Is franchising a contractual entry mode?
[12] Essentially franchising as a contractual entry mode can be described as a type of licence agreement which means that an organization wants to enter a foreign market quickly with a low degree of risk and resource commitment. [13]
Is franchising a market entry mode for subway?
One possible entry mode is called franchising which is used by a lot of well-known companies worldwide. The focus of this term paper is to evaluate this type of entry mode based on the example of Subway, an international operating fast food chain. To accomplish this purpose, the theory of market entry modes is explained in the beginning.
Which companies use franchising as a foreign market entry strategy?
Subway, 7-Eleven, Pizza Hut, and McDonald’s are just a few examples of organisations that have been successful using franchising as their foreign market entry mode. Subway was founded in 1965 in the United States; using franchising as a foreign market entry strategy it has grown to have over 42,000 stores in 107 countries.
What are the foreign market entry modes?
A number of foreign market entry modes exist, including: exporting, licensing, franchising, joint venture and wholly owned subsidiary. The following section will analyse these foreign market entry modes in greater detail. 1. Exporting Exporting is a cross border sale of domestically grown or produced goods.
What is franchising in business?
Franchising is a distribution system of autonomous business relationship that not only enables sharing of brand identification but as well providing a robust marketing and distribution network. This strategy is based on a mutual agreement between two companies that is the franchisor and the franchisee. In order to enter in foreign markets with low degree of resource commitment and risk, Bloc Digital can make use of this strategy. Apart from offering licenses and rights, Bloc Digital can assist the franchisee further by marketing, equipment, organizing, and designing. Through franchising, Bloc Digital will benefit from a swift growth as the franchisees will utilize their own capital to set up its facilities. However, there are some downsides associated with this market entry strategy that Bloc Digital should put into consideration before implementing it.
How does franchising help Bloc Digital?
Through franchising, Bloc Digital will grow, reduce the risk of failure, establish a market share, develop its brand, and reduce its operation costs in foreign markets. Establishing agreements with other reputable businesses in the global business arena can be a cost-effective approach to growing Bloc Digital. The company will not be impelled to cover the costs of investing in new staff or premises as the franchisee will incur all those expenditures. Besides, additional sales in foreign markets will mean additional profits for Bloc Digital and if it retains this in the long term, it will have a saleable asset for its future (Chen, 2018). Moreover, by franchising, this company will lessen the risk of failing while launching its services in oversea markets. Since the business will be based on a proven idea, Bloc Digital can consistently check how viable other franchises are prior to committing itself. Nevertheless, the management will gain a competitive market share without necessarily testing the market (Sun, & Lee, 2019). In order to guarantee itself a successful franchise, this firm can use recognized brand names and trademarks. In so doing, it will benefit immensely from any promotion or advertising the franchisee will undertake (Lopes, 2020). Other benefits that will accrue to Bloc Digital by executing a franchise include support from other companies, idea of future success, economies of scale, purchasing power, and establishment of robust relationships with stakeholders in foreign markets.
Is franchising a success?
Franchising is one of the most successful and success market entry models in the contemporary business environment. Before implementing this strategy, however, Bloc Digital should evaluate both the benefits and setbacks based on its goals in the foreign markets. If franchising is right for business, its benefits far outweigh the drawbacks and thus the company should adopt it.
How does franchising benefit a franchisee?
The franchisor benefits from a possible rapid growth of the company because of the fact that potential franchisees use their own capital in order to set up their facilities. [17] These investments are like a capital infusions for the running business of the franchisor since the dissemination of the company in general rises. Besides the advantage of the capital infusion the wider allocation of the business leads to a spread of business risk across geographical markets. [18] Further the publicity of the brand in general rises. Like already mentioned the franchisee is obligated to pay a certain amount to the franchisor what generates a steady income stream for the franchisor. Additionally the know-how of the local partners can be used in order to cope with the local habits.
What are the different entry modes in franchising?
The different entry modes can be classified by degrees of resource commitment, risk exposure, control and profit return. [5] Further studies have shown that the choice of entry mode depends on industry-specific and country-specific factors too. The following figure shows the different entry modes divided into three groups: The export, contractual and investment modes. [6]
What is franchising subway?
3.2 Franchising as an expansion strategy. Subway is a company that has spread worldwide through its expansion strategy. This strategy is based on franchising, the market entry mode, Subway used in order to enter foreign markets.
