Introduction
Franchising is a business arrangement
where one party (the franchiser) grants another party (the franchisee) the
right to use its trademark or trade-name as well as certain business systems
and processes, to produce and market a good or service according to certain
specifications.
When it comes to the definition of
franchising, it is a business opportunity that allows the franchisee to start a
business by legally using franchiser’ expertise, ideas and process in its business
plus assistance in organization training, merchandising and management in
return for a consideration from the franchisee.
Features of franchising
Franchising is contractual commitments
made by both the franchiser and the franchisee serve as the structure of the
franchise system and must be protected at all times to ensure the effectiveness
of an expanding franchise network.
To control quality of goods and
services, franchisors control those goods and services that franchisees are
allowed to sell. From time to time, franchisors may allow franchisees to
experiment as a source of possible innovation or as regional variation or different
customer base may require such deviations.
- Well established business.
- Need limited investment.
- Easy entry in the new market.
- Business has large establishments.
- Facilities in diverting business risks.
- Results in large turn over.
- Division of labor and specialization.
- Based on mutual agreements.
Types of franchising
- Product franchise
- Manufacturing franchise.
- Business- format franchise.
- Manufacture- retailor franchise.
- Wholesaler- retailor franchise.
- Service sponsor retailor franchise.
Elements
- Contractual relationship.
- Licensor
- Licensee
- Rights
- Intangible property
- Payment (Royalty)
- Specified geographic area
- Specified period time.
· Categories of franchising
- Job franchise
- Product or Distribution franchise
- Business format franchise
- Investment franchise
- Conversion franchise.
Importance of franchising
· Proven market
for product or service.
- Advantages of purchasing.
- Advantages of training.
- Advantages of marketing and management.
- Quality control standards.
Buying a franchise can be a quick way to
set up own business without starting from scratch. There are many benefits of
franchising but there are also a number of drawbacks to consider.
Advantages
- The risk of business failure is reduced by franchising. Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.·
- Products and services will have already established a market share. Therefore there will be no need for market testing.
- Using a recognized brand name and trade mark. The benefit from any advertising or promotion by the owner of the franchise - the 'franchisor'.
- The franchisor gives a support - usually as a complete package including training, help setting up the business, a manual telling, how to run the business and ongoing advice.
- No prior experience is needed as the training received from the franchisor should ensure the franchisee establishes the skills required to operate the franchise.
- A franchise enables a small business to compete with big businesses, more so than an independent small business, due to the pool of support from the franchisor and network of other franchisees.
- Usually have an exclusive rights in the existing territory. The franchisor won't sell any other franchises in the same territory.
- Financing the business may be easier. Banks are sometimes more likely to lend money to buy a franchise with a good reputation.
- It benefits from communicating and sharing ideas with, and receiving support from, other franchisees in the network.
- Relationships with suppliers have already been established.
Disadvantages
- Costs may be higher than the expected amount. As well as the initial costs of buying the franchise, the pay continuing management service fees may have to agree to buy products from the franchisor.
- The franchise agreement usually includes restrictions on how people can run the business. People might not be able to make changes to suit the local market.
- It may find that after some time, ongoing franchisor monitoring becomes intrusive.
- The franchisor might go out of business.
- Other franchisees could give the brand a bad reputation, so the recruitment process needs to be thorough.
- It may find that difficult to sell the franchise - It can only sell that to someone approved by the franchisor.
- All profits (a percentage of sales) are usually shared with the franchisor.
- The inflexible nature of a franchise may restrict the ability to introduce changes to the business to respond to the market or make the business grow.
The theory of franchising predicts that
when the business model barriers-to-imitation are lower, or the business model
applicability is more uncertain, which occurs when the firm’s tacit
knowledge, asset specificity, site specificity, brand specificity, etc., are
lower, the greater will be the rate of franchising. Barriers-to-imitation and
isolating mechanisms help to sustain the economic rent accrued with the
business model mechanism. With higher barriers-to-imitation and thus with less
uncertain approrpiability, the firm would prefer to retain control of their
outlets to maximize the rent appropriation and minimize the potential for
franchisee hold-up; in which case, the rate of franchising would be lower 37 since
the firms will maintain control of the outlets. Further, when the appropriate
rent is high warranting a higher royalty rate and since the
royalty rate cannot be arbitrarily increased, the rate of franchising will decrease.
The rate of franchising increases when the appropriability is more uncertain or
when the size of rent decreases.
- The lower the franchisor’s specific know-how, the greater is the rate of franchising.
- The lower the franchisor’s isolating mechanisms, the greater is the rate of franchising.
- The lower the franchisor’s location specificity, the greater is the rate of franchising.
- The lower the franchisor’s human capital specificity, the greater is the rate of franchising.
- The lower the franchisor’s brand value and customer lock-in, the greater is the rate of franchising.
Managing the franchise business life
cycle
Franchisors move through phases of
growth, development, maturity and in some cases, decline.
This is the same lifecycle for most
businesses (including franchisees), however the nature of franchising and the
resources available to a franchise business network to plan a sustainable
offering is usually able to ensure the ongoing relevance of the
franchise brand and franchise business model, effectively extending
the franchise lifecycle and providing longevity in the market.
