QUESTIONS
15-1. How does Warner generate royalties by using contractual entry strategies?
(LO 15.1; AACSB: Application of knowledge)
■ Warner licenses with many types of companies worldwide to use Potter-related images on
manufactured products like game software, children’s furniture, school supplies, toys, and
■ The licensing process has been self-generating—each new Harry Potter book yielded a
15-2. What are the advantages of licensing as described in the case?
(LO 15.3; AACSB: Application of knowledge)
■ Warner’s licensing of Harry Potter has advantages and disadvantages.
■ Advantages- Warner allows companies worldwide to use Potter-related images on
■ Disadvantages- Intellectual Property Violations, i.e. piracy.
15-3. What risk(s) does Warner face from licensing Harry Potter?
(LO 15.3; AACSB: Application of knowledge)
■ Overexposure– Too many products licensed to carry the Harry Potter-related images, so that
● SUGGESTED SOLUTIONS TO CASE QUESTIONS
15-4. Subway brings to China various intellectual property in the form of trademarks,
patents, and an entire business system. What are the specific threats to Subway’s
intellectual property in China? What can Subway do to protect its intellectual property in
China?
(LO 15.7; AACSB: Analytical Thinking)
■ Intellectual property protection in China is weak, and franchisors such as Subway must
■ The case notes that Starbucks was imitated by a Shanghai coffee shop that copied its logo
■ One way Subway can protect its intellectual property is to engage with strong, reliable
■ Regarding piracy of intellectual property, there are some regulatory systems and methods of
recourse. International treaties such as the Paris Convention, the Berne Convention, and the
15-5. What do you think about Subway’s method and level of compensating its master
franchisee and regular franchisees in China? Is the method satisfactory? Is there room
for improvement?
(LO 15.4; LO 15.5; AACSB: Analytical Thinking)
■ Evidence suggests that Subway’s model and level of compensation for its franchisees in
China is satisfactory. The case is not specific, but it notes that many franchisees have become
15-6. What are the advantages and disadvantages of franchising in China from Jim
Bryant’s perspective? What can Bryant do to overcome the disadvantages? From
Subway’s perspective, is franchising the best entry strategy for China?
(LO 15.5; AACSB: Analytical Thinking)
■ A big advantage to franchising in China is the size of the market: The fast food market is
about $150 billion per year. China’s urban population, which is the target market for casual
15-7. Subway faces various cultural challenges in China. What are these challenges and
what can Subway and its master franchisee do to overcome them?
(LO 15.4; LO 15.5; AACSB: Analytical Thinking)
■ Cultural challenges at the macro or institutional level include limited financing of franchisees
V. END OF CHAPTER QUESTIONS
● TEST YOUR COMPREHENSION
15-8. Distinguish between the major types of intellectual property: trademarks,
copyrights, patents, industrial designs, and trade secrets.
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(LO 15.1; AACSB: Application of knowledge)
15-9. What are the major characteristics of licensing?
What are the major characteristics of franchising?
(LO 15.2; LO 15.4; AACSB: Application of knowledge)
■ Students should note a license usually involves a specific time period and a specific country
■ Franchise agreements are similar to license agreements, but are usually longer term. The
15-10. What are the advantages and disadvantages of franchising from the perspective of
franchisors and franchisees?
(LO 15.5; AACSB: Application of knowledge)
■ Advantages of Franchising-
◘ Provides master franchisees with an exclusive, large, predefined territory and
The Franchisor Perspective
■ Exhibit 15.6 highlights the advantages and disadvantages of franchising, from the point of
view of the franchisor.
■ Firms prefer franchising when they lack the capital or international experience to get
■ Advantages:
◘ Low-risk, low-cost entry strategy
■ Disadvantages:
◘ Maintain control over potentially thousands of worldwide outlets
◘ Potential conflicts including legal disputes with franchisee
The Franchisee Perspective
■ Exhibit 15.7 highlights the advantages and disadvantages of franchising to the franchisee.
■ Advantages:
◘ Beneficial to SMEs, many of which lack substantial resources and strong managerial
skills
■ Disadvantages:
◘ High initial investment
◘ High royalty payments
15-11. Name the industries that rely the most on franchising to tap foreign markets?
