Internationalization Opportunities for Chain Restaurants - Research Paper Example

Program: BBA, BA, S7. Individual Business Report HA725 Faculty responsible: S. Tustain Executive summery Internationalization is a difficult process as it requires an entry into a new market with different customer segments. The initial entry or establishment is like set up a new investment or enterprise. This is because it requires a heavy initial capitalization just as is the case with setting up a firm. In setting up an international chain of restaurants, the threats and opportunities that will be faced by the investor are more or less similar to those of establishing a business. Franchising is an opportunity that can lead to easy establishment of an international chain of restaurants. Within franchising, other benefits like reduction of risks to the investor, ease of capitalization and marketing are also identified within this report. Threats are also not left out within the model of franchising. The main threats to the establishment of a chain of restaurants are also given within this report. Introduction There are several opportunities that a business venture can pursue in the process of expanding its market share. Some of these opportunities lie within the current market or are extended to other market segments beyond international borders. Such opportunities beyond borders make a business want to spread its wings beyond its current economic borders. An entry strategy can act as either strength or an opportunity for an enterprise in its bid to go international. Each stage has to plan well as a pedestal for success. For instance, in Wit (2002), the threats to a positive result in the internationalization of US higher education is identified as the initial stages of planning and research. In the context of business, internationalization strategy mainly deals with the entry method that a selected firm uses to capture the new market. After a careful and proper analysis of a market, the choice of entry method can serve as a strength to the firm. However, without accuracy within the analysis or a bias could lead to the strategy being a threat to the expansion of the firm (Mundim, Allessandro and Stocchetti 2000). Common strategies employed by companies include franchising, mergers, acquisitions or just a direct introduction into a market. Several literature is available on the topic of internationalization that focus on different topical areas (Ruzzier, Hirsich and Antoncic, 2006). These include barriers and drivers to internationalization (OECD 2009), and (Romano & Ratnatunga 1995) that focuses on branding as an opportunity for small market enterprises growth. A potential gap in literature could be an observation on branding as a strength or weakness in the internationalization of an enterprise. The implication here is that there are many threats and opportunities resulting from different factors in a business environment. This paper, therefore, gives a report on Franchising as an opportunity or threat to the internationalization of a chain of restaurants business enterprise. Methodology The qualitative research approach is selected to carry out this research. The choice of a qualitative approach is based on the nature of the data that is to be used in the study. According to (Suryani 2008), it is essential to grasp the theoretical background of the research methodology before application. The information obtained by the individual is then what informs the choice of methodology. A qualitative approach is selected in this case due to the nature of the paper which is a report on how branding can be a strength or opportunity in internationalization. The main question that the reports seek to clarify is "how?". This could only be achieved through a qualitative approach and the use of words to explain the research question. Qualitative approaches are also best suited when one is trying to generate a broader explanation on a phenomenon. The suitability stems from the fact that it allows for an in-depth analysis of a small range of data in different perspectives The qualitative approach to this study was implemented by a case study. A case study offers a deeper observation of a given unit or phenomenon and makes a relation to another similar instance of the unit or phenomenon in another setting. As such case, studies are useful in providing insights into a situation that is of the same nature and orientation to the case being studied (Kohlbacher 2008). Feagin, Orum, & Sjoberg (1991) argues that the importance of a case study is based on the fact that its economical as a single individual can successfully carryout a complex research. Moreover, the use of a case study can offer a multifaceted investigation into a unit that yields a variety of explanations on the subject of the discussion. In agreement with this position, Klenke (2008) further explains that the use of a case study could even take many forms such as exploratory, explanatory or intrinsic analysis of a unit. For this study, the case study was conducted in three phases. The initial phase is data and evidence collection followed by an analysis of the evidence and then a reporting on the evidence generated in the end. Yin (2003) identifies the methods of collecting information or evidence in a case study as direct observation, participant-observation, archival records, documents, interviews and physical artifacts. It further commends the use of case studies as a method that has a high ability to generate a variety of evidence. In this study, the method used to gather information was mainly secondary sources. The study used empirical researches that have been conducted and information from other documents like books and journals. Much of the data analyzed are retrieved from the case of internationalization process of firms in the Brazilian textile industry. The study after that makes a link on the strategies employed by these companies like franchising to the strengths and opportunities for chain restaurants in the global market. It also reviews the trends in the restaurant related businesses in franchising and gives the data available on the same. Results Three companies are chosen from the Brazilian textile industry. The main reason for this selection is that there is an amount of empirical data that is available on the internationalization of these companies. The companies are Cia.Hering, Karsten, and Dudalina. Cia. Hering begun its operations in 1880 and main deals in the