Entrepreneurs Who Wish to Expand Their Business Should First Expand Their Networks - Essay Example

"Entrepreneurs who wish to expand their business should first expand their networks" In the traditional business environment, business operating is a manual, time-consuming and labor-intensive process involving requests for quotation, purchase order submissions, order approval and confirmation, shipping, invoicing and payment. But with the help f information systems, business can gather information more quickly at a relatively low cost. For example, 1800-flower Company provides a broad range f give products. The company's information system collects and stores data on birthday and invitations, as well as a record f gifts send to specific recipients. It maintains a customer information file holding all such data which alerts them f forthcoming events. At the appropriate times the company sends customized message to the customers with suggestion for flowers and presents. The company gains a world-wide reputation. Therefore, good management information systems fast the business operation and use resource more effective. Basket Company also involves similar business actives we discussed above, by equipping the management information system, will greatly support business operation. Now the competition f basket market is very furious, it is not enough to improve only the product, we should impress the customers as a person who cares them more than their selves. To achieve the goal, we have to identify the trend f customer needs. Like large office goods supplier---Staples. The company system maintains lists f previously ordered items. Over time, Staples learned a great deal about its customers' preferences and use that information to offer new items. We value our employees as they play an important role in company success, but only with the helps f those tools, our employees and managers can easily make the decision on buy from supplier and predicate the profits. Thus, the good management information system plays a more important role in the competition. One f the outcomes f information system is the strategies for competitive advantages. The three basic strategies for competitive advantages are cost leadership, differentiation and focus. Management information system can have a considerable part to play in a competitive strategy, cutting the labor and administration cost during business operation, the business can sell goods or provide services at a price that is lower than the competitors. Surveys and feedback sessions will be conducted from detailed transaction records and various data to access the ongoing project. Expanding business network is in fact an expansion f an organization. Franchising is a generic term that describes a way f doing business. In essence a model f business structure that relies on a relationship in which an owner (franchisor) f a business has licensed others (franchisees) to use a business system and trade name to market and sell products/services. Thus it is a marketing concept f delivering products and services that can be applied across a diverse range f businesses. The International Franchising Association has developed 75 different categories describing the businesses f its members. Who is involved Franchising involves two parties: Franchisor - The franchisor is the initial owner f a business system which has been developed and proven to be a successful method f operating a particular business. As owner, the franchisor has the legal capacity to provide licenses to others (franchisees). Typically the owner seeks to expand the business through a relationship with others who have similar objectives. Franchisee - The franchisee is the party that has entered into an agreement with the franchisor to use the trade mark / business name and business system in a defined outlet or territory. How does it work Essentially the franchisee has agreed to be part f the franchisor's operation. In return for fees, the franchisee secures these rights for a set period f time and can expect from the franchisor: Training in business practices - Documentation on procedures - Advice and assistance in the operation and management f the business - Economies f scale in a number f business requirements; such as advertising and purchasing. A background on franchising Franchising is not a new phenomenon with examples f franchising that can be traced back to the 1850s. An early model is the relationship f breweries and hotels in New South Wales. The prominence f franchising today had its beginnings back in the 1930's, with an explosion f the concept occurring in the 1950's as the development f fast food chains took off across the world -as experienced by McDonalds. In the United States there are more than 20 current franchisors that have been operating since before the 1960's; with some having been established in the 1930's. Growth and future f franchising Franchising is reaching a level f dominance to a point that an independently run operation is becoming an exception rather than the rule. Franchising is the fastest growing method f delivering business services in the global economic system and currently accounts for more than one-third f all retail sales in the USA and UK. By the 2012, worldwide franchising is expected to have evolved into the leading form f retail sales. The phenomenon is more recent in the United States with currently 25% f retail sales occurring through a franchised operation. With an annual growth rate f franchised operated outlets in the order f 14% per annum, franchising now account for over 650,000 employees working for in excess f 50,000 franchisees. Retail sales through franchising are expected to soon reach 50%, compared with about 5% in 1980. Relevance to SME sector Franchising has elements f both large and small