Franchising

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Franchising

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Franchising is undoubtedly the most innovative and efficient form of organization yet devised to distribute products or services

In the complex world of business nowadays, companies always search for new methods which enable them to gain competitive advantages. A franchise is one of those effective ways to increase companies??™ profits. It is a business models that parent company, franchisor, authorizes their franchisees to sell their products and/or services. The franchisor controls the method of conducting business of franchisees such as manufacturing, sales, marketing and management to meet the parent company??™s quality standard. As stated in Allbusiness.com website (n.d) ???A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and individual or group wishing to use that identification in a business??¦??™.Why franchising is the most innovative and efficient form of organization We should look back to its history and then analyze its functions.

The first franchise

The concept of franchising has been around for a long time. The idea of selling off a part of business to expand into new market or maintain a major part of business usually came from the lack of investment fund from business owners. Through their creativity they were able to keep the business alive by selling franchise opportunities to the new entrepreneurs.

Younger (1995) noted that the first franchise system has been developed by Singer Company. In the 1850??™s the company manufactured sewing machines and sold them by creating a network of dealers. Singer provided retail system, trained and delivered the format of shop management to the dealers. Their franchisees, dealers, paid Singer a fee to work in a particular area and earned money for each sale of a sewing machine they bought from the parent company and then resold.

Their significant in the beginning of the franchise and the opportunities it crated came from the creation of the contract that is still used today between the original business owner and the franchisees. Nevertheless, even if the management of Singer system was incomplete, it can be said that it was the first prototype of franchise business.

The development of franchise

As stated in Wikipedia website (2010) after World War II, retail shops which had operated only developing products enhanced themselves to provide services. A&W and Tastee Freeze which their restaurants distributed in suburb of the US started ???Drive-In??™ system to serve customers who had to travel by car. This was a joint of the full format of franchise called ???Format Franchising??™ in the 1950??™s. Modern franchise was in form of franchise-based food service establishment. For example, Dunkin Donuts, McDonalds, Burger King, Baskin-Robbins, Kentucky Fried Chicken- -they all geared up and franchised out that finally National chains appeared.

Most people still assume that the McDonald??™s Corporation actually owns all McDonald??™s restaurants in the world. In fact, most McDonald??™s restaurants are owned by independent franchisees. As you can see, the Big Mac tastes the same in Thailand as it does in the US; the name outside look the same in Singapore as they do in the UK. However, if you notice each country??™s franchisees, you will see that it always launch new different taste for those people in the country such as in Thailand, we had limited edition of sticky rice-pork burger. Because of that creativity, this brought enormous profits to the franchisees.

The Model of Franchising

To be franchise business, franchisor and franchisee did agreement contract to do business together that contains 3 major parts as the following;

??? Franchisor promise to exercise significant control or provide assistance in the operation of the business.

??? Franchisor promise to provide a trademark, trade name, service mark, commercial symbol for sale or distribution of the goods or services

??? Franchisees promise to paid compensations which are Franchise fee (as an initial fee for starting its franchise) and Royalty fee (as continuing fee and the percentage of its total revenue.)

One reason for franchising success is its flexibility. Not only can this concept be modified to serve optimally as the distribution channel for various industries but it can also put up various expansion models. There are many different types of franchise available covering many different industries as The Franchise Business website (n.d) and Dewar-Healing (n.d) defined;

1. Retail Franchise

Retail franchises tend to be popular high street chains that provide either products or services to usually walk-in customers. A good high street location plays a bit part in the success of such franchises as a busy or popular site is necessary for customers to visit the store. One major factor in running a retail franchise is that it requires lots of customer interaction, and therefore excellent customer service is a high priority. Examples include food, fashion, printing and telecommunications.

2. Management Franchise

A Management franchise tends to include office based work, and will include working closely with businesses and organizations to provide either a service or product. This type of franchise is best for those with management experience and the ability to work with a number of staff. A management franchise often requires skilled staff with experience in administration and dealing with clients to ensure that businesses use a franchise and guarantee a set amount of business.

Examples include parcel delivery type franchise or other van based service franchises that are run from regional HQ??™s, depots and hubs.

