1 Review Chapter 3b Instructor Shan A. Garib, Winter 2013

2 Franchising  Similar to licensing but instead of IP (idea) the company grants permission to use it’s name or trade marketed goods ◦ Two main forms:  Second generation franchise – company receives a complete business package including instructions on how it must operate, train and advice eg McD’s ◦ Advantages ◦ - enables company to establish an international presence rapidly without investing a lot in target market - company in agreement is local so parent company benefits from knowledge of local market and ties to government

3 Franchising ◦ Advantages -Second generation allows greater level of control so parent can protect reputation ◦ Disadvantages

4 Franchising ◦ When is franchising a suitable strategy?  When name or trademark will be attractive in a target market

5 Franchising

6 Subcontracting  Transfer related ◦ Company providing foreign manufacturer with raw materials, semi-finished, products, components, a design or the technology to produce goods. ◦ The company purchases the goods from subcontractor ◦ Different levels:  – company in foreign market produces goods to spec by parent company then parent company sells and markets eg Ford  ODM – - parent company sells and markets in foreign company

7 Subcontracting  tages  Enables company to produce goods at low cost than domestic production  No real cost to establish mftg process in target market  Parent company does not have to obtain a business license  Parent free to focus on other core competencies  Products produced in target market so no need transportation  No taxes or duties  Many governments welcome these arraignments  Parent can benefit from the knowledge and expertise of the local mftgr

8 Subcontracting  tages ◦ Distribution, marketing, and sales must be organized ◦ Finding suitable subcontractors hard, vetted, and monitored  Can be considered form of business partnership

9 Subcontracting  When is subcontracting a suitable strategy? ◦ Strategic goal of reducing costs ◦ Easily ◦ When parent company doesn’t have the funds to invest in overseas expansion ◦ Cheap way to  When is it NOT suitable? ◦ When can’t cope ◦ Or with increasing levels of completions

10 Strategic Alliances  Defined as a partnership in the  Share knowledge, skills, resources and profits/losses! Advantages ◦ Domestic company benefit from ◦ Sell products at competitive price b/c no taxes/duties ◦ Develop local presence without big investment ◦ No language or cultural ◦ Local accreditation skipped by domestic ◦ Sometimes tax credit given for partnerships ◦ Domestic companies can locally bid on contracts

11 Strategic Alliances  Defined as a partnership in the target market  Share knowledge, skills, resources and profits/losses! Advantages ◦ Domestic company benefit from marketing knowledge and skills from local firm ◦ Sell products at competitive price b/c no taxes/duties ◦ Develop local presence without big investment ◦ No language or cultural ◦ Local accreditation skipped by domestic ◦ Sometimes tax credit given for partnerships ◦ Domestic companies can locally bid on contracts

12 Strategic Alliances Disadvantages  Reputation of local partner impacts domestic company’s reputation

13 Branch Offices  Most often the  Example of a foreign direct investment strategy  Used as first step, to gain foothold, make companies presence known, and collect valuable information on market dynamics, preferences  Retail Outlets ◦ Beyond branch offices ◦ Network of

14 Branch Offices  Retail Outlets ◦ Maybe wholly owned and operated by parent eg. Wal-Mart ◦ Gives parent company control over whole distribution chain – usually for large corporations ◦ Puts company in direct contact with customers so reactions can be monitored ◦ Parent company responsible for hiring and training, inventory and operating the outlets

15 Branch Offices  Retail Outlets tages ◦ Simple way to establish a presence, gather intel., network, product testing ◦ Overcomes ◦ Complete control ◦ Easier to train staff, and deliver after sales service tages ◦ Very expensive and time consuming ◦ Responsible for every link in chain ◦ Legal and tax requirement

16 Branch Offices  When is opening a branch office a suitable strategy?  When goal is to establish or expand presence in target market  Can devote managerial time needed to hire, scout locations, maintain operations  Can deal with Joint Ventures  Tightly  Two+ companies form a strategic relationship to conduct business in a foreign market

17 Joint Ventures  Forms separate  Each has to invest in property, finances, skills and gets interests in profits/losses and assets  Various forms – depend on function for which they are established  R&D JV – share technical skills and knowledge to speed up development of new technology  JV – one company provide production facilities to mfgtr good of another  Marketing & distribution JV – one company has marketing and distribution experience and other has products/service in a target market

18 Joint Ventures  Advantages ◦ Get higher sales volumes, greater market penetration and profit potential than any other strategy ◦ Less invested, limits liabilities and risk ◦ Benefit from government incentives to invest  Disadvantage ◦ If differing viewpoint arise big problem ◦ Hard to regain funds invested if want to pull out

19 Joint Ventures  When is a JV a suitable strategy? ◦ Objectives are to max profits, rapidly expand market share, or diversify activities ◦ Can commit to a LT commitment ◦ Comfortable with moderate amount of risk

20 Greenfield Investment  Build a whole owned subsidiary in target market  Example of  Strategy involves building everything the company needs from the ground up eg factory, distribution networks Disadvantages ◦ Companies must be committed to LT commitment ◦ Losses pulling out are HUGE! ◦ Companies must determine legal and tax structure of target market ◦

21 Greenfield Investment Advantages ◦ Use of cheaper production facilitates ◦ Accesses new processes, skills and personnel ◦ It can position itself as a local company ◦ Gain access to local marketing skills and knowledge  When is Greenfield a suitable strategy? ◦ Expand market share, increase profits, acquire new resources and technology ◦ Great when facing trade barriers or favoritism ◦ Must be able to invest LT and handle high risk