businesses. Generally operating on a state or national level with benefits f scale f economies through increased purchasing power a franchised operation might be considered a large business. However in this sense it does not have the scope f salaried employees managing company owned outlets; instead self-employed people operate their own business outlet in line with the requirements established by the franchising agreement. Whilst enjoying benefits f large scale operations, franchising remains essentially a small business by the nature f local ownership, local employment levels and profit distribution. The positive contribution f franchising has assisted in changing perceptions f small business and its relevance to the economic environment f America and illustrating the importance f small business providing services to consumers. Code f Franchising A national non-profit association with voluntary membership open to any organization involved in the sector, the FCA has the objectives f establishing standards, providing information and education and lobbying governments on relevant issues. Organizational and Structural Elements Types f Entities There is no particular rule for the nature f entity structure, however generally: Franchisors will usually operated under a company structure, with either private or public ownership; sometimes depending upon the level f maturity and size f the franchised operation. Franchisees, like any small business will operate under structures that normally exist including sole proprietor, partnership or private company. The basis f these structures will affect the nature and scope f potential funding sources; for example franchisees that operate as a private company are likely to be required by funding sources to provide directors guarantees. Documentation Franchise Agreement Both parties involved in a franchise relationship will enter into a franchise agreement; which is an enforceable contract. The contract will generally set out the rights and obligations f both parties, for example including the: - disclosure requirements imposed on a franchisor through the Trade Practices Act - details f the licensing agreement on the business system; for example that requires the franchisee to manufacture T-shits with specific requirements on colors, a particular logo and that they be 100% cotton Generally failure to comply with requirements will impose penalties, including termination. Other elements that should be addressed by the contract include the period f licensing, rights or options form renewal, nature and scope f franchise fees. Manuals and Policies The franchisor should develop a range f operational manuals and policies that reinforce the business practices and reflect the requirements f the franchise agreement. Policies will not only help to regulate the activities f an individual franchisee but also provide the basis f standardize practices across the entire franchised operation. These documents should describe the elements f how to run all aspects f the business. Additionally training manuals will be require for initial commencement f franchisees (and later reference) that are as much about how the processes are required to be undertaken but also about conveying the attitudes and expectations f the franchisor. Franchising fees In order to ensure ongoing survival f the brand and business system that forms the franchise it is essential that ongoing income is received from franchisees. This income is generally comprised of: - License fee - a once-off entry fee that providing access to the business systems and use f trade/business name. - Royalty fee - generally monthly fees based on an element f operation, such as the level f monthly turnover. Income derived from these fees, in addition to providing the franchisor with a personal income source will be used to develop and monitor the business operation, ensuring adequate marketing and promotion along with support to franchisees with training in business practices and management. Relationships General Implications Often the level f satisfaction f franchisees will be influenced by the ability f the franchisor to manage expectations and deliver on the initial promises f success. Franchisors and franchisees must exist in a cooperative manner that encourages the success f the business for both. A successful franchise relationship will be built on conscious efforts f all parties to maintain a relationship. Whilst disputes may arise it is a process f ensuring that they do not deteriorate into a destructive process. Agency Implications Agency relationships arise through the process f principals delegating decision-making to other agents that act on their behalf. Potential conflicts occur when the agents may not have the same objectives and motivation as the principles, leading to resources being directed away from the owner's objectives. These relationship issues are particularly evident in the case f large enterprises where an element f distance exists between owners & managers and to a lesser extent in small business managers where the owner & manager are generally the same person. Whilst franchising operations are by nature small businesses in which owners (not salaried employees) manage the business, the large state or national network structure does give rise to elements f agency issues similar to large scale operations. Whilst the motivation f local ownership will assist in aligning the objectives f the local owner (franchisee) with that f the franchisor and the group as a whole, agency issues can still arise including: - Operation f the franchised outlet outside the established standards and operating guidelines. - Shirking f effort to promote and generate new and repeat business; hoping to survive on the efforts f other franchisees. - Poor representation f the