What Is Franchising Licensing Economics Essay Team members : Low Chun Kit J11009011 N1 Tan Chun Keat J11009425 N1 Ng Yong Leng J11009041 A1 Lim Chin Ying J11008972 N1 Low Zhi Lun J12010861 A1 Table of Contents Question There are 4 common ways for a firm to expand its operations and marketing into overseas markets: exporting, licensing/ franchising, joint ventures and direct investment. First, explain what each approach entails. Then, select the one that you would use if you were among the 4 board of directors of a large company. Why is the approach particularly appealing? What is exporting? Exporting is a process of selling product to an international markets to earn extra profits. Export Business is a venture where the organization/firm buys or sell products or services from other country and sell them in the home country. What is Exporting? Exporting is the most common method that most of the organization use and it was known as the least risky method. Besides that, exporting can be direct or indirect. Direct exporting is through agent or internet to access to customer and on the other hand indirect is through an intermediary which helps you to exports products from home country. Example of intermediary is Tesco and Giant. This essay is an example of a student’s work Disclaimer This essay has been submitted to us by a student in order to help you with your studies. This is not an example of the work written by our professional essay writers. Essay Writing Service Dissertation Writing Service Who wrote this essay Place an Order Why should we choose exporting? The first point of why should we choose exporting is because it can helps to increase sales because the organization can extend its target market for their product to prove their popularity at the domestic level. Besides that, business from overseas buyers will create a profitable business relationship. Moreover, it increase the product’s life cycle because the organization can sells it in foreign market when its demand is decreasing in the home country. For example, winter clothes in America can be send to Australia because one America turns summer it will be winter in Australia. Secondly, it avoid the changing of domestic conditions means that once the organizations thinks that they are facing strict rules and regulation they can just export to foreign country where their rules and regulation is more lenient. For example, the most widely product consume around the world which is cigarette. For some country like U.S they restrict all packaging of the cigarette box must follow a certain color and packaging so that company can choose to shift out of U.S and move to a foreign market. When there is advantage of something there is also disadvantages. Firstly the disadvantage of exporting is that it increase the cost of a product which is the cost of exporting abroad, insurance of the product, shipping charges and agent’s commission/fees. Secondly, the transportation policy might be a factor where different country have different exporting policy which are complicated and some are just to avoid foreign investor to disturb their market value. Thirdly, is collecting the payments and debts from agents or retailer should be a problem because the distance is too far which is hard for the headquarters to collect its debt and payments. Lastly, is for the organization to understand the import and export law of different countries and cultures. Which mean if an organization wants to enter Malaysia there are certain rules and cultural law to follow. For example, exporters should know that Malaysian is led by the muslim so they should not advertise pork and alcohol widely. Now for advantages, Firstly is increase the market size and brand awareness where you reach out to every country and every retailer in that particular country around the world. This will add more sales and create a brand awareness by just a small advertisement people will know about the product. Secondly, is works as an protection against a downturn in the current domestic market. For example, if the market in the main country depleted you have money coming in from other country to support or cover the lost in the current market. Besides that, in a world recession it will affect every economic downturn of an country and it will be easier for the organization to revive back from recession because it already penetrated the market. Examples of company which have successfully penetrate the market is mostly the cars industry such as Toyota which was originated from Japan where they begin by exporting their cars into the U.S market and from there they slowly export trough out the world and now they are one of the leading car brands in the world. On the other hand, the company that failed to use this method to be successful is mostly the bubble tea because bubble tea would not be able to last long and it require to be consume in less than a week. If it is not consume in less than a week the pearl which is a jelly and that jelly will be harden and could not be consume after that. How does this relate to ChaTime? The disadvantage of this to ChaTime is because, ChaTime is a company which focuses on beverages and most of their drinks is made right when the customer order. Besides that, it is not suitable because ChaTime could not preserve the original taste of their bubble tea since it is stored in the Tupperware for so long. Moreover exporting is a process of selling the product out of the country where ChaTime beverage does not suit to be export because of it actual packaging and if ChaTime were to change it packaging it will cost more and the consumer will think is not worth it for the same type of drink but different quality which can be purchase from the grocery shop or hypermart. It is more cheap if we buy the raw materials there, for example the milk powder and make it there instead of exporting it. The product is not massed produced, it is made on the spot, this is one of the disadvantages. One of the advantages of exporting is, if you export the materials needed to make the product, the originality of the product is preserved. What is franchising/licensing? A company has two ways of expanding their businesses, franchising and licensing. It is very effective and have been done by many companies. Before I begin, franchising is define as “a continuing relationship in which a franchisor provides licensed privilege to the franchisee