Franchising Business Model - Research Paper Example

? Franchising Franchising has become a common marketing practice in today’s world. Franchising is basically a practice in which another firm’s business model is used but this is mostly done for successful firms. Franchising is a practice used as an alternative to building chain stores. This is done in order to distribute goods just like chain stores but in the case of franchising liabilities and investment is both restricted. Franchising is a type of retailing method that has spread very quickly all over the globe over the recent years. Franchising emerged as a new form of retailing (Bardsley, N., & Key Note Publications. 2000; Kotler, P. 2000) Franchising is a business model in which many different entrepreneurs share a single and common brand name. The person who owns a franchise is known as franchisee and the company who allows the entrepreneur to open up a franchise is known as franchisor. The parent company allows the franchisee to use its brand name and trademarks and also the strategies but in return charges a fee. The franchisee needs to pay a fee for using the parent company’s trademark and strategies etc. The franchisee also needs to pay royalties based on the revenues that it has generated from a certain franchise (Kotler, P. 2000) As explained earlier that franchising is form of retailing and it differs from all other form of retailing methods. Franchises are differentiated by three characteristics. First of all the franchisor is the owner of the trademark and licenses it to the franchisee in return for royalty payments. Second characteristic is that the franchisee pays for the right to be part of the system of the franchisor. And thirdly the franchisor is the one who provides its franchisees with an operating system or a system for doing business (Kotler, P. 2000) Franchising has helped in globalization. Franchising is a practice that has been used by various companies to reach the corners of the world. Companies use this practice of franchising when they want to expand globally. It has helped in the expansion of the businesses across the globe. Previously it was very costly for the businesses to expand globally. Franchising has reduced the cost of expansion. It is a faster and cheaper form of expansion. It is a cheaper form of expansion for the parent company because in this form of expansion it do not have to add a company-owned store but instead the stores are owned and operated by a third party (Czinkota, M. R., Ronkainen, I. A., & Tarrant, J. J. 1995; Kotler, P. 2000) Franchising does not work for all forms of businesses. Businesses for which franchising is a good retailing practice have several characteristics. These characteristics include that the business must have a good track record of profitability, the business could be easily duplicated, also that the business should have a detailed system of procedures and processes. Other characteristic include that the business should be unique and follow some unusual concept, also that the business should have a broad geographic appeal and it should be relatively inexpensive and easy to operate as well. It is not necessary for the businesses to have all these characteristics in order to follow the practice of franchising. Even if the business has any one of the mentioned characteristics, the business can incorporate the franchising into its business model (Bardsley, N., & Key Note Publications. 2000) The franchising business model is used among many industries but it is most popular amongst the fast food chains, hotel industry and the other restaurant industries. Examples of global brands that have entered into the business model based on franchising include McDonald’s, KFC, Subway, Burger King, etc. Franchising is a form of expansion but there is one very important thing that needs to be taken into consideration. Franchising is affected culturally. A particular franchise serves particular vicinity within which it is based. A franchise carries the name of a global brand but it needs to adjust according to the cultural norms within which it operates. The marketing practices also need to be adjusted accordingly. If the franchises fail to adapt to the cultural norms and values then is most likely that the brand will fail in that particular locality. Cultural norms are crucial point of concern for any franchise to start its operations (Sherman, A. J. 2004; Czinkota, M. R., Ronkainen, I. A., & Tarrant, J. J. 1995) As discussed earlier, franchising is most popular amongst the fast food chains such as McDonald’s and KFC. If we look at both the chains, they both operate globally. Their business model is based on franchising. They operate in different countries and different cultures. A common example of these fast food chains adapting to different cultures will be their menus. They have set their menus accordingly. In different countries they have prices their products accordingly. An example of KFC Corporation can provide with a detailed explanation of the cultural adaptation. KFC is the world’s largest fast-food chicken chain with almost 11000 franchises present in 80 countries or territories. KFC used a strategy of expanding globally through franchising. Same strategy was followed by KFC to enter into the Japanese market. Japanese termed fast food as an unhealthy food, made by mechanical means and also that it was artificial. What the franchise owner did was that in corporation with the KFC as a parent company, advertised the brand according to the Japanese culture. In order to build trust with the Japanese audience, KFC advertised by depicting that the chicken cooked at KFC carries an element of Southern hospitality, an old American tradition and also authentic home cooking. Similarly it also expanded in China and India and many other countries (Liu, W. K. 2008; Kotler, P. 2000) McDonald’s example can be looked upon to add as another example to the cultural