Licensing, Franchising, and Other Contractual Strategies
15.1 Explain contractual entry strategies.
15.2 Understand licensing as an entry strategy.
15.3 Describe the advantages and disadvantages of licensing.
15.4 Understand franchising as an entry strategy.
15.5 Explain the advantages and disadvantages of franchising.
15.6 Understand other contractual entry strategies.
15.7 Understand infringement of intellectual property, a global problem.
Cross-border exchanges in which the relationship between the focal firm and its foreign partner is governed by an explicit contract.
TYPE OF CONTRACTUAL RELATIONSHIP :
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.
Franchising: Arrangement in which the firm allows another the right to use an entire business system in exchange for fees, royalties or other compensation.
Royalty: A fee paid periodically to compensate a licensor for the temporary use of its intellectual property, often based on a percentage of gross sales generated from the use of the licensed asset.
Specifies the nature of the relationship between the licensor (owner of intellectual property) and the licensee (the user).
In a typical deal, the licensee pays the licensor a fixed amount upfront and an ongoing royalty (usually 2-5%) on gross sales generated from using the licensed asset.
Advantages for licensor
Low investment
Low involvement
Low effort, once established
Low-cost initial entry strategy
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
TYPE OF LICENSING
Trademark Licensing
-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.
-E.g., Coca Cola, Harley-Davidson, Laura Ashley, Disney, Michael Jordan
Copyright Licensing
-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.
Know-How Licensing
-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.
Process 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
Advantages for franchiser:
Low investment;
Can internationalize quickly to many markets;
Low effort, once established; and
Can leverage franchisees’ local knowledge.
Disadvantages for franchiser:
Maintaining control over franchisees may be difficult;
Franchiser has limited control over its assets abroad; and
Risks creating a future competitor.
Other Contractual Arrangements
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.
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With international leasing, the lesser rents out machinery or equipment to clients abroad, often for several years at a time. E.g., Airlines lease aircraft
Under a management contract, a contractor supplies managerial know-how to operate a hotel, resort, airport, hospital, or other facility, in exchange for compensation.
Infringement of intellectual property
The unauthorized use, publication, or reproduction of products or services protected by a patent, copyright, trademark, or other intellectual property right.
Negatively affects consumer attitudes about the branding and quality of legitimate goods.
Hinders company inventiveness and innovation