CASE STUDY Based on the case study Expansion to foreign markets : Usaflex, . It is recommended that the answer to each question be approximately 700 words in length.

Question 1 Using relevant internationalisation theory and evidence from the case, a) describe and explain Usaflexs internationalisation process. b) explain the factors influencing Usaflexs internationalisation decision

Question 2 In international business, firms have various choices when making decisions on their entry mode. Usaflex opted to use licensing instead of franchising when opening retail stores abroad. Using relevant entry mode theories, critically evaluate why Usaflex opted for licensing and not other entry mode choices [foreign direct investment (wholly owned or joint venture), franchising, etc].

CASE STUDY BELOW

Internationalization of Usaflex

Usaflexs international activities consist of exports and licensing. The company was exporting its products well before it was acquired by the current owners: In 2012, Usaflex was exporting to Bolivia, Russia, Costa Rica, Suriname, the United Arab Emirates, Kuwait, Germany, Argentina, Venezuela and Colombia. Following the acquisition, the new management sought to boost exports even further. In 2018 alone, Usaflex increased export revenues by 55%. By 2019, Usaflex exported to 51 countries.

The company exported products sold in the Brazilian market (around 80% of the total exported), as well as customized products for specific customers (20% of the total). Latin America was the region where the company concentrated its international expansion. At the end of 2018, Usaflex exported about 6% of its production; in 2019, the number increased to 8% and it was expected to increase by 10% to 15% until the end of 2022. This percentage was defined to get the benefits of exporting and at the same time, keep risks low. The CEO considered as advantages of this modality increased revenue and volume but also weighted the medium and long-term risk of exposing a significant portion of revenue to currency factors. In the short term, the target market was still Latin America, but in the long-term, Europe and the USA. To support sales, Usaflex had 33 representative offices in Brazil and two representatives abroad.

The momentum generated by the franchises brought visibility to Usaflex in Brazil. Thus, some multi-brand stores that were already selling the product abroad were interested in opening stores following the model developed for the Brazilian franchises. According to Bocayuva, Usaflex was the worlds largest manufacturer of comfort leather shoes. The product has a technology that attracts international buyers. Then, the Brazilian footwear is very cheap compared to competitors products abroad; the Usaflex price is only one-third of a similar product sold overseas, and superior in terms of what it offers and delivers.

Usaflexs management, however, opted for not adopting the franchise model abroad but prefered to use licensing. Thus, between 2017 and 2018, ten licensed stores were opened in four countries, namely, five in Costa Rica, two in Israel, two in Bolivia and one in El Salvador. In 2019, Usaflex had a total of 17 licensed stores abroad and planned to open eight more in 2020. Until 2023, the company intended to open new stores in the following countries: Portugal, Paraguay, the United Kingdom and the USA, as well as another store in Bolivia and El Salvador and two new stores in Israel. Negotiations were underway with partners in South Africa, Ecuador, Guadeloupe and Bolivia.

Usaflex has participated in international fairs to further its international expansion. According to Bocayuva, it has been common for fairs to provide contacts that lead not only to future exports but also to potential licensees interested in opening Usaflex stores in other countries.

International licensing

The decision to license was based on the CEOs previous experience with another company that had overseas franchise operations, but which were not always successful. Bocayuva grasped the fact that the franchise model abroad required a lot of investment and brought little return. For example, he explained that getting to the break-even point in an international franchise operation required at least 20 stores in the same location. In addition, he realized that legal and operational aspects make the use of franchising in other countries financially unfeasible. This fact was mainly due to the foreign companys ignorance of local laws, which could differ greatly from country to country. According to Bocayuva, such knowledge was more widespread among the locals; foreigners usually did not have access to the same information. He explained:

A franchise operation abroad is costly because a franchise agreement requires the franchisor to provide management, legal, architectural, marketing, and other support. In return, the franchisee pays fees to use the brand and to garner knowledge about the business. Due to these two factors, I decided to license and not to franchise abroad. Licensing gives the parties more freedom; the licensee can allocate its costs as it sees fit, and the [licensing] company does not have to offer certain services and does not pose a risk of potential litigation.

In Bocayuvas opinion, the main difference between franchise partners and Usaflexs type of licensing agreement with overseas partners is the non-payment of royalties and marketing funds by the local partner, and there is no obligation for the company to offer management, subsidy and marketing services. In some respects, however, licensing abroad is similar to the franchise system used in Brazil, where there is an obligation to use identity in the architectural standard. Licensees pay a licensing fee and the agreement is effective for five years.

