College of Education

School of Continuing and Distance Education 2016/2017 – 2017/2018

Business Entry Strategies

Lecturer: Dr. Samuel C.K. Buame, UGBS Contact Information: skbuame@ug.edu.gh

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Session Overview

• This session will introduce to how to enter into business. The discussion will focus on four the business entry strategies including their advantages and disadvantages.

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Goals and Objectives

• At the end of the session, the student will:

1. Explain what a business entry strategy is.

2. Mention the various business entry strategies

3. Formulate a business entry strategy for their businesses.

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Session Outline

The key topics to be covered in the session are as follows:

• Topic One: Importance of Entry Strategy

• Topic Two: Starting A Business From The Scratch

• Topic Three: Business Buy-Outs: Buying an Existing Company

• Topic Four: Licensing

• Topic Five: Franchising

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Reading List

• Pages 214 to 218 of the main text –

• Buame, S.C.K. (2012). Advanced Entrepreneurship: Enterprise Culture, Venture Creation, Promotion & Management of SMEs in Ghana --- MAIN TEXT

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IMPORTANCE OF ENTRY STRATEGY Topic 1

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Importance of Entry Strategy

• One important decision the entrepreneur must take is that of deciding on an entry strategy.

• The choice of entry strategy depends on the individual entrepreneur. Sometimes, the choice is influenced by the type of business, how much it will cost for a particular entry type, the urgency of starting business.

• Each entry strategy has its advantages and disadvantages.

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STARTING A BUSINESS FROM THE SCRATCH

Topic 2

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Starting a business from the scratch

• Can you imagine starting your own business from the scratch?

• This will mean acquiring your own business premises and starting or doing everything yourself from the beginning.

• Imagine yourself going round your community looking for a piece of land to buy for the start of a business; or going round looking for the various consultants and experts to help you establish a business.

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Starting a business from the scratch (cont’d)

• Now because you are starting everything from the scratch you need carry out activities such as:

• Product design - You may have to seek expertise on designing a prototype product.

• Testing - After designing the product and producing on trial basis, you need to test in the market in order to determine how the target market will respond.

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Starting a business from the scratch (cont’d)

Why Preferred by Entrepreneurs?

– They like freedom. – They like challenges and like to see the evidence of

what they have accomplished. – They are willing to take moderate risks. – They are optimistic. – They are able to tolerate uncertainty.

Starting a business from the scratch (cont’d)

Advantages • The experience is usually rewarding.

• You can structure the business however you like and

operate it just as you want to (within constraints of the community and the demand for your product or service)

• It offers independence from the corporate world.

Starting a business from the scratch (cont’d)

• Disadvantages

There are, however, some disadvantages.

• Normally, starting anything from the scratch is not easy.

• It involves time and special effort.

• Sometimes one experiences frustrations as things seem not move in the manner expected.

BUSINESS BUY-OUTS: BUYING AN EXISTING COMPANY

Topic 3

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Business Buy-outs: Buying an existing company

• Another way of entering into business is to buy an existing company.

• It may happen that an existing business is being sold for many reasons.

• There is nothing wrong in buying an existing business.

• It is one of the fastest ways of entering into business.

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Business Buy-outs: Buying an existing company

• It has a numbers of advantages, for example:

• It may continue to be successful

• It may already have the best location

• Employees and suppliers are established

• Equipment is already installed

• Inventory is in place, and trade credit is

established

• You can “hit the ground running”

• You can use the previous owner’s experience

• It’s a bargain

Critical Issues Avoid buying “painted tombs” or “empty shell”

• Why does the owner want to sell … the real reason?

• What is the physical condition of the business?

• What is the potential for the company’s products and services?

• What legal aspects must I consider?

• Is the business financially sound?

• Always seek EXPERT advice in all regards

LICENSING Topic 4

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Licensing

• It is an arrangement where a domestic manufacturer (licensor) grants the right to intangible intellectual property to a foreign company (licensee) to manufacture and sell its unique products in return for a fee or royalty

• The intangible property includes: inventions, formulas,

processes, designs, copyrights and trade marks • The domestic firm shares production specifications and

techniques with the foreign firm. • The foreign firm can then build and sell the products in

its own home markets. Example Coca-Cola or Pepsi

Licensing Cont.

• One can enter into business through licensing where permission is given to produce, copy the patent, trademark or copyright.

• This is a process involving two parties.

• The person giving out the license is known as the licensor who may have right over some information, process or technology protected by a patent; and the person receiving the license, known as the licensee.

