Cultivating a franchised business Flashcards
What is the franchise cycle?
The franchise cycle relates to the franchise system from the perspective of the franchisor. It consists of
1) Conception
2) Research
3) Pilot operation
4) Development
5) Maturity.
What is the conception stage of the franchise cycle?
Virtually all business development begins with an idea. In franchising, the initial idea might be to:
1) develop a business which later seems appropriate to franchise
2) expand an existing business using the franchise model
3) create a business for the purpose of franchising.
Good business practice would suggest that the idea be followed by market research and viability studies. The research stage should, however be considered as an essential stage in the launch of a franchise system.
What is the research stage of the franchise cycle?
A prospective franchisor considers whether the business:
1) can be duplicated
2) will work in different areas or regions
3) will be viable for franchisees.
4) is viable for the franchisor.
The act of franchising is expensive and many of the expenses are front loaded.
The franchise system must be detailed and documented, trademarks and any other intellectual property must be properly protected, agreements must be drafted and, where required, disclosure
documents prepared and membership of franchise organisations arranged.
The launch of itself involves promotion and consequent expense. Therefore the prospective franchisor must research the number of franchises that must be sold to achieve operational break even, and the likelihood of selling that number within a reasonable period of time.
What is the pilot stage of the franchise cycle?
The franchise concept is tested through a small scale pilot, typically lasting at least one year.
Without a pilot business any projections about
income and profit margins are, at best, educated guesses and any inefficiency in the service delivery system would not have been exposed.
The pilot tries to determine the critical success factors for the business.
What is the development stage of the franchise cycle?
The franchise network is developed through sales to franchisees. While rapid growth of the system is anticipated, if the franchise system does not attract franchisees in the numbers expected the franchisor can suffer serious cash flow problems, and development and expansion of the system can
stall.
This is a very vulnerable stage for the franchisor as the costs of promoting the franchise system combined with providing services to existing franchisees can be prohibitive.
What is the maturity stage of the franchise cycle?
The franchise system is able to provide sustainable businesses for the franchisees and a reliable income for the franchisor.
The benefits of franchising, including bulk buying power of goods and services as public recognition of the brand will have been well established by this point in the life cycle of a franchise system.
This stage does not equate to an end of development. Strong franchisors remain alert to changing trends both in technology and customer requirements and work with franchisees to maintain brand equity
What are the attributes that you would expect to see in a potentially successful franchise system?
1) can be duplicated
2) will work in different areas or regions
3) will be viable for franchisees.
4) is viable for the franchisor.
When is a franchise most vulnerable in the franchise cycle?
The development stage.
If the franchise system does not attract franchisees in the numbers expected the franchisor can suffer serious cash flow problems, and development and expansion of the system can stall and the business can fail.
It is during this stage that the franchisor might be tempted to overstate the benefits of becoming a franchisee, or offer unwise inducements to attract franchisees.
What is the role of the franchisee in developing the franchise?
While franchising may reduce the risk of starting a new business, but it does not eliminate that risk.
In the case of a fixed site, retail franchise that is associated with a well-known brand, the location and signage will be significant aids, but alone they will not guarantee success.
The tenacity, attitude, willingness to work and build relationships are all requirements for success.
When the new franchise is in a service industry and there is no fixed site, the importance of the franchisee building relationships within the local community is essential.
The support and marketing provided by the franchisor is not usually enough, positive action by the franchisee is necessary.
What are the unique challenges associated with service based franchises?
Although the franchise might be associated with a recognised brand, the presence of a new franchise in an area is not as obvious as when there is a large fixed site.
Management skills are critical
Franchisees must use every opportunity to promote their business and secure relevant customers for their customer base.
Building relationships within the local community is essential.
What are the steps essential to a successful launch?
In addition to the pre-launch costs, prospective franchisors must anticipate a period of up to two years before a new franchise system will generate profits for the franchisor.
In addition to the financial analysis and pilot site, other steps essential to a successful launch, include:
1) Protecting intellectual property, particularly trademarks and any patents
2) Formalising a robust supply chain
3) Designing clear franchisee selection criteria
4) Documenting the operations, or service delivery systems
5) Making decisions about various matters such as the ownership structures, duration of franchises and flexibility of operations.
What are the critical success factors to determine from a pilot?
1) Unique and sustainable business model
Standardised business model, tried and tested system
2) Strong brand
Existing brand, recognizable and appealing
3) Easy to control
Clear control mechanisms, comprehensive training manual
4) Managed expansion
Excellent ongoing training and support. Clear franchisee selection criteria
5) High entry barriers
Difficult to copy business model, Loyal and identifiable target group.
What are the post-launch challenges?
1) Selling franchises
If there has been at least one successful pilot outlet there will be a basis for projecting turnover and profitability, but such projections are still based on assumptions about the repeatability of the pilot in
different locations with different personnel.
A pilot operation will have the benefit of providing some market penetration and brand recognition, both positive factors when trying to sell franchises
Deciding whether to implement multi-site franchising and sell additional sites or territories to existing franchisees.
2) Deciding whether to retain pilot sites or sell to franchisees.
Sale can reduce the financial burden. However, If the franchisor has a test site, innovations can be tested,. The testing process will provide franchisees with the confidence that changes to the system have been trialled.
Pilot sites provides the franchisor with direct intelligence to supplement that received from franchisees.
3) Sales and expansion too aggressive and rapid. Territories not large enough and the ability of the franchise system to sustain difficult economic times untested.
What are the key considerations in multi-site franchising?
This is where you sell additional sites to current franchisees.
Advantages:
The franchisees already know the system and how the franchisor operates and there may be some economies of scale, particularly with back end administrative work.
Disadvantages:
The dilution of personal control if a franchisee operates more than one site is the main negative of multiple sites. (Spread to thin)
What are the nine P’s?
1) Product
2) Price
3) Promotion
4) Place
5) People
6) Processes
7) Physical Evidence
8) Perseverance
9) Pride
