FRANCHISE FEVER
There are several ways for a company to enter a foreign market. Besides licensing, one of the ways is also
franchising,
which
originates from the French word for free and is mainly used by service companies like
McDonald’s, which is certainly one of the best-known and powerful franchisers in the world.
In a franchising system, a franchiser plans, directs and controls systematic operations of a closely
connected group of enterprises, the individual franchises. Franchises are recognized by three main
characteristics:
1. The franchiser owns a trademark or service mark and licenses it to franchisees in return for royalty
payments.
2. The franchisee is obligated to pay for the right to be a part of the system. Besides initial fee, start-
up costs includes rental and rental of equipment and fixtures, and in some cases regular license fee
3. The franchiser supplies its franchisees with a marketing and operation system for doing business.
McDonald’s, for example, demands franchisees to attend its “Hamburger University” for 3 weeks in
order to learn how to manage the business. The franchisees must also follow strict procedures in
buying materials.
Certain reasons must be considered before buying a franchise:
High start-up costs and royalty fees –
For example, in order to open a McDonald’s, the franchisee has
to pay both for the location, as well as the franchise fee so he could operate the business for a period of 20
years. After that period, another franchise fee is charged. Besides that, every year, a franchisee must pay a
royalty fee to the franchiser.
Extremely high raw material costs –
with the purpose of maintaining consistency in their offerings
(services)? Franchisers usually insist that their franchisees buy raw materials directly from them or from a
supplier with which they have a special agreement, meaning that they receive a discount on what the
franchisees order. The prices charged for these materials are usually much higher than anywhere else. But,
if the franchisee decides to buy its raw materials somewhere else, the franchiser can legally end the
relationship, potentially leaving the franchisee without its entire investment.
Lack of financing
– The franchisees usually have to use their own savings or take out a loan, because
most franchises don’t provide financing. In some cases, franchisers will help their franchisees get started
by financing franchise fees, equipment or start-up costs. And even though franchisees have to put up a
portion of their personal assets as security for the loan?, at least they don’t have to reduce their bank
accounts to zero.
Lack of territory control
– Market saturation and decreasing returns are the reasons why most
franchisers will limit the number of stores in some area. Still, many franchisers will try to squeeze as many
retail stores into an area as possible. The individual franchisee is the one who suffers in this situation,
because his potential market is reduced drastically.
Lack of individual creativity
- Franchisers request uniformity, which means that every singe aspect of
the business is governed by the franchise.
Franchisers may not know your area
– The most important factor in determining the success or failure
of a business is location. Even though franchises can do studies and calculate a possible good location for
the business, they don’t know the area as well as the locals. So if a store is not in a favorable position, the
franchisee can have trouble with running the business successfully.
Benefits for the franchiser are shown in many ways. For example, through their ability to cover a territory
in a very short time, the motivation and hard work of employees who are entrepreneurs, the franchisees
familiarity with local communities and conditions, as well as huge purchasing power.
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Franchising is beneficial to franchisee too. They profit from buying into a proven business with a well-
known and accepted brand name. It is also easier for them to borrow money from financial institutions and
receive support in areas like marketing, advertising, site selection and providing workers for a company
(staffing).
FOREIGN DIRECT INVESTMENT
Foreign direct investment is a mode of entry into foreign markets. FDI occurs when a company invests
directly in facilities in order to produce or market a product in a foreign country. The FDI relationship is
made up of a parent enterprise and a foreign affiliate. Together they form a multinational company. In
order to be described as FDI, the investment has to provide control for the parent enterprise over its
foreign affiliate. According to the UN, in order to gain control over its foreign affiliate, the parent company
must own 10% or more of the ordinary shares.
In the years after the Second World War, the global FDI was dominated by the United States because
much of the world was recovering from the destruction caused by the war. Since that time FDI has spread
globally, and its importance in global economy has grown. Nowadays, FDI stocks account for more than
20% of the global GDP. The most favoured destinations for FDI are the emerging markets, such as China
and India.
There are two main forms of FDI:
•
Green-field investment
. Green-field investment involves direct investment in new facilities or the
expansion of existing facilities. Host countries are taking certain promotional efforts in order to attract FDI,
and their primary target is green-field investment. This is because it creates new production capacity and
jobs, allows the transfer of technology and know-how and links the local production to the global
marketplace.
However, there are some disadvantages as well:
-Green-field investments often crowd out local industry, as multinationals are able to produce goods more
cheaply,
-and also, profits from the production do not return to local economy. They return to the multinational’s
home economy instead.
•
Mergers and Acquisitions
. They occur when existing assets are transferred from local firms to
foreign firms.
-When assets and operations of firms from different countries are combined to form a new legal entity, we
talk about a cross-border merger.
-Cross-border acquisitions occur when the control of assets and operations is transferred from a local to a
foreign company. In this case, the local company becomes an affiliate of the foreign company.
Unlike green-field investment, acquisitions do not provide long-term benefits to the local economy. In most
cases the owners of the local firms are paid in stock from the acquiring firm. This is why the sales profits
do not stay in the local economy. Despite that, the majority of cross-border investment is in the form of
mergers and acquisitions.
There are other classifications of FDI as well. According to one of them, we can distinguish between three
different types of FDI:
•
Horizontal FDI
. It occurs when a company locates the manufacture of the same product or group
of products at more than one plant located in different countries. The examples are: General Motors, Ford,
BMW.