Franchisors however are not immune from
failure and can move through all stages of their business lifecycle including
decline and failure, in the same manner as any non-franchised business.
The most dangerous stages in the
business lifecycle are the start-up and growth stages. These are where any new
businesses, franchised or otherwise, are most vulnerable.
For franchisees during this early phase,
the support provided by the franchisor, the strength of the franchise business
model, brand, marketing and operating systems all help to provide stability and
security to see the franchisee through.
Franchisors on the other hand, do not
have the same support available to them as they grow and develop, and
potentially are more vulnerable to business failures in their early days, and
often prior to, or just shortly after franchising has commenced.
Franchisee Lifecycle
The support provided by the franchisor
to the franchisee makes a big difference to the franchisee’s own life cycle.
High levels of support early in the
franchise relationship will accelerate a franchisee’s growth and facilitate
their early maturation.
Similarly, support provided by
franchisees to one another add strength to the franchise business network
and also assist in the early maturation of each other’s franchise businesses.
Franchisors usually find the nature of
support provided to a franchisee during the course of their lifecycle in
the franchise business changes from highly technical and operationally
focused at the start, to management, financial and marketing expertise as the
franchisee matures.
Extending the Franchisee
Due to the limited period over which a
franchise operates, franchisees are able to extend their life cycle by
committing to additional terms.
Renewing a franchise agreement, and
therefore extending the franchise business lifecycle, is a conditional grant.
franchisors and franchisees must agree
on the basis of new franchise agreements term in advance, however if the
relationship is mutually acceptable to both parties, it is more likely than not
to continue.
Exiting the Franchise Business
As well as extending their
franchise business lifecycle, franchisees can also choose to exit (usually
by selling), which under new management provides the franchise business with a
further extension of its lifecycle.
Once franchisees have exited the
franchise business, the relationship with the franchisor need not end there.
In Australia and other parts of the
world, franchisors are required to maintain a list of contact details of
past franchisees as part of the disclosure document information given to
potential new franchisees.
This requirement to provide contact
details of former franchisees should encourage franchisors to consider the
nature of what ongoing relationship is appropriate to maintain goodwill with
former franchisees.
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Franchisor-identified stages in the
life cycle of the franchise
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Franchise Life cycle stages
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Brief description
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Franchise start-up date between…
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Stage 1: Gestation
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This
stage entails the pre-opening preparation of the franchise ‘store’ (business)
and incorporates all facets from the identification of the site, to obtaining
approval from the franchisor and the actual launch / opening of the store.
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Sep
2009 – Sep 2010
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Stage 2: Entrepreneurial
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The initial, business start-up phase.
The franchisee (and franchise) is simultaneously excited and overwhelmed,
anxious, and uncertain about the ‘way things should be done’. Requirements,
systems and procedures have not yet been internalised and entrenched (“bedded
down”).
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Mar 2008 – Aug 2009
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Stage 3: Methods and Systems
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The
franchise business is in place and operating to expectation. The franchisee’s
focus is largely directed at refining systems and methods, and on achieving
margins.
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Mar
2004 – Feb 2004
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Stage 4: Maturation / Decline
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The franchise business is by now a
known quantity and operating effectively - the business is essentially on
‘cruise control’. The management team is established and demands on
management innovation and capacity are minimal. The franchisee is not innovating
or investing the same degree of effort as he/she did in previous stages and
could lose interest (experience boredom). In this stage the original debt
incurred when purchasing the franchise (‘store’) in all probability has been
repaid and the franchisee often experiences newfound wealth. This situation
could lead to a stage of renewal or decline.
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Mar 2001 – Feb 2004
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Stage 5: Renewal
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When
reaching this stage, the franchisee is usually confronted with the choice
(decision) of revitalising (and revamping) the business or putting it up for
sale. This stage typically prompts the onset of the next ‘entrepreneurial’
stage and the life cycle continues at a new level of functioning.
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Mar
1993 – Feb 2001
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Conclusion
Sustainability of
business format franchising does not appear to be under threat if the prolific
growth of this business form is considered. However, franchisees are exiting
the franchise system in favor of independent business endeavors and
dissatisfaction and unmet expectations in the relationship are some of the
important underlying causes (Frazer, Merrilees & Wright, 2007). While
little is known about the unique behavioral dynamics at the level of the
individual franchise, and how this is influenced by the presence of an
overseeing franchisor, the current study has revealed that the franchise
(franchisee) has to deal with an extensive range and variety of change dynamics
that pose significant challenges to the sustainability of the franchise. A
significant proportion of these changes are generated internally by the
franchisor. By implementing policies that do not acknowledge the impact,
consequences and unintended (and undesirable) side-effects of such changes the franchisor
may inadvertently erode the sustainability of franchises. While further
research is required to illuminate the idiosyncratic dynamics that permeate the
franchisor-franchisee relationship, awareness of the pervasiveness of changes
impacting on the franchise (and franchisee) at this initial stage, is in the
interest of both the franchisee and the franchisor.
