Franchises as a Form of Business Start-up - Essay Example

Franchises as a Form of Business Start-up In the 21st century, franchising has become a more popular practice for new market entrants. Franchising refers to a process in which an organization intending to enter a new market purchases the right to use an organizations business model. The history of franchising dates back in the 19th century when European local titled land owners would grant peasants the right to hunt or even hold markets within these lands. Today, even large corporations are finding this as the most flexible approach of starting up business in new markets. Franchising has a wide range of advantages including capital reduction, risk sharing and the benefits of a streamlined business model. The Franchisee finds it easier to pay the initial and the loyalty fees which are way lower than the required capital cost. At a time when cost has become an important aspect of business, Franchising has become a winner for international companies that intend to penetrate as many markets as possible in their global business design strategy. McDonalds is among companies that have franchised in an effort to expand their business within new markets. The organizations has profited from rapid expansion, use of effective business models and reduced cost entering new markets. From this note, franchising has become a popular practice due to its efficiency in business start-up. In the modern business industry, organizations are experiencing pressure to start new businesses in the international market as one way of appealing to bigger geographical space. One major driver for expansionism in business is the saturation of local business markets. Before the 21st century, organization sharply focussed on expansion of business within the local markets due to the increasing demand for products within such markets. However, the demand in the local markets has reached a plateau phase and organizations can make little profits from these markets (Francois & Wooton, 2010). When demand remains flat, organizations are at the risk of incurring losses as expenses go higher while the profit remains constant (Garg, Priem & Rasheed, 2013). Consequently, organizations are forced to move out of the local markets and consider entering into new markets. Therefore, fall in demand within local countries has forced organizations to consider appealing to a broader geographical coverage as the only way to remain profitable. Secondly, the upsurge of competition within local markets has motivated organizations to consider launching international business strategies. For instance, the rise in competition in countries such as US consumer product industry has affected investors such as Starbucks and McDonalds. Competition within a market results to the reduction of profitability due to the struggle for a small market demand. As the supply exceeds demand, organizations surrender their bargaining power to the consumers, leading to price reduction of their products (Boeker, Goodstein, Stephan & Murmann, 1997). As prices go down, investors experience reduced profits and their ability to open new businesses within such markets is limited. Therefore, such companies have to find new potential markets to ensure that they escape harsh market conditions. The global interconnection evident in the current century has provided a platform for organizations to launch their internationalisation strategies (Gerhardt et al., 2013). As the world crystallizes into a small global village, companies have an opportunity to enter new markets and take advantage of growing demands within in different markets. For instance, the Middle East has become one of the potential markets for US consumer product companies as they focus on the unexploited opportunities for their products (Francois & Wooton, 2010). On this note, globalisation has paved way for organizations to escape competition within saturated local markets and to take advantage of new markets where demand remains untapped. While internationalisation strategy is the ultimate solution to the problem of market saturation and the preliminary requirement for business profiling, it is a big challenge for organization. New markets are characterised by uncertainties and requires enough research to understand the market dynamics. (Yadong, Jinyun & Lu Wang, 2011). Since every business market is unique in terms of consumer tastes and preferences, social-political attitudes as well as regulations, it becomes a challenge to enter into new markets. Blind entry into a new business market is the cause for failure of many organizations within new markets. Besides, entry into new markets is expensive and requires a company to plan a huge budget as an initial capital. In addition, organizations are never certain of how customers will respond to their products. Therefore, despite the numerous advantages of an internationalisation strategy, it is clear that a wide range of challenges awaits any organization that intends to start a new business. Franchising seems to be an ultimate solution to a number of challenges that come along with starting a new business. Evidently, organizations have used different practices while entering new markets. Besides Franchising, there exist other market entry strategies such as wholly owned subsidiaries, alliances, exporting and joint ventures. However, there is evidence that each market entry strategy has its own limitations and organizations have to choose one which meets its needs (Yadong & Huaichuan, 2009). While choosing a market entry strategy, organizations have to make wise decisions as there are consequences for their choice. Often, firms are looking for cost effective strategies that ensures that companies have minimal expenses. Secondly, organizations seek to diversify market risk to avoid too much loss in the event of failure (Vickery, 