M odule iii

Module III

Choosing a direction, opportunity recognition and entry strategies

WHAT WE WILL BE STUDYING?• Franchising, Sponsorship and Acquisition, • The strategic window of opportunity: scanning,

positioning and analyzing, • Intellectual Property creation and protection.

INTRODUCTIONExternal Parties to help grow a business:• Franchising, • Joint Venture,• Acquisition and• Mergers

FRANCHISINGFranchising is an agreement whereby the manufacturer or sole distributor of a trademarked product or services gives exclusive rights of local distributor to independent retailers in return for their payment of royalty and conformance to standardized operating procedures.

FRANCHISING (cont.)What you may buy in a franchise?• A product or service• A patented formula or design• Trade names or trademarks• Financial management system for controlling the

financial revenues.• Managerial advice from experts• Economies of scale for advertising and purchase• A tested business concept

FRANCHISING (cont.)Advantages of franchising:1. To the franchisee2. To the franchisor

FRANCHISING (cont.)Advantages of franchising to the franchisee:1. Product acceptance (accepted name, product, or

service). No need to advertise.2. Management Expertise (training program to

franchisee regarding accounting, personnel management, production). (E.g.) franchisee has to spend some time at McDonald’s school. To work at their existing stores.

3. Capital requirement (demographic analysis, competitor, business condition, ability to pay) --- (Construction cost, purchase of equipment)

FRANCHISING (cont.)4. Knowledge of market (target market, income of

people, competition, location)5. Operating and structural controls (Quality control

of product and services, criteria of hiring/firing, training, cleanliness, including new product)

FRANCHISING (cont.)Advantages of franchising to the franchisor:1. Expansion Risk2. Cost advantages

FRANCHISING (cont.)Disadvantages to franchisor:1. Considerable capital allocation is required to build

the franchise infrastructure and pilot operation. At the beginning of the franchise program, the franchisor is required to have the appropriate resources to recruit, train, and support franchisees.

2. At the beginning of the franchise program there is a broader risk that the trade name can be spoiled by misfits until such time the franchisor is capable of selecting the right candidate for the business.

FRANCHISING (cont.)3. There is a risk that franchisees exercise undue

pressure over the franchisor in order to implement new policies and procedures.

4. The franchisor has to disclose confidential information to franchisees and this may constitute a risk to the business.

FRANCHISING (cont.)Disadvantages to franchisee:1. The requirement to pay the franchise fees and

royalty to the franchisor, which in some cases can be exaggerated.

2. The transfer of all goodwill built in the local market to the franchisor upon expiration or termination of the franchise contract.

3. The necessity of abiding by the franchisor’s operating systems, standards, policies and procedures.

4. Reduced corporate profit margin due to payment of royalties and levies.

FRANCHISING (cont.)Types of franchises:1. Dealership: Commonly found in automobile

industry & FMCG sector. Here, manufacturers use franchises to distribute their product lines.

2. Most common type of franchise is the type that offers a name, image such asMcDonald’sSubwayKFC

FRANCHISING (cont.)3. Third type of franchise offers services.(e.g.) Income tax preparation companies,

Real estate companies

FACTORS TO BE CONSIDERED BEFORE GOING FOR FRANCHISING

1. Unproven versus proven franchise:Unproven requires less investment but it is more risky. Proven requires high investment but it is less risky. (high growth rate)

2. Financial stability of franchise: How many franchises are in the organization?How successful is each of the members of franchise organization?Does the franchisor have management expertise in production, finance and marketing?

FACTORS TO BE CONSIDERED BEFORE GOING FOR FRANCHISING (cont.)

3. Potential market for new franchise.

JOINT VENTURE Two or more companies farming a new company.

Sony-Ericsson is a joint venture by the Japanese consumer electronics company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones. The stated reason for this venture is to combine Sony's consumer electronics expertise with Ericsson's technological leadership in the communications sector. Both companies have stopped making their own mobile phones.

JOINT VENTURE (cont.) Types of joint ventures:1. Industry-university agreements: created for the

purpose of research. Problems:

a) Objective of firm is to obtain tangible results such as patent, from its research investment.

b) University would like to share its research work through research paper.

2. Joint venture for cooperative research: Goal of this corporation is to sponsor basic research and train professional scientists and engineers to be future industry leaders.

JOINT VENTURE (cont.) 3. International joint venture:

JOINT VENTURE (cont.) Factors in Joint Venture success:1. Accurate assessment of parties and how best to

manage the new entity in the light of relationships.2. Degree of symmetry between the partners.3. Expectations of results of joint venture must be

reasonable.4. Timing must be right. (Environmental analysis,

industrial analysis, target market etc.)

ACQUISITIONSPurchasing all parts of a company.

1. All tangible assets2. All intangible assets

ACQUISITIONS (cont.)Advantages of an acquisition:1. People are well aware of acquired firm’s brand name and

its positioning in the market.2. Acquired firm has its suppliers, wholesalers, retailers.3. Actual cost of acquiring the business can be lower than

other methods of expansion.4. Employees of an existing business will be an important

asset.5. Since entrepreneur does not have to be concerned with

finding suppliers, hiring new employees, customer awareness, so more time can be spent on looking opportunities and strengthening business.

ACQUISITIONS (cont.)Disadvantages of an acquisition:1. Marginal success record2. Overconfidence in ability3. Key employee loss4. Over-valuated

MERGERS

STRATEGIC WINDOW OF OPPORTUNITYGrowth Strategies: Growth strategy is based on

knowledge of product and market1. Penetration Strategies2. Market Development Strategies3. Product Development Strategies4. Diversification Strategies

STRATEGIC WINDOW OF OPPORTUNITY (cont.)


Penetration Strategies:A penetration strategies focuses on the firm’s existing product in its existing market by penetrating the product by encouraging existing customers to buy more of firm’s current products.

(e.g.) A pizza company engages is an extensive marketing campaign to encourage its existing customer base of university students to eat its pizza 3 times a week rather than 2 times a week.


Market Development Strategies:• New Geographical market• New Demographical market


Product Development Strategies:

Diversification Strategies:1. Backward integration: A step back in the value-

added chain towards raw materials.2. Forward integration: A step forward in the value-

added chain towards the customers.


Implication of growth for the firm:1. Pressures on existing financial resources

i. Managing inventoryii. Managing fixed assetsiii. Managing costs and profits

2. Pressure on existing Human Resources3. Pressure on management of employees

i. Establish a team spritii. Communicate with employeesiii. Provide continuous training to employees


4. Pressure on entrepreneurs timei. Increased productivityii. Increased job satisfactioniii. Improved Interpersonal relationships

M odule iii

Business

Transcript of M odule iii