FRANCHISE AND LICENSING
Companies looking to enter new markets with manufacturing and/or
marketing purposes can use different types of entry modes. Entry modes can
be defined as an institutional structure when a company introduces or
incorporates products, technologies, skills or other resources into a market.
This chapter discusses one form of entry mode, namely franchising and
licensing.
A. Concept and Types of Franchises
Franchising is a form of entry modes that are contract-based, namely
one company providing or providing property or other assistance to another
company for a certain period of time. The franchising company is known as
a franchisee while the franchisee company is known as a franchisee. The
property provided is generally in the form of intangible assets such as
trademarks or trademarks. In general, this brand name is the most desired
item by the franchisee. This is what makes it difficult for small and little-
known companies to attract the attention of franchisees. However, this
franchise contract is not only related to the brand name. Franchisees can also
provide various knowledge or skills (know-how), and technology related to
certain products or services.
There are various types of franchises that are commonly used. One of
them is product franchising, where franchisees give franchisees the right to
distribute their products. In this case, the franchisee grants the right to use
his company's trademarks, but does not include his business system as a
whole. Furthermore, there is also a franchise business format in which the
franchisee obtains the right to operate under the franchisee's company brand
name, including obtaining the business operating system. In addition, there
is a type of investment franchise when the franchisee invests funds in the
franchisee company with the aim of obtaining profits in the future. Some
examples of international companies that do franchising are KFC,
McDonald's, Domino's, Burger King and Pizza Hut.
B. Aspects Covered in Franchise
The franchise aspect includes both positive and negative aspects. The
positive aspects include various advantages of the franchise. One of them is
related to the use of franchising as a form of entry mode that has low costs
and risks. Franchising helps companies maintain consistency through a
standardized product replication process. However, some franchisees may
make minor modifications to the product or marketing system to suit local
buyers. In addition, franchising also has other advantages, namely
accelerating the process of geographical expansion. Another benefit of
franchising is gaining knowledge of local culture and management prowess
thereby helping to reduce the risk of business failure and create a
competitive advantage.
On the other hand, the negative aspects of franchising include various
problems that are caused, both to the franchisee and the franchisee. First,
franchisees will find it difficult to manage a large number of franchisees
spread across various countries. This problem is related to the concern that
the franchisee is not able to maintain the consistency of product quality and
promotion systems in various different markets. In addition, franchising also
has a negative influence on the franchisee in the form of a loss of
organizational flexibility as a result of the franchise agreement. These
franchise contracts generally limit the strategic choices of the franchisee
company and it is not uncommon for the franchisee company to be forced
to promote products that come from other divisions of the franchisee
company
C. The Role of Franchising in International Business
Franchising is one of the simplest forms of international business after
export-import activities. The existence of a franchise contract between one
company and a company in another country certainly has a great impact on
international business activities between the two countries. Through
franchise contracts, the company can reduce its dependence on domestic
market demand. It has been explained previously that this franchise is a form
of international business that has a low level of risk and cost so that it attracts
a lot of attention from entrepreneurs. The existence of franchise
relationships between companies in different countries also encourages
trade and business activities between the two countries
D. Licensing Concept
Licensing is a form of contractual entry modes, where one company
grants property use rights to another company for a certain period of time.
The company granting the license is referred to as the licensor and the
licensee company is referred to as the licensee. Similar to franchising, the
licensing company will also receive royalty payments of a certain
percentage of the revenue derived from the licensed property. In general, the
license includes various intangible properties such as patents, copyrights,
special designs and trademarks.
Some types of licenses are exclusive licenses, nonexclusive licenses,
and cross licensing. An exclusive license gives the company the exclusive
right to carry out production and marketing activities using the property
licensed in a specific geographical area. On the other hand, a non-exclusive
license grants the right to use the property, but does not include access to
the market. Furthermore, there is cross-licensing that occurs when
companies use contracts or licensing approvals to exchange intangible
property for each other. Some of the international companies that grant
licenses are Bluestar Alliance, ViacomCBS, Warner Media, and Starbucks.
E. Aspects Covered by the License
Similar to franchising, licensing also has positive and negative
aspects. There are several advantages of using licenses as entry modes. First,
the licensor can use the license as a source of financing in international
expansion. This is because most licensing agreements require licensees to
contribute equipment and investment funds, either through the construction
of production facilities or using existing capacity. This access provides great
benefits for licensors who lack the funds and management resources to
expand. Second, licensing is a form of entry mode that is less risky for
licensor companies compared to other forms of investment. This is because
licensing contracts help protect licensor companies from the risk of
operating in volatile markets. Furthermore, licensing also helps reduce the
likelihood of licensor companies' products appearing on the black market.