2014). Apart from this, while entering new markets, organizations look for a strategy that is easy to exit with the least negative consequences. As such, there is a direct relationship between the success of an organization and the route it decides to take while starting up a new business. From a close evaluation, Franchising has become a popular practice due to its advantages. In comparison with other market entry strategies, Franchising is the favourite when it comes to the cost of starting up a business. Designing a business model is an expensive process for organizations due to the high costs of opening new stores. Therefore, organizations are running from high capital costs that are involved in opening new subsidiary stores. Therefore, Franchising allows organizations to escape the high capital cost that may impact on their product prices. As competition is inevitable both in the short and long-term for organizations, it is crucial for manager to reduce the cost of investments as it has a direct impact on the price of their products. When companies franchise, they are able to offer competitive prices within the new market, which is crucial in an era when price is the key driver of customer behaviour (Nijmeijer, Huijsman & Isabelle, 2014). Organizations that open up subsidiaries in new markets increase their cost of investment and have to design a whole business model. In addition, designing a complete business model is a long process that organizations have to take years before its successful. Therefore, Franchising gives them the opportunity to enjoy a well-developed business model and hence avoid the crude process of starting a new one. From this perspective, franchising popularity arises from its advantage in reducing the cost of investment. Next, Franchising as compared to other market entry approaches allows a company to enjoy the benefits of a fully grown business model. Developing a successful business model is a big challenge for many organizations. Organizations require extensive environment scanning before even starting up a business. Marketing research seeks to identify consumer tastes and to understand the dynamics of the new market. Organizations take a few years before they can design products that best suit their target markets (Antonowicz, 2011). Since market pressure is always pushing, organizations that go it alone business have to submit to a slow process of settling in foreign markets. Franchising is the ultimate solution to the long and slow process of setting up a business in new markets. Since companies want to enter new markets and settle while the demand still lasts, they opt for this approach. In short, franchising allows organization to rapidly deploy their expansion strategy while minimising their cost of investment. Thirdly, Franchising eliminates a wide range of risks that organizations need to consider while entering new markets. While organizations remain optimistic in the expansion strategy, there are times when the outcome is not predictable. As a result, managers have a certain degree of uncertainty as they consider starting up new businesses. For instance, while the Middle East markets are opening for consumer products, the business environment is complex due to changes in economic stability, cultural and religious attitudes and unpredictability of customer behaviour. Therefore, entering this market poses risk of business loss for any company (Lewandowska, 2014). Companies are preferring franchise as one way of absorbing this risk. Purchasing the right to use the economic model of an organization helps an organization to reduce the chances of loss. Since there are many Franchiser companies, organization have had a good opportunity to select the best organizations that suit their match their economic model. In one way, Franchising has helped many companies to reduce business risks while starting up business in uncertain markets. There exist numerous franchisors available for Franchisees when they decide to enter new markets. McDonalds is one of the companies that has successfully offered the rights of franchising to many companies. About 80% of the company’s stores are operated by franchisees all over the world (Spiropoulos, 2014). The reason why McDonalds is a favourite for many companies is its international image as a consumer product company. Therefore, organizations have found it favourable to use this good image to inject efficiency in their business organizations. A good corporate image is crucial for any business that intends to attract its consumers and to increase its sales. Organizations that buy McDonalds rights enjoy a good supply chain management strategy that starts with effective advertisement, strong operational strategies and effective customer relationship approaches. Kathryn Slater-cater, the franchisee of McDonalds in Daily City California is one of the investors who have leveraged the strong organizational model of the company to start business in California. The company has enjoyed the benefit of working with good business system, while reducing its investment capital and sharing the market risks. However, it is clear that there exist a number of challenges in franchising strategies. In buying the rights to use a franchisors economic model, the operational cost is low but the initial capital is may be high. Apart from this, the companies bargaining power is jeopardized especially when the parent company decides to change its business model. Where such changes may impact negatively on the franchisee, they do not have the privilege to campaign against this change. For instance, Kathryn Slater-cater, the franchisee of McDonalds in Daly City California complained against the high cost of the franchise that has compromised their ability to pay its employees (White, 2014). She expresses the need for government regulations to provide the franchisee