When entering a business market (be it a local or a foreign one), one must consider the many entry strategies available to him or her. Which one is a better strategy: franchising or licensing?
Franchising
It is a strategy that entails an owner of a trademark permitting a franchisee to use the trademark or brand as a complete package in exchange for a fee or a royalty. Examples of franchises are fast food chains.
An advantage of this strategy can also be a disadvantage: the success of your franchise depends on the success of the brand, says Startups. Franchising an unknown brand will not be as hot a hit as using a well-known brand like McDonald's or Starbucks.
This next detail can also be a pro or a con, depending on how you look at it. According to Startups, there is a high level of control and standardization of rules, procedures, and products in a franchise.
As a franchisee, this can be a downside due to the fact that you are not allowed any entrepreneurial creativity. As a franchisor, however, you would find the level of control advantageous.
Furthermore, one can gain local information with this entry strategy. One would also have greater access to finances in the form of bank loans.
Licensing
This approach, on the other hand, involves permitting a licensee to use another's trademarked product or service in a business for a limited period of time in exchange for a fee. Examples of licensing would include a toy company manufacturing toys designed as the Avengers characters.
According to TCii, licensing is a fast and low-risk way of entering a market especially a foreign one due to the licensor transferring rights to operate to the licensee. However, there is a risk for the licensee to become a competitor in the future and to take advantage of the spillover of knowledge that can occur.
In addition, a licensee would not be subject to the same level of control and restrictions as a franchisee would be. A licensor would have to deal with the fact that he or she has a low level of control over the products licensed and accept the possibility that the brand can be damaged if it is handled poorly.
So, which is better? It can depend on the parties involved.
For instance, a French person would be more amenable to franchises due to the French culture of desiring rules and control. Thus, if you want to do business with the French, you have to take into account their business culture and what they are more likely to accept.
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