Bocayuva pointed out that even though licensing is the cheapest and least risky business arrangement for the company; there must be a partnership between the parties. Furthermore for that to happen, the partners must be upfront with each other, displaying the companys values and taking the characteristics of the market into account. According to Bocayuva, the company has adopted a passive stance in seeking licensees for foreign markets:

Usaflex does not actively seek foreign partners; we only analyze any proposals we might receive. One important feature to qualify a candidate to become one of our partners is that it must be a player in the footwear sector in its own country. The only exception to date is the Israeli licensee, which was not operating in the local market.

According to Bocayuva, being known and dominating the local market are competitive differentials and, consequently, an advantage for this type of partnership because it provides knowledge about the culture of the country and the characteristics of its consumers. Then, as there is no obligation to purchase specific items, the partner can assemble the product mix based on knowledge of the local market and consumer preferences. The company offers a variety of products for partners from a wide range of possible choices. Bocayuva says he has no preference for Brazilian or foreign partners: the most important feature is that the partner must already have a store structure, industry experience and knowledge of the local market. Due to the diversity of countries and cultures of the licensees and the degree of freedom of operation, Usaflex expects them to be highly involved with the business, not only financially but also operationally. They also work to a lesser extent with customized projects for certain clients, such as Dr. Scholls brand, for example.

Usaflex has an international team consisting of a market executive and three assistants. This team opens the stores and approves the layout. Twice per year, the team visits the stores located in countries with high sales volumes. If the partnership is successful, the contract is renewed. The parameters adopted for this evaluation are mainly sales volume and expected results.

The company has received more than 100 inquiries from interested parties to open stores in Latin America, Europe, the USA, China, Russia, the Middle East and Africa. Because Usaflex does not prioritize its operations abroad and selects only international partners that have the desired characteristics, some markets are not targeted at all. For example, due to the preference for formal associations between companies, there is little interest in forming partnerships in Africa and the Middle East. Normally, local entrepreneurs do not want to go in alone and they ask the company to contribute part of the capital. Besides, local laws benefit the citizen more than the foreign investor, and in the event of a dispute, Usaflex could be severely harmed, said Bocayuva.

Regarding Europe, the CEO is looking forward to expanding the number of licensed stores to create unique products and to take a step further in shoe design to target a segment that has not yet been reached by Usaflex. The US market is considered strategic, and the international team includes one employee dedicated exclusively to that country. Since the US market is very competitive, Usaflex requires the local partner to have a high investment capacity. According to Bocayuva, At the end of 2019, in the USA, we participated in several strategic meetings with many potential investors and everyone assessed all the opportunities to open stores, but nothing came of it. However, there were sales for some distributors who could potentially become future store owners in the licensing business.

The relationship of trust between the parties grows closer as the partner learns more about Usaflex, its values, its product quality standards and its respect for customers and partners. Usaflex is investing in developing a model store at its headquarters so that its potential employees can learn about our history and values, and have access to information to support decision making, stated Bocayuva.

Usaflexs channels of communication with licensees are email, telephone and WhatsApp. There is also a customer relationship management (CRM) system to serve the stores. The international partner is regarded as a foreign customer and, as such, is more closely tied to sales, requested volume and stock availability, explained Bocayuva. Usaflexs e-commerce platform allows institutional customers access to the companys product portfolio. The platform enables the international partner to pre-order products, evaluate import-related issues and subsequently confirm the order.

Results of internationalization

Learning through internationalization is undoubtedly one of the main results of Usaflexs internationalization process. Bocayuva reported as an example the case of the customer Dr. Scholls, which, at the time, demanded highly superior quality products from its other Latin American partners: One lot manufactured by Usaflex for Dr. Scholls was rejected on quality. In a demonstration of commitment to the partnership, we remade all the products at no additional cost. The experience has made it clear the need to invest in quality, process and product improvement to meet customer expectations and to demonstrate Usaflexs commitment to our partners. In addition to franchisees and licensees, Usaflex has also worked with strategic and technological partners.

In 2017, the company set up a partnership with IBTeC (Brazilian Institute of Technology for Leather, Footwear and Artifacts) and Sebrae-RS. The purpose of the agreement was to develop the supply chain capabilities and bring new materials aiming to raise the products to the highest international standards. The company developed an adequacy manual to provide technical guidance for operational processes involving the acquisition and management of restrictive chemicals in processes and inputs. This collaborative project is in line with Usaflexs growth strategy by offering comfortable, innovative and sustainably designed shoes. The level of return is currently very low, but it may improve eventually because part of the production is still manual, reported the companys CEO.

The companys management believed that internationalization has contributed to product enhancement and that it has provided greater recognition and visibility. In 2017, Usaflex won the design and sustainability award from the Brazilian Footwear Industries Association (Abicalados), which aims to encourage best practices for international expansion.