with the right to bargain against any oppressive acts of the franchising companies. In addition, franchising may result to the destruction of a company identity, hence leading to loss of organizational value. Therefore, organizations must exercise caution while entering into franchise while starting up their business. From a close evaluation, it is crucial for organization to consider the best franchise firms that best suit their development strategies. One crucial factor for any organization is the ability to select an organization that matches its own business system. A good business system allows franchisees to achieve profitability in the shortest time possible. Secondly, it is crucial for an organization to choose a company that supports its own business strategy (Binh & Terry, 2014). When organizations enter into new markets, they need to retain their identity while using the franchisors profile to roll its own products to the public domain. Thirdly, is crucial for an organization to consider the long-term impacts of the franchise on its economic returns. While firms remain hopeful in making profits, it is crucial for organizations to consider an exit strategy (Blanchard, 2013). Often the franchisor may make it hard for franchisees to exit their union (Daley, 2014). On this note, organizations need to design an exit strategy before entering into a franchise. On this ground, while there are many advantages of franchising, it is crucial that organization make wise decisions while starting up their businesses. In conclusion, franchising has become a common practice for both small and large business organization at a time of business expansionism. Notably, franchising gives organization an opportunity to reduce the cost of capital investment, share business risks and enjoy the value of good business models. Resultantly, managers are finding it easy to start new businesses within new markets which are crucial for business differentiation at a time when local markets are turning unprofitable. The increase of many franchisors gives franchisees an opportunity to choose organizations that match their own business models and ones that will push business to a new level. However, it is notable that organizations are aware of the challenges of franchising. This market entry strategy constrains the rights of the franchisees and reduces their bargaining power within the deal. Secondly, it is advisable for organizations to consider an exit strategy when such strategies turn soar. This way, an organization can ensure that they enter into beneficial relationships that best satisfy their business plans essential to position them in the business market. Bibliography Antonowicz, A 2011, 'The Dissemination Of Franchising All Over The World: An Attempt To Assess The Scale Of The Phenomenon', Problems Of Management In The 21St Century, 2, pp. 8-18, Business Source Complete, EBSCOhost, viewed 2 December 2014. Binh, N, & Terry, A 2014, 'Meeting the Challenges for Franchising in Developing Countries: The Vietnamese Experience', Journal Of Marketing Channels, 21, 3, pp. 210-221, Business Source Complete, EBSCOhost, viewed 2 December 2014. Blanchard, K 2013, 'A veteran's perspective on franchising: franchising proves that success is attainable while maintaining balance between structure, competitiveness and freedom', Franchising World, 5, p. 18, Business Insights: Essentials, EBSCOhost, viewed 2 December 2014. Boeker, W, Goodstein, J, Stephan, J, & Murmann, J 1997, 'Competition in a Multimarket Environment: The Case of Market Exit', Organization Science, 8, 2, pp. 126-142, Business Source Complete, EBSCOhost, viewed 2 December 2014. Daley, J 2014, 'Bullish On Franchising', Entrepreneur, 42, 1, pp. 143-160, Business Source Complete, EBSCOhost, viewed 2 December 2014. Francois, J, & Wooton, I 2010, 'Market Structure and Market Access', World Economy, 33, 7, pp. 873-893, Business Source Complete, EBSCOhost, viewed 2 December 2014. Garg, V, Priem, R, & Rasheed, A 2013, 'A Theoretical Explanation of the Cost Advantages of Multi-unit Franchising', Journal Of Marketing Channels, 20, 1/2, pp. 52-72, Business Source Complete, EBSCOhost, viewed 2 December 2014. Gerhardt, S, Hazen, S, Dudley, D, & Freed, R 2013, 'Franchisor Fees & Expense Requirements Base Lined To Mcdonald's Corporation', Asbbs Ejournal, 9, 1, pp. 71-81, Business Source Complete, EBSCOhost, viewed 2 December 2014. Lewandowska, L 2014, 'Franchising as a Way of Creating Entrepreneurship and Innovation', Comparative Economic Research, 17, 3, pp. 163-181, Business Source Complete, EBSCOhost, viewed 2 December 2014. Nijmeijer, K, Huijsman, R, & Isabelle, N 2014, 'Creating advantages through franchising in healthcare: a qualitative, multiple embedded case study on the role of the business format', BMC Health Services Research, 14, 1, pp. 1-29, Academic Search Premier, EBSCOhost, viewed 2 December 2014. Spiropoulos, R 2014, 'Best buys in franchising', Black Enterprise, 2, p. 56, Business Insights: Essentials, EBSCOhost, viewed 2 December 2014. Vickery, P 2014, 'The New Franchising Code: A new era for franchising', Mondaq Business Briefing, 2014, Business Insights: Essentials, EBSCOhost, viewed 2 December 2014. White, M 2014, 'Hold That Order - Perspective On NLRB vs. McDonald's As Joint Employer Of Franchise Workers', Mondaq Business Briefing, 2014, Business Insights: Essentials, EBSCOhost, viewed 2 December 2014. Yadong, L, Jinyun, S, & Lu Wang, S 2011, 'Emerging Economy Copycats: Capability, Environment, and Strategy', Academy Of Management Perspectives, 25, 2, pp. 37-56, Business Source Complete, EBSCOhost, viewed 2 December 2014. Yadong, L, & Huaichuan, R 2009, 'An Ambidexterity Perspective Toward Multinational Enterprises From Emerging Economies', Academy Of Management Perspectives, 23, 4, pp. 49-70, Business Source Complete, EBSCOhost, viewed 2 December 2014. Read More