Introduction to Franchise Business - Essay Example

 FRANCHISE BUSINESS Introduction A franchise business is a form of an arrangement whereby an established business, in this case franchisor, enters into a legal contract with a franchisee, a partner who will operate day to day the business of a franchisor on a territory where the business did not exist before. It involves granting a business firm the right to sell the products of another firm; where the selling company receives payments, and the ‘mother’ firm expands its customer base, geographical coverage as well as increased cash flows. Origin of Franchising The history of franchising dates back to 1850’s, when an American entrepreneur Isaac Singer the inventor of the sewing machine chose to sell licenses to other entrepreneurs in different parts of the country. This idea was prompted by the fact that his company staff could not provide sufficient training to the customers who bought his product (Sherman, 2011). In 1960, Ray Kroc, an American fast food business man after taking over small chains of food companies laid strong foundations for one of the most successful food franchises in the world. Due to globalization and reduction of barriers to international trade like tariffs, many firms driven by the need to increase production of goods and services have used franchising as a perfect tool to market their products in other countries outside the place of incorporation (Sherman). Multinational companies like Coca-Cola, a producer of drinks and leading firms in automobile industry like Toyota are operating in almost every part of the world through franchising. Justification of the business In the 20th century, most of the world’s economies followed expansionary paths, with many firms finding a solution to increasing their customer base in operating businesses in foreign countries. During this period, most countries had exponential increase in population growth rates that necessitated accommodating foreign firms in an economy for this would spur employment opportunities (Hammond, 2011). Businesses that are run of franchising rails stand a chance of excelling because the products as well as services brought in the market place have been established by the franchisor and the setbacks in launching a new product were dealt with originally. Again, a proven business formula has been put in place for marketing the product, and the franchisee’s business will not need extra time to pick momentum in the new market place. For businessmen and women, trading with already tested products offers income (Hiam, 2007). Nature of the business This franchising business is global, whereby the multinational has a registered head office in the country of incorporation. Coca-Cola Limited is an example of a franchise which has its head office in New York, U.S.A. being, spread to almost each country in almost every continent, each country has a registered head office where the major policies and administrative functions are carried out from. At country level, Coca-Cola Limited after assessing the market potential of its products and analyzing the annual demand of its drinks will enter into an agreement with potential business firms to aid in the production and distribution of its products to the entire nation. Other business operations like carrying out market research, mobilizing the locally available raw materials will thus be made easy through this arrangement. In return, the business firm turned franchise will generate income from the sale of the drinks to the local customers. The business turns them to their ‘own boss’ since they now operate their own firms. On the same note, Coca-Cola Limited will lay down the procedures and rules that are to be followed by the successful franchises to carry out the business (Nash, 2000). This will make the franchises from violating Coca-Cola’s policy which may damage the reputation of their products. Coordination between the franchisor and the franchisee is carried out to ensure that the products that enter the market place are of superior quality. In return, the franchisee is supposed to pay one time franchise fee, as well as royalty fee to Coca-Cola. Once the franchising agreement is struck, Coca-Cola Limited will be in ‘business for itself, but not by itself’. This will spur the ‘mother company’s’ earnings and sustainability in the market place. Elements of the business The franchisor is the inventor of the product or service brought forth in the market. He/she came up with the original idea and the procedures of production, carried out successful market research to improve the quality of the product in order to increase its competitiveness in the market. The refined product is now taken to a particular marketing niche where customers perceive it as a ‘superior good’ i.e. a product of ‘superior quality’ against competing products (Nash, 2000). On the other hand, the franchisee has marketing tips in a foreign market niche, and probably through training or any other form of induction method will produce the product on behalf of the franchisor, having met all the stipulated guidelines on the inception of the agreement. The two parties will make the product available in the market place. The franchise agreement is the legally binding contract on which the franchising relationship is based. The franchisor’s obligations are clearly stipulated in the document. Franchises rights and duties are again indicated. Any breach of contract by either party can lead to a legal action and recovery of damages depending on the laws of the country where the franchise is operating (Nash, 2000). The market place consists of potential customers who are willing to buy the products to satisfy a certain need. We have the regulation authorities, which is mainly the government system of the country in question. The authorities host regulators like the tax authorities, quality assurance controllers who make sure that the product meets the international standards. Benefits and risks For the franchisee, a number of benefits emanate from striking the franchising deal. One, the corporate image is already established. Most of the customers in the territory are aware of what the corporation produces and hence the firm will be mainly involved in production and distributing the product to the customers. This will be a relief since activities that demand vigorous marketing like introducing a new brand to the market dominated by competitors has been done already (Hiam, 2007). Due to the dynamics in the market place and increased expectations from customers, the franchisee may be forced to up his production skills to keep in pace with changing market trends as well avoid the risk of being edged out by competitors. During the initial stages of the production, training may also be required, and this is facilitated by the availability of the franchisor that has all this information at fingertips, and will offer it with zeal for the betterment of the company (Hiam, 2007). An original business idea is not readily available for every business man and if it is, the strategy should be given time and resources to work, bearing in mind many business endeavors fail. A franchising agreement will elevate a businessman to an established producer whose products are known in the market place due to previous market awareness. This reduces the time lag between entering the market place and earning profits from the products stocked. There is also an element of cost saving since there will be no wastages in testing the market (Hiam, 2007). For the franchise, there are a number of risks. The franchisor may be uncooperative in matters of enhancing consumer satisfaction necessitated by changes in the market trends. This will leave the franchisee’s firm in a tricky situation when the continuity of the business is put into question. When the governing authorities make it difficult to trade in the territory and a subsequent exit is planned, the franchisee will suffer a considerable setback. To the franchisor, there are advantages. Expansion of the firm to new territories guarantees increased earnings, a strengthened customer base and hence a promising business continuity. More partners come into the business with the same interest of increasing the customer service. This synergy build up ensures superior quality product, which increases the brand visibility. The franchisor can focus on administrative activities of the ‘mother firm’ and leave production and distribution to the agents well versed with the territory (Sherman, 2011). The risks are punitive rates by the regulation authorities, like nonresident tax, which greatly reduces net earnings to the franchisor and makes the trading in the territory difficult (Mathews, 2006). If production of the products may be too technical and sensitive like nuclear reactor, the franchisor may have to follow strict protocols to gain entry, and monitor the activities for it. Conclusion Franchising is a good way of boosting productivity of multinationals, at the same time ensuring economic growth in diverse economies. When authorities stress on job creation to curb unemployment, they should also create conducive environment for foreign economies to operate in their territories. References Hammond, Raleigh. Smart Retail, 3rd Ed, New Jersey: Pearson Education, 2011. Hiam, Amos. Wileys Pathway Marketing, U.S.A: John Wiley and Sons, 2007. Nash, Edward. Direct Marketing, 4th Ed. U.S.A: McGraw-Hill, 2000. Mathews, Joe, Don Debolt and Deb Percival. Street Smart Franchising. U.S.A: John Wiley and Sons, 2006. Sherman, Andrew, Franchising & Licensing, 4th ed. United States: AMA, 2011 Read More