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EMBA 530 Innovation and entreprenuership initial post - Essay Example

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Franchising is a special form of product distribution, if seen from the franchisor’s perspective, or a form of entrepreneurship if seen from the franchisee’s viewpoint. A franchise is a legal concept, defined by the Franchise Rule as “a continuing commercial…
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EMBA 530 Innovation and entreprenuership initial post
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Franchise and Franchisors Franchising is a special form of product distribution, if seen from the franchisor’s perspective, or a form of entrepreneurship if seen from the franchisee’s viewpoint. A franchise is a legal concept, defined by the Franchise Rule as “a continuing commercial relationship” whereby “(1) a franchisee (a) offers, sells, or distributes a franchisor’s goods or services, which are identified by the franchisor’s trademark, service mark, trade name, or advertising, or (b) operates a business under the franchisor’s marks in accordance with the franchisor’s quality standards; (2) the franchisor (a) has significant control over how the franchisee operates its business, or (b) significantly assists the franchisee in operating its business; and (3) the franchisee is obligated to make a payment or to promise to pay the franchisor to being operating the franchise” (U.S. GPO, 2013).
Clearly, franchising is governed by legalities because rights overlap in these types of businesses. The franchisor and the franchisee are limited in their prerogatives – an important consideration in considering whether the franchise is actually an enterprise (Mumdžiev & Windsperger, 2011). There are pros and cons to a positive answer. Entrepreneurs should be able to assess their environment and determine marketing strategies including determining product design, pricing strategy, distribution and promotion, also finance and production methods – capabilities which in a franchise are often stipulated by the franchisor. On the other hand, it may be argued that the franchisee is an entrepreneur because he risks his own capital and actually runs the business (unlike a mere investor), and also strategizes in terms of place because it is often the franchisee who chooses the venue and provides the physical facilities. It may be argued in this case that the franchisee still did the strategic choices when he chose one particular franchisor in a pool of many other alternatives.
As a legal entity created by mutual assent, the nature of the franchise is determined largely by the specific contract entered into by the franchisor and the franchisee. The franchisor may be relatively liberal, i.e. letting the franchisee determine the product offerings like McDonald’s did in India where people do not eat beef, or the contract may be very specific such as McDonald’s franchises within the U.S. Ketchen, Short & Combs (2011) have asked the same question distinguishing enterprise from franchise, and instead of giving a straightforward answer, they concluded with a rule of sorts, that to determine whether a specific franchise is an enterprise, one must qualify the issues of opportunity recognition, risk, organizational size, stage of organizational development, and organizational autonomy.
Which offers a risk/reward payout? According to Pricewaterhouse Coopers in their 2010 report on franchises, there was a contraction in output from franchises in 7 out of 10 industries during the period 2008 to 2009, and a modest increase (mostly about 2%) in all industries in 2009 to 2010. However, in the earlier literature dated in the 1970s, claims of record-breaking profits and successes were attributed to franchises (Dant, et al., 2012). Readings convince us that when the principal business in new and innovative and the franchise is an early entrant in the market, the rewards may be great because the franchisee is benefitted by a winning and tested formula (i.e., that of the franchisor), thus lowering the risk to franchisors. However, when the industry has matured and there are many franchises of the same franchisor, then the later franchise holders will only be adding to the competition in an increasingly crowded market (Hoffman & Preble, 2003). Franchisors actually compete against each other because they sell exactly the same product in exactly the same way, and may be competing only on the basis of location, so switching cost is really low. In that case, as more franchises are opened, competition becomes tighter, and profit margins become slower, leaving little profit to the late franchisee.
To what extent might personality, attitudes and cognition influence the risk/reward payout realized by franchises vis-à-vis enterprises? I think this is true of all businesses, whether franchise or enterprise, small scale or large scale, no matter the industry. According to some studies, the selection of franchisees require that the successful candidates possess as much risk-taking attitude, confidence in their personality, and ability to recognize new opportunities as are possessed by entrepreneurs (Sivakumar & Schoormans, 2011). This appears to suggest that the risk-reward ratio has just as much to do with the personal attributes of the franchisee or entrepreneur, as it has to do with the economic prospects (boom or bust, recession or growth), the socio-cultural milieu, and the politico-legal environment. I would add, since the rights conveyed by the franchise agreement determine to a great extent the degree of participation of franchisees, then the risk-return will also depend much on the comparative rights of the parties to the franchise contract.
References
ABA Section of Antitrust Law (2006) Antitrust Law and Economics of Product Distribution. American Bar Association
Dant, R P; Grünhagen, M; Kaufmann, P J; Brown, J R; Cliquet, G; & Robicheaux, R A (2012) ‘Chronicling the Saga of 25 Years of International Society of Franchising.’ Journal of Small Business Management, 50 (4): 525-538
Hoffman, R C & Preble, J F (2003) ‘Convert to Compete: Competitive Advantage through Conversion Franchising.’ Journal of Small Business Management, 41(2): 187-204
Ketchen, D J Jr.; Short, J C; & Combs, J G (May 2011) ‘Is Franchising Entrepreneurship? Yes, No, and Maybe So.’ Entrepreneurship Theory and Practice. Baylor University, May 2011, DOI: 10.1111/j.1540-6520.2011.00442.x
Mumdžiev, N & Windsperger, J (May 2011) ‘The Structure of Decision Rights in Franchising Networks: A Property Rights Perspective.’ Entrepreneurship Theory and Practice. Baylor University, May 2011, DOI: 10.1111/j.1540-6520.2011.00440.x
Pricewaterhouse Coopers (21 Dec 2009) Franchise Business Economic Outlook. Retrieved from http://www.k2businessdevelopment.com/images/stories/documents/2010_pwhc_outlook_franchise_industry.pdf
Sivakumar, A & Schoormans, J P L (2011) ‘Franchisee Selection for Social Franchising Success.’ Journal of Nonprofit and Public Sector Marketing. 23:213-225
U.S. Government Printing Office (2013) ‘Part 436 – Disclosure Requirements and Prohibitions Concerning Franchising.’ Electronic Code of Federal Regulations. Retrieved from http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&sid=7fb172a7c5e183d29bce19e7031fab8e&rgn=div5&view=text&node=16:1.0.1.4.55&idno=16 Read More
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