Contract Manufacturing, Licensing, and Franchising – Pros and Cons

The compilation of these International Business Notes makes students exam preparation simpler and organised.

Contract Manufacturing, Licensing, and Franchising

Franchising is a Business Strategy in which the franchiser (owner of the business, product, or services), affiliates with franchisees (dealers of products) for distribution, business expansion, and marketing. Franchisees use the trademark and strategies of the parent company i.e. franchiser and sell the products on their behalf. Both parties agree on specific terms like advertising, training, support through a Franchising agreement. Some common examples of franchising are McDonald’s, Pizza Hut, Starbucks, Burger King, etc. There are very high chances that the car you drive or the restaurant you go eat in is also a component of either contract manufacturing, franchising or licensing. Surprised? Let’s understand more advantages and disadvantages of Franchising, Licensing, and Contract Manufacturing.

Contract Manufacturing

Contract manufacturing is engaging a deal with a manufacturer to produce a product of the business. Basically, contract manufacturing is the outsourcing of part of the manufacturing process of a product to a third party. Since numerous businesses are confronted with high start-up costs and constrained resources, organizations are turning towards Contract Manufacturing.

For example, Flextronics Corporation makes Microsoft’s Xbox game. Flextronics corporation is a huge company with factories around the world and nearly USD $15 billion in sales in 2004. Microsoft has simply outsourced its manufacturing. There are many fields and services in which companies outsource, like the food chain, design, productions, etc.

Advantages of Contract Manufacturing
Contract Manufacturing supports international firms to manufacture commodities on a huge scale without a large investment in setting up manufacturing plants.

It includes little investment outside national borders therefore, the risk is minimum.

Also, it helps an organization to get the items fabricated or assembled at a lower cost.

It is helpful for local producers in foreign nations as they could use their potential production capabilities and also a ready market for their own items is provided.

And it gives chance to local producers to get engaged in global business and gain profits without additional capital and with minimum hassles.

Disadvantages of Contract Manufacturing
In any case, if the local producers do not follow the production techniques and quality range, it may cause serious product quality problems for the international firm.

The local manufacturer needs to produce commodities as indicated by the terms and details of the agreement and thus, it loses its control over the producing process.

A local producer isn’t permitted to sell the outcome according to his will and has to entirely depend on the firm or their sales.

Licensing and Franchising

Licensing and Franchising

Licensing is an agreement between Licensor and licensee wherein one organization gives the other organization access to its patents, trade secrets, or technology for a fee known as a royalty. The organization that gives the access is the licensor. The organization that obtains the access is the licensee.

Franchising is an agreement between franchisee and franchiser. Here the franchiser will allow the franchise to use its brand name and logo to provide services and or goods under such a brand. However, the franchise will be bound by the quality and the makeup of such goods as indicated by the franchiser. For example, McDonald’s fast-food restaurants around the world run on this franchise model. And yet every Mcdonald’s in an area has a standardized menu and the food will taste the same in all their outlets.

Examples of Franchising

  • McDonald’s
  • KFC
  • Burger King
  • Pizza Hut
  • Dunkin Donuts
  • Subway
  • Taco Bell
  • Dominos Pizza
  • Baskin-Robbins

Advantages and Disadvantages of Franchising and Licensing

It is a more affordable method of stepping into international business as the licensors or franchisers don’t need to pour too many funds abroad.

The level of risk of the licensor is low because there is zero or next to zero investment is involved.

Licensee/Franchisee is the individual who is a resident of the same country which limits Government intervention. Thus, business runs without any hurdles.

The licensee has more market understanding and contacts as he is a local individual which guarantees the achievement of marketing goals.

Excluding Licensee/Franchise, no other foreign organization can utilize such trademarks and licenses.

There is a slight threat that the licensee may begin advertising his own products which are indistinguishable from the licensors.

Business formulas and secrets can get revealed to others in the market if not secured properly.

Clashes may emerge amongst licensor and licensee with respect to the maintenance of records, payment of loyalty, non-adherence of the standards, and so forth.


What is brand licensing?
Licensing is the leasing of intangible assets. Brand licensing is basically a license agreement related to a particular brand name. So say for example you want to use one of Disney’s cartoon characters (let’s say Mickey Mouse) for promoting your goods. Here you would enter into a brand licensing with Disney to use their proprietary asset, which is the character of Mickey Mouse.