MBA International Marketing: Franchising in international business & International contract manufacturing.
Franchising is a special form of licensing in which the franchisor makes a total marketing programme available, including the brand name, logo, products and method of operation.
Franchising is defined by International Franchising Association as “the contractual relationship between the franchisor and the franchisee in which the franchisor offers a continuing interest in the business of the franchisee in such areas as know-how and training and where the franchisee operates under a common trade name, format and/or procedure, owned or controlled by the franchisor and in which the franchisee has or will make a substantial capital investment in his/her business from his/her own resources.”
In reality, franchising is a contractual agreement between a franchisor and a franchisee, which allows the franchisee to conduct a given form of business under an established name.
Benefits of international franchising are:
- Name recognition and global branding
- Reputation building
- Economies on advertising
- Support to various franchisers across the world
- Rapid expansion with minimal investment
However, the major limitations of international franchising are:
- Complexity in control of franchisee in various countries, which may lead to the loss of the company’s image and reputation.
- Transfer of intellectual property rights to franchisee may give rise to a competitor.
International contract manufacturing
Under contract manufacturing, the internationalizing firm gets manufacturing or assembly of products from a third party in the foreign markets. As part of the agreement, the overseas contract manufacturer customises the products on behalf of their client.
In a number of cases, the overseas manufacturer also handles the ordering and shipment processes for the client. As a result, the client does not have to maintain manufacturing facilities, purchase raw materials or hire labour to produce the finished goods.
International contract manufacturing is common in a large number of industries such as pharmaceuticals, garments and automotive parts. The terms of contract manufacturing arrangements may vary from case to case. The benefits of international contract manufacturing are:
- Low expenses on manufacturing
- Lower capital requirements
- Access to outside expertise
However, a major limitation of contract manufacturing includes reliance on external manufacturers who may not fulfil their market commitment in terms of time and product quality. Therefore, the selection of the right partner to outsource product manufacturing is important. The partner needs to possess both the capacity and resources to meet the requirements of the international markets.
However, contract manufacturing provides opportunities to small manufacturers, especially from developing countries, to enter international markets.