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Case study.

Case 1. International joint venture.

Your company has set up a joint venture with a local company in a new market. The aim of this joint venture is to enter a new market with the benefit of local knowledge. The local company is small, just the owner and five employees. Your company employs 2400 staff throughout the world.

The main terms of the joint venture are that you will invest $25000 in the first year for marketing and distribution. You will earn 5 per cent of the expected turnover of $200,000 in the first year; in the second year you will invest a further $15,000 and take 5 percent of an expected turnover of $350,000. In the third year, you will invest just $10,000 for a 5 per cent return on forecasted turnover of $500,000. All conditions are subject to revision on an annual basis dependent on targets being achieved and the contract respected. You are midway through the first year and turnover is running well below target (just $60,000 in 6 months). Your investment has already been made. Relations with your foreign partner are not good. He does not speak your language, you don't speak his. He says there have been a lot of unforeseen problems, you feel you don't have enough control. You have asked for a meeting next month. This meeting has been called to discuss the options open to you to try and get the joint venture back on track.

Agenda

1.Market report

2.Financial report

3.Options:

a)recruitment of a local employee to oversee the joint venture

b)more regular reporting

c)plan to abandon joint venture at end of first year.

4. Action plan

Notes to the agenda

1. Market report

The Marketing Manager will report on the first 6 months of operation 2. Financial report

The Finance Manager will report on the figures. 3. Options

The meeting will discuss all the options. 4. Action plan

An agenda for the meeting with the local partner will be finalized.

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Roles

Managing Director

This joint venture was your idea and you feel it much too early to talk about pulling out. You want to go to the meeting next month in a positive frame of mind.

Marketing Manager

You feel the joint venture is not working. You would be better off with direct control. In the first 6 months, the local company has gained a lot of customers (more than expected) but, in many cases, has failed to supply them. As a result, billing is much lower than anticipated and there is a big danger of losing the goodwill that has already been created by the marketing effort financed by your $25,000. You think the answer is to start again at the end of the year, with a small sales office manned by your own people.

Finance Manager

The first 6 months have been disappointing ($40,000 below budget). The sales have not come through and the cash flow is very poor. It seems the invoicing of the local partner is slow and inefficient. You favour taking a very strong line at next month's meeting. You think you should increase the percent royalty of turnover and supply one of your team to oversee the finances of the joint venture locally.

Area Sales Manager

You feel it is much too early to judge this joint venture. You think you should be offering more support to the local company without charging for it in the first year. All the market research shows that the market potential is enormous. The fact that they have already got a lot of customers underlines this. It seems it is more a problem of systems.

Distribution Manager

You feel most of the problems are caused by poor distribution systems. You would like to go out next month and see their systems. You don't think the joint venture should be charged for your time and expenses. It needs to be given a chance to succeed.

Case 2. A Problem in Going Global

BCB Corporation, a high-technology company, produces central processing units, video display terminals, and other computer hardware. It is a large multinational company headquartered in Dallas, Texas.

While BCB has a solid technology and distribution network, orders have gone soft, competition has intensified, and profit margins have decreased recently. BCB seems to be caught in a business downturn. Consequently, several of the top executives of BCB

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have been pushing for the company to go global. They believe BCB can compete more successfully against U. S. and Japanese producers of computer hardware if it forms a joint venture in Japan with Omada Corporation and also builds some new factories in locations outside of the United States where capital and overhead costs are lower. However, in order for BCB to globalize, a complete restructuring of the organization will be necessary, and some of its offices in the United States will have to be eliminated. Thousands of employees will be laid off, as a result.Charles Chambers, President and CEO of BCB, is the one member of upper management who is adamantly against the plan to globalize. He does not see the necessity to reshape the company and is especially averse to the idea of eliminating so many jobs. Chambers has a strong commitment to his employees and also does not believe in letting one central office make decisions about a global product line. Instead, he wants to maintain the country- by-country organization of BCB and the standardized products, marketing, and advertising that BCB has always had. Why should BCB restructure just because market dynamics have changed?

The first quarter earnings statement has just come out, and BCB is not doing well, compared to last year at this time. Its major competitors all appear to be eating into BCB's markets. A meeting of the Board of Directors has been called for Tuesday at 4 P.M. to discuss BCB's future and its possible reorganization as a global business. Larry Thomas, Chairman of the Board of Directors, will run the meeting. He wants Chambers to go along with the globalization plan, but he knows how stubborn Chambers can be. Therefore, he has asked Anne Shaw, Director of Finance, to prepare a detailed financial analysis of the projected globalization plan and bring copies of it to the meeting. He has seen Anne's preliminary figures, and they look good.

