Business Agreements for Market Expansion
Licensing
A license is an agreement between two business parties where one firm gives the purchaser of the license the rights to process, distribute and sell its brand in exchange for royalty payments. An example of a successful licensing agreement is the Coca Cola agreement with bottling agents in almost all countries of the world. Licensing can be used to expose new markets to the brand without having the licensing firm set up shop within the geographical location of the new market. The risks associated with testing the new market such as low sales turnover, are borne by the licensee. There are downsides to this method of market expansion. Since lower level management decisions cannot be coordinated by the licensor, the firm has limited control over the level of revenue that can be generated by the brand. This could lead to low payoffs if the licensee firm performs poorly. Licensing hence works well when agreements are reached with reliable partners.
Exports
Exporting is another strategy used in expanding markets for a global outreach. This basically involves selling the company’s products to foreign countries through foreign distributors and resellers. One key advantage of this method in contrast to licensing, is that the firm maintains control over aspects of its operations such as quality of product, production levels, preferred distribution channels and pricing. On the other hand, a major setback to exporting as a means of market expansion is the existence of restrictive trade policies in importing countries. These policies may impose high duties and customs tariffs in order to secure a competitive advantage for local firms. As a result, it would only work well where foreign trade policies in importing countries are favorable (Lavin, Cohan and Locke, 2011).
Wholly owned business subsidiaries
A wholly owned business subsidiary is a division of the parent company that is built and run by employees of the company itself. A subsidiary can significantly drive market growth for a company’s products in new regions. This is because of the proximity that the company gains to its new customers thus allowing it to receive greater feedback in terms of market reactions. In addition to this, the response time of the firm to such feedback is much higher than in export operations. A good case for this is the American Apparel Corporation which has subsidiaries in several countries that always stay attuned to new fashion trends hence sustaining demand levels. On the other hand, the cost of opening new subsidiaries and keeping them in line with the company’s objectives is much higher. It would be more advantageous to form subsidiaries when the company’s product has already attained substantial growth and is known well in new markets.
Joint ventures and partnerships
In a joint venture, a firm searches for viable business partners to form a temporary entity that will sell some of its products. In a partnership, the businesses may agree to work together for an indefinite period thus making it a permanent agreement. A joint venture can be used to launch a company’s products in a new market. The manufacturing and promotion of the product will be invested in by all partners. In doing this, the risks that accompany the new business are absorbed by all parties. Consequently, this strategy works best when there is uncertainty in the success of the product in the new market. A joint venture also demands that there is mutual benefit for all firms bound by the agreement.
Direct investment
As a method of market expansion, direct investment is a capital intensive process. The company will opt to buy out another company in the new market region or expand its operations. For instance, a fast food restaurant can to expanded include a coffee bar which will serve beverages from the investing company. After purchasing a stake in another company, the firm can then roll out its own products to consumers. The working advantage of direct investment over an entirely new subsidiary is that it takes much shorter time to enter into the market.
Alliances
An alliance is a business arrangement where participants choose to cooperate in achieving a certain part of their operations. An alliance will thus operate without discarding the autonomy of each firm involved. There are several types of alliances. These include sales alliances, solution specific alliances, geographic –specific alliances, investment alliances and joint venture alliances (Kuglin & Hook, 2002). A geographic – specific alliance can serve the purpose of market expansion quite well when two firms which share this goal team up to market and produce each other’s brands. A good example of this is the alliance between Molson Coors Beer Company in Canada and Foster’s Group in Australia to manufacture and sell each other’s beer brands. The advantage of this strategy is that the businesses involved have low costs to incur in setting up the necessary infrastructure to get started in new markets. They also gain the advantage of using each other’s reputation in new regions.
References
Kuglin, F.A. & J. Hook (2002). Building, Leading, and Managing Strategic Alliances: How to Work Effectively and Profitably With Partner Companies. New York: American Management Association.
Lavin, F., Cohan, P. & Locke, G. (2011). Export Now: Five Keys to Entering New Markets. Singapore: John Wiley & Sons.