Compare and contrast licensing and franchising as foreign market entry
strategies. Why is franchising a more comprehensive strategy?
Chapter 16
Licensing, Franchising, and Other Contractual Strategies
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International Business: The New Realities, Global
Edition, 3e (Cavusgil)
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and Other Contractual Strategies, Licensing, Franchising, Franchise, Chapter16
Answer: A licensing agreement specifies the nature of the relationship between the owner of intellectual property, the licensor, and the user of the property, the licensee. High-technology firms routinely license their patents and know-how to foreign companies. Intel has licensed the right to a new process for manufacturing computer chips to a chip manufacturer in Germany.
ReplyDeleteUpon signing a licensing contract, the licensee pays the licensor a fixed amount up front and an ongoing royalty of typically 2 to 5 percent of gross sales generated from using the licensed asset. The fixed amount covers the licensor's initial costs of transferring the licensed asset to the licensee, including consultation, training in how to deploy the asset, engineering, or adaptation. Certain types of licensable assets, such as copyrights and trademarks, may have lower transfer costs. The royalty percentage may escalate with increasing sales.
Franchising is an advanced form of licensing in which the focal firm, the franchisor, allows an entrepreneur, the franchisee, the right to use an entire business system in exchange for compensation. As with licensing, an explicit contract defines the terms of the relationship.
Franchising is more comprehensive than licensing because the franchisor prescribes virtually all of the business activities of the franchisee. The franchisor tightly controls the business system to ensure consistent standards. International franchisors employ globally recognized trademarks and attempt to guarantee the customer a uniform retail experience and consistent product quality. Completely standardized business activities, however, are difficult to replicate across diverse markets. Differences in franchisee resources, key ingredients, worker qualifications, and physical space may necessitate changes to the franchise formula.