International Business Bluefield College April 26 2010 Franchising

International Business Bluefield College April 26, 2010 Franchising and Licensing Global Marketing

Foundation Concepts � Cross-border contractual relationships: Entering a formal agreement with a foreign 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’. � 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: an arrangement in which the firm allows another the right to use an entire business system in exchange for fees, royalties or other compensation.

Contractual Relationships � Governed by a contract that provides the focal firm moderate level of control over the foreign partner. Control refers to the ability of the focal firm to influence the decisions, operations, and strategic resources of a foreign venture. � Typically involve exchange of intangibles (intellectual property) and services. Examples include technical assistance and know-how. � Can be pursued independently or in conjunction with other foreign market entry strategies. Contractual relationships may accompany and support FDI and exporting. � Pharmaceutical firms engage in cross-licensing practices in which they exchange scientific knowledge about producing products and distribution rights. � Service firms in retailing, fast food, car rentals, television programming, and animation rely on licensing and franchising agreements.

Intellectual Property Rights � The legal claim through which the proprietary assets of firms and individuals are protected from unauthorized use by other parties. � Provide inventors with a monopoly advantage, for a specified period of time, so they can exploit their inventions and create commercial advantage. � Without legal protection and the assurance of commercial rewards, most firms and individuals would have little incentive to invent.

Types of Intellectual Property � A patent gives an inventor the right to prevent others from using, selling or importing an invention for up to 20 years. Covers new products, processes, machines, or improvements. � A trademark is a distinctive design, symbol, logo, word, or series of words placed on a product label, which identifies a product or service as coming from a common source. � A copyright protects original works, giving the creator the exclusive right to reproduce the work, display and perform it publicly, and to authorize others to do these activities. Can cover works from music, art, literature, films, and software. � An industrial design refers to the appearance or features of a product. � A trade secret is confidential know-how or information that has commercial value. Trade secrets include information such as production methods, business plans, and customer lists. � A collective mark is a logo belonging to an association or group whose members have given firms the right to use the mark to identify the origin of a product or service.

International Licensing Model

Leading Licensors

Advantages and Disadvantages of Licensing � Advantages for licensor Low investment Low involvement Low effort, once license is established Low-cost initial entry strategy � Disadvantages for licensor Performance depends on the licensee Licensor has limited control over its asset(s) abroad Risks creating a future competitor.

Franchising � 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. � More comprehensive and generally longer-term than licensing. � Master franchiser is an independent company authorized to establish, develop, and manage the entire franchising network in its market.

Franchising Market Entry Strategy

Leading Franchisors

Roles of Franchisor and Franchisee � Franchisor: provides vital assets has economies of scale, a wealth of intellectual property, and know- how about its own industry � Franchisee: performs local functions in foreign markets, such as marketing and distribution, that the franchisor usually cannot perform. has entrepreneurial drive, deep knowledge about the local market and how to run a business there.

Franchisor Advantages & Disadvantages

Franchisee Advantages & Disadvantages

Protecting Intellectual Property v Contractual arrangements provide only moderate control over foreign partners. v Laws that govern contractual relations are often insufficient abroad. v Thus, it is critical to: ü Have a strong contract ü Develop close, trusting relationships with foreign partners ü Provide foreign partner with superior resources and strong support

Guidelines for Protecting Intellectual Property � Intellectual property laws are weak in many countries. � Key international treaties include: Paris Convention for the Protection of IP Berne Convention for the Protection of Literary and Artistic Works Rome Convention for the Protection of Performers and Broadcasting Organizations � It is critical for the firm to: Understand local IP laws and enforcement procedures Avoid countries with weak IP laws Register patents, trademarks, copyrights in each country where the firm does business Ensure that licensing and franchising agreements provide for IP oversight Pursue IP infringers in court Monitor franchisees, intermediaries and partners for asset infringements Train employees to protect assets

Global Strategy in Marketing � Global Marketing Strategy: A plan of action that guides the international firm in: positioning itself and its offerings, targeting global market segments, and devising marketing program elements Global market segment: a group of customers that share common characteristics across many national markets. Firms target these buyers with relatively uniform marketing programs. E. g. , the global youth segment who are customers to MTV, Levi’s. The global segment of jet-setting business executives. � Global positioning strategy: strategy in which the firm’s offering is positioned similarly in the minds of buyers worldwide. E. g. , Starbucks, Volvo, Sony. �

