Category 2: Internationalization Entry Stage

Category 2 is the second stage of internationalization process, which is named as

“Internationalization Entry Stage”. This is the term used to describe strategies of

Malaysian foodservice firms at the moment of entering international market. It is the moment when Malaysian firms are dealing with their international partners. This category was developed based on 4 concepts in 2 themes below.

5.3.1 Theme 1: Foreign Embeddedness

For this theme, it was developed based on (1) Franchise System; and (2) Foreign Partners. For the concept of “Franchise System”, it was the first found in United States dated back to the 1850s. Later, it was popularized by American fast food such as A&W, McDonald’s and KFC to expanding their businesses throughout the world. Since Malaysian foodservice firms have been also adopting franchising strategy of foreign foodservice firms to expand overseas, it is themed under “Foreign Embeddedness”. The following is the analysis of the formulation of the concept of “Franchise System”:

5.3.1.1 Concept 1: Franchise System

The statistics show that most of the local franchise entrepreneurs are getting into foodservice segment with 120 franchises, clothing and accessories take second place with 53 franchises, maintenance and services 46, and beauty and health-based franchises, 32 (The Star, 2009, October 30). Thus, franchise system is the most popular way of doing business in Malaysia. Franchise system includes a license that grants the right to operate the business. It spells out the payment of franchising and royalty fees, advertising fees, and substantial personal net worth to the franchisor, based on certain percentage of sales.

At Internationalization Entry Stage, Malaysian foodservice firms adopt franchise system to expand internationally. By using the cross-case analysis for these three firms, there are common patterns in this concept:

Firm A: …We’re using franchising method of going abroad because it’s less risk on the HQ (headquarters). Most of our outlets are owned by franchisees…We appointed one master franchisee in Middle East, Al Abbas Group; one master franchisee in Southern India, MGM Entertainment Pvt. Ltd. The rest are small franchisees. In China, we appoint many master franchisees because of the size of the country and its population…

Firm B: …We eventually adopt franchise system which we believe it can maintain the quality of our menu items…We use franchising in Malaysia and also most of the countries penetrated, it’s about 99% of our business. This is because we already had franchising experience in Malaysia and Southeast Asian countries. It always works.

Franchising is easier; we just need to sign the agreement with our partner… The overseas entry mode is 100% franchising. Except for China and Australia, the equity owned by them is 51% [respectively]…Even though we adopt the franchising of western-style café concept; we try to differentiate ourselves from our competitors…

Firm C: …Our first step was we set up our own outlet and with our success record we started to set up our franchise business in Malaysia. When setting up our franchise business we registered ourselves with our Government body regulating the Franchisors in Malaysia. Proper guidance was given by the Government body. We also engage a solicitor to draw up our franchise agreement. In the agreement it spells out the responsibilities of both the Franchisor and the Franchisees…

In the analysis above, franchising is the entry mode of overseas expansion. As foodservice firms, the competitive advantage of franchise system is based on management know-how. Thus, the risk of losing control over its management skills is

lower because the trademark is well protected by international laws. When Malaysian franchisors are in foreign markets, they can reduce the costs and risks by transferring them to their franchisees. On the other hand, franchisees minimize the risk of starting new business because of the successful proven business model provided by franchisor.

Therefore, by adopting franchising strategy, they can build global presence more rapidly and at relatively low cost and risk. Franchisees, on the other hand, will take this good incentive to build profitable operation as quickly as possible.

Thus, the franchising adopted by Malaysian foodservice firms to internationalize their business does make sense because fast food cannot be exported, like many services. By franchising, the management know-how of Malaysian foodservice firms, in terms of foodservice operation and restaurant concept are subject to written contract. Their brand names are also relatively easy to be protected using this contract. In this case, it can reduce costs and risks associated with opening new outlets in foreign markets.

Before gaining final approval, potential franchisees must be screened and go through training provided. Malaysian foodservice firms adopt franchise arrangements to expand its markets and have been successful in gaining worldwide presence through the effective use of proven managerial success. Since franchising agreement requires the payment of royalty and a percentage of revenue, franchisor provides assistance in operating business to their foreign partners.

5.3.1.2 Concept 2: Foreign Partners

At International Entry Stage, the capabilities of foreign partners are important in selecting the right franchisees. Based on the cross-case analysis for the three firms below, there are common patterns that develop this concept:

Firm A: …Before expanding overseas, we use more stringent selection criteria, that is, they (foreign partners) must have experience in doing business…The overseas partners must have an average master franchisee fee of USD 100,000 with additional USD 10,000 for every outlet. Another investment of USD 250,000 per outlet is needed for the operations…Our foreign partners must also responsible for their own logistics cost and taxes. They will advise us about the culture of the country and their taste and preference included government regulation. They know the authority…They must be able to build the brand in their country. They must be initiative, creative, endurable, and enthusiastic to do the business…We need them because they’re experience and long enough in the business, they’ve run franchise business before…We have good Arab partners. They are able to develop the brand, multiple the outlets, and manage the chain…

Firm B: …the important criteria of selecting partners in expanding business overseas were the partners must have business sense, strong financial background, and stable business…we just need to sign the agreement with our partner. So long we select the right partners; they can handle everything without problem. However, in Australia, we use joint venture because it’s a developed country. Our partner there claimed that it’s a big market, he needed our involvement. We’d 51% of majority shares; while Australian partner’s 49%. We hold the majority control….If the fund needs to be used, we must get permission from our partners…We also must get good partners who have strong financial background in overseas.

Firm C: …Information from the market survey helps us to jointly determine strategies for our overseas expansion with our identified master franchisee operator for each country or territories…With the information from the market survey we will use financial tools to