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International Marketing

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Lesson#24

Franchising

MODES OF ENTRY INTO INTERNATIONAL MARKETS

Franchising

Franchising:

a form of licensing
a contractual arrangement in which a firm (the franchiser) sells the right to use its intellectual
property (technology, patents, work methods, brand names, trade marks, copyrights, and company
name) to a firm (the franchisee) in return for fees
The franchiser provides significant assistance and/or exercises significant control over the
franchisee’s method of operation.

Types of franchise agreements:

• Product/trade name franchises
distribution of product in a specified territory or location with the use of manufacturer’s
trademark.
car dealerships, petrol service stations, soft-drink bottles.
• Business format franchises
incorporates the licensing of a trademark for business in a specified territory along with an entire
system for conducting a business.
These now account for nearly 75% of all franchise businesses, examples are McDonalds, KFC,
Bodyshop, Giordano concept shops etc.

Franchising strategies for rapid growth in international markets:

Single-unit franchising
the franchiser grants to an individual franchisee the right to operate a single unit within a
defined territory.
• Multi-unit franchising
involves granting the franchisee the right to operate more than one franchise from the same
franchiser
• Conversion franchising
acquiring and converting existing business into a franchise
International franchising commonly involves “Master Franchising” and joint-ventures
Creative franchising can include many things ranging from money-back guarantees, and stock
ownership, to the use of sophisticated management techniques

Key considerations in franchising:

• franchising package must be sound and cohesive, adapted to environment of target country
• franchiser must be able to provide value to franchisees on continuous basis
• adequate financing
• careful selection of franchisees
• building strong cordial relationships with franchisees
• providing continuing support to franchisees
• compliance with foreign regulations

The franchiser’s balance:

Positive factors

– demonstration effect
– rapid expansion of business
– franchisee’s financial contribution
– franchisee’s motivation and local knowledge
– low risks involved

Negative factors

– lacks ultimate control
– demands of training
– protection of intellectual property
– creating future competitors
– misuse of franchise rights
– low profitability

The franchisee’s balance:

Positive factors

– well known brand name
– training
– low failure rate
– continuing technology and management skills transfer
– financing support
– independent yet linked to larger business and an international network

Negative factors

– inappropriate or unfamiliar brand name
– exaggerated or deceptive claims
– inadequate support with purchase requirements
– unsuitable technical, managerial or marketing know-how
– lack of security
– excessive initial investment
– proliferation of outlets
– disadvantage in negotiations

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