Why is franchising important?
An important point is that the franchising strategy is based on a strong brand, which helps to attract new franchisees. The strong brand is based on above-average customer satisfaction values , which help to retain the buyer's loyalty to the brand. [23] This recognition value of the brand helps to attract possible partners, which want to benefit from a proven business concept, without having the effort to seek after ones in potential target markets. In the case of Subway the first international franchise was opened in 1984 in Bahrain, because a domestic investor wanted to use the brand for his purposes and approached the company about opening a sandwich shop on the Persian Gulf Island. [24]
Why did subways use franchising?
Subway used franchising in order to grow rapidly. In the years from 1988 until 1997 Subway was the fastest growing franchise system worldwide. [32] In terms of restaurant numbers the company managed to out-compete the major competitors worldwide and there is no end in sight for this growth.
Why did subways jump hurdles?
Besides that Subway had to jump some more hurdles because of weak intellectual property enforcement in China. Uncovering the secrets of the company in order to support the franchisees was connected with a high risk exposure because of the fact that many US brand had seen local companies take their names and logo and open fake, unapproved restaurants and stores. [31] The use of franchise gave Subway the opportunity to access loyal intermediaries in order to avoid the described problem.
Why is entry mode important?
A central issue linked to this question is the entry mode decision, because it is essential for the success of the globalization activities of a company. One possible entry mode is called franchising which is used by a lot of well-known companies worldwide.
Did You Know?
Partnerships in emerging markets can be used for social good as well. For example, pharmaceutical company Novartis crafted multiple partnerships with suppliers and manufacturers to develop, test, and produce antimalaria medicine on a nonprofit basis. The partners included several Chinese suppliers and manufacturing partners as well as a farm in Kenya that grows the medication’s key raw ingredient. To date, the partnership, called the Novartis Malaria Initiative, has saved an estimated 750,000 lives through the delivery of 300 million doses of the medication. 11
What is Illy Caffé?
The joint venture, Ilko Coffee International, was created to bring three ready-to-drink coffee products—Caffè, an Italian chilled espresso-based coffee ; Cappuccino, an intense espresso, blended with milk and dark cacao; and Latte Macchiato, a smooth espresso, swirled with milk—to consumers in 10 European countries. The products will be available in stylish, premium cans (150 ml for Caffè and 200 ml for the milk variants). All three offerings will be available in 10 European Coca-Cola Hellenic markets including Austria, Croatia, Greece, and Ukraine. Additional countries in Europe, Asia, North America, Eurasia, and the Pacific were slated for expansion into 2009.
How to enter a new market?
Another way to enter a new market is through a strategic alliance with a local partner. A strategic alliance involves a contractual agreement between two or more enterprises stipulating that the involved parties will cooperate in a certain way for a certain time to achieve a common purpose.
What is exporting in business?
Exporting is the marketing and direct sale of domestically produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Since it does not require that the goods be produced in the target country, no investment in foreign production facilities is required.
Why do firms export to countries?
Firms export mostly to countries that are close to their facilities because of the lower transportation costs and the often greater similarity between geographic neighbors. For example, Mexico accounts for 40 percent of the goods exported from Texas. 5 The Internet has also made exporting easier. Even small firms can access critical information about foreign markets, examine a target market, research the competition, and create lists of potential customers. Even applying for export and import licenses is becoming easier as more governments use the Internet to facilitate these processes.
What is FDI in business?
A common form of FDI is the foreign subsidiary: an independent company owned by a foreign firm (called the parent ). This approach to going international not only gives the parent company full access to local markets but also exempts it from any laws or regulations that may hamper the activities of foreign firms.
What is the best way to build a company's own presence?
Ultimately, most companies will aim at building their own presence through company-owned facilities in important international markets. Acquisitions or greenfield start-ups represent this ultimate commitment. Acquisition is faster, but starting a new, wholly owned subsidiary might be the preferred option if no suitable acquisition candidates can be found.
How does cooperative exporting work?
