Expanding Overseas
C o m p e titive A d va n ta g e in th e G lo b a l E co n o m y
M o d u le 9 : E x p a n d in g O v e rse a s: P a rt II
M o d u le I n tr o d u c tio n
R e a d in g s
R eq u ired
R eview C hapter 6 in G lobal Strategy
G rębosz, M ., & O tto, J. (2013). In tern atio n al exp an sio n o f b ran d s b y realizatio n o f co
b ran d in g strategy (h ttp s://csu glo b al.id m .o clc.o rg/lo gin ?u rl= h ttp s://search
eb sco h o stco m .csu glo b al.id m .o clc.o rg/lo gin .asp x?
d irect= tru e& d b = b th & A N = 9 34 38 2 50 & site= eh o stlive). Journal of E conom ics &
M anagem ent, (14), 7787.
R eco m m en d ed
D eutschm ann, M . (2014). A system o f co u n try m ark et an d en try strategy ch o ice: A n ew
h o listic m o d el o f in tern atio n alizatio n (h ttp s://csu glo b al.id m .o clc.o rg/lo gin ?
u rl= h ttp s://search eb sco h o stco m .csu glo b al.id m .o clc.o rg/lo gin .asp x?
d irect= tru e& d b = b th & A N = 9 4 30 8 351& site= eh o stlive). G lobal M anagem ent Journal, 6(1),
3142.
F o r Y o u r S u cce ss
Franchising is an attractive m ethod of overseas expansion. It reduces risks for both the franchiser
and franchisee. Yet, the m ethod isn’t foolproof and m any franchises crash and burn. The keys to
success include sufficient capital, know ledge of the local m arket, and an ability to differentiate your
product or service from the com petition.
For this w eek, you w ill com plete a C ritical Thinking A ssignm ent w here you w ill describe businesses
that m ight be best suited for using an exportbased strategy or an equity investm ent strategy to
expand overseas. Think about factors such as risk, cultural differences, and how best to address the
com petition. There is no Live Session this w eek.
L earn in g O u tco m es L earn in g O u tco m es
1. D efine several entrylevel strategies for entering foreign m arkets.
2. D escribe the process of identifying m arkets to operate in.
3. E xplain equity and nonequitybased m odes of entry into foreign m arkets.
1 . S tr a te g ie s – D iv in g I n
If personal contact w ith the foreign m arket is im portant to your business, exporting is probably not
for you. H ow ever, there are other w ays to establish your business overseas. O ne com m on m ethod
w ould be to open a branch location or franchise in another country. C onsider M cD onald’s, a
com pany w here 80 percent of the restaurants are ow ned and operated by franchisees. M cD onald’s
operates in about 100 countries around the w orld, to include Saudi A rabia. This link takes you to
M cD onald’s w ebsite that is specifically designed for its Saudi A rabian custom ers:
h ttp ://w w w .m cd o n ald sarab ia.co m /k sariyad h /en /h o m e.h tm l
(h ttp ://w w w .m cd o n ald sarab ia.co m /k sariyad h /en /h o m e.h tm l)
C onsider the follow ing video, w hich looks at the franchise m odel from m any different angles:
(Source: https://youtu.be/6fidL51oakg)
H o w F ran ch isin g W o rk s: A n Illu strated G u id e A s you can see from the video, success is not a guarantee. E ach stakeholder the franchise ow ner,
the franchisee, the em ployees, and the consum er has different and som etim es conflicting
interests. A nd, w hile the franchise system is designed to low er risk and prom ote success, franchises
fail at alm ost the sam e rate as nonfranchise new businesses.
B y establishing a branch location or distribution center overseas, you are becom ing part of the local
m arket in that country. This m eans that you w ill be contributing to the local econom y w ith rent and
tax paym ents, and possibly em ploying local residents in your enterprise. You w ill need to w ork
closely w ith governm ent authorities to ensure that you properly register your business, report
incom e, and stay w ithin the law in the operation of your business. M ost im portantly, you w ill have
to know the local m arket w ell enough to know w here to establish yourself in that m arket. This
requires good contacts, relationship building, and know ledge of the location.
W hat do you notice about this list? W hat types of products or services appear best suited for
franchising? H ow m any different countries are represented in the top 100 global franchises? W hat
types of franchises do you think w ould w ork best in the M iddle E ast?
A n efficient business m odel blam ed by som e for low w ages, franchising squeezes sm allbusiness
ow ners betw een corporations and w orkers. H ere's a rundow n on how it w orks. Part of a
W B E Z/Front and C enter investigation series.
You m ay be surprised to learn about the types of com panies that decide to
follow this route. Som e of the larger, and a few of the sm aller, ones can be
found on this list:
h ttp ://w w w .fran ch ised irect.co m /to p 10 0 glo b alfran ch ises/
ran k in gs/
(h ttp ://w w w .fran ch ised irect.co m /to p 10 0 glo b alfran ch ises/ran k in gs/) W hat strikes you about the franchises listed at this w ebsite? W hy do you think they are successful in
Saudi A rabia? A re you surprised by the am ount of cash required to invest in som e of these
franchises? H ave you used any of these services or products?