adaptation. McDonald’s is a fast-food chain that is famous for its burgers. When it entered India, it had to incorporate some changes into its menu. In India beef is considered sacred so McDonald’s could not bear taking a risk in keeping the beef burger in its menu. So it tailored its menu according to the local tastes. McDonald’s prices in US and UK are quite high but in India the prices were kept low. It was observed that prices charged were quite low as compared to other developed countries. From both the examples of KFC and McDonald’s it is quite clear that any brand operating globally has to adapt to the cultures in which it operates. And the only way that these businesses have expanded is through franchising because it was otherwise costly for them to expand globally (Liu, W. K. 2008; Kotler, P. 2000) When it comes to following the practice of franchising there are some advantages and disadvantages associated with it. There are several disadvantages of franchising. There is high legal expense. In order to prepare agreements and to acquire the license the franchisee needs to incur a very high legal expense. Then there are technical legal constraints which mean that the franchisee needs to follow the technical procedures instituted by the franchisor. The franchisee needs to follow the technical standards and procedures set by the franchisor. Then comes the franchising marketing constraints. Everything from advertisements to the brochures, menus etc need to be approved from the parent company. Another constraint regarding the marketing is that the marketing costs are high and not any set marketing strategy can be followed all over. But this is mainly a disadvantage for the franchisor because he’ll be the one bearing the advertising costs. Then there is a disadvantage of control issues. There might be a difference in quality and controls as compared to the company-owned operations. This difference in quality and controls can raise an issue because there are quality standards and procedures set by the parent company. The franchisee will have to abide by all the rules. Another disadvantage is that the franchisee after some time might start questioning the franchisor as to what have the franchisor done for the franchisee because franchisee will be the one incurring all the costs of operating in a particular region or locality. Franchising is a rapid growth strategy and it may be too rapid that the franchisor might not have the capability of supporting the expanding franchises (Chen, S.-L. H. 1990) Disadvantages are there but they do not overshadow the advantages of franchising. In the present globally expanding businesses, franchising is an important practice and is being used widely. Franchisor and franchisee both gain numerous advantages from the use of this retailing practice. Franchisor does not have to incur high costs for opening up new company operated stores. All the costs are incurred by the entrepreneurs in different parts of the world. Franchisee gains an advantage, that it can make use of a well-known brand name. Franchising increases entry barriers for the competitors which raises the position of the brand that is setting these barriers. The franchisor gets high royalty fees and also high initial franchise fees. Franchising helps in building clusters of units in a single locality that helps in achieving of a dominating local presence. Franchising is a way of market penetration. It helps in reaching global markets at a cheaper cost. Another advantage is that franchises have a superior image over other distribution approaches. Franchising provides both a legal and an institutional structure that allows a strong and detailed control over the individual franchise’s marketing and operations (Chen, S.-L. H. 1990; Kotler. P 2000) Franchising is not just restricted to the retail outlets. There are other types of franchising as well. Retail franchising is the traditional approach. One of the new approaches is the manufacturer-sponsored retailer franchise in which the manufacturer provides licenses to the dealers to sell its products. These dealers are basically independent businesspeople who agree to the terms and conditions laid down by the manufacturer. Another new approach is manufacturer-sponsored wholesaler franchise. An example of this would be Coca-Cola who provides with licenses to the wholesalers that they could buy its syrup then carbonate, bottle and sell the product further to the retailers in local markets. Franchising has now become a common practice used by most of the businesses. An entrepreneur needs a large capital amount for opening up a franchise. The businesses need to understand the importance of franchising in today’s world and should maneuver their business models accordingly. Franchising generates new employment opportunities in addition to the expansion of businesses. It also provides a wider scope for marketing as different cultures are involved in setting the marketing strategies that need to be followed in different countries. Through franchising businesses can gain a global presence and dominance at a cheap cost (Kotler. P 2000) References Bardsley, N., & Key Note Publications. (2000). Franchising. Hampton, Middlesex [England: Key Note Publications Kotler, P. (2000). Marketing management. Upper Saddle River, N.J: Prentice Hall. Sherman, A. J. (2004). Franchising & licensing: Two powerful ways to grow your business in any economy. New York: AMACOM. Czinkota, M. R., Ronkainen, I. A., & Tarrant, J. J. (1995). The global marketing imperative. Lincolnwood, Ill., USA: NTC Business Books. Liu, W. K. (2008). KFC in China: Secret recipe for success. Singapore: John Wiley & Sons (Asia. Alon, I., & Welsh, D. H. B. (2001). International franchising in emerging markets: China, India, and other Asian countries. Chicago: CCH Inc. Chen, S.-L. H. (1990). The advantages and disadvantages of franchising to the prospective investors of the fast food restaurants. Read More