(LO 15.4; AACSB: Application of knowledge)
■ Exhibit 15.5 profiles Leading International Franchisors
■ Franchising is very common in international retailing. Students should refer to this exhibit
featuring the top leading international franchisors. Industries include professional business
■ Yum! Brands, Inc. owns the KFC, Pizza Hut, and Taco Bell; is one of the largest retail
15-12. Define and distinguish the following contractual entry strategies:
build-operate-transfer, turnkey projects, management contracts, and leasing.
(LO 15.6; AACSB: Application of knowledge)
■ For each type of contractual entry strategy, the text includes a box explaining its
characteristics. Students might try creating a chart with several columns outlining the type of
■ Build-operate-transfer arrangement, known as BOT, is similar to turnkey arrangements.
■ Turnkey contracting- an arrangement in which the focal firm plans, finances, organizes,
■ Management contracts – a contractor supplies managerial knowledge to operate a hotel,
■ Leasing- The focal firm, called the lessor, rents machinery or equipment to clients abroad,
15-13. What are best practices in managing international contractual relationships?
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(LO 15.6; AACSB: Application of knowledge)
● APPLY YOUR UNDERSTANDING
15-14. Warner Brothers is doing a thriving business by licensing images of Harry Potter
characters. Firms that manufacture software, games, clothing, and other products enter
into licensing agreements with Warner, paying the firm ongoing compensation to
produce goods that feature Potter images. However, some illicit operators produce
products that feature Potter images without entering a licensing agreement with Warner.
What steps can Warner take to address this problem? Some nations lack substantial
intellectual property protections and are characterized by significant, ongoing
counterfeiting of corporate assets. What can Warner do to protect Harry Potter properties
from intellectual property infringement in such countries? Intellectual property violations
are especially common in China. Should Warner avoid licensing Potter in China? Justify
your answer.
(LO 15.7; AACSB: Analytical Thinking)
■ Warner should carefully select its partners in foreign countries, and do everything it can to
protect its intellectual property. With regard to intellectual property violations, Warner should
15-15. Suppose upon graduation you get a job with Hitachi America, Ltd.
(www.hitachi.us), the U.S. subsidiary of the giant Japanese firm. Hitachi uses various
contractual entry strategies in its international operations. These include
build-operate-transfer and turnkey projects in the infrastructure development sector,
management contracts to run nuclear power plants, and leasing of heavy earthmoving
equipment to foreign governments. Hitachi America wants to extend its reach into Latin
America. Prepare a brief report for senior management in which you explain the various
ways to implement its existing entry strategies in this region.
(LO 15.6; AACSB: Analytical Thinking)
■ Students should first describe Hitachi America’s business. Hitachi America, Ltd. markets and
manufactures electronics, computer systems and products, IT services and industrial equipment
■ For example, Hitachi America could propose a turnkey project to plan, finance, organize,
manage, and implement all phases of an infrastructure development project for a Latin
15-16. Ethical Dilemma:
You are the president of Dynamic Publishing, a firm that publishes textbooks. During an
overseas trip, you assess the prospects for marketing Dynamic’s textbooks abroad.
Upon visiting a university in a developing country, you discover that many students use
photocopied or locally reproduced versions of Dynamic’s books. Upon investigation, you
are advised that most students could not afford to attend college if they were required to
pay full price for the books. You are dismayed by the clear violation of intellectual
property rights. You believe Dynamic cannot maintain profitability if its intellectual
property is infringed. You also feel obligated to protect the rights of the authors of
Dynamic’s textbooks. At the same time, however, you are sympathetic to the students’
plight. Using the ethical framework in Chapter 4, analyze the dilemma presented here.
Should you try to enforce Dynamic’s intellectual property rights, or should you look the
other way and allow the illicit photocopying to continue? Is there a creative solution to
this problem?
(LO 15.7; AACSB: Reflective thinking)
Ethical Framework
1. Identify the problem
2. Examine the facts
3. Create alternatives
Evaluate each proposed action to assess its consistency with accepted ethical
standards, using the approaches described earlier:
■ Utilitarian—which action results in the most good and least harm?
4. Implement course of action
5. Evaluate results
1. Identify the problem
■ As the President of Dynamic Publications, a difficult choice is presented. University students
in a developing nation are very poor and cannot afford legally obtained texts for class use.
2. Examine the facts
■ In order to make an informed ethical decision, all stakeholders should be consulted. Who are
the stakeholders?
● Developing/emerging market university students – assess true financial hardship.
