We continue our investigation of the methods we can employ to expanding businesses into new markets.
Inside today’s video we will focus on understanding contract manufacturing and franchising from the asset owner’s perspective. If the attributes of your product and company culture align with one of these methods you stand to achieve the highest return on investment (ROI) of all the business development strategies. Why is this… well you’ll have to watch the video to discover why.
How to Craft a Winning Market Entry Strategy – Part 2: Transcript
In the last video we talked about Licensing and how it presented one of the quickest and least expensive ways of entering a new market. In this video we’ll dive into Special Licensing Agreements.
There are two overarching categories that we’ll talk about.
Let’s look at Contract Manufacturing
It’s exactly what the name implies. The asset owner retains the services of a contractor to produce the product, or in some instances fulfill a service; think call centers and drop shippers. The technical specifications are provided with the explicit purpose of having that contractor only use them to produce the product.
The benefit of this arrangement is that it allows an organization to specialize in a certain aspect of the value chain.
There are many Global organizations we’re all familiar with that follow this business model. Some of the most followed are apparel companies, like Nike, who utilize contract production facilities. Allowing them to focus on the surrounding value-based activities, product development and consumer market. Another cohort that quite often follows this business model is the technology industry. Marvell – not to be confused with the comic book concern – Marvell Technologies, which most likely has one or more of their chips in your cell phone, uses this outsource model so that they can concentrate on what generates the greatest return, the design of high-end semiconductor chips.
Franchising, the second of our two points today.
This is a contract between a parent company – franchisor and a franchisee that allows the franchisee to operate a business developed by the franchisor in return for a fee and adherence to franchise-wide policies.
What this basically boils down to is that someone has developed a business that they feel can be – or has proven been able to – port into a new geographic market. Because they don’t want to invest the time or money in a new market they are willing to lease the concept and instructions to others who want to bring the brand to other regions. In order to successful do this innovator has taken the time to detail the required launch process and day-to-day operations such that it is a formulaic process.
The specialty retailing industry favors franchising as a market entry mode. For example, there are more than 1,800 Body Shop stores around the world; 90 percent of the stores are operated by franchisees. Franchising is also a cornerstone of global growth in the fast-food industry; a case in point is the reliance of McDonald’s on franchising to expand globally. The fast-food giant has a well-known global brand name and a business system that can be easily replicated in multiple country markets.
There has been much written about the decision process for a franchisee (the buyer) but very little around what a prospective franchisor should consider. Use the following seven questions as a quick cut as to whether your business can utilize a franchise market entry strategy.
- Will local consumers buy our product?
- How tough is the local competition?
- Does the government respect trademark and franchiser rights?
- Can our profits be easily repatriated?
- Can we buy all the supplies we need locally?
- Is commercial space available and are rents affordable?
- Are our local partners financially sound and do they understand the basics of franchising?
Hopefully I’ve given you some food for thought.
Inside the next video we’ll keep walking up the curve and start our discussion on investment alternatives.
Thank you for watching.
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