design, manufacture and retail of apparels in Brazil and internationally. Its internationalization began in 1960. The major markets targeted by this company are European countries and the United States. For each of these companies, the company uses specific strategies to capture the market. For instance in the United States market, the company uses value addition as an entry strategy. The company exported semi-finished apparels which were then customized for the American market before sale. In the South American segment, franchising is the main method that it uses to increase its presence. This is mainly bent on the fact that brand image is an efficient marketing position in the continent (Moreira da Maia and Lima 2011). Karsten is also a Brazilian company that deals in the manufacture of the bedroom, table and bath linen. The company was established in 1882. Its main reason for expansion internationally was to capture a more mature market for its products. The process of internationalization began in the early 1970s. The companys strength in the international market is as a result of the formation of different subsidiaries that are either producing or exporting its product. These subsidiaries work in the same way as franchises work and are capable of delivering high profitability (Moreira da Maia and Lima 2011). Most of its franchises in South America are totally owned by the company making it have higher sales in the region as compared to the competitors. Dudalina as compared to its rivals, the company is relatively new. It opened its doors in 1957 with major operations within the country. Its internationalization process began in the early 1980s this has since received tremendous benefits that include the ability to shake off a local economic crisis in the country. The companys franchises have not been successful (Moreira da Maia and Lima 2011). Most notably, the franchise that it ran in Uruguay did not result in the success that led to the company dropping its franchising ideology. From the review of the three companies that have been discussed in this paper, the results show mixed fortunes in the internationalization process. All the companies used a different approach towards gaining an international market segment. The most notable of the approaches identified in this study are value addition, franchising, and direct entry. The other details of the companies can be summarized as in the tables below. These tables indicate the exports of the companies and the relative stock turnover capacity sold by each in the international market. The percentage of stock sold in the international market is important in determining the efficiency of the business model or the brand image within the selected markets. It also shows the reception of the strategies and the reception of the brand at international levels. Cia. Hering Dudalina Karsten Year of establishment 1880 1957 1882 Products Apparels Apparels Household linen Turnover in $ 1.2 billion 240 million 965 million Export as a percentage of the turnover 2% 3% 7% Internationalization process Franchising, direct entry and other methods. No franchise, direct entry and sales through stores Franchising, direct market entry a Source- Moreira da Maia and Lima(2011) Internationalization strategies of Brazilian companies in the textile industry A major franchise destination identified by these companies is the United States economy. This choice points out to the fact that there is a huge potential of small businesses collaborating and succeeding in doing business within this economy. Dant (2008), points out that there are about 1500 franchising chain in the American economy. This represents a total of over 760,000 franchisees that operate within this economy with a substantially huge workforce. Within the hotel or chain industry, there are several franchises that have been identified by this study. These include the Hilton hotels and the Intercontinental group of hotels. Much of these hotels properties are owned and operated under franchise agreements. With the reputation that the brands have, the ease of success in the industry is higher compared to operation under the individual business name. In the early 1980s a common trend in the hotels and restaurants was to operate under a franchise. This gave rise to some of the strongest brands within the industry today. The brands also a have a high market presence internationally. The table bellow gives a list of hotels and chain restaurants that were operated with a franchise agreement within the same period. Firm Franchises Company owned Percentage franchises Kentucky Fried Chiken 3,600 800 81.8 Domino’s Pizza 439 245 64.2 Dunkin Donuts Inc. 1,100 70 94 Burger King Corp 2,767 488 85 Carvel Corp 700 2 99.7 Wendy’s international 1,606 767 67.6 Source Norton (1988) an empirical look at franchising as an organization form Interpretation of results The results from this research point to various directions about the internationalization of the companies. These companies employ different tactics and strategies in their entry to the markets selected. While the bulk of their sales remain within the local market, they export a substantial amount to the foreign markets. The percentage of exports per company varies with the turnover and the method used in entering the foreign market. Considering Cia. Hering, the level of turnover is high as compared to the rest of the companies that are used in this study. This implies that despite a small percentage of export, the market share that it commands is considerably higher than its rival firms. The results of the percentages of sales turnover can be best illustrated in the graph bellow. The international sale of Dudalina is seen to be smaller comparative to the sales gained by the two companies that use franchising as a method of internationalization. The failure by Dudalina in establishing a franchise in Uruguay could be an indication that in some economies, the aspect of franchising does not work well. The failure of the franchise can also be attributed to disadvantages of the franchise form of agreement. As noted, a franchise has several advantages. The advantages include the preopening impetus that the franchisor gives to the new branch and the post opening advantages (Hunt, 1977). Before the opening of a restaurant or any other type of franchise, the advantages of the trademark are transferred to it. It acts as a pre-market entry advertising to the new branch. For strong, reputable