franchise brand in dealing with customers, damaging the reputation and goodwill f the whole franchise. Financing Elements - how to finance your franchise General Franchising can be viewed as a form f method f expansion that is self funding. In contrast to funding the growth f a business in which the business owner retains ownership f everything, a business that embarks on expansion through a strategy f franchising, the franchising partners ultimately provide the growth capital - thus allowing the franchisor to avoid being burdened with much f the heavy financing costs. A key to success for any business is being able to access adequate finance, relevant for both franchisors and franchisees, covering needs in working capital, property finance and plant & equipment finance. Proper preparation and planning for these financial needs is required as it lowers the risk to the lenders and allows the franchisor / franchisee to properly manage and utilize the funding provided and avoid the use f wrong financial options. The success and maturity f the franchising model has helped in opening the doors f funding providers. For example the ANZ Bank internet website has a specific segment devoted to finance for franchising stating "ANZ understands franchising". Additionally specific lending officers specialize in dealing with loans associated with franchising. Options for finance Sources f finance for both franchisors and franchisees will in some instances come from common sources, such as: - Equity - Banks - Leasing companies - Trade creditors - Profit retention However the nature f the franchisor will have access to some unique sources, such as Venture Capital and Public Offerings, but also will be subject to providing assistance to franchisees - in essence also being a funding provider. Personal Equity Generally a franchise operation will set a minimum amount f personal equity to be put into the business. This is the funds that can come from your own sources - such as savings, equity in personal assets or personal loans from family & friends. Banks The business f banks is to lend money and they specifically target the franchising industry. Many different type f loans are generally available, but the conservative nature f banks will generally lead to a requirement that any business loan is secured by personal assets or property security. In some instances another option might also be personal credit cards. Leasing Leasing is an option that allows the business to acquire plant & equipment without tying up cash or credit lines and it reduces the amount f cash needed to be raised. Whilst it may be a more costly option in the longer run, when initial cash is restricted it can provide a viable alternative. Trade Creditors Funding requirements can be meet through assistance provided by suppliers (Trade Creditors) who allow a period f time to pay for goods supplied, thus helping to finance the operation f the business. Within the scope f this option, franchisors need to consider offering assistance direct to franchisees, as a means f attracting suitable franchisees. Recently Bakers Delight have been attempting to attract younger aged franchisees, who generally lack asset backing but offer a longer term strategy for developing the franchise brand. Profit Retention A profitable business is its own source f funds where owners forgo returns in the expectation f retained funding further growth and development. This can be particularly useful when the cost f alternative funding is high or there is resistance to relinquishing equity (i.e. control) in the business. Whilst the above options might be options that are considered by franchisors and franchisees, the following are more specific to the franchisors only. Venture Capital Venture Capitalist will consider investments in businesses that have a potential for relatively high returns. A form f equity funding the venture capitalist will own part f the business with the expectation f being able to exit at some point (such as going public) to move onto new projects. Public Offering Through a public offering, shares in the business are sold to the public; a process f selling equity in the business. An option that involves considerable documentation and set up expenses it offer a means f funding further expansion (such as international outlets), a process f valuing the business and obtaining a return for the investment made in establishing the business operation. However it can result in a loss f control. Key factors include documentation, share value and careful selection f underwriters. Conclusion The United States, along with the rest f the world has in recent times seen the spectacular success f franchising with businesses building a network f outlets through a strategy f expansion by franchising. No longer are they limited by their own resources, establishing franchises built on the capital resources f other small business owners; governed by a standard f operating business practices. Options for financing follow traditional lines, however the maturity and success f the business model is changing perceptions f lenders who now specifically target potential franchise operators. Works Cited "ANZ Understands franchising", Retrieved 6 Oct 2005 from http://www.anz.com.au Ang, J.S., (1991), "On the theory f finance for privately held firms", Journal f Small Business Finance, 1 (3), 185-203. Ang, J.S., (1991), "Small Business Uniqueness and the Theory f Financial Management", Journal f Small Business Finance, 1 (1), 1-13. Chow, L. & Frazer, L., "Servicing customers directly - mobile franchising arrangement." European Journal f Marketing. Vol 37 No ¾ 2003 pp 594-613 David whiteley 2000 introduction to e-business McGraw-hill international UK Frazer, L., and McCosker, C. 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