Franchising offers franchisees the advantage of starting up a new business quickly based on a proven trademark and way of doing business, as opposed to building a new business from scratch. The franchised business is based on a proven idea and has an existing customer base, therefore making it much easier to sell your product than it would if you were to start up your own business. By buying into a franchise you are gaining the benefit of the franchisors experience as well as the name and reputation that has already been built up by the franchisor. Therefore it is no wonder that ‘according to the U.S. Commerce Department, an estimated 95% of franchises succeed, whereas only 25-35% of independent businesses succeed.’ (http://money.howstuffworks.com) It is also not surprising that franchising makes up for about 3.2 percent of all businesses and 35 percent of all retail and service revenue in the United States, proving that it is big business.
Franchising is very often a wise choice because consumers like to purchase goods and services from familiar names with reliable standards of service and quality. When buying a franchise, the franchisee is buying a tried and tested system, providing them with more security than starting a business independently. Franchisees may also benefit from the franchisor’s activities, such as advertising, marketing, research and development and their purchasing power. ‘The research and development budget of a franchisor will often be substantial, providing the franchisee with new products and services as well as advice on how to introduce the new product or service.’ (www.europeanfranchising.co.uk) Large companies such as McDonalds, for example, spend millions on advertising their products. By buying into a franchise such as McDonald’s, the franchisee can take advantage of the franchisors name and its advertising budget. This can be incredibly beneficial as independent companies would not be able to do this, simply because they could not afford to. Franchisees of experienced and successful companies are more likely to gain a reasonable share of their local market and achieve break even more quickly than would otherwise be the case. Furthermore, economies of scale, listed earlier in the assignment as a franchisor benefit, will benefit franchisees as well. ‘The combined purchasing power of the network will help franchisees to secure preferential deals with key suppliers. Although this will vary from industry to industry, it is not at all uncommon that savings achieved by franchisees through access to bulk deals pay the lion share of ongoing franchise fees.’ (www.butterfield.co.za) For the franchisee, franchising means having all the advantages of owning their own business, with far fewer risks and hassles. It allows an individual to feel the pride and independence of owning his or her own business. Other benefits to the franchisee include the training an individual receives from a franchisor, this training should help him/her avoid any mistakes and generate more profit. Support and assistance is also provided by the franchisor, giving the franchisee quick access to help solve any problems that may arise. This gives the franchisee a sense of not being alone. This can be hugely beneficial, as entrepreneurship can often be a lonely and difficult road and success can be particularly isolating. This links in with Elton Mayo’s ideas of being part of a time. As franchises are not in effect, individual businesses, they have team like qualities and therefore employees feel more motivated.
Disadvantages for the franchisor include the fact that the establishment of a franchised business will demand a significant amount of investment. There will be high set up and development costs to begin with. Once the franchised business has been set up the franchisor will need to provide the franchisee with much support, particularly in the early stages of the new franchise, as sales figures will most probably be low. In the early stages of franchising a business there will most likely be initial losses, but ‘as soon as a reasonable number of franchises are up and running, and early franchisees begin to mature, the franchisor's income flow will become increasingly attractive.’ (www.butterfield.co.za)
‘The disadvantage of franchising to the franchisor is that it has to control and co-ordinate a network of semi-independent businessmen and ensure that they build and maintain a favourable image for the whole franchised operation.’ (www.europeanfranchising.co.uk) In some circumstances the owner of the franchisee may not be capable of running his or her business properly, or it may not be sufficiently capitalised. This can lead to a bad public image of the business, as well as the franchisor failing to maintain a high quality level of continuing support to the franchisee. Each bad franchisee has a negative effect, not only on his/her own business, but indirectly on the whole company, including all the other franchisees. Careful franchisee selection is particularly important as the existence of the business could depend on it. Should the franchisee under-perform, the franchisor cannot simply fire the franchisee, as they have made a significant investment in the business. This can, at times, be a huge disadvantage to the franchisor, as once the decision to franchise a business has been made it is extremely difficult to reverse it. Franchisors can, however, terminate their agreements with franchisees, although this is costly, frustrating and also incredibly time-consuming. One of the main disadvantages of franchising is that the franchisor can often lose control over the day-to-day operations of the business. ‘One way to ensure greater control is by establishing in each market a master franchisee, who is responsible for monitoring the operations of individual franchisees.’ (J.Wild, p457)
One of the main disadvantages of franchising for the franchisee is that things have to be done the franchisors way. Although the franchisee may own the franchised business, the franchisor will impose standards and demand that they are maintained, for example: opening and closing times, product quality, selling the franchise as well as even minor factors. For example, McDonald’s employees have to fry their chips at a certain temperature for a certain amount of time. This links in with McGregors motivation theory. In a company such as McDonald’s, employees are treated as theory X as they are told what to do and have set guidelines about how to do things. However, if theory Y management was put into practise the end product would be different each time and this is not what a company such as McDonald’s want their products to be like. It also ties in with what Frederick Taylor (1856-1915) said: Specified methods are used to determine ‘the best way’ to do things and employees are trained and taught according to prescribed methods. Another disadvantage for the franchisee is that under the terms of the franchise agreement, they may have to purchase stock from the franchisor. This can be a disadvantage as they may mark up the prices, but on the other hand they may be able to offer them to the franchisee at a discount because of their purchasing power. As a franchisee you also have to pay the usual business costs, for example: rent of premises, utilities and the costs of any employees you take on. In some cases franchisors expect the franchisee to pay for the training of employees, or to contribute to the cost of national advertising campaigns, which can often be an incredibly costly and time consuming disadvantage. Franchised companies usually have high start up costs; a lot higher than if you were to start up your own business. However the benefits of buying into a franchise will often override this initial disadvantage and the franchisee will reap the benefits of buying into a well-known company.
Franchisees can often find themselves becoming too dependent on the franchisor, believing that it is the franchisors objective to provide them with a constant flow of customers, however this is not the case. The franchisor is there to support the franchisee and help them with any problems that occur, but they cannot be relied upon to provide day-to-day involvement in the business. Although the franchisor wants the best for the franchisee and the company as a whole, disagreements in decisions and policies can easily arise. Often the franchisors decisions do not work out for the best and can take a negative effect on the franchisee. Therefore the lack of freedom to make your own decisions, as you would in an independently owned business, can be to a disadvantage.
Although companies based in the United States dominate the world of international franchising, franchising in the UK is certainly on the increase. The franchising industry is worth £9.65 billion, that is an increase of 2% on 2003. The franchising industry employs around 330,000 people in the UK, which is an increase of 1% on last year. For well-known brands such as McDonald’s, Pizza Hut and the Body Shop, franchising has brought considerable rewards for both the franchisor and the franchisee. Franchising can be particularly beneficial over setting up your own business as it reduces the risk involved and generally provides the franchisee with a steady flow of customers, as opposed to trying to form your own customer base. With franchising being proven to be the safest way of starting up your own business, its is no wonder that nine out of ten franchisees are reporting a profit. Franchising enables you to see your potential business in operation before you invest a penny. On the other hand, it is probably not for someone who does not like to be told what to do and likes to do things their own way. Although there are disadvantages for both the franchisor and franchisee, I would personally say that the advantages outweigh the disadvantages and that franchising seems to be a particularly wise option and is expected to increase significantly within the next 12 months.
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