Differences between Modes of Operation
In order to understand the differences between the modes of operation during an international expansion of an organization, it is essential to define them. Franchising refers to a method of reducing reliance on local demand and growing new, future revenue as well as profit centres globally. The strategy involves low risk, needs little investment, and provides a significant upside potential for scaling capacity (Rosado-Serrano et al., 2018). It is a pooling of resources and ability to achieve a firm’s strategic promotion, distribution and sales objective.
Definitions
Franchising usually involves an organization that grants another the right to conduct business, for example, selling a good or service, under its successful model and identified by its trademark. The brand’s owner charges a fee upfront to the second firm, which is payable upon signing the franchise contract (Rosado-Serrano et al., 2018). Other charges which can include costs of marketing, royalties or advertising, may apply with regard to the way the agreement is set or discussed. The franchisor must provide training, marketing, and other support services.
Furthermore, franchising in the global scale offers firms an international master franchise owner. This refers to an individual who is often a native of the nation and understands the political and bureaucratic issues in the country better than a foreigner (Rosado-Serrano et al., 2018). An example of a firm that practices franchising is McDonald’s. For fifty years, it has given opportunities to persons and companies who share similar values and vision of serving tasty fast food via franchising.
Licensing is another mode of operation that an organization planning to expand internationally can choose to employ. It refers to a business agreement between two firms whereby one offers the other special permissions, for example, utilizing copyrights in exchange for payment (Elia et al., 2020). The licensing contract in the global scale involves two parties from different regions, whereby the licensee gets resources or the permission to produce a product. This might include patents, managerial skills, or technology needed to manufacture products (Elia et al., 2020). The advantage of using this strategy is that it allows a company to enter markers that trade restrictions may restrict.
Additionally, there is less risk involved, and one does not require to invest much capital. An example of this approach is when suppose firm A, which manufactures and sells Baubles and is based in the United States, wants to enter the Chinese market (Elia et al., 2020). It can achieve this by having an agreement with another company B found in China (Elia et al., 2020). The first organization will allow the other to utilize their product patent and offer them resources as well, and in return, they will receive payment.
The Chinese company then gets the permission to produce Baubles for trade use. The last mode of operation to consider while trying to expand globally is management contracting. This refers to an arrangement whereby operational control of an organization is vested by agreement in a separate firm that performs the required managerial functions in return for payment (Verbeke et al., 2018). In Asian countries, the majority of the hotels are operated under the contracting management method.
Differences
With the above information, one can conclude that the three modes of operation are different. On the one hand, in franchising, a franchisee is given a business within a box, which means there is a limitation to the operation. The franchisee gains access to the company’s intellectual property and expertise in an operations manual. Additionally, there might be existing promotion finances for the franchise. On the other hand, in management contracting, the operator manages and operates the firm for the owner and receives payment for the work. In terms of key obligations, whereas a franchisee is in charge of the business’s daily operations, they do not have to be accountable to the franchisor.
In management contracting, the operator must account for what they have done to the owner. Lastly, the franchisee pays the franchisor a fee, while in management contracting, the operator is the one that is paid for their job. When comparing franchising to licensing, one can note that while it is allowed to use a franchisor’s trademark and other intellectual property, a party is permitted to only use the trademark in licensing agreement. However, a licensee’s advantage over the franchisee is that they are not limited in controlling business operations. A franchisor will determine how the trademark is used in addition to the marketing plans, location, and operations in general. It is noteworthy to state that whereas a licensee controls operations in a licensing agreement, an owner determines the operations conducted by the owner.
Reasons for Changing Mode of Operation
An organization that has employed one choice of mode of operation may decide to choose another due to various reasons. One that experts have considered to be the main is a change of policies (Verbeke et al., 2018). A government can alter regulations and affect international business. Various issues may cause this, but the most common include high unemployment rate, nationalistic pressure, widespread poverty, and political unrest. The result is that the foreign firms become more restricted, especially in their agreements (Verbeke et al., 2018). For instance, U.S.-based companies that practice franchising in China may decide to use management contracting, whereby they allow a second organization in the host nation to run daily operations. The Chinese and United States are in poor trade terms might result in stricter rules for operating. Having a Chinese national to be in charge reduces the level of impact the government has on the business.
There are cases whereby the changes favor the business, and rather than entering into a management contract, a company chooses to franchise. When the trade relations between countries improve, it becomes easier for organizations in the nations to invest internationally as the rules or laws encourage them to accomplish that. Trade has and can be used as a tool politically and thus, result in an international business being entangled in a trade embargo (Verbeke et al., 2018). Most firms respond to such a situation by either abandoning their operations completely or changing their strategies.
Political risks exist in all countries worldwide and can vary in terms of magnitude from one to another. They may emerge from policy changes by nations to alter control imposed on interest rates. Additionally, they may result from actions of legitimate governments, such as the regulation of agreements or contracts between local and foreign companies (Elia et al., 2020). For instance, when two parties enter into a licensing contract, the government can influence this by stating the maximum fee to be paid in terms of percentage by the domestic firm. Another example is when the organizations enter into a management contract, and the government limits the foreign company’s business ownership.
The government can impact the international expansion and thus, influence the change of mode of operation through a longer approval process of foreign companies, for example, a franchisor. For a successful business partnership, the brands must be evaluated by government officials, which is important (Elia et al., 2020). However, in the event of a trade war or poor relations between nations, this procedure can be delayed for a particular firm, leading the latter to opt for another strategy. In some cases, the charges to become a franchisee of an organization in a specific country are placed higher than normal to discourage business.
Another reason companies can decide to change a mode of operation is due to lacking necessary resources. For instance, one that initially chose to license might opt for management contracting as a result of limited funds or personnel. This is especially for small businesses, whereby the agreement can save them time and other money (Verbeke et al., 2018). Allowing the operational control to be undertaken by another firm means they do not need to concern themselves with functions such as marketing and bookkeeping. It enables them to concentrate on the main priorities, for example, product development or establishing one’s position in the market.
Two organizations in a franchising agreement may decide to opt for management contracts due to a lack of expertise. For example, small company X franchising in Brazil may allow the change to ensure that they still achieve their goals despite lacking knowledge or insight. For this size of the firm, signing a management agreement can aid in distributing staff duties more efficiently (Verbeke et al., 2018). In the event the customer care team has to handle its bookkeeping, for instance, outsourcing the function would allow more time for customer services. Transitioning from one mode might appear costly and may possess many risks. However, it is important to weigh the pros and cons, and in case the gains are more than the disadvantages, then it is proper to evolve.
References
Elia, S., Munjal, S., & Scalera, V. G. (2020). Sourcing technological knowledge through foreign inward licensing to boost the performance of Indian firms: The contingent effects of internal R&D and business group affiliation. Management International Review, 60(5), 695-721. Web.
Rosado-Serrano, A., Paul, J., & Dikova, D. (2018). International franchising: A literature review and research agenda. Journal of Business Research, 85, 238-257. Web.
Verbeke, A., Coeurderoy, R., & Matt, T. (2018). The future of international business research on corporate globalization never was. Journal of International Business Studies, 49(9), 1101-1112. Web.