Concept of Franchising and Licensing
Franchising is a type of market distribution where the owner of the business system known as the franchisor, grants an individual or group of individuals the right to run a business, to sell the product and provide serving facilities with the goodwill of the franchisor’s business name.
While licensing is allowing the other person to sell a business’s product. The main difference between franchising and licensing lies here – in the franchising system, you allow the other person to ‘duplicate your business’. In licensing, you permit the other person to merely ‘sell your product’. In both the cases, the franchisor will receive a fee in return of this duplication or sell.
We will learn about the difference in a tabular form in the henceforth section, to have a clear picture in mind.
Difference Between Franchising and Leasing
What is Meant by Contract Manufacturing?
In the contract manufacturing business process, the hiring firm approaches the contract manufacturer with a design or a formula. The contract manufacturer then enters a contract with the firm to produce products for that firm. In the contract, the contract manufacturer quotes the parts based on business processes, labour, other material costs etc.
The hiring firm generally notes down different quotes from different contract manufacturers, then after the bidding process is completed, the hiring firm selects a source on the agreed price and the Contract Manufacturer (CM) acts as a factory for the hiring firm by producing and shipping units of the design on behalf of the firm.
Advantages of Contract Manufacturing
Contract Manufacturing type of business proves to be convenient for a lot of business corporates.
Contract Manufacturing offers a number of advantages, which are listed below:
1. Cost Saving –
The hiring firm saves its capital cost as now they rely on the facility and production done by the CM. The firm saves other costs like – wages and training.
2. Mutual Benefit in the Contract –
The contract is established for several years, both the parties acknowledge the smoothness in the conduct of business, which will be beneficial for both.
3. Advanced Skills –
The hiring firm takes the advantage of the skill that may not be present with them, which the CM may possess in this case. Also, the CM is well connected with the raw material supplier and can be efficient enough in the methods of production.
4. Good Quality –
The contract manufacturers are focused in producing the goods and services all by themselves, hence they do not compromise on the quality and are quite efficient in this field.
5. Focus –
Companies can focus their core competencies better as the major task that is producing is already taken up by the contract manufacturer.
6. Economies of Scale –
The contract manufacturers are in a contract with multiple customers that they produce for. As they serve these bulk numbers of customers, they can offer reduced costs in acquiring those raw materials, leading to economies of scale.
Hence, resources are not wasted and can give an advantage of smart production through economies of scale.
FAQs on Franchising, Licensing and Contract Manufacturing
1. What is franchising in the context of business?
Franchising is a business model where a company (the franchisor) grants another individual or company (the franchisee) the right to operate a business using its established brand name, business model, and operational systems. In return, the franchisee typically pays an initial fee and ongoing royalties to the franchisor.
2. What is a licensing agreement?
A licensing agreement is a legal contract where a company or individual (the licensor) gives another party (the licensee) permission to use its intellectual property. This can include patents, trademarks, copyrights, or trade secrets. The licensee pays a fee or royalty to the licensor for this right, but operates their own business independently.
3. Explain the concept of contract manufacturing.
Contract manufacturing is a form of outsourcing where a company hires another firm (the contract manufacturer) to produce its goods or components according to its exact specifications. The hiring firm retains full control over the product design, branding, and marketing, while the manufacturer focuses solely on the production process.
4. What is the primary difference between franchising and licensing?
The primary difference lies in the scope of control and the business model. Franchising involves licensing an entire business system, including the brand, products, and operational methods, with the franchisor maintaining significant control. Licensing is narrower, granting rights to use a specific piece of intellectual property (like a logo or patent) with very little control over the licensee's overall business operations.
5. How does contract manufacturing differ from licensing?
The key difference is in the core activity. Contract manufacturing is a service agreement focused on production; a company is hired to make a product for another. Licensing is a legal agreement focused on granting permission; a company is given the right to use intellectual property. A licensee might use a contract manufacturer to produce goods, but the two agreements are distinct.
6. What are some common examples of franchising and licensing in India?
Here are some common examples:
- Franchising Examples: Food chains like McDonald's, Subway, and Domino's Pizza; educational institutes like Kidzee; and retail stores like Gitanjali.
- Licensing Examples: A local clothing brand getting a license to print and sell T-shirts with Marvel superhero characters; a tech company in India licensing a patented technology from a US firm to use in its own products.
7. Why would a company choose contract manufacturing over setting up its own production unit?
A company might prefer contract manufacturing for several strategic reasons:
- Lower Capital Investment: It avoids the massive cost of building, equipping, and staffing a new factory.
- Focus on Core Competencies: It allows the company to concentrate on what it does best, such as research, design, and marketing.
- Access to Expertise: It leverages the specialised skills, technology, and efficiency of an established manufacturer.
- Scalability: It offers flexibility to increase or decrease production volume based on market demand without major financial risk.
8. How does the degree of operational control for the parent company vary between franchising and licensing?
The degree of control varies significantly:
- In franchising, the parent company (franchisor) exercises high operational control. They enforce strict guidelines on everything from product quality and service standards to store layout and marketing to ensure brand consistency.
- In licensing, the parent company (licensor) has low operational control. Their influence is limited to ensuring the proper use of the licensed IP as specified in the contract. They do not manage the licensee's broader business operations.
9. In what ways do intellectual property rights play a crucial role in both franchising and licensing?
Intellectual Property (IP) is the fundamental asset in these agreements. In franchising, the entire business model, including the trademark (brand name) and proprietary operational processes, is a package of IP that the franchisee pays to use. In licensing, the agreement is explicitly for the use of a specific piece of IP, such as a patent for an invention or a copyright for a character, which forms the core value being transferred.