•
Vertical FDI
. It occurs when a company locates different stages in the production and marketing
of a single product or group of related products in different countries.
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several factors. These factors include: 1) the propensity (tendency) to import, 2) the amount of foreign
labour used, and 3) the type of capital investment.
1) The propensity to import is the amount of each individual unit of tourist expenditure that is used to buy
imports. The more locally made products are sold to tourists, the more tourist money will stay in the
country.
2) Many countries use foreign labor in serving the tourist. It is either because the locals will not do the
work, or because they don’t have the skills. The result is that the money paid in wages to the employee is
not spent in the destination but in the employee’s home country.
3) Most lesser-developed countries turn to foreign countries and corporations for assistance when building
infrastructure and facilities, because they cannot afford to finance the construction internally. The
destination needs influx of foreign money to develop the tourism potential. This can lead to high leakage
from the local economy because the profits are sent out of the country.
Nowadays, tourism is constantly gaining in importance at local, regional, national and international level. As
a result of that numerous pressure groups have become involved in tourism issues. Such groups include
Greenpeace, Friends of the Earth and community organizations.
MERGERS, ACQUISITIONS AND TAKEOVERS
The term
mergers and acquisitions
represents a type of business strategy and management dealing
with the merging and acquiring of diferrent companies. These usually take place in a friendly environment
where superiors of both companies meet and go through a
due
diligence process
to guarantee a
successful joining between all the participants involved. But, acquisitions can sometimes happen through
hostile takeover
which implies apsorbing the majority of
outstanding shares
in the open stock
market.
The expressions ‘merger’ and ‘acquisition’ have somewhat different meanings. We talk about an acquisition
when one company takes over another, target company, which ceases to exist, and therefore establishing
itself as the new owner. On the other hand, a merger occurs when two similar companies, instead of
continuing to operate separately, decide to join together and form a single, new company. This type of
process is called a ‘merger of equals’.
The main difference between these terms refers to a way they are financed. While mergers are normally
financed by a
stock swap
which means issuing stock to exchange for the shares of the other company,
acquisitions are financed by a
cash deal
. This process involves buying a company with cash, or through
the issue of some sort of debt instrument. Also, it is possible for a company to acquire another company by
issuing
junk bonds
to raise funds.
There are many different types of mergers categorized by the relationship between two merging
companies:
Horizontal merger
- two companies that are in direct competition and share the same product
lines and markets
Vertical merger
– a customer and company or a supplier and company. For example, a cone
supplier merging with an ice-cream maker
Market-extension merger –
two companies that sell the same products in different markets
Product-extension merger -
two companies selling different but related products in the same
market
Conglomeration –
two companies that have no common business areas
M&A have various advantages:
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Economies of scale
– The combined company can often reduce duplicative departments or
operations. In this way, they lower the costs of the company and therefore increasing profit,
because, theoretically, the revenue remains the same
Increased revenue,
due to lack of competition
–
It means that the company will get rid of a
major competitor, increasing its power to set prices
Increasing revenue,
due to “revenue synergies” known as “cross-selling” if a bank buys a stock
broker, it can sell its products to the broker’s customers. At the same time, the broker can sign up
the bank’s customers for brokerage accounts.
Synergy –
refers to a better use of complementary resources. It is best described by this equation:
one plus one makes three. When buying a company, the goal is to create shareholder value which
is higher than that of the sum of the two companies.
Taxation –
Profitable companies can buy unsuccessful companies so they could use target’s loss in
their favor. They achieve this by reducing their tax liability. Rules are set up in many countries, in
order to prevent this from happening.
The disadvantages, on the other hand are:
Overestimating the value of the target company
- The main goal of a company in M&A is to
maximize its profits and provide benefit to the shareholders. But research shows that, due to lack of
due diligence, parent companies often overestimate the value of their target company.
Diseconomies of scale
– The firm becomes too large, and because of its size the unit costs rise.
It’s harder to control a bigger organization, workers can feel less committed to it, and the co-
ordination between departments becomes more difficult
Manager’s hubris
– Managers usually overestimate their ability to create value from an
acquisition, and are willing to pay a significant premium over a target firm’s
market
capitalization
. The reason is that their rise to the top has given them an unrealistic idea of their
capabilities.
Job loss
– Employees are afraid of M&A because of massive
lay-offs
Cultural aspect
– Every company is different from the other by the way it presents itself on the
market, how it deals with employees, customers, etc. If this problem is not solved from the start,
the M&A between two culturally different companies can lead to lower productivity.
Monopoly
– A monopoly can be created by a merger. Due to the fact that there are not many
competitors in the market, the parent company has the power to control the prices and increase
them, thus increasing its own profit. However, this rarely happens, because of the strict laws that
prevent monopolies.
WORLD TRADE ORGANIZATION
World trade organization (WTO) is an organization that deals with the rules of trade between nations at the
global or near-global level. The WTO has numerous roles. It is an organization for liberalizing trade. It’s a
forum for governments to negotiate trade agreements. It’s also a place for them to settle trade disputes.
The WTO agreements are lengthy and complex. It’s because they represent legal texts that are covering a
wide range of activities, such as: agriculture, banking, textiles and clothing, government purchases,
industrial standards and product safety, intellectual property, and much more. But the foundation of the
multilateral trading system is based on a number of simple, fundamental principles that are common for all
WTO agreements. These principles include:
-trade without discrimination,
-freer trade, gradually, through negotiations,
-promoting fair competition, and
-encouraging development and economic reform.
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