[SOUND] The next entry strategy that we're

going to explore here is franchising.

Franchising is very similar to licensing, and

so our last pic we are going to explore right now.

While in licensing, you could sell a patent or a copyright or

a name even, for the licensee to use, in franchising.

You also are selling the know-how and

the franchiser sets the rules of operations to the franchisee.

Basically, the most successful franchising system existing in the world

right now is the one by the US-based multinational corporation,

McDonald's, that has a chain of restaurants around the world.

And most of these restaurants are through franchises.

So, somebody gets the right and the know-how and

the rules of operation by McDonald’s and starts engaging in that operation and

sends royalties to McDonald’s eventually.

The advantages of franchising are very similar to the ones in licensing.

The most obvious advantage of franchising is the speed by which

a firm can expand around the world.

If you are relying on local business people for

your expansion, that would save you a lot of time in

terms of how you expand and explore different markets.

Another advantage is that these franchisees actually know the market

very well, they have been there for a long time.

They know their rules of operation in their country.

They know their culture, they know the tastes of people.

And they know how to get around the different regulations existing in their

countries.

All this takes a long time for a firm to learn, and this is something that,

again, a firm like McDonald's has avoided or has diminished or

minimized by having franchisees in charge of their operations.

This means that a firm can have a very fast global presence by using this model.

As we know it depends on the industry.

This is mostly for service industries more rather than for manufacturing ones but

it has worked very well for firms like McDonald's or firms like Starbucks.

There are of course some disadvantages or potential disadvantages with franchising.

The first one as with licensing is quality control.

When you have thousands, literally thousands of franchisees,

how do you know one of them, let's say, for restaurants,

is not using low-quality products?

How can you can you control the customer service on all of them?

All these elements become a very big challenge for multinational corporations.

How have they dealt with it lets take again the case of McDonald's.

They decided to have what they call a parent franchisee,

a firm that would be in charge of looking at the quality of the other franchises and

making sure that they follow the general rules by McDonald's.

McDonald's also trains people in what they call their own university and

send them back.

And in this way they hope they will keep the quality up or

the type of service and keep certain standards for all the restaurants.

Now, setting a rigid set of rules sometimes can generate problems.

Let's look at the experience of Starbucks in Australia.

If we go back to our case analysis Australia would be very close to

the United States in terms of culture.

Which again, led many people to think okay, operating in Australia should

not be very different from operating in Canada, or the United States.

Now it happened that Australians have this very long tradition

of the neighborhood coffeehouse.

And this is something that they look for

certain things in their neighborhood coffeehouse.

When Starbucks arrived, they wanted to bring this idea of now

we're the third actor between your work and

your home kind of like we're going to be the new element in the neighborhood.

But the Australians didn't really buy this idea.

There were many things missing about what they thought a coffee house should have

and this was a costly experience for Starbucks.

Again, the cultural distance in theory

is not big, but it actually was.

[MUSIC]

Franchising

Global Strategy II: Doing Business in The Global Economy

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