Small Business, Entrepreneurship and Franchising - Essay Example

Small business, entrepreneurship and franchising A franchise is a mode of business arrangement in which the developer or franchiser of the concept ofthe business grants a person or franchisee a licensed right to operate and own the business using the franchiser’s trademark and business concept. The franchiser assists the franchisee to start up the business through providing assistance and training in selecting site, ordering inventory, site development, marketing and advertising support. Due to this assistance, the franchisee pays a franchise fee, advertising fees, continuous royalty fees and other related fees to the franchiser (Zimmerer, 2008). The franchisee raises operations money and manages the business operations. In franchising mode of business, someone else does establishment of the business for another. The franchiser shares the business expertise for a financial consideration with the franchisee. Franchising can be of different types. There is one where a business is developed much earlier on especially with existing products and the manufacturer grants right to sell the products to the franchisee. The other is the franchise where franchiser allows franchisee to utilize a special recipe or process as well as the name of the franchiser. Today, the format of business type of ownership is constituted by franchising where franchisers do not only grant the right to sell products and services or its name, but also transfers totally the way of operating the business developed such as management methods, operating, training and marketing systems, as well as technical experience and expertise (Sherman, 2007). The franchisee is also extensively trained by franchiser as well as offered an ongoing support. Buying a franchise may as well be a feasible and/ or viable alternative to establishing a new business. This paper therefore seeks to discuss the drawbacks and benefits of adopting franchise mode of business in the hospitality industry. The primary benefit associated with franchising is minimization of risks. Establishing a new business is often very risky. New business risk failure within their first three years of operation, this is because the owners still have to experience the sustainability curve of operations. Franchising however minimizes these risks since it’s already established. Franchisors also provide much information to the franchisees before any investment is made on the business. This enables the franchisees to try if the business if fit for them or not. Franchisers also sell business already running with proven operation methods and business format. The services especially in the hospitality industry which are already selling successfully are adopted by franchisees hence beneficial than establishing the new services to be offered (Walter, 2009). The franchiser’s management experience also maximizes the potential success of the franchise. This is because this experience is disseminated to the franchisee through training and formal instructions. Franchisers already established provide regional or national name recognition (Sherman, 2007). This is a benefit to the franchisee as they will not have to develop a name to be recognized in the region. Franchisers also offer homogeneous operation systems which enables franchisees to offer products and services of a uniform quality to their customers effectively and efficiently. This uniformity is associated with the power of mass purchasing, customer loyalty, brand recognition and identification, and capitalizing on a proven business format (Robin, 2007). These will be enjoyed by franchisees. Franchising mode of business is also beneficial in that franchisers offer assistance and help in management including: facility and personnel management, and procedures and standards of accounting (Reynolds, 2008). Even though a person may have these qualifications, they may not be aware of how to use and apply them in the business. Franchiser in this respect trains franchisee on how to apply them and expose them to work situations. The business plan is also developed with assistance of franchiser which includes helping in standard operating procedures that the franchiser already developed (McKern, 2007). This is usually very challenging when establishing a new business. Another big benefit is the advertising and marketing aspect. The franchiser prepares and develops a marketing campaign through regional or national marketing. These benefits the franchisees immediately they assume ownership of the business. Additionally, franchisers may offer advice on developing effective programs for marketing in the local area via the fund of cooperative marketing to which a percentage is contributed by the franchisee (Hitt, 2009). It is also possible that franchisees receive financing assistance in a new franchise via the franchiser, who in most cases has an arrangement with institutions that lend money to franchisee, however, the franchisee will accept the loan responsibility, and the involvement of the franchiser only increases the probability of getting the loan approved. Training benefits are also provided by franchiser to the franchisee. This is significant if the business concept is very complex. Finally, franchising has a strong baseline or solid niche of economy that considers all the specialized needs (Harrison, 2009). On the other hand, franchising is associated with various drawbacks. The franchise owners must confront several difficulties such as: the limited freedom, although business owners cherish the provision of business products, plan, and materials that are already arranged for them by the suppliers, few business establishers sees lack of personal choice in the products and plan in general. Franchise owners rarely get the chance to select their own services, products or mode of advertising; franchising is also expensive and is associated with several costs (Franklin, 2008). The franchisees do not only meet the expenses of the business like rent and other associated expenses, but also pays fees such as royalties, licensing among others. Other companies may also restrict the kind of contractors to be used which may ultimately not provide the best bargains; personal risk is a drawback to franchisees. Although the business may be up and running, there may be other hidden reasons why the business is being let go by the franchiser. This may amount into gross losses to the franchisees in the long run; when one buys a franchise in the hospitality industry, it means he or she has entered into a binding agreement with the franchiser (Donald, 2007). The resulting contract dictates how the franchisee will run the business and this leads to minimal or no room for innovation and creativity; franchisers also restricts where franchisees operate, the services they offer, the products they sell as well as the suppliers they contact and use; the franchise’s reputation may be affected by the dismal performance of other franchisees; and even though franchisees will strive to make profits after incurring the expenses involved, they continuously share the profits with the franchiser (Benson, 2008). Franchising mode of business in the hospitality industry may seem simple for the first time; however, it is not a guarantee of success. This is because the good business management principles such as hard work, informed decision making, serving customers in a good manner, having enough money, and time management still apply to the franchises (Bartlett, 2009). Other drawbacks that can be witnessed in adopting franchising mode of business especially in hospitality industry include: i. Interactions with other vendors are restricted since the franchiser already established specific vendors ii. The longevity of the business is related directly to the prosperity of the entire company iii. The business arrangement may be terminated when profits may just be growing high iv. Franchisee cannot alter the business niche already identified by the franchiser v. Growth, success and development of the business is wholly constrained by the entire company vi. Franchise is more costly in upfront costs and royalty payments vii. Less control of business as many decisions are made from the company viii. One cannot deviate from the pre-established business guidelines of operations (Arnolds, 2008) It is however a fact that not all the franchising businesses provide the same support and input level. Many franchisers are also not very restrictive like others (Adongo, 2010). In summary, in spite of the mentioned drawbacks of a franchise, franchising mode of business is generally beneficial in the hospitality industry due to the benefits mentioned above such as minimal risks, customer base, business niche, access to vendors, training, security of business among other benefits stated above. Bibliography Adongo, L. 2010, Entry and Cooperative Strategies in International Business Expansion Age, New York: Greenwood Publishing Group Arnolds, F. 2008, Managing Franchises, London: John Wiley & Sons, Inc Bartlett, C.A. 2009, Transnational Management: Text, Cases and Readings in Cross Border Management. 5th Ed., Boston: McGraw-Hill Higher Education Benson, J. 2008, The Global Entrepreneur, New York: Dearborn, Donald, F. 2007, International Business ownership, London: Cengage Learning Franklin R. 2008, Entry Strategies for International markets, London: John Wiley & Sons Harrison, F. 2009, Franchising and small businesses an international perspective, London: Routledge, Hitt, A. 2009, Strategic Management Competitiveness and Globalization, Nelson Education Ltd McKern, B. 2007, Global Network Business Corporation, London: Routledge, Reynolds, F. 2008, Navigating the complex rules, controls of franchise, London: John Wiley & Sons, Inc. Robin, S. 2007, Global business strategy, New York: Cengage Learning Sherman, J. 2007, Franchising & licensing, AMACOM Div American Mgmt Assn Walter, K. 2009, Handbook of international management, London: John Wiley and Sons, Zimmerer, T. 2008, Essentials of Entrepreneurship and Small Business Management, New Jersey: Pearson Prentice Hall Read More