Can you contribute to the discussion on risks and opportunities of new business ventures?

Can you tell your Joint Ventures from your Licensing opportunities? Can you, as a PR practitioner – agency or in-house – meaningfully contribute to a board/executive management decision on these topics?

Do you know what main risks and opportunities either present so that you can prepare your communication strategy / marketing plan accordingly?

Not everyone is interested to learn how their clients’ businesses operate, what their USPs are or what growth potential they have. But if you are interested and want to, at least, have a minimum understanding of what I would call “real world”, this blog might help.

When moving onto new markets, primarily international ones, the most preferred options for business expansion are either the joint venture or licensing.

Joint ventures offer the potential business partners to pool their resources while proportionally sharing the risks and rewards entailed by such a legal agreement.

The benefits of a Joint Venture agreement can be:

  1. Companies with similar products/services can jointly penetrate a foreign market
  2. Access to knowledge and information held by the Joint Venture partner
  3. Risk and profit sharing in the new business
  4. Access to new geographical markets
  5. Building on an already existing market share and marketing tools

Among the risks of a Joint Venture agreement, we have:

  • “Local partner” requirement by the laws of that country
  • Difficulty to integrate the human resources component and relevant knowledge
  • Business, corporate and values – culture clash
  • Fast capital spending and difficulty over control; unrealistic profit expectations

Licensing, on the other hand, comes with its own specific opportunities and risks:

Licensing opportunities:

  1. Brand name recognition
  2. Generation of alternative revenue streams
  3. Circumvention of trade barriers
  4. Local product/service adaptability
  5. Contract Manufacturing provides limited financial commitment

Licensing risks:

  • Limited market control
  • Licensee developing its own service/product know-how
  • Potential for licensees to become competitors

Competitive Edge

There are several reasons why a Joint Venture could be considered a strategically beneficial option for any business expansion:

  • A reduced risk of penetrating a new market or further expanding one’s business there
  • Reaching a minimum size to be allowed to conduct business in that potentially restrictive and restricted market
  • Reducing the constraints posed by the legislation of that country
  • Pursuing a very specific business or investment opportunity

Smaller companies may find licensing attractive, primarily if they wish to take advantage of the licensor’s know-how and expertise, without using too much of their own capital. A similar strategy could be used by a multi-national company wishing:

  • to quickly penetrate a foreign market,
  • to take advantage of the conditions offered by the said market, and
  • to make it less easy for its competitors to enter this market

JV Examples

One of the failed attempts of entering a joint venture (JV) was that supposed to occur between the British Aerospace (BA) and Taiwan Aerospace (TA). Although an agreement in this regard had been signed, leading to the creation of Avro Aerospace in 1993, the deal was shortly terminated due to the divergent objectives of both parties:

  • BA wanted to penetrate new markets in Asia which it didn’t have access to in the day, TA refusing to relinquish them
  • TA wanted access to the BA technology and equipment, the latter refusing to share them

An example of a very successful JV between seemingly competing organisations is that of Hulu. Hulu is an online streaming service offering both paid and free TV programmes and movies, with an estimated value of $8.7 billion as of 2018. The initial JV was entered into by:

  • News Corp – owner of Fox
  • Disney – owner of ABC and
  • Comcast – owner of NBC

Another successful example of a JV is that of Shell and Montedison. Without partnering Montedison, Shell would have had great difficulty in penetrating the Italian petrochemical market. Monteshell (m505_en) was the newly established entity and, following the asset take-over of Total’s operations in Italy, Monteshell became one of the largest oil and gas producer and distributor in Italy.

Licensing Examples

The revenues generated by Walt Disney’s merchandise are in excess of USD 50 billion per annum, in 2016 the level thereof reaching a record USD 56.6 billion. Currently, in terms of the Disney stores alone, there are over 370 licensed outlets across the world, primarily in North America, Asia and Europe.

Franchising is an extremely popular licensing mechanism, currently used by the beauty, fashion and fast food industries. For instance, according to the latest evidence available and researched by Entrepreneur Europe, the Top 3 franchises in the US are McDonald’s, 7-Eleven (the largest convenience store franchise in the world) and Dunkin’ Doughnuts.

Joint Venture as a Recommended Option

For instance, although seemingly restrictive in many ways, the Chinese market opportunities for multi-national companies are abundant, primarily if there is a willingness from the foreign investor to enter into a formal partnership with a Chinese counterpart.

The Chinese Joint Venture (JV) structure can take several forms, according to the strategic or national security sector the newly established entity will operate in but, generally, the most common forms of JV are the Co-operative JV and the Equity JV.

The Co-operative JV provides the foreign investor with more flexibility thus the risk/profit ratio may vary. The Equity JV is strictly dependant on the capital investment ratio of both partners, the profits of the business being distributed accordingly.

Although still cumbersome in terms of legislative regulations, operational and administrative costs, China is a very attractive and lucrative market for foreign investors, attracting USD 34.72 billion between January-March 2018.

Given that the Chinese Government still controls many business sectors in the country, the only option available to foreign investors wishing to expand onto the Chinese market and whose business operations cover the food and drinks sectors, building and constructions, automobile and machinery manufacturing as well as beauty products, is that of entering a JV with a local partner.

Licensing as a Recommended Option

Licensing can be a very straight-forward and a less problematic revenue stream for most consumer-focused multi-national companies: food, clothing, drinks, confectionary, beauty products etc.

However, licensing should be exercised with caution when the countries/regions of licensees often fall short of the licensor’s high standards of safety and hygiene or where not substantial verifications can be carried out by the licensor’s representatives in that country/region.

For instance, war or general dissent torn countries like Libya, Tunisia, Yemen may not be regarded as a recommended licensing opportunity due to the costs incurred in the training, assessment and verification phase by the licensor.

The size of the market is one of the main criteria for licensing and highly attractive are the Asian and African markets.

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Founding Chartered PR Practitioner, CIPR Board member (2018), former UK Government Communication Services and Institute of Directors mentor, published author and university lecturer, Ella has almost 20 years of high level government and international organisations experience in corporate reputation, leadership and crisis management, across business disciplines and governments, including investment markets, lender organisations, national and international media, NGOs and affected communities. She is a 2014 Service Award Winner of the Society of Petroleum Engineers, Assessor of CIPR's Chartered Scheme, an elected member of the CIPR Council (2017-2018), Founder of CIPR’s Energy Leadership Platform, former Chair of CIPR’s Foresight Panel and a Fellow of the Institute of Leadership and Management. She handled some of the most prominent international crisis of recent times, she developed the Leadership Development Programme for SPE’s MENA young engineers and she has also been an adviser to several governments on their national branding strategies. Her list of clients includes McKinsey & Company, Boston Consulting Group, Total, BP, Shell, Centrica, KazTransOil, Averda, The World Bank, Private Investment Development Group, the European Commission, the European Bank For Reconstruction and Development and many others. She is also Robert Gordon University's Lead Trainer for the Crisis Communication Diploma (CIPR Specialist Diploma).

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