to do business and offers assistance in organizing, training, merchandising, marketing and managing in return for a monetary consideration” (Entrepreneur, N.D). Where as for licensing, it is define as “a business arrangement in which one company gives another company permission to manufacture its product for a specified payment” (Entrepreneur, N.D). I would touch on many areas of this two ways from the governed perspective, registration, territorial rights, support and training, royalty payments, use of trademark/logo and examples of company that has done each of this. This essay is an example of a student’s work Disclaimer This essay has been submitted to us by a student in order to help you with your studies. This is not an example of the work written by our professional essay writers. Essay Writing Service Dissertation Writing Service Who wrote this essay Place an Order Firstly, franchising is governed by the securities law, where they have their personal company law before anyone could do a franchising on it. A franchising business is basically done for new entrepreneur who does not want to begin their own business as it is easier to run this business because franchisors have already perfected daily operations through trial and error. Besides that, new franchisee requires to register their business to the governed. It is because the business does not directly mean it is theirs as they have to report to their franchisor on monthly basis or so. Moving on, the territorial rights are offered by the franchisor to the franchisee because they have the right to interfere, however as a person who wants to franchise a certain company, they should be aware of this part. For example, if the franchisee were to open a shop in Subang Jaya, and the place is starting to get packed with people, the franchisor cannot interfere and open up another branch in the area nearby. For support and training in a franchising company, it is provided to all the franchisee and they do not have to worry about the staffs. This is why many people does franchising because they do not have to fork out a sum of money to train and find workers. Franchising have to also pay royalty to their franchisor, this is because the franchisor has some amount of shares in your business, however if the franchisee would to make loss, franchisor are not required to pay for your debts. Lastly, the usage of trademark and logo are retained by the franchisor and used by the franchisee. This are the examples of companies that have succeeded in franchising their company or store, the well known fast food company, McDonalds. They have been in the market for over 73 years and they are now one of the top in the food chain industry. Besides Mcdonalds, Subway and 7-11 are two of the companies that have been successfully franchising their company around the globe. Moreover, not all companies have successfully franchised, there are some companies that failed in the process. For example GOLF ETC, they have the highest percentage of failure rate which sums up to 71.08% world wide. This is because they could not sustain the amount of shops and do not gain any sales in the long term which made them to fail in the market. (BlueMauMau, 2012). Moving on towards licensing of a company, they have the different requirements from franchising. Licensing are governed by contract law, contract law are basically written agreements associated with exchange of goods and services, money, and properties (BusinessDictionary, N.D). For example, paying a sum of money with signage of return agreements black and white, in return getting license to a company. Moreover, they are not required to do registration compare to franchising. However, they are flaws in licensing of a certain company who sells products. Territorial rights are not offered to people who license the company and the licensee can sell similar licenses and products in the same area. It is the totally opposite of franchising because they have the rights to ask for terms and conditions for other people/owners to not open the same shop around the area. Moving on, support and training are not provided to the licensee for their workers because it is a totally separate entity from the licenser. However, there are also royalty payments for licensee as they have to pay for the renewal of license every 2 to 5 years. In between they do not have to pay anything from the revenue they get besides income taxes. Besides that, the use of trademark or logo can be redesigned and be licensed by the licensee and to suit his or her preference. Examples of companies that have successfully did licensing are Microsoft Office. They are a brilliant company to tackle the IT industry during the technology savvy era and made billions yearly. The advantages if ChaTime run under franchising is because, ChaTime is a special type of drink that is brought in from Taiwan industry. This is because it is a special kind of drink, franchising allows the franchisee to have their territorial rights which means other franchisee cannot reopen the similar type of drink at the same area. Basically, it is a safety measure to ensure that you gain maximum profit. Also, franchising, if your business is deemed profitable, can enable you to expand easily, due to public interest to invest in your product and open a store. However, there is a disadvantage which is that the franchisor has a small amount of shares on your business compared to licensing where they only have to purchase license every couple of years. Moreover, the training are done by the franchisor, therefore it is easy for the franchisee because they do not have to spend extra money to train their worker. Lastly, the trademark and logo are done by the main company done by which very convenient for the franchisee where the do not have to forked out a certain sum of money to redesigned logo. What is a joint venture? There are many companies expanding international currently by exporting their products and services. Other than that, one of the strategies companies applied when they expand their companies is through joint venture. What is joint venture? It occurs when there is two or more firm owned a legal organization. By joint venture companies can minimize their lost if anything goes wrong and gain more profit compare to the other firm because they are the dominant. The companies must share common objectives other than increase revenue