Standardization and Adaptation � Adaptation: company efforts to modify elements of the international marketing program to accommodate specific customer requirements in a particular market. Adaptation is costly. May require substantial changes to products, manufacturing operations, (lower) pricing, distribution, and marketing communications. Costs add up across many national markets. Firms may pursue a regional strategy, where marketing program elements are formulated to exploit commonalities across a geographic region, instead of across the world. Standardization: company efforts to make the marketing program elements uniform, with a view to targeting entire regions of countries, or even the global marketplace, with a similar product or service. � Management tries to strike some ideal balance between global integration and local responsiveness � Firms Prefer Standardization �

Tradeoffs: Standardized vs Adapted

Global Branding Well-known global brands include: Hollywood movies, pop stars, sports stars, personal care products, toys, credit cards, food, beverages, furniture, and electronics � A strong global brand � � enhances the efficiency and effectiveness of marketing programs, facilitates the ability to charge premium prices, increases the firm’s leverage with resellers, stimulates brand loyalty, inspires trust and confidence in the product. Designing Global Products with Global Teams Until 1990 s, product development and design was a sequential process, usually based in a single country. Today, many more firms develop global products intended for world markets from the outset. Product designers work in virtual global teams, experts drawn from subsidiaries across the globe

Major Global Brands

Factors Affecting International Pricing � Nature of the product or industry. A specialized or highly advanced product, or an industry with few competitors, can facilitate charging a higher price. � Location of the production facility. Locating manufacturing near customers or in countries with low-cost labor facilitates lower prices. � Type of distribution system. Channels in some countries are very complex. Some distributors mark up prices substantially. � Foreign market considerations. Local purchasing power and distribution infrastructure are big factors.

Factors Affecting International Pricing � Pricing Strategies � Rigid cost-plus pricing. Set a fixed price for all export markets, by adding a flat percentage to the domestic price to compensate for the added costs of doing business abroad. � Flexible cost-plus pricing. Set price to accommodate local market and competitive conditions, such as customer purchasing power, demand, and competitor prices. � Incremental pricing. Set price to cover only variable costs, not fixed costs. Firm assumes that fixed costs are already paid from sales in the firm’s home country, or other countries.

Combating International Price Escalation � � � Shorten the distribution channel. That is, bypass some intermediaries in the channel. Redesign product to remove costly features. E. g. , Whirlpool developed a no-frills, simplified washing machine for sale in developing economies. Ship products unassembled, as parts and components, qualifying for lower import tariffs. Do final assembly in the foreign market, often using low-cost labor; or assemble in Foreign Trade Zones. Have product re-classified using a different tariff classification to qualify for lower tariffs. Imported goods often fit more than one product category. Move production or sourcing to another country to take advantage of lower labor costs or favorable currency rates.

Transfer Pricing � The pricing of intermediate or finished products exchanged among the subsidiaries and affiliates of the same corporate family located in different countries. � May be used to repatriate profits from countries that restrict MNEs from taking their earnings out of the country. � May be used to shift profits out of a high corporate tax county into a low corporate tax one, thereby increasing company-wide profits.

Strategic Use of Transfer Pricing � The favored subsidiary is likely to be in a country with: Lower corporate income-tax rates High tariffs for the product in question Favorable accounting rules for calculating income Political stability Little or no restrictions on profit repatriation Strategic importance to the MNE

Gray Marketing � Legal importation of genuine products into a country by other than authorized intermediaries. � Gray marketers buy the product at a low price in one country, import it into another country, and sell it there at a higher price. � Causes: Large difference in pricing of same product between two countries, often the result of company strategy. Exchange rate differences of products priced in two different currencies.

Concerns over Gray Markets Risk of tarnished image when customers realize the product is available at a lower price through alternative channels. � Strained manufacturer-distributor relations as authorized distributors lose sales. � May disrupt regional sales forecasting, pricing strategies, merchandising plans, and other marketing efforts. � Strategies to Cope with Gray Markets � Standardize pricing across the firm’s markets within the same region. Pursue illicit intermediaries; Fire intermediaries who break the rules. Reduce flow of products into markets where gray market brokers procure the product. Differentiate products in individual countries. Design products with exclusive features in each market. Publicize the limitations of products obtained from gray market channels

Global Account Management � Servicing a key global customer in a consistent and standardized manner, regardless of where in the world it operates. � Wal-Mart is a key global account for P&G. Wal-Mart expects consistent service including uniform prices for the same product from P&G regardless of where in the world they are delivered. � Emphasizes the use of cross-functional teams, specialized coordination activities for specific accounts, and formalized structures and processes. � Each customer is assigned a global account manager, or team, which provides a coordinated marketing support and service worldwide.

Marketing Media Analysis