● Advanced country university students – any concession made to the developing/emerging
3. Create alternatives
■ The choice is will have resounding effects in both the home and host countries, as well as
shape the corporate citizenship image of Dynamic Publishing. This ethical dilemma provides
■ If Dynamic Publishing chooses to prosecute the companies that are distributing counterfeit
material, students will no longer be able to attend school. From a utilitarian basis, authors and
shareholders would be harmed slightly due to a loss in profit. However, students would be
harmed greatly because the only chance at developing human capital and creating a brighter
■ Again, two of the ethical approaches reach the same conclusion, as the virtues of an
individual or a company should strive to promote the common good. Dynamic Publishing should
strive to achieve both economic and social goals concurrently. Management should care about
■ Collectively, the different ethical approaches yield mixed results. The President should explore
other options that allow for every approach to clearly validate a decision. Therefore, another
4. Implement course of action
■ A viable option would be the creation of a charity for the developing nation students. The
charity could be structured as an arm of Dynamic Publishing, with authors and shareholders on
■ Another creative approach might be to develop pricing strategies for developing/emerging
5. Evaluate results
■Then evaluate it to see how effective it was. How did it turn out? If you had it to do again,
would you do anything differently?
● GlobalEDGE™ INTERNET EXERCISES http://globaledge.msu.edu
15-17. Suppose you get a job at the office of the International Intellectual Property
Alliance (IIPA; www.iipa.com). You learn that worldwide piracy of products is rampant.
Your boss assigns you to draft a brief policy memo in which you address the following
questions.
• What is the worldwide scope of piracy? What industries are most affected by
■ Piracy is a major worldwide trade problem that crosses all borders. The industries most
affected are Business Software, Records & Music, Motion Pictures, Entertainment Software,
15-18. Suppose you are an international entrepreneur and want to open your own
franchise somewhere in Europe. You decide to conduct research to identify the most
promising franchise and learn how to become a franchisee. Entrepreneur.com publishes
an annual list of the top 200 franchisors seeking international franchisees. Visit
www.entrepreneur.com for the list or search for “franchising” at globalEDGE™. Choose
the franchise that interests you most (for example, Subway, Spar, Century 21, Benetton)
and visit its corporate website. Based on information from the website, as well as
globalEDGE™ and Hoovers.com, address the following questions.
• How many franchised operations does this firm have outside its home country?
• What are the major countries in which the firm has franchises? Are there any patterns
in terms of the countries where this firm is established?
• According to the application information provided at the corporate site, what
qualifications is the firm seeking in new franchisees?
• What types of training and support does the firm provide for its franchisees?
(LO 15.4; LO 15.5; AACSB: Analytical Thinking)
Example: Domino’s Pizza LLC
a. Foreign Franchises: 3,223
b. Australia, Canada, Japan, Britain, France, Italy, Germany, China, Mexico, Argentina. The firm
c. Qualifications: Minimum of 1 year management experience. The firm provides support for
d. Training & Support: Domino’s Pizza offers training at the headquarters for 6-8 weeks and
15-19. The International Licensing Industry Merchandisers’ Association (LIMA;
www.licensing.org) is an organization with offices worldwide. It supports merchandise
licensing through education, networking, and professional standards development.
Suppose you work for an animation company that has developed several popular
cartoon characters that have licensing potential, in the same way that Disney licenses its
cartoon characters. Your company wants to learn more about how to license its cartoon
characters. Visit the LIMA Web site and write a memo that addresses the following:
● Who are the major members of LIMA?
● What are the major trade shows that your firm can attend to exhibit its licensable
products and learn more about licensing?
● What types of seminars and training are available to learn more about becoming a
licensor?
Based on the information provided at the site, what can you learn about
anti-counterfeiting activities and challenges in licensing?
(LO 15.2; LO 15.3; LO 15.7; AACSB: Analytical Thinking)
a. The majority of LIMA’s members are managers and other employees working at licensing
departments of major corporations.
b. The major trade shows that our firm can attend are:
c. Seminars and training available to learn more about becoming a licensor are:
d. In the era of globalization, licensing has changed from domestic to international. Entering
into a new region entails understanding different cultures, linguistics, and consumer behavior.
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Assisted-graded writing questions:
15-20. What are the advantages and disadvantages of licensing?
15-21. Distinguish between licensing and franchising. What are the main types of
franchises?
15-22. MyManagementLab Only– comprehensive writing assignment for this
chapter.
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