Franchising has go through all the companies internationally as it has been a creative scheme for entrepreneurs who are fearful to initiate their personal company and the danger of being businessman , franchise could be defined as “agreement whereby someone with a good idea for a business sells the rights to use the business name and sell a product or service to others in a given territory” [1] As shown in the figure below, the process of franchise agreement. (McHugh, McHugh, & Nickles, 2006).
Figure 1.1
Although franchising is most commonly associated with fast food outlets, the concept has been applied to a very wide array of both consumer and business-to-business services and now spans some 75 different product categories [2] . (Jim & Lee, 2007). New types of franchises are being created and commercialized all the time in countries around the world. [3]
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The most important difference among franchise association and other contractual agreements is that franchise scheme are in general based on several unique good or service; on a technique of planning business; or on the trading name, care or copyright that the franchiser has widened. Franchising has been well-known in fast foods, health and fitness centers, motels, real estate, haircutting, travel agencies and auto rentals.
Advantages of Franchises.
Management and Marketing assistance: entrepreneur who do franchising has a superior opportunity to be successful than a entrepreneur who is opening a business as that person previously has aid from the franchisor as the brand is famous and is previously in the market the franchisors makes the advertisings and decides the position and expands supports in the other procedures [4] .(Nickels,McHugh,McHugh,2008)
Personal ownership: entrepreneur (sole proprietor or partnership) who is a franchisee is the proprietor of his business therefore achieving the revenue. However, the regulations and policy are done but the fact remains that the franchisee is his own boss.(Nickels,McHugh,McHugh,2008)
Nationally recognized name: for instance, opening store like Zara which is famous in all countries, the franchisee’s business is not introducing new product or service, thus the procedure of introducing or going through the acknowledgment procedure is excluded because the Zara is previously well-known. (Nickels,McHugh,McHugh,2008)
Lower failure rate: When a businessman franchise, he is buying an well-known brand name that has been successful. Statistics demonstrate that franchisees has a better possibility (66%) of achievement than entrepreneurs who starts personal company. . (Nickels,McHugh,McHugh,2008)
Disadvantage of Franchises.
Large start-up costs: majority of franchises demands a high establish fee that may be hard for franchisee to attain. Therefore, it may be high-priced reason the franchisee to take loans from banks to manage to pay for the establish. (Nickels,McHugh,McHugh,2008)
Management regulation: management of franchises has its own technique in being directives with policy and laws. Setting restrictions for the franchisees could make them believe like they aren’t directing their own business, ” for example, franchisees joined forces to sue franchisor Meineke Discount Muffler Shops, Inc., for fraudulently pocketing money they gave the company for advertising. The franchisees won an initial judgment of $390 million against the company.” (Nickels,McHugh,McHugh,2008)
Coattail effects: the “coattail effect” is once the franchisor’s business is cost-effective and in the enlargement level afterward the franchisor’s faces a huge dilemma when his franchisees are weakening regardless of how this business is beneficial the franchisor have to recognize that his business is at danger if his franchisees are failing. (Nickels,McHugh,McHugh,2008)
Restrictions on selling : selling a private business is more easier than reselling a franchising business. with the purpose of controlling the high quality, franchisors have to sell their companies or stores to a franchisor that agrees to follow their principles and relate it to business. (Nickels,McHugh,McHugh,2008)
Types of franchises
Product Distribution franchises: basically selling the products and “supplier dealer” relationships. The franchisor certifies its trade name and design to the franchisees nevertheless usually does not offer them with an whole system for running their business. Such as Pepsi and Ford.
Business format franchises: conversely, it is using a franchisor’s goods, service and trademark, although the whole technique to accomplish the selling itself, for example the marketing plan.
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McDonalds case study
McDonald’s is the best example for franchising. McDonalds gives the right to sell their goods to franchisee wishing to develop their business.
McDonald’s buy or rent the location and the building. The entrepreneur (franchisee) owns the furniture, the equipment and the right to work the franchise for 20 years. To make sure consistency all through the world, all franchisees must use standardized McDonald’s branding, menus, design layouts and administration systems.
Benefits for McDonalds.
When the franchisee accepts to control McDonalds according to “McDonald’s” principles of value, service and quality. McDonald’s frequently evaluate the quality of the franchise production and collapse to keep principles might threaten the license. The franchisee should predictable to turn out to be concerned in local events and charities.
When a company decides to franchise, they have to maintain the quality of the product and ensure how it is done. For instance, if a company usually sells a high quality product, but in a specific country, they don’t really care. This might affect the company as maybe scandals could happen or start to boycott. The McDonald’s method, though, has been effectively attempted and tested. For instance, cooking processes in McDonald’s, they are broken down into little, cyclical duties, allowing the staff to turn into highly well-organized and skillful in all responsibilities.
There is a training program that remains nine months, which franchisee is responsible to complete them with a full-time, just to support themselves. This training program is totally necessary. McDonalds, starts the training with wearing the uniform and educate the whole thing from food preparation and cooking to serving consumers and cleaning-up.
The advantages for the franchisor
McDonald’s be aware of the advantages of a franchise company. Franchises expand number of businessmen, complete of willpower and ideas, into the organization. Franchising facilitates McDonald’s to have the benefit of greatly quicker expansion and the formation of a actually international “brand identity”. Increasing in the number of restaurants lead to benefit from economies of scale to McDonalds.
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For the financial part, McDonald’s gets a monthly rental fee, that is calculated on a descending scale based on McDonalds’ sales. There is also a service fee of 5 percent of sales in addition to the contribution to marketing. The purchase price of a restaurant is based on cash flow and is generally about £150,000 upwards. The new franchisee is expected to fund a minimum of 25 percent of this from their own unencumbered funds.
Mchdonalds innovation
At the same time as the franchisees must accept to manage restaurants in the McDonald’s technique, there still remains several range for “innovation”. a lot of ideas for innovative items on the menu originate from the franchisees reaction to consumer. Making new products is fundamental to any company, even one which has productively relied on a imperfect menu for a lot of years. Customer’s taste change eventually and as a large corporation requirements to take action to these changes. Innovation introduces energy and permits the company to develop market before ignored or unnoticed.
McDonalds and Suppliers
Stakeholders, important to the accomplishment of the company, is the “supplier”. since McDonald’s think about the value of its goods to be of total significance, it puts standards for suppliers that are among the maximum in the food industry. McDonald’s considers in developing close dealings with suppliers – the whole thing is finished on an open accounting.
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