Growing your business be expanding into new markets is one of the most tried & true business growth strategies. Many business leaders point toward it as the vision for their organization. Having a vision is key, but strategy execution earns the dollars.
Inside today’s video I discuss the pros and cons of licensing. The discussion introduces the theoretical aspects of this strategy. Of all the options open to a business this is the quickest to implement. We also look at a case where licensee brought unforeseen fortunes to the licensor’s doorstep.
How to Craft a Winning Market Entry Strategy – Part 1: Transcript
Welcome back. In the last video we introduced the market entry continuum. In this video we’ll dive into the Licensing revenue model.
So exactly what is licensing?
Licensing is a contractual arrangement whereby one company (the licensor) allows another company (the licensee) to market and produce one or more of its products or services in exchange for royalties, license fees, or some other form of compensation. The licensed asset could be anything…
- a patent
- trade secret
- brand name
- or product formulation
Essentially licensing is a business structure that allows the creator of an asset to make money without having to investment more time or effort.
If you’re thinking it is only for hard good manufactures like Hugo Boss, Coca-Cola, and Caterpillar? Think again, media and entertainment companies like Viacom, Marvel Comics and the National Basketball Association are heavy licensors. Their agreements allow them to extend their brands and generate substantial revenue.
There are two key advantages associated with licensing as a market entry mode.
First, because the licensee is typically a local business that will produce and market the goods on a local or regional basis, licensing enables companies to circumvent tariffs, quotas, or similar export barriers.
Secondly, when appropriate, licensees are granted considerable autonomy and are free to adapt the licensed goods to local tastes.
The most referred to business case of the opportunity costs associated with licensing dates back to the mid-1950s, when Sony obtained a licensing agreement for the transistor from AT&T’s Bell Laboratories. The then head of Sony dreamed of using transistors to make a small, battery-powered radio. Seems simple enough now, however at the time, Bell engineers thought it was impossible to manufacture transistors that could handle the high frequencies required for a radio; they advised Sony to try making hearing aids. Undeterred, Sony presented the challenge to their engineers who spent many months improving the chip’s performance. What makes this story doubly ironic is that Sony was not the first company to unveil a transistor radio; a U.S.-built product, the Regency, featured transistors from Texas Instruments and a colorful plastic case. However, it was Sony's high-quality, distinctive approach to styling and marketing savvy that ultimately translated into worldwide success. They spent the time and energy to understand what would work in each of this initial target markets and turned this knowledge into distinctive, market-focused offerings.
There are, however, disadvantages associated with licensing. The key one’s are:
- Limited participation
- Lack of control
- Licensee may become a competitor
- Licensee may exploit company resources
So that’s it for licensing.
Inside the next video we’ll keep walking up the curve and discuss Special License Agreements.
Thank you for watching.