Market Entry Strategies: Contract Manufacturing, Licensing & Franchising

Contract Manufacturing

Contract manufacturing is the term used to refer to manufacturing that is outsourced to an external partner—one that specializes in production and production technology.

Benefits

• Labor cost advantages
• Savings via taxation
• Lower political and economic risk
• Quicker access to markets

Caveats

• A contract manufacturer may become a future competitor
• Lower productivity standards
• Backlash from the company’s home-market employees regarding HR and labor issues
• Issues of quality and production standards

Licensing

Licensing refers to the exchange of rights to another party in exchange for payment.

Rights Covered by Licensing

• Patent covering a product or process
• Manufacturing know-how not subject to a patent
• Technical advice and assistance
• Marketing advice and assistance
• Use of a trademark/trade name

Motives for Licensing

• The licensor firm will remain technologically superior in its product development
• The licensor is too small to have the financial, managerial, or marketing expertise for overseas investment
• Product is at the end of its product life cycle in advanced countries but extending the product life cycle is possible in less developed countries
• Opportunity for profit on key components
• Government regulations may restrict foreign direct investment, or if political risks are high, licensing may be the only realistic entry mode

Benefits

• Appealing to small companies that lack resources
• Faster access to the market
• Rapid penetration of global markets

Caveats

• Other entry-mode choices may be affected
• The licensee may not be committed
• Lack of enthusiasm on the part of a licensee
• Biggest danger is the risk of opportunism
• The licensee may become a future competitor

Franchising

Franchising is the exchange of rights between a franchisor and a franchisee, such as the right to use a total business concept including use of trademarks, in return for an agreed royalty. Franchising can take forms such as product and trade name franchising or business-format franchising.

Benefits

• Overseas expansion with a minimum investment
• Franchisees’ profits are tied to their efforts
• Availability of local franchisees’ knowledge

Caveats

• Revenues may not be adequate
• Availability of a master franchisee may be limited
• Limited franchising opportunities overseas
• Lack of control over the franchisees’ operations
• Problems in performance standards
• Cultural problems

Joint Ventures

Joint venture refers to an equity partnership between two or more partners. The foreign company agrees to share equity and other resources with other partners to establish a new entity in the target country.

Forms of Joint Venture

• Majority
• 50-50
• Minority
• Cooperative joint venture: collaboration but no equity
• Equity joint venture

operations, Problem in performance standards and Cultural problems.