Developing the business Flashcards
How can a franchisee expand a business?
The rights of franchisees are limited to operating a business for a fixed period, usually within a fixed region or territory.
Business expansion can take the form of growth within the fixed site or, with the support of the franchisor, expansion into additional sites.
What is multi unit franchising?
When a franchisee is given the rights to operate multiple stores or regions.
In most cases franchisees do not have rights that oblige franchisors to allow them to open multiple sites, either within their own territory, or in additional territories.
In some cases franchisors are against the concept of franchisees owning multiple outlets because they believe that the time of the franchisee is best spent
focussing on only one site.
However, as the franchising industry matures there has been an acceptance of allowing competent franchisees the right to open multiple franchised sites, or outlets.
The caveat is ‘competent’ franchisees. It would be unusual for the franchisee to be granted a right to expand into additional site in the franchise agreement, but permission can be granted if both franchisor and franchisee agree.
Why would someone operate a multi-unit franchise?
There may be economies of scale if two sets of accounts and administrative functions can be run side by side, and the gross profits achieved from
additional turnover would hopefully offset a possible increase in staffing costs.
The risk of the second site would be less than for the initial site because the franchisee would know the
system, the potential profit margins and the attitudes of the franchisor before making the increased investment
If the sites are in adjoining territories, which would be convenient for the franchisee, possible dilution of the trade of the first site must be taken into account
when determining the viability of the expansion.
However, if the franchisor plans to grant another franchise in that adjoining territory the existing franchisee may wish to expand rather than watch another franchisee take some of the customers.
Some, but not all, franchise agreements, give a right of first refusal to acquire franchises in adjoining territories.
How can a franchisee grow within its territory?
Managing competition and innovation compliant with the system.
There is a point when the franchisee must take some personal responsibility for continued growth.
Franchisees know what is happening in their local area better than the franchisor, can assess the competition, and watch localised trends.
Provided that any innovations are implemented in accordance with the franchise agreement, franchisors will often look favourably upon self help attitudes and provide them with additional support.
If a franchisee is diligent in the operation of the franchised business and aware of local conditions, they will be able to outperform other franchisees in the same system
What are ten pointers for franchisees to understand competition?
1) know who the competition is
2) know the corporate culture of the competition
3) build an inventory of the offerings of the competitor
4) assess the reputation of the competitors
5) become a customer of the competitor
6) investigate the detail of the competitor’s employee relations
7) watch for trends
8) watch prices (though do not necessarily compete on price alone)
9) keep abreast of social media
10) become familiar with the local market share.
Why might a franchisor expand overseas?
A domestic market has become saturated,
A business stagnates because of increased competition
Franchisors are uniquely well placed for
international expansion because they will have already developed systems of expansion through the network of independent businesses: the franchisees.
There are very significant costs and risks associated with international expansion
They need a stable domestic business that can support the additional costs that such an expansion would entail.
What are the challenges with expanding overseas?
1) different cultures,
2) political environment
3) economic environments.
But also
4) Competition
5) Demand
6) Operational risks
These risks are similar to the risks faced by the franchisor when the first decisions were made to expand domestically through franchising.
What should a franchisor do to expand overseas?
Decide upon the country, or countries, to target.
Perform detailed research and preferably another pilot operation.
The risk of international expansion is reduced if the customer profile in the target market is very similar to that of the market of origin with similar cultures and economies.
It is sometimes decided that the first foray into international expansion shall be into similar neighbouring country like Australia and New Zealand and the United States of America and Canada.
Some countries will not allow foreigners to
establish businesses within their boundaries unless the foreigner has a local partner, others require a huge amount of investment (and paperwork) before permission is granted to operate on shore.
What are cultural risks with expansion?
1) Different religious beliefs and different tastes; they
language,
2) Corruption or usual inducements expected by bureaucrats,
3) Levels of education of the potential staff and the attitude to work.
If the franchisor is not able to navigate through these factors alone they might need local advisors and a willingness to be flexible.
What are political risks with expansion?
The political risks can be very difficult to minimise and often have greater influence upon the success or otherwise of an overseas venture.
1) Complex taxation regimes including withholding taxes,
2) more (or less) stringent labour laws
3) volatile political situation that does not bode well for foreign investors.
Some countries with emerging economies welcome foreign investors, support franchising and provide incentives for individuals to open small businesses particularly in franchising which is seen as a lower risk than other small business.
What are economic risks with expansion?
1) Currency exchange in the era of floating currencies, 2) interest rates and in-country inflation
can all impact negatively upon the sustainability of international business.
3) The willingness of the local population to use their disposable income buying the products or services offered by the franchise.
What are the methods of country expansion?
1) Subsidiary
2) Direct Control Method
3) Master Franchisee
4) Joint ventures
What are the pros and cons of a subsidiary?
A subsidiary is where the franchisor incorporates a company in the target country and would operate locally,probably with a mix of ‘head office’ and local staff.
Advantage:
The level of control, albeit remote, over the processes in the new country.
Disadvantage:
Very expensive to establish, but this is to be balanced
against the potential income from controlled growth and direct contractual and financial relationships with franchisees.
What are the pros and cons of the direct control method?
This is where the franchising operation in the target country is run by the ‘head office’ in the country of origin.
Only sustainable if the countries were in close proximity and there were no significant ‘country risk factors’.
Unless the same currency is used in both countries there will still be foreign exchange issues and the transfer of monies across borders which can give
rise to reporting obligations.
What are the pros and cons of a master franchisee?
When a franchisor allows a subsidiary or separate company to assume the role of the franchisor for a region.
Advantages:
1) The costs of entry are much lower than they would be if there was company expansion
2) The master franchisee could be owned by nationals of the target country so there will
be no difficult foreign investment hurdles to overcome.
3) The master franchisee could be operated by nationals of the target country who are
aware of the market place and the competitors.
4) The master franchisee is well placed to recognise any variations to the business model
that might be advisable.
Cons:
1) Master franchise agreements, and the relationships between franchisees, the master franchisee and the franchisor, can become complex.
2) Dilution of the royalty stream that comes from that country or territory