Questions

1.What could Chambers do to change the minds of those who favor globalization of BCB?

2.What could Thomas do to change Chamber's mind?

3.Should BCB remain a multinational corporation or become a transnational corporation?

4.How can BCB make the transition from multinational to transnational?

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3. Franchising

Franchising is a business system in which a company (or franchisor) sells an individual (or franchisee) the right to operate a business using the franchisor's established system or format. As part of the franchise agreement the franchisee pays an initial sum of money, a franchise fee or front end fee, to the franchisor and agrees to pay a royalty or management services fee for continuing advice and assistance, which is usually calculated as a percentage of annual turnover. The franchisee may also pay an advertising fee to contribute to the franchisor's annual advertising and marketing costs. The franchisee also has to find the necessary capital to open the business. The franchisor provides an operations manual which contains all the information that the franchisee needs to run his or her business. A franchisor may appoint a master franchisee to supervise the business in a particular area. Not everyone is cut out to be an entrepreneur, or an entrepreneur, either. The personality called for is that of a risk taker and innovator. Some people are more cautious or simply want more assurance of success. For them, there is a vastly different strategy for operating a business; that is the opportunity of franchising. Business students often mistakenly identify franchising as an industry. Franchising is not an industry but a method of distributing a product or service, or both, to achieve a maximum market impact with a minimum amount of investment. Entrepreneurship and franchising are actually complementary process. Entrepreneurs develop ideas and build a winning product that they offer to share through a franchise agreement. Basically, a franchise agreement is nothing more than an arrangement whereby someone with a good idea for a business (the franchisor) sells the rights to use the business name and sell a product or service (the franchise. This mutual reliance caused the number of franchise outlets to grow to over 500,000 in 1988 with sales of over $ 540 billion.

Advantages of Franchises

Franchising has penetrated every aspect of American and global business life by offering products and services that are reliable, convenient, and cost effective. Richard Ashman, chairman of the International Franchise Association headquartered in

Washington, D.C., probably put it best when he commented, “You name it and there is a good chance that some one out there is franchising it.” Obviously, the growth experienced in franchising throughout the world could not have been accomplished by accident. Franchising clearly has many advantages. The following are some of these advantages.

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Management Assistance. A franchise (the person who buys a franchise) has a much greater chance of succeeding in business because he or she has an established product (for example, McDonald’s hamburgers), help with choosing a location and promotion, and assistance in all phases of operation. It is like having your own store with full-time consultants available when you need them. Furthermore, you have a whole network of peers who are facing similar problems who can share their experiences with you.

Personal Ownership. A franchise operation is still your store and you enjoy much of the freedom, incentives, and profit of any sole proprietor. You are still your own boss, although you must follow more rules, regulations, and procedure s than you would with your own privately owned store.

Nationally Recognized Name. It is one thing to open a new hamburger outlet or ice cream store. It is quite another to open a new Burger king or a Baskin-Robbins ice cream shop. With an established franchise, you get instant recognition and support from a product group with established customers from around the world.

Financial Advice and Assistance A major problem with small business is arranging financing and learning to keep good records. Franchisees get valuable assistance in these areas and periodic advice from people with expertise in these areas. In fact, some franchisors will even provide financing to potential franchisees they feel will be valuable parts of the franchise system. One quarter of Entrepreneur magazines’s top 500 franchisers offer some sort of direct financing.

Disadvantages of Franchises

It almost sounds like the potential of franchising is too good to be true. Indeed there are costs associated with joining a franchise that must be considered. The following are some disadvantages of franchises.

Large Start-Up Costs.Most franchises will demand a fee to just obtain the rights to the franchise. Fees for franchises can vary considerably.

Shared Profit.The franchisor often demands a large share of the profits, or a percentage commission based on sales, not profit. This share demanded by the franchisor is generally referred to as a royalty. Often, the share taken by the franchisor is so high that the owner does not make a profit that matches the time and effort involved in owning and managing a business. [For example, the Southland Corporation, (7-Eleven stores) insists on a very high share of the gross profit earning by some of its franchises. In some areas, the expense of this royalty is causing 7-

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Eleven franchises to lose their stores]. The royalty demanded by a franchisor is an important factor to consider in your involvement.

