This chapter reviews the opportunities and issues a company will face when conducting business in the global marketplace. With the ever-increasing dynamics of international trade, you should read this chapter carefully. It is an excellent starting point to consider the skills required to expand your business internationally.
When considering strategic entry into an international market, licensing is a low-risk and relatively fast foreign market entry tactic.
Identify the benefits and risks associated with licensing as a foreign market entry model
In a licensing relationship, the buyer of the product, service, brand or technology being licensed.
In a licensing relationship, the owner of the product, service, brand or technology being licensed.
When considering entering international markets, there are some significant strategic and tactical decisions to be made. Exporting, joint ventures, direct investment, franchising, licensing, and various other forms of strategic alliance can be considered as market entry modes. Each entry mode has different pros and cons, addressing issues like cost, control, speed to market, legal barriers, and cultural barriers with different degrees of efficiency.
A licensor (i.e. the firm with the technology or brand) can provide their products, services, brand and/or technology to a licensee via an agreement. This agreement will describe the terms of the strategic alliance, allowing the licensor affordable and low risk entry to a foreign market while the licensee can gain access to the competitive advantages and unique assets of another firm. This is potentially a strong win-win arrangement for both parties, and is a relatively common practice in international business.
Let's consider an example. The licensor is a company involved in energy health drinks. Due to food import regulations in Japan, the licensor cannot sell the product at local wholesalers or retailers. In order to circumvent this strategic barrier, the licensor finds a local sports drink manufacturer to license their recipe to. In exchange, the licensee sells the product locally under a local brand name and kicks back 15% of the overall revenues to the licensor.
Before deciding to use licensing as an entry strategy, it's important to understand in which situations licensing is best suited.
Licensing affords new international entrants with a number of advantages:
While the low-cost entry and natural localization are definite advantages, licensing also comes with some opportunity costs: