Question

In this assignment, you are required to write about the strategic advantages and disadvantages of different entry modes. Choose 2 modes of entry, and compare them. First, explain the theoretical background of both entry modes and how to enter the international markets. Then, give practical examples of how the two entry modes have been applied in practice by business

Answer 1

The market entry modes to enter international market:

Licensing: In this entry mode, the company gets permission from another company to use its processes, manufacturing, trademark, etc. in another country for operation.

• Advantages of Licensing are:
  • Involves very little expense and knowledge expertise
  • Easy mode for entry in international markets
  • Involves less amount of risk
  • Return on capital is quite high
  • Involves very less nationalization risk
• Disadvantages of Licensing are:
  • The level of involvement and participation is low of the company
  • The duration of license is short and involves renewal of license
  • License renewal costs are high
  • Licensees can become competitors for business
• Example: Coca Cola gives license to companies like United Bottles to manufacture coke in Zimbabwe.

Franchising: the company intends to conduct business of the parent company, called the franchisor, in the international market. An agreement binds the franchisee to the franchisor such that the franchisee needs to pay operational fee to the franchisor.

• Advantages of Franchising are:

• Franchisee has greater control over the business operation
• Easy mode of entry in international market
• Low cost, low risk entry mode
• Helps in generating economies of scale
• Capitalizes on local responsiveness as well

• Disadvantages of Franchising are:
  • Searching for a franchisee can be time consuming
  • Higher risk to the franchisor’s brand image and company reputation
  • Pressure of maintaining standards is quite high
• Example: McDonalds and Burger King had extended their operation in Indian market through the mode of franchising

The key differences between the two entry modes are:

• Licensing pertains to manufacturing and marketing of products while Franchising is all about services
• Licensing is done as per Contract Law while Franchising is governed by Company Law
• Licensing is one time transfer while franchising happens periodically
• Licensor does not have any control on the other party’s business apart from access to the license, while franchisor has considerable control on the business of the franchisee
• Franchising is more expensive than licensing