Management regulation. Management assistance has a way of becoming managerial orders, directives, and limitations. Franchisees may feel burdened by the company’s rules and regulations and lose the spirit and incentive of being their own boss with their own business. See Figure below for a summary of benefits and drawbacks in franchising.

Coattail effects. What happens to your franchise if fellow franchisees fail? Quite possibly you could be forced out of business even if your particular franchise were profitable. This is often referred to as a coattail effect. The actions of other franchisees clearly have an impact on your future growth and level of profitability. Remember, franchising is a team effort. If you play with a bad team, chances are you will lose.

Vocabulary and language focus.

1.Explain the meaning of the following words and word-combinations:

1) reliance

2) peer

3) incentive

4) proprietor

5) to obtain the rights

6) to be burdened (by/with)

7) to be forced (out of)

2.Fill in the gaps in the sentences using the previous list of words.

1.He hasn’t much … to work hard.

2.Jack tried to find the murderer but it vain, as he was …useless facts.

3.He’s got a very high position in the society and it will not be very easy to find his …

4.… is one of the most important factors needed to both partners of the business deal.

5.Being a franchise but is not the real … of your business.

6.His company wasn’t ready to face the fierce competition and so it was … of business.

4.Based on the following description, identify some of the benefits and drawbacks of owning a franchise.

Kentucky Fried Chicken (KFC) is a nationwide fast-food franchise. All prospective KFC franchise owners must go through an evaluation process, during which they must submit an application and site proposal for approval and submit to a personal interview in Louisville, KFC’s headquarters. Upon approval, KFC offers the franchisee a training program. To the franchise, KFC makes available an advertising and promotion

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kit, opening assistance, equipment layout plans, and a choice of interior decor items from a list they provide. In addition to standard KFC menu items, a franchisee may offer other items upon approval from KFC management. KFC outlines the estimated cash requirements for opening for such things as equipment, initial investment, insurance payments, and utility down payments to give franchisees an idea of their cash needs. The franchise fee and cost of building and land are also the responsibility of the franchisee. There is a loyalty rate based on percentage of gross sales to be paid to KFC, for ongoing franchises.

KFC advertises on nationwide television on behalf of its franchisees, so local owners do not have to develop their own television advertising. The local owners pay a percentage of their gross sales to KFC as a national advertising fee, and each franchisee is required to spend an additional percentage for local advertising.

4. The Challenge of International Franchising

Franchising in international markets clearly takes time. The explosive growth of franchising in the United States has not been duplicated in most overseas markets. Caution is also a keyword to keep in mind when evaluating international opportunities.

Kenneth Franklin, President of Franchise developments, Inc., advises, “A franchise concept that works well in the U/S/ may not successfully transfer into another culture [see the box called The Fish that Drowned]. Keeping someone onsite is now an important part of the franchisor’s effort.” Therefore, to protect their interests in many overseas markets, franchisors often make use of a subfranchising agreement.

A subfranchising agreement gives the right to a principal living in a foreign market to oversee franchise operations in that market. Can principals sell franchises or revoke franchise agreements? Yes they can! Dunkin Donuts, a franchisor with over 1,600 franchises overseas, uses a subfranchising agreement. According to the company, this type of agreement provides incentive to both sides to perform their expected roles.

Opportunities in International Franchising

Are the major opportunities in international franchising available only to large franchise systems? Absolutely not! If you travel overseas today, you will find that newer, smaller franchises are going international as well. Smaller franchises such as Postal Instant Press (PIP), Budget Rent-a-car, Service-master, and Duraclean have all ventured into the international markets. Video Update, Inc., a franchisor of video rental stores, recently licensed a joint venture in Malaysia to open 100 Video Update stores. A similar venture is being negotiated for Singapore. What makes franshising

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successful in international markets is what makes it successful in the United States: convenience and a predicate level of service and quality. Now you can go to Osaka, Japan, and visit studebaker’s, a restaurant and bar franchise that features American songs from the 1950s and 1960s. A Wurlitzer jukebox plays the “hully gully” and the “bunny hop” while waitress in 1950s dress serve the food and beverages. The are 542 McDonald’s stores in Japan as well. Many franchises are being solicited by potential overseas franchisees. That is what lured Gymboree, a franchisor or children’s gym centers, to Spain, France, Japan, and South Korea. Remember though, franchisor must be careful to adapt to the region. In France, the people thought a furniture stripping place called Dip ‘N’ Strip was a bar that featured strippers. In general, however, U.S. franchises are doing well all over the world and are adapting to the local customs and desires of consumers.