such as customer satisfaction. “The need to combine strategic resource contributions and foster functional co-operation and co-ordination between the partners to create mutual advantages is at the heart of both companies.” (Morosini, 1998) There is certain factor that must be concern in joint venture, penetrating into other countries and their culture. In the business world culture played an important role. Hence, culture will have impact on joint venture. Therefore a mix companies with different culture must have be aware and understand each other culture before proceed into business. This essay is an example of a student’s work Disclaimer This essay has been submitted to us by a student in order to help you with your studies. This is not an example of the work written by our professional essay writers. Essay Writing Service Dissertation Writing Service Who wrote this essay Place an Order Companies that are successful in joint venture are the Goodyear Tire & Rubber Co and Sumitomo Rubber Industries. These companies joint venture which clearly define their agreement and share a common objectives. These two companies invest time and effort analyzing the understanding the challenges of joint venture. This company took a shorter time period in agree in term of the agreement in joint venture in Japan. This give them advantage by being pioneer and penetrate the market in Japan before other competitors do. Besides that they also, do not have to spend extra cost on training as Japan labor force are good and skillful which help to save time period indirectly by skipping training the labor. In addition, the supplies from Japan qualities are high qualities which help to save cost from importing supplies or having local supplies problems. They do believe in the strategy cultural adaptation by understanding the japanese culture and made them less competitive in the market. However not every companies are successful in joint venture, for example the French investors invest automobile in China. The companies that are involved are Peugeot and Guangzhou Automotive Manufacturing (GAM). Even though the companies are successful working together now but before that they face a lot problems which took the French investor four years to negotiate with China. The problems which they faces at first is the labor force in China do not have the professional intelligent and skills which causes the French investor have to provide training which lead to extra spending of money. Besides that, the company Peugeot in Guangzhou, China lack of suppliers that do not meet the French requirement. The quality of the parts China provide do not meet their requirement thus, the company have to increase in expenditure to import parts from other countries. Peugeot in China are the local brand of automobile. One of the main reasons China can build vehicles at lower prices that affect the sales of Peugeot. Furthermore the government affects the Peugeot because the government influence over the local and there is a trade barrier for Peugeot’s supplier from Beijing. Even though many companies face problems in joint venture with China. There are companies that are successful in joint venture with China which is the Peugeot competitor from German Volkswagen. So how joint venture can relate to Chatime ? If Chatime were have to joint venture they have to be the pioneer in tea in the country. As for Japan, they already have different varieties of teas already. So if Chatime wanted to open new market in Japan by joint venture they have to corporate with the locals and the benefits is they will don’t have to spend more cost on training as the labor in Japan are already have the skills. On the other hand, Japan have the good quality of tea leaves as the culture main drinks are tea. Hence, Chatime have no need to bring in tea from other part of the country which minimize the expenditure. In contrary, the disadvantage the Chatime will be facing or have to be concern is the sales and attraction of the consumer. As Japan have a lot competitors for example Boba tea. They will have to take the risk to open new market and the idea of Chatime was also initially get from Japan. What is direct investment? Direct investment is related to control or a significant degree of influence, and tends to be associated with a lasting relationship. Direct investment generally defines that the situations in a certain company which has established manufacturing its facilities in another country, either it go through wholly owned subsidiaries or also as a joint venture partner with an incomplete ownership stake. Direct investment are governed by the laws of the both of the country which the business involve in which the parent company is populate and the country in which the subsidiary does the business. In these cases, where international trade approves has been enforced or the host country has allowed the assets of the subsidiary, international law will concern as well. Direct investor may supply funds, knowhow, marketing, management and also technology. Firstly, direct investment by a foreign company assist the diffusion of the new and high technologies and also the unique managerial techniques into the country, generally helps the position of domestic manufacturers throughout all of the industries. Secondly, the establishment of a subsidiary will ease the trade, and allowing the host country to get more fully employ on its own assets, whether it is through lower labor pay, access to raw materials, or employment of the other companies. Lastly, the introduction of a foreign subsidiary is able to raise the standards of efficiency for domestic firms, which can compete with the foreign subsidiary. This essay is an example of a student’s work Disclaimer This essay has been submitted to us by a student in order to help you with your studies. This is not an example of the work written by our professional essay writers. Essay Writing Service Dissertation Writing Service Who wrote this essay Place an Order Firstly, the disadvantages are primarily from the ability of the foreign parent company to pull out the economic profits from the operations of its subsidiary and deliver them out of the country. Secondly, it is able to hide the truth that the subsidiary may change the employment of national assets away from other activities that might be more advantages to the economy. Investor will lose control over what, where and