pricing, and fees, they are
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Document Summary
Export: products are shipped and sold in foreign markets: advantages. Licensing: arrangement in which one company gives another company permission to manufacture/sell its product for a specified payment: advantages. Focusing on the premise for the joint venture (sales and growth) causes the partners to forget about integration, cooperation, and efficiency between the different cultures and management styles being combined in the joint venture. Fully owned subsidiary: a business enterprise can establish smaller, separate entities called subsidiary companies. Corporations often form subsidiaries particularly when they produce a number of different products and services. The operational risk is concerned with one company rather than spread across multiple entities (such in a joint venture) The conditions under which licensing should be chosen over exporting is when trade costs are high and many specific modifications are needed to a product. Describe these two major risks and provide an example each. Also, describe three ways in which firms can mitigate each risk.