Cooperative exporting is another exporting option that organisations can use as a foreign market entry strategy. Organisations use this entry mode by entering an agreement with another foreign or local organisation to use its distribution network. This entry mode allows organisations reach to the foreign market without the associated risks that come with other entry modes. Cooperative exporting is generally mutually beneficial, provided the goods being exported don’t impede the sale of other products being sold. For cooperative exporting to be successful the exported product should complement, as oppose to compete against other products being sold. US chewing gum company Wrigley successfully entered the Indian market using cooperative export as their foreign entry mode. Wrigley entered a cooperative export agreement with Parrys, a local confectionery company, by doing so Wrigley gained access to 250,000 retail outlets.
What is the term for a foreign market entry strategy where a semi-independent business owner (the franchisee?
3. Franchising . Franchising is a foreign market entry strategy where a semi-independent business owner (the franchisee) pays fees and royalties to the franchiser to use a company’s trademark and sell its products and/or services.
How do wholly owned subsidiaries work?
The two ways that wholly owned subsidiaries come about is through either acquisition or greenfield operations. Acquisition is the purchase of a foreign organisation as a way to enter a new market. A greenfield operation is the creation of a new organisation and legal entity in the foreign market. A number of organisations that want to limit their risk, while maximizing their exposure to the foreign market will choose acquisition as their entry mode. This is because an acquisition uses an already established brand name and customer base. However neither acquisition or greenfield are seen as superior to one another, the entry mode which is more beneficial is dependent upon the organisations circumstances, goals and objectives.
What are the advantages of franchising?
The most common advantages of franchising are that it capitalizes on an already successful strategy, the franchisee generally has local knowledge, it’s less risky than equity based foreign entry modes, and the franchiser isn’t exposed to risks associated with the foreign market.
What is indirect exporting?
Exporting is a cross border sale of domestically grown or produced goods. There are three types of exporting: indirect exporting, direct exporting and cooperative exporting. Indirect exporting is the most low risk entry mode as there is effectively no exposure to the foreign market and its associated risks.
Why do organizations go global?
An organisation will need to determine their desired level of commitment , flexibility, control , presence and risk when going global, in order to choose the entry mode which best suits their situation. ...
What company entered the Indian market?
US chewing gum company W rigley successfully entered the Indian market using cooperative export as their foreign entry mode. Wrigley entered a cooperative export agreement with Parrys, a local confectionery company, by doing so Wrigley gained access to 250,000 retail outlets. 2.
Decreased Brand Quality
- Due to not having full control over franchises, the quality of products and services can reduce drastically in the foreign market. Unlike start-up franchising where the franchisee is bound to follow all the pre-defined/ mentioned rules and regulations of the franchise business, there is less control in this mode of market entry due to distance, var...
Financial Risk
- When expanding into another country, the financial risk involved remains one of the biggest disadvantages. Although it is nothing compared to other market entry modes, it is still a serious consideration in the business world. For instance, the exchange rates between currencies could lead to an unfavourable return on investment. The business or franchisee may also have a hard t…
Nurturing A Future Competitor
- Agreeably, franchise monitoring can count as an advantage at the initial stages of franchise, but after that it leaves the franchisee with so much experience and knowledge about the franchise. Owing to the fact that the franchisor has to be contacted for every change made in the business and approval is needed for the same, the secret and landmark to success are passed on withou…
Compliance Challenges
- The difference in culture and business setup can create issues with branding, public relations and corporate culture; regulatory differences also pose a significant challenge. Franchising might create a more favourable platform, but it still very different when compared to the home country. Business laws and regulations tend to vary significantly between countries, provinces, and state…
Re-Selling Issues
- If, for instance, the franchisor is not easy and wishes to sell the franchise, it is hard for him/her to do the same as the franchisee needed to be considered and only after he/she approves it, it is then the franchise could be transferred. It is same as the restrictions and lack of maximum control faced by franchises, both in local and international markets.
Cultural Differences
- One of the major problems of expanding into other countries is overcoming the cultural barriers. Note that because something is acceptable in the United States does not necessarily mean that it will be acceptable in other countries. Every country has its own culture, and a business may not be able to accurately predict what people in that culture will enjoy.
Not Maximizing Profits
- Also note that the franchisee will only have to pay the franchisor a part of the sales as royalty, they make at the franchise. This could be in large amounts than the profits the franchisee will receive in return or even smaller compared to market demand and business environment. The franchisor only receives part of the profit and not all of the profits like, maybe, other mode of market entry. …