when the funds are invested. People tend to be uninformed on structured of fund, operations etc which can lead to investors being taken advantage of. Lastly, investor is limited by own funds and there is the possible that investor will missed some golden opportunities. Example of successful Direct Investment Google makes first direct investment in utility-scale clean energy Google is no more strangers to the renewable energy. Google has invested in the geothermal technology, small grid ventures, electric cars, and also wind power startups. All of the investments ideas came from Google.org, the beneficent arm of the company. According to the Official Google Blog, Google Inc. invested in renewable power is because it is providing attractive pay back to Google and more capital for developers to build additional project. NextEra Energy Resources’ invested $38.8million into Google for the wind project in North Dakota. Two wind farms that Google build can generate 169.5 megawatts of energy and it’s enough to power more than 55,000 homes. Google shows that this project uses the lasted wind turbine technology which is providing a very low cost energy to the grid. Success Story of Foreign Direct Investment in India Westerns saw there is a good developing potential in India as an economically strong adobe for investment and also investing cash to start off a new venture. Recently, there were some jurisdiction prevalent of the law in India, this caused the Indian government realize the potential that embattled in the Indian economy and what was pulling it to stay. Finally in the year of 2005, Indian central government passes a jurisdiction by allowing a cent percent of foreign direct investment into the Indian economy. This was one of the major steps taken for a number of foreign investors to come in India and invest their money into various segment of the market. In the Indian economy market, the most benefit sector one is telecom, automobiles, retail, real estate and also construction business. Besides from the government laws and jurisdictions, there are also other factors that affect the success of foreign direct investment in the country. The most important factors are the tremendous support base provided by India to the success of the projects laid out by these foreign investors. Moreover, there are a lot of types of raw material desired by these manufacturing projects. Next, another favorable factor in India is they have a large workforce, large work employee field. All of these factors can be more recognized as the many choices of factors that have lead to the success of the foreign direct investment in the country. Example of failure in direct investment FDI in single-brand retail fails to gain momentum . “Foreign investment in single-brand retail failed to gain momentum in the FDI limit to 100% from 51% earlier.” Knight Frank said. The share of foreign investment in single-brand brings out the total FDI inflow into the certain country which declined from 0.03% in December 2011 to 0.2% in June 2012. It is stated that the main reason which out down the interest of foreign investors to conditions. “Notwithstanding the increase of FDI limit in single brand retail from 51% to 100% in January 2012, investments failed to pick up in the subsequent six months (January 2012-June 2012),” Knight Frank said. The country witnessed an overall FDI inflow of USD 16.74 billion during this half year. The share of FDI in single brand retail fell from 0.03% in December 2011 to 0.02% in June 2012. There would be improvement in the FDI inflow in single-brand retail over the next 6-12 months as the conditions on ownership and the source has been easier. “Single brand retail was opened to foreign investment in 2006 with a cap of 51%. This cap constrained foreign retailers desirous of entering India albeit with a full control. The limit, subject to fulfillment of certain conditions, was hiked to 100% in January this year,” Knight Frank said. The report shows that the recent reforms measures say by the government can have a positive impact on the realty sector. “The entry of foreign retailers would not just address the high vacancy in retail real estate but also help in the growth of such developments in future,” Knight Frank said. How direct investment gives Chatime advantages and disadvantages Firstly, direct investment may bring a lot of advantages or benefit to Chatime. If Chatime direct investment into Japan, Chatime will help to spread out the new and high technologies and also the unique managerial techniques into Japan, this will helps the position of the domestic manufacturers throughout all of the industries. Secondly, the formation of a subsidiary will ease the trade, and also allowing Japan to get more fully employ on its own assets, whether is it through lower labor pay, access to raw materials, or employment of the other companies. Chatime will help out a lot of Japan’s unemployment rate by direct investment. Lastly, the introduction of a foreign subsidiary is able to raise the standards of efficiency for domestic firms, which can compete with the foreign subsidiary. Chatime direct investment its company or business into Japan, it is able to increase Japan’s standards of efficiency for the domestics firms, and this is able for them to compete with the foreign subsidiary. Direct investment to another country is able to bring a lot of benefits to the company or business and also to the country itself too. While direct investment has so many advantages, we should consider about its disadvantages as well. Firstly, the disadvantages are Chatime’s profit earns in its parent company or country, Chatime must invest most of its money to Japan’s Chatime, this will cause most of the Chatime money in its own parent company or country is frozen. Secondly, it is able for Japan to hide the truth that the subsidiary may change the employment of national assets, such as labor and capital, away from other activities that might be more advantages to the economy. So, we can see, if Chatime direct investment into Japan’s Chatime, Chatime won’t get fully information of Japan, and Chatime will lost a lot of money before the business in Japan start. Besides that, Chatime will lose control over what, where and when the funds are invested. Lastly, Chatime is limited by its own funds and there is the possible that Chatime will miss some of the opportunities in other business.