International Business Strategies: Trade, Licensing, Franchising
Reasons for International Trade
Countries engage in international trade for several reasons:
- Imports: To gain access to different products, cheaper products, and different technologies.
- Exports: To increase profits and access more markets.
Understanding Licensing Agreements
A licensing agreement involves one company (the licensor) granting permission to another company (the licensee) to use its products, services, brand, or patents.
Motivations for Licensing:
- Licensor: To achieve faster growth, gain flexibility, enter new markets, and increase profits with less direct involvement.
- Licensee: To gain access to new technology, obtain exclusive distribution rights, and leverage an established brand name.
Franchising: Advantages and Disadvantages
Advantages:
- For the Franchisor: Receives revenue (fees, royalties), expands brand presence without managing all locations directly.
- For the Franchisee: Easier access to financing, reduced business risk, operational support (HR, marketing, quality control, advertising).
Disadvantages:
- For the Franchisor: Potential loss of control over brand standards and operations.
- For the Franchisee: Lower profit margins (due to fees/royalties), loss of operational autonomy, adherence to stringent guidelines.
Choosing Licensing Over Franchising
A company might prefer a licensing agreement over franchising, particularly for manufacturing processes. Key reasons include:
- Simplicity for Licensor: Easier management as the licensor primarily collects fees without needing to oversee franchise operations.
- Lower Risk: Generally involves lower risk and investment compared to setting up or managing franchises.
Joint Ventures: Pros and Cons
Advantages:
- Access to new countries (especially those with centrally planned economies).
- Entry into previously unavailable markets, products, or customer bases.
- Shared financing, managerial expertise, and technology.
- Access to local cultural knowledge.
- Potential for economies of scale.
- Risk reduction through shared investment.
Disadvantages:
- High failure rate (estimated around 50%).
- Potential for conflicts between partners regarding strategy or operations.
Establishing Foreign Subsidiaries
Companies may set up foreign subsidiaries to facilitate decentralized decision-making. This allows local management to better adapt operations and strategies to the host country’s specific customs and cultural nuances.
Canada’s Stance on Protectionism
Canada generally opposes protectionism because trade barriers like tariffs often lead to retaliation from trading partners, harming exports. Agreements like the North American Free Trade Agreement (NAFTA) (now CUSMA/USMCA) were established to reduce such barriers.
Factors Affecting the CAD/USD Exchange Rate
The Canadian dollar (CAD) can strengthen against the US dollar (USD) due to various factors. For example, during the 2008 economic crisis, the US faced significant financial institution failures, a credit crisis, and a housing slump, which devalued the USD. Simultaneously, demand for Canada’s natural resources remained high, supporting the CAD’s value.
Impact of Communication Technology on Global Business
Advances in communication technology have significantly expanded international business capabilities, enabling companies to operate and coordinate activities across different time zones, effectively allowing for 24-hour operations.
Value-Added Goods in Canadian Trade
Value-added goods are products where a significant portion of the profit comes from the manufacturing and processing stages, rather than just the raw materials.
Major Canadian Value-Added Imports:
- Machinery and equipment
- Motor vehicles and parts
- Consumer goods
Major Canadian Value-Added Exports:
- Motor vehicles and parts
- Industrial machinery
- Aircraft
- Telecommunication equipment
- Plastics and fertilizers
Currency Speculation
Companies or individuals speculate on currency markets primarily to profit from anticipated fluctuations in exchange rates.
Case Study: Tim Hortons and Maidstone Bakeries
Joint Venture Background:
Tim Hortons entered a joint venture with IAWS Group plc (an Irish food company) to create Maidstone Bakeries in Brantford, Ontario. This venture aimed to centralize the production of partially cooked and flash-frozen baked goods for Tim Hortons franchises.
- Ownership: The venture was structured with shared ownership between Tim Hortons and IAWS Group (Maidstone).
- Purpose: To supply all Tim Hortons locations, replacing in-store baking kitchens.
- Benefits Claimed: Reduced waste (unsold fresh doughnuts), faster service (“fresh” baked goods in 2 minutes), potentially better quality and consistency.
- Partner Contributions: Maidstone brought expertise in large-scale baking and flash-freezing technology.
- Impact on Franchisees: Required an investment (estimated $35,000 – $50,000 per store), increased the cost per doughnut (e.g., from 9 cents to 12 cents), but was intended to boost overall profitability and efficiency.
Tim Hortons Business Model Notes:
- Tim Hortons became privately owned (multinational) after 2010. (Note: Ownership structure has changed multiple times, currently part of Restaurant Brands International).
- Primarily a franchise model, though some corporate-owned stores exist, partly to showcase the model to potential franchisees.
- Corporate revenue streams include:
- Royalties (e.g., 3.5-4.5% of gross sales)
- Rent (e.g., 8.5%)
- Franchise fees (e.g., $400,000 initial fee – Note: This figure seems high and may need verification, typical fees vary)
- Sales of goods (coffee, supplies) to franchisees.
Case Study: Hypothetical Franchise (Latch & Orly)
This example illustrates key franchising concepts:
- Chain vs. Franchise: A chain (like Starbucks, primarily corporate-owned) involves the parent company owning and operating locations. A franchise involves granting rights to franchisees.
- Systemization is Key: For a business (like “Latchman’s Coffee Shop”) to be franchisable, operations must be standardized into a replicable system (manuals, procedures).
- Franchisee Motivation (Orly):
- Leverage an established brand name (“Latchman”) for instant customer recognition.
- Benefit from a consistent product and operating model.
- Receive training and support, reducing the need for prior expertise (e.g., coffee making, ordering).
- Reduced risk compared to starting an independent business.
- Franchisor Responsibilities (Latchman):
- Provide significant support to franchisees (training, supply chain, marketing).
- Maintain quality control across all locations.
- Potential Downsides:
- Franchisee deviating from the system can damage the brand’s reputation (Quality Control issue).
- Franchisee has less autonomy and pays fees/royalties.