Copyright © 2014 Pearson Education FM : FM : Anis Gunawan, MBA,MM,SP 10. Licencing and franchising

International Business: Strategy, Management, and the New Realities I.Foundation concepts of International business II.The environment of International Business III.Strategy and opportunity assessment IV. Entering and operating in International Markets. V. Functional Area excellence International business 10. Licencing and franchising

International Business: The New Realities, Global Edition, 3 rd Edition by Cavusgil, Knight, and Riesenberger Chapter 16 Copyright © 2014 Pearson Education

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. 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 ‘creations of the mind ’. Copyright © 2014 Pearson Education IP Novartis IP

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 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. Copyright © 2014 Pearson Education Franchising House of bread Licencing Disney

Examples of Contractual Relationships 1. Bristol-Myers Squibb entered a cross-licensing agreement with IMCOR Pharmaceutical Co. to produce 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 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. Copyright © 2014 Pearson Education BM

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. Copyright © 2014 Pearson Education

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. Copyright © 2014 Pearson Education

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. Copyright © 2014 Pearson Education

Market Entry Strategy Controll 0 % 100 % Ownership 0 % 100 % LicensingFranchising Management Contract Equity Joint Venture Ownership & Strategic Alliances

Time Contro l Risk Branch Export / Subsidiaries Indirect export Agent/distributor export Joint Venture Sole Venture Licensing Designing Entry Strategy Low High

A.Licensing as a Foreign Market Entry Strategy Copyright © 2014 Pearson Education

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. Copyright © 2014 Pearson Education 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, 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. Copyright © 2014 Pearson Education HD

Trademark Licensing Copyright © 2014 Pearson Education

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. Copyright © 2014 Pearson Education

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. Copyright © 2014 Pearson Education

Leading Licensors Ranked by Licensing Revenues Copyright © 2014 Pearson Education

Main Advantages and Disadvantages of Licensing 1.Advantages for licensor 2.Low investment 3.Low involvement 4.Low effort, once established 5.Low-cost initial entry strategy 6. Disadvantages for licensor 7.Performance depends on the foreign licensee 8.Licensor has limited control over its asset(s) abroad 9.Runs the risk of creating a future competitor Copyright © 2014 Pearson Education

Disadvantages of Licensing 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. Copyright © 2014 Pearson Education BrbBrb

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. Copyright © 2014 Pearson Education

2.Franchising as an Entry Strategy Copyright © 2014 Pearson Education

Examples of Leading International Franchises Copyright © 2014 Pearson Education

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. Copyright © 2014 Pearson Education

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. Copyright © 2014 Pearson Education

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. Copyright © 2014 Pearson Education

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. Copyright © 2014 Pearson Education

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. Copyright © 2014 Pearson Education

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. 4.Other examples: pharmaceutical products, medical devices, car parts. Copyright © 2014 Pearson Education LV