3. Single Operator Franchise

A Single Operator franchise can take two forms. Both involve the selling of a product or service within a particular trade and require a certain degree of marketing to ensure that the public are aware of the services or products offered. One type of Single Operator franchise involves being out and about with the public to provide a service, such as car valet for example. In this case the franchisor will often supply all trademarked items including equipment, uniforms and vehicle branding. The franchisees will operate from their own van and provide valet services to all customers under the banner of a trademarked name. Another form of Single Operator franchise involves working directly with businesses rather than the general public. This usually only involves working standard office hours, and although the franchisee should be mobile most work can be carried out from a home office. Example of business sectors include cleaning, motorist service and repair/security systems.

4. Investment Franchise

An Investment franchise often involves investing large amounts of money into Business & Finance franchises without working directly within the business. The franchisees will employ a team of managers to ensure the smooth running of the franchise and will not have to work there. Take 7-eleven (Thailand) for example, the investors just only invest in capital and franchise fee of shops. The parent company has a management team and employees who will operate those shops without the operation of franchisee.

McDonald??™s: the Successful case of Franchising

When people think about success franchising, definitely McDonald??™s is always the first as prime example. McDonald??™s continues to be recognized as a premier franchising company around the world. As stated in McDonald??™s Website (2010) today, McDonald??™s is the world??™s leading food service retailer with more than 32,000 local franchise restaurants serving more than 60 million people in 118 countries. Of those stores, more than 75 percent are owned by independent operator franchisees.? 

Raymond Kroc gets the credit as the driving force behind McDonald??™s successful franchise growth. He did not start out as a restaurant owner, but as a milk shake maker, ???Multimixer??™, salesman. In 1954, Kroc visited the restaurant and was amazed at the speedy business operation that served so many people. He made a proposal to the brothers to let him franchise restaurants outside of their home base in California.? In 1955, Kroc launched ???McDonalds Systems, Inc.??? as a legal structure to run his franchises.
The first international McDonald??™s franchise opened outside the US in Canada and Puerto Rico in 1967. Since then, McDonalds has spread all over the world, with its largest franchise store featuring more than 700 seats opening in Beijing, China in 1992.
One critical factor that contributes to franchise success is a consistent commitment to standards. Because of Kroc??™s vision, McDonald??™s franchise restaurants became well-known. ???Quality, Service, Cleanliness and Value??? was the company??™s first motto, and customers knew that no matter where McDonald??™s restaurants they visit, they could rely on those qualities of food and services restaurants offered. Kroc??™s brilliant marketing insights produced many winning strategies. He launched ???Hamburger University??? in 1961 to train all franchisees in every aspect of McDonald??™s management.
However, this chain??™s success also rests on another key component, which at first glance might seem contrary to franchising principles ??“ continual innovation and adaptation to market conditions. It is interesting to note that many of the new products added to McDonald??™s menu over the decades were developed by franchisees.
??? For instance, the ???Big Mac??? introduced in 1968 was the brainchild of Jim Delligatti, one of the earliest McDonalds Systems franchisees. The ???Egg McMuffin??? was developed in 1973 by McDonald??™s franchisee Herb Peterson. A Canadian franchisee invented The McFlurry in 1997.
??? In 2005, another adaptation to the times and consumer demand was the provision of WiFi with Nintendo in select locations; and delivery service in Singapore, where customers can phone in their order and have it delivered 24 hours a day, seven days a week. The company has also departed from its standard free-standing units, and installed quick service kiosks in busy places, like malls and airports.
Moreover, McDonald??™s was one of the first franchise restaurants to post nutritional information about its menu, and now offers salads and other healthy options in recent years. This show that the company ready to adapt their product reflect to market trend and response to customer demand.
The Advantages and Disadvantages of Franchising
As studied the McDonald??™s case above and the note from Daszkowski (n.d), we can conclude the advantages of franchising in term of franchisor and franchisee as follow;
In term of franchisor
1. Franchisors get compensation of franchising from the two types of fees: franchise fee and loyalty fee from franchisees.
2. Franchisors expand their businesses without using their capital investment.
3. Franchisors expand their band without having to deal with typical headaches of running the outlet themselves.
4. Franchisors obtain new idea of product and services, and the concept of business model from franchisees. Moreover, they can get customer feedback and demand via franchisees.
5. Franchisors can still control their administration and management of their shops to maintain their brand image.
In term of franchisee
1. The popularity of franchise business model has to do with its proven track record of success and ease in becoming a business owner. There is a higher possibility of success because a proven business procedure and solution already set. In addition, products, services, and business operations have already been recognized.
2. Financing the business may be easier. Banks are sometime more likely to lend money to buy a franchise with a good reputation.
3. The corporate image, trade mark and brand awareness is already recognized. Consumers are generally more comfortable buying goods they are familiar with and working with companies they know and trust.
4. Franchise companies usually provide business expertise (marketing and advertising plans, management guidance, financing assistance, and site location), extensive training and other supports to their franchisees in effort to help them succeed.
5. Many times products and services are advertised at a local and national level by the main franchise companies. This practice helps boost sales for all franchisees, but individual franchisees dont absorb the cost.
6. Some Franchisors provide exclusive rights in franchisee??™s territory. The franchisor will not sell any other franchisee in the same territory.
7. Relationships with suppliers have already been established.
However, Franchise business model still has some drawbacks for franchisee which need more concerns when selecting franchisor.