1. Explain the following words and word combinations:

1)to exert

2)counterbalance

3)to take smb. on

4)stake

5)the drop in the value (of)

6)to hold on

7)to revoke

8)to solicit

9)to lure

3.She has been … to the Middle East by the promise of high wages.

4.The cost needed for obtaining right to the franchise must be at least …by earned profit.

franchising in particular.

5. Communication skills – case study

Case 1.

Duncan couldn't believe it at first when he ripped open a letter that Friday morning. It was from a solicitor in Manchester stating that an uncle, whom he had met only once, had left him £10 000. Pictures of all the things he could buy flashed through his mind: a new car, an extension to the house, a world tour – the holiday of a lifetime.

Duncan and his wife Sarah went through all the possibilities while they were celebrating his luck in a restaurant that night. It was Sarah who finally persuaded him to take a chance and start working for himself, as he had always wanted to do.

They spent the following morning in the public library, looking up details of franchises. There were a vast number on offer, ranging from car tuning and damp proofing to picture framing. The initial costs ranged from £2500 to £250000. Duncan thought he could do best with carpets. There were two franchises on offer – one from HOME CHOICE CARPETS and the other from FITTED CARPETS.

Read these offers and decide which franchise you would advice Duncan to choose.

1. HOME CHOICE CARPETS

It's such a simple way of making money, we're surprised no one has thought of it before. We find you all the carpet customers you want. You visit them at home - show them samples - and take their orders. Within days, the carpet of their choice is delivered direct to their door - and you return to fit it. YES! It's as easy as that. We provide everything you need to ensure that you are earning £££s from Day 1.

•Full training and back-up advice

•Free tool kit containing all the high-quality equipment you'll need - stretchers, knives, measuring tapes etc.

•National advertising and local business launch.

Like many of our franchisees, you too could soon have a turnover of £100,000. , But that's not all! When you reach a turnover of £150,000, you become a County

Franchise Master - with the right to offer franchises of your own throughout the county or city where you operate. So, you’ll be making even more £££s.

2. YOUR OWN BUSINESS FOR £10,000

For 10 years, we have been providing fitted carpets in people's own homes. To run a successful franchise for FITTED CARPETS, you need to be physically fit, hardworking, determined to succeed, and willing to work antisocial hours. If you match up

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to that, you could be earning £10,000 in your first year, and £20,000 or more in year three. No experience is necessary, as we provide everything you need.

-Full training by experienced carpet fitters and sales persons

-Local advertising throughout the whole franchise period

-Management support from headquarters

-FITTED CARPETS uniforms

-A fully-equipped FITTED CARPETS van, with tools and carpet samples.

Although we supply a comprehensive range of carpets at very competitive prices, you can also buy carpets from other suppliers if you wish. There are now a few franchise vacancies in selected areas at a total cost of £10,000 including VAT. Write, with full details of your career to date, stating why you think you would be a successful franchisee to FITTED CARPETS.

Case2. Fortune Garments

This week, the international fashion group Fortune Garments is holding its first global conference in Barcelona, Spain. Fortune Garments, one of Hong Kong's oldest trading groups, makes high quality, clothing. It has become a global company: it has over 3000 suppliers in 17 countries, and employs staff from all over the world in its head office and factories. It is expanding rapidly in foreign markets with sales of over $ 1.8bn. Fast delivery, innovative design, and reliable quality are essential for success in the fashion business. Fortune Garments' Chairman, Michael Chau, is proud that his company can usually accept a major order and deliver the goods to a customer within four weeks. However, globalization has brought problems in the company's overseas plants, and this is having a bad effect on its share price. A journalist from the Eastern Economist Review suggested recently that the company could become the target of a takeover if it didn't sort out its problems soon. Managers from all the overseas plants are attending the conference. Michael Chau has asked them to consider the problems outlined in the discussion document below.

Discussion document Problems

1. Quality control

Many subsidiaries make clothing from materials supplied by several of the company's plants. Although this helps to lower costs, the materials are often of poor quality. This has resulted in cancelled orders. Recently, a German distributor refused a consignment