• The parties often agree on a licensing fee which the

licensee pays the licensor periodically.

Licensing Cont.

• It can take the form of a royalty or some other specified. Thus, licensing may be defined as an arrangement between two parties.

• Licensing has significant value as marketing strategy to holders of patents, trademarks to grow their business in new markets when they (the licensor) lacks resources or experience in those markets.

Licensing Cont.

• Before entering into a licensing agreement, the entrepreneur should ask the following questions: 1. Will the customer recognize the licensed property?

2. What kind of protection does the licensing agreement provide?

3. Are renewal options possible?

4. What is the long-term prospect for the licensed product?

• Essentially, licensing is an arrangement where, for example, a domestic manufacturer, such as Coca Cola, permits a foreign company to manufacture and sell its unique products.

Licensing Cont.

• Advantages • Provides quick access and a friendly and

knowledgeable ally as the firm enters a foreign territory.

• The local business gains name recognition and a proven product.

• Research benefits, consultancy services and even adverts are shared.

• Both businesses benefit from the sales that follow. • An excellent option for the entrepreneur to increase

revenue without the risk and costly start-up investment

FRANCHISING Topic 5

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Franchising • This is similar to licensing. As in licensing, the

franchising agreement has two parties.

• The giver of the franchise is known as the franchisor and the receiver is known as the franchisee.

• The franchisee pays a fee known as the franchising fee. It is paid periodically as agreed between the parties.

• Unlike in licensing, the franchisor gets more involved in the activities of the franchisee.

• The franchisor can provide initial capital, training of employees and help in the procurement of inputs for the franchisee.

Franchising Cont.

• Franchising may be defined as “an arrangement whereby the manufacturer or sole distributor of a trademarked product or service gives exclusive rights of business in return for royalties and conformance to standardized operating procedures”.

• One of the most important advantages of a franchise is that the entrepreneur does not have to incur all the same risks that are often associated with starting a business from the scratch.

Types of Franchising • Types: - Trade name, Product distribution, Pure

(Business format)

1. Trade name franchising involves a brand name, such as MTN. Here the franchisee the right to use the franchisor’s trade name without distributing particular products exclusively under the franchisor’s name.

Types of Franchising 2. Product distribution franchising involves a franchisor

licensing the franchisee to sell specific products under the franchisor’s brand name, and trade mark through a selective, limited distribution network.

3. Pure franchising (Comprehensive or business format franchising) involves providing the franchisee with a complete business format including a license for a trade name, the products or service to be sold, the physical plant, the methods of operation, a marketing plan and quality control processes and the necessary business support systems.

Advantages of Franchising • Management training and support

• Brand name appeal

• Standardized quality of goods and services

• National advertising program

• Financial assistance from franchisor

• Provide franchisee with proven products and business formats

• Franchisee benefit from centralized buying power

• Territorial protection

• Greater chance for success

Disadvantages of Franchising

• Franchising is not always the best option for an entrepreneur.

• Problems between the franchisor and franchisee are common.

• The disadvantages usually centre on the inability of the franchisor to provide services, advertising and location and when promises that are made in the franchise agreement are not kept.

• Sometimes there is a little flexibility for developing new products or in expanding a business in a specific location.

• That is for many franchising agreements there is a clause of Restrictive Covenant.

• The covenant may restrict creativity and self-expression on the part of the franchisee as to location, distance, size, and time and product innovation.

Disadvantages of Franchising (cont’d)

• Disadvantages

– Inability of the franchisor to provide services, advertising and location

– Promises made in the franchise agreement not kept

– Little or no flexibility for developing new products or in expanding business in a specific location

– There is a restrictive covenant in franchise agreement which may restrict creativity and self-expression on part of the franchisee as to location, distance, size and product innovation

Investing in franchise

• Thus, before investing in a franchise, it is important that the entrepreneur conducts a self-evaluation to be sure that entering a franchise venture is right for him or her. The entrepreneur may have to answer some of the following questions:

• Are you a self-starter?

• Do you enjoy working with other people?

• Are you able to organize your time?

• Are you in good health?

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Investing in franchise

• In addition to the above, you need to ascertain some of the following: – The training programs provided to franchisees.

– The financial status of the franchisor

– Names and addresses of other franchises

– Protections that will be provided to franchises.

– Restrictions on goods or services franchises are permitted to sell.

– The financial statement of the franchisor.

– The initial franchise fee and other initial payments that are required to obtain the franchise.

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