brand names, the advantage of the marketing is very high (Blair & Lafontaine 2005). The franchisor is also required to offer training assistance to the new enterprise to enable it cope with the franchisors standards. This eliminates the need for the franchisee to offer training to employees (Welch, Benito & Petersen 2007). As such, the benefits of the franchise can be seen as numerous, and it is a deserving business strategy. However, failure can also occur within the same arrangement. The failure can arise from the bad will of the brand image transferred from the franchisor to the franchisee. It can also result from the engagement between the franchisor and franchisee in their terms and conditions. The selective failure by Dudelina in Uruguay can also be attributed to the effects of government regulation. In most cases, the regulation by governments is that in international franchises, the use of local goods and services is mandatory (Campbell 2011). As a result, some governments cap the level of foreign input in the franchise agreement which can lead to their failures. In this case, government control is viewed as a threat to the establishment of successful franchises. The predominant method or form of business in the hotels and restaurant business is no doubt franchising. This position can be supported by the findings in the major international restaurants form of business above. The results can be presented by the graph below for purposes of illustration. Graph: a comparison of the form of business in major international restaurants. The trends in the restaurant business can be attributed to many factors. These include the reduction of risk to the franchisor, availability of capital (Lafontain 1992) and the high survival rate of the franchises. For investors that plan to make a move in to the international market, the advantage of the contribution of capital in a franchise arrangement covers the risk of loss. In the event of failure, the franchisee covers all the losses, and the franchisor is protected from the same. Culture and norms of different populations is also a factor in the establishment of these franchises. A franchisee is in the best position to understand the local culture and norms of the population around it. Food and culture are closely linked items. A franchise, therefore, is best suited in delivering great outcome to business in the food industry like restaurants. Apart from the food aspect of culture, the business norms in the country of the franchisee are only best understood by the franchisee (Fladmoe-Lindquist & Jacque 1995). This aspect will make the ability of the franchisor to benefit from keeping up with the norms be higher comparative to a direct entry. Conclusion Franchising offers both strength or an opportunity and a threat to a firm in the process of internationalization. Through internationalization, a business enterprise seeks to increase its market presence (Ubrežiová, Bujňáková, Kapsdorferová, & Majorová 2009), and this comes with the additional requirement of capital. In the case of failure to make an impact, the result is a great loss to the parent business. This means that a company going international faces the task of raising a huge capital and a potentially high risk of failure. To mitigate these difficulties, franchising can be a method employed by a company or an investor as they seek to expand internationally (Bates 1995). Franchising is an opportunity for the investor in the chain restaurants for many reasons. In order for an investor to come up with a chain of restaurants, a large amount of capital has to be raised. The capital requirement for location labor and production equipment for a chain of restaurants would be too much for a single investor to generate. As a result, the investor can go into franchise agreements that last for specific periods. At the end of the period, the investor can buy back the franchise with the profits accrued during the period or extend the contract (Paterson 2001; Brickley 2002). This kind of arrangement reduces the risk on the side of the franchisor. If the capital is wholly raised by the franchisee, the risk of failure is then wholly transferred to the entrepreneur in this case. As such all the losses are covered by the investor and not the franchisor (Welsh, Alon, & Falbe, 2006). Political and cultural risks are also mitigated in the same way within this kind of arrangement. Since the franchisee is well aware of the culture and norms within which the franchise is operated, the possibility of norm clash between the franchise and locals is limited. A similar case is witnessed in the likelihood of political interference to the franchise. As compared to direct investment then the use of a franchise minimizes the risks of doing business. Abel (2013) suggests that franchising can lead to value creation. The value created is a result of the choice of growth through franchising. Through franchising, as with the case of United States restaurant chains, market value and economic value are more likely to be created (Abel 2013). Franchising can also result on threats to establishing a new business even within the restaurants industry. The costs escalate over time, and a franchisee has to pay royalties that would otherwise not be payable if ne stated a new and independent businesses altogether (Press 2006; Kotabe & Helsen 2009). Flexibility in the business model is another threat that could limit the efficiency of operating a franchise (Mendelsohn 2004). Inflexibility results from the fact that in order to maintain similar quality as the franchisor in the restaurant business, the franchisee has to operate the business within the same models as the parent company. Recommendation In order to establish a chain of restaurants internationally, franchising is the best alternative taken in expansion. The selection of this alternative as a possible opportunity to the chain restaurants is as a result of the costs involved in terms of initial capital. The capital requirement for this business is huge, and an investor risks losing too much even if they had the resources to finance the operations. From the point of view of the franchisor, the reduction in risks, the availability of capital creation of value are major opportunities that the model of franchising comes with. Other benefits which are also business opportunities of franchising are related to the political and social business environments. 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