1. Costs of franchise may be higher than expect. As well as the initial costs of buying the franchise, franchisees pay continuing management service fees and may have to agree to buy products from the franchisor.
2. The franchise agreement usually includes restrictions on how you run the business. Some franchisors may require franchisees to follow their operations manual in order to ensure reliability. This limits any creativity on the part of the franchisee.

3. Franchisees have to be very good at following directions in order to maintain the image and level of service that business owner created. If the franchisee is not able to run a quality business or does not have enough funding, this could restrict success.

4. Franchisors may be negligent on their commitment to support the franchisee. Also, they may make poor decisions that would have a bad effect on the franchisee. As a result, it is vital to verify any franchise concept thoroughly before signing any agreements.

5. It is difficult to sell franchise. If franchisees would like to sell it, they must only sell to someone approved by the franchisor.

Summary

Franchising is undoubtedly the most innovative and efficient form of organization yet devised to distribute products or services. The concept of franchising has been over a century, but it is still fascinated by business owner who would like to distribute his or her products with limited capital.

Franchising concept first developed by Singer Company who produced sewing-machine. Nevertheless, it is well-know because many fast-food restaurants successfully implemented this concept over the world. The best example is McDonald??™s where franchisees have a right to create new idea of their menus, while the business owner can still control the quality of foods and services. McDonald??™s also ready to adapt themselves to marketing trend or customer demand in each country that enable them to success in every market. Franchise is not limit to food industry, but it can adjust in various industries such as retail shops, hotel chains, car rental, consultant services, and so on as divided into 4 types: retail franchise, management franchise, single owner franchise and investment franchise. Franchising has several advantages and some disadvantages that the person who would like set up his or her business by franchise model need to studied and selected proper franchisor before signing franchise contract.

All things considered, franchising provide the way to increase profits to business owners without new capital investment and also enable new entrepreneur to success in their business without using their know-how or doing any trials and errors in their business . Customers also satisfied that even if they travel to different counties, they can trust the product and service from the same brand. Therefore, Win-Win situation is occurred. Isn??™t that the point of doing business

Reference List

Allbusiness.com n.d., What Is a Franchise |Franchises from AllBusiness.com, viewed 28 April 2010, http://www.allbusiness.com/buying-exiting-businesses/franchising-franchises/2198-1.html

Daszkowski, D. n.d., Advantages& Disadvantages of a Franchise, view 30 April 2010, http://www.evancarmichael.com/Buying-A-Business/914/Advantages–Disadvantages-of-Owning-a-Franchise.html

Dewar-Healing, T. n.d., An Explanation of Franchise Types, view 29 April 2010, http://www.franchiseadvice.com/articles/store/fa_article_06.pdf

McDonald??™s 2010, Our Company- About McDonald??™s, view 29 April 2010, http://www.aboutmcdonalds.com/mcd/our_company.html

The Franchise Business n.d., Franchise Types of Franchise??”Franchises, viewed 29 April 2010, http://www.thefranchisebusiness.co.uk/types-of-franchise-c86.html

Wikipedia 2010, Franchise-Wikipedia, view 29 April 2010, http://th.wikipedia.org/wiki/%E0%B9%81%E0%B8%9F%E0%B8%A3%E0%B8%99%E0%B9%84%E0%B8%8A%E0%B8%AA%E0%B9%8C

Younger, B. 2005,The History of Franchising – The Creation of the Franchise Business., viewed 28 April 2010, http://ezinearticles.com/The-History-of-Franchising—The-Creation-of-the-Franchise-Business&id=113608


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