This paper addresses three core questions in international finance and strategy. It compares acquisition and licensing as modes of foreign market entry, weighing factors such as speed of growth, cost, control, and risk. It then examines how strategies like franchising and e-commerce allow firms to pursue international expansion without proportionally increasing their size. Finally, it considers how large multinational corporations such as Coca-Cola and PepsiCo retain significant growth potential in developing markets through deeper market penetration and brand extension strategies. The paper draws on established strategic management and marketing literature to support its analysis.
When firms wish to expand into foreign markets, there are a number of choices regarding how that expansion can take place. Two key options are acquisition and licensing, each of which carries distinct advantages and disadvantages.
If a firm undertakes an acquisition strategy, it purchases an already established firm. The target acquisition may be attractive because it is already established and possesses market share and resources needed to compete. Acquisition gives the company a physical presence in the new market along with the resources required to compete there. The advantages include the ability to gain market share quickly (Thompson, 2007). For example, when the US firm Walmart wanted to expand into the UK, it chose to acquire the UK supermarket chain Asda, the third-largest competitor in the marketplace. There may be a steep learning curve with an acquisition, as the firm needs to learn quickly about the new market and the acquired firm. The cost may also be high, as the purchase price will reflect the added value of the established firm; there will additionally be costs associated with the takeover and with integrating the operations of the acquired firm with those of the parent company (Thompson, 2007). However, the acquisition gives the parent firm total control and entitles it to all resulting profits (Thompson, 2007). This can result in fast growth and rapid revenue generation.
A license is an agreement by which a firm acquires the rights to produce goods under the name of the company selling the license. There are many examples, including Pilkington Glass, Schweppes, Coca-Cola, and Heineken, where international expansion has been achieved through the sale of licenses (Kotler and Keller, 2008). Under this model, the company selling the license gains a fee and is also likely to receive an additional amount based on sales. However, in selling the license, the firm may lose a significant degree of control over the way the brand is used and sold, and it will retain only a small percentage of the revenues generated. That said, licensing is a more cost-effective mode of expansion and allows for a faster expansion strategy (Thompson, 2007).
Comparing the two models, the licensing approach is likely to result in the fastest growth rate for brands, as it leverages the capital of others. This also makes it the lowest-risk option, since the firm has little or no capital at stake. The risks associated with acquisition are higher, encompassing both the purchase price and the ongoing cost of managing operations. Nevertheless, acquisition is likely to produce the greatest revenue growth in the short term.
There are circumstances in which the size of a firm need not increase in proportion to its international opportunities. If a firm uses strategies such as licensing or franchising, there is significant potential to pursue international growth without the actual size of the firm increasing substantially. For example, firms such as KFC, McDonald's, and Starbucks use the franchise model to expand internationally, as this requires only minimal support from the parent firm and results in only slight increases in its size. Operating in a virtual environment — that is, via the internet — may also facilitate greater access to international markets without requiring an increase in firm size. This is particularly true where the product or service consists of some form of digital content, given the limited resources needed to satisfy demand (Chaffey, 2009).
"Developing market penetration and brand extension opportunities"
"Cited sources in strategic management and marketing"
You’re 76% through this paper. Sign up to read the remaining 2 sections.
Sign Up Now — Instant Access Already a member? Log inAlways verify citation format against your institution’s current style guide requirements.