O f course, these are w ellknow n com panies w ith substantial revenue and global reach. B ut even
sm aller com panies can engage in global m arkets m ore easily today than ever before by opening
foreign locations. They m ay partner w ith a related com pany that already exists overseas (for
instance, if you sell pencils you m ay find a stationery supplier abroad); they m ay open sm all shops
to sell their goods directly; or they m ay link up w ith distribution netw orks that help to get their
product to m arket in a num ber of places. U nlike exporting, these processes require distribution or
franchise agreem ents w ith foreign partners.
A s dem and for foreign goods continues to grow , and as disposable incom e for foreign citizens
continues to increase, the opportunities to enter foreign m arkets w ill expand. Ignoring this trend
m ay be detrim ental to a new business venture.
N ow take a look at this list of franchises in Saudi A rabia:
h ttp ://w w w .fran ch ised irect.co m /in tern atio n alfran ch ises/sau d i
arab ia/18 3/
(h ttp ://w w w .fran ch ised irect.co m /in tern atio n alfran ch ises/sau d i
arab ia/18 3/)
2 . S tr a te g ie s – D o n ’t D iv e I n J u s t Y e t…
W hile franchising can be a low errisk path tow ard global expansion, it is not foolproof. A ccording
to Strauss (2014), there are a num ber of reasons w hy franchises w ill fail. In his interview w ith
franchise guru Sean K elly, Strauss highlights a num ber of im portant lessons learned for franchise guru Sean K elly, Strauss highlights a num ber of im portant lessons learned for
entrepreneurs considering the franchise route:
Lesson 1
T h e term “h o t n ew fra n ch ise” is a n o xy m o ro n
W ouldbe entrepreneurs are eager to get in on the ground floor of a trendy new business. W hat
they should do is the exact opposite, says K elly. “The benefit of a franchise is really to buy
som ething that’s been proven over a period of tim e. H opefully som ething that’s been proven
over different econom ic clim ates. So it’s done w ell in good tim es and in bad” (Strauss, 2014,
para. 4).
Lesson 2
F ra n ch ises fa il w ith a b o u t th e sa m e freq u en cy a s in d ep en d en t b u sin esses
The m yth that franchises are less prone to failure than other sm all businesses is sim ply that. The
reality is that they generally go out of business at the sam e rate. H ow ever, w hich franchise you
choose can m ake a big difference, says K elly. “Som e franchise chains have failure rates as high as
80% to 90% , w hile others have alm ost no failures. D on’t be seduced by vague statistics or
com m on w isdom ; do careful research on the specific franchise you are considering to determ ine
how m any franchise ow ners are still in business through the full term s of their franchise
agreem ents” (Strauss, 2014, para. 6).
Lesson 3
H ire a sea so n ed fra n ch isee a tto rn ey b efo re y o u sig n a co n tra ct
The num ber of people that buy into a franchise w ithout having a law yer explain the contract
agreem ent to them is astounding, says K elly. Ignorance, in franchising, is not bliss— it’s a
potential nightm are. “They’re m aking this huge com m itm ent of hundreds of thousands of
dollars up front, they’re securing it w ith their house, they’re com m itting to w hat they’re going to
be doing som etim es for the next 10 or 20 years of their lives. It’s rem arkable how m any of them
w on’t hire som ebody w ho is experienced in franchising to help them the franchise opportunity
that they’re looking at or even go through the franchise agreem ent and explain to them w hat
they’re signing” (Strauss, 2014, para. 9).
Lesson 4
D o n ’t exp ect g o vern m en t o versig h t o r h elp
Franchisees are not consum ers and not protected as such; they are considered entrepreneurs and business investors. D espite w hat som e w ouldbe franchisees believe, the governm ent
oversight in the industry is paltry at best. “The (Federal Trade C om m ission) instructs
franchisors to disclose certain types of inform ation to franchise buyers, but doesn’t check to see
if they do so,” says K elly. “If your franchisor doesn’t perform as prom ised or if you later feel you
w ere lied to or m isled, it’s likely that your only recourse w ill be to hire an attorney and file an
expensive law suit” (Strauss, 2014, para. 12).
W hile franchising is an appealing m ethod for global expansion, there are m any reasons w hy
franchises fail. M any problem s are related to insufficient capital, w hile other problem s are created
by an inability to differentiate the franchise from the com petition. Success stories abound – as
m entioned above, M cD onald’s operates in about 100 countries to include the M iddle E ast and
Subw ay’s 40,000 stores include D jibouti – but the failure of m any franchises like R adio Shack and
M rs. Field’s C ookies show that this m ethod of expansion is not foolproof.
Test yourself on som e of the concepts covered in
M odule 9 in this brief quiz.
C lick H ere to B egin
C h eck Y o u r U n d erstan d in g
R e fe re n ce s
Strauss, K . (2014). 13 m istakes new franchises m ake. W all Street Journal. R etrieved from
http://w w w .forbes.com /sites/karstenstrauss/2014/05/27/13m istakesnew franchisees
m akeandhow toavoidthem /