In addition, the licensee also benefits from using the license contract as a
tool to enhance production technology
In addition to these positive aspects, licenses also have negative
aspects that include various disadvantages of using licenses as entry modes.
The first drawback is that there is a risk related to the failure of the licensee
company to produce the results desired by the licensor company. In addition,
licensing contracts can also reduce the consistency of product quality and
marketing systems in different countries. Furthermore, there is a possibility
that the licensee company will become a competitor of the licensor company
in the future. In other words, a licensing contract can mean lending a specific
strategic property to a competing company.
F. Difference Between Franchise and License
Franchises and licenses have some differences. First, franchising
gives a company greater control over the sale of products in the target
market. Franchisees must comply with strict procedures regarding product
quality, daily management duties, and marketing promotions. Second,
although licensing is more commonly used in the manufacturing industry,
franchising is mainly used in the service industry such as the entertainment
industry, lodging, restaurants and others. Third, licensing includes the
transfer of property that only occurs once at a certain time, while franchising
includes providing continuous assistance to the franchisee.
G. Strategic Alliance Partner Concept
Strategic alliances are a form of business relationship between two or
more entities that agree to work together to achieve certain strategic goals.
This cooperative relationship is formed without involving the construction
of a new company. Business alliance partners can be formed for a short
period of time or for several years depending on the goals to be achieved.
Business alliance partners can be formed between a company and its
suppliers, buyers and even competitor companies. Sometimes in a business
alliance partner, each partner buys a certain amount of shares or ownership
of each other. Thus, each company has a direct influence on the performance
of its peers in the future. This will reduce the likelihood that one partner will
try to take advantage of the other company. Some examples of strategic
alliances are Uber and Spotify, Starbucks and Target, Apple Pay and
MasterCard, Disney and Chevrolet.
H. Types and Advantages of Strategic Alliance Partners
In general, there are two types of strategic alliance partners, namely
equity strategic alliances and non-equity strategic alliances. Equity strategic
alliance is a form of alliance partner when one company buys a certain
amount of equity from another company or business or both agree to buy
each other's equity. If only one company buys a certain amount of equity
from another company, then this is known as a partial acquisition, while if
the two buy each other's equity, it is called a crossequity transaction. On the
other hand, non-equity alliances occur without forming a new entity or
sharing equity.
In general, there are two types of strategic alliance partners, namely
equity strategic alliances and non-equity strategic alliances. Equity strategic
alliance is a form of alliance partner when one company buys a certain
amount of equity from another company or business or both agree to buy
each other's equity. If only one company buys a certain amount of equity
from another company, then this is known as a partial acquisition, while if
the two buy each other's equity, it is called a crossequity transaction. On the
other hand, non-equity alliances occur without forming a new entity or
sharing equity.
I. Important Aspects of Strategic Alliances
There are several aspects that play an important role in the success of
a strategic alliance. First, strategic alliance partners must be accompanied
by commitment and support from the organizations or companies involved.
This has to do with the directors or managers who play an important role in
forming alliance partners. Second, these strategic alliance partners are
formed by interrelated parties, both in terms of products, technology and
markets. Similar to other forms of international business, strategic alliance
partners are also related to business culture and experience. Furthermore, in
companies or parties involved in strategic alliance partners, they also have
the same vision and goals and share the benefits and experiences of the
organization with each other. In addition, the decision-making process and
communication between colleagues is in the form of a horizontal hierarchy
and not in the form of a vertical hierarchy. This means that communication
takes place between employees at the same level of the company involved.
J. Maintaining Healthy Alliances
A healthy international alliance partner and has great potential for
success has several characteristics. These characteristics describe the
balance between interests, control, risks, and potential profits
Healthy strategic alliances are generally formed from companies or
partners that have the same market power. Alliances formed of companies
that have a large market share with small companies have a smaller chance
of success. Furthermore, all colleagues involved must maintain a high
degree of autonomy and flexibility. In addition, there must be equal or
balanced ownership participation between the parties involved. This aims to
ensure that all the benefits or profits generated can be shared equally. To
maintain a healthy strategic alliance, each company must also maintain a
fair and balanced contribution.
