Entrepreneurial opportunities include the following forms of opportunities:
- Opportunities in product markets (Venkataraman, 1997)
- Opportunities in factor markets (e.g. discovery of new materials, Schumpeter, 1934).
Within the product market entrepreneurship, there are three categories of opportunities as described by Drucker (1985):
- Creation of new information, like the invention of new technologies
- Exploitation of market inefficiencies that result from information asymmetry, as occurs across time and geography
- Reaction to shifts in the relative costs and benefits of alternative uses for resources, as a result of political, regulatory or demographic changes.
It is important to state here that according to Schumpeter (1934) when the beliefs of sellers and buyers about the value of goods and services are different then these resources can be sold above or below their marginal cost of production. Another researcher that reinforces the above statement is Kirzner (1997) who believes that the reason why entrepreneurial opportunities exist is because different community members have different beliefs about the value of resources, given that there is a potential to transform them into a different condition. Moreover, people’s beliefs are affected by private information, superior intuition etc. they make different decisions about what new markets could be created in future and what prices to set.
The essay continues to examine the discovery of the entrepreneurial opportunity and questions its main requirements.
The Discovery of Entrepreneurial Opportunities:
Discovery of entrepreneurial opportunities occurs when an individual identifies that a set of resources is not placed in its “best/maximum use”. This may mean that this set of resources are priced too low or either is believed that these resources could be sold in different time and location, perhaps in different format as well. Casson (1982) argued that if the above entrepreneurial opportunity was correctly exploited then this would result in entrepreneurial profit, whereas if the opportunity was incorrectly exploited the entrepreneur would incur entrepreneurial loss.
Why is it important for the entrepreneur to understand what an opportunity is?
It is worth saying that the entrepreneur can profit from an opportunity only if he/she recognizes the existence and value of the opportunity. Hayek (1945) says that all opportunities must not be obvious to everyone all the time. Kirzner (1973) strongly agrees with Hayek’s opinion and states that at a particular time; only a small part of the population will discover a particular opportunity. According to Harvey and Evans (1995) sensitivity to entrepreneurial opportunities that will come up is a necessary ingredient of success. However, Harvey and Evans (1995) state that this opportunity should match with the market demand whether entrepreneur is supplying a product or service.
I strongly believe that recongising the opportunity on time and realizing its value is an important step into entrepreneurial success. Thus, understanding what an opportunity is and recognizing it is a crucial advantage in entrepreneurial activities.
The discovery of franchise opportunities by prospective franchisees:
After questioning the importance of opportunity understanding from the entrepreneur it’s the time to analyze the franchising opportunity and how the individual reaches the decision to become a franchisee.
The European Franchise Federation gives the following definition of franchising: Franchising is "a mode of distributing goods or services based on a network of independent partners. Franchising operates on the basis of a contractual agreement between two independent business parties, the franchisor and the franchisee, in which the franchisor grants the franchisee, for the term of the contract, the right to buy and operate the franchisor's branded and formatted business system for a fee and according to the prescribed rules and procedures developed for the system by the franchisor." [Source: ].
As described by the International Franchise Association (1988) franchising is “a way to be in business for yourself but not by yourself”. According to Trutko et al. (1993) and Stanworth et al. (1997) its current growth rate may be slowing down, however, there is a phenomenal growth over the past four decades due to several reasons. Some of the reasons include:
- The belief that it allows the most of the independence that any small business owners would have
- Providing training, support, and
- Reduction in the risk associated with starting your own business. (International Franchise Association Educational Foundation and Horwath International 1990).
The following table is showing statistics from UK, USA and India during 2007-2008 associated with franchising growth:
Table 1: Franchising growth in UK, USA and India (2007-2008). Source: Franchising Lecture 2 by Joanne Larty, Lancaster University.
Why is it important for the franchisee to understand what an opportunity is?
It is important that the prospective franchisee recognizes the franchise opportunity and go for it especially when he/she has never own a business before. The advantages of franchises over business opportunities are significant, thus prospective franchisees should not mix a business opportunity with a franchise one. Franchising theory associated with franchisees’ decision criteria shows the importance of both personal and business benefits derived from franchising. Some of the business benefits from franchising include reduced risk related to start-ups, lower development costs, proven brand name, support and training from franchisor who is providing marketing materials and resources such as a branded website. Personal benefits associated with franchising are greater independence, “be your own boss”, more flexible working hours, more time with your family etc (Franchising Lecture 3 by Joanne Larty, Lancaster University).
In this point I will argue that the choice to become a franchisee may not be the correct one for those who value independence to the extreme that they want to run their own business without being controlled by others. Franchisees are closely controlled by franchisors and they must obey to the guidance and rules of each franchising operating systems. Now let’s see how the individual decides to become a franchisee and what factors influences this decision.
The choice of self-employment and the decision to become a franchisee:
Many researchers have shown that prospective franchisees wanted firstly to become self-employed and that the decision to acquire a franchise was made after. Patrick J. Kaufmann (Boston University) in his Journal of Business Venturing “Franchising and the choice of self-employment” focuses on the decision between franchise and independent business. According to the author, “the purchase of a franchise is part of a larger more complex process; one that begins with the antecedents to the intent to become self-employed and ends with the purchase of a franchise itself” (Kaufmann, 1999). Kaufmann concludes in six Hypothesis associated with the initial decision to become self-employed. The following table demonstrates the Hypothesis:
Figure 1: Kaufmann’s six hypotheses associated with the decision to become self-employed. Source: Own drawn table.
According to Kaufmann (1999) self employment is not the same as entrepreneurship. A self-employed individual is “a person who earns his/her income from his/her own work or business, rather than working for someone else and receiving a salary or wage” (). In almost all of the definitions of entrepreneurship, researchers talk about a kind of behaviour that includes: 1. initiative taking, 2. the organizing and reorganizing of social and economic mechanisms to turn resources and situations into means-ends relationships, 3. the acceptance of risk and possible failure (Robert D., Michael P. Peters, PhD and Dean A, 2005). Kolvereid (1996a) argues that an individual who wants to become self-employed have the choice to form a new and unique enterprise or merely buy an existing business. However, an individual can become self-employed by being involved in entrepreneurial activities, by buying or inheritancing an independent business or by purchasing a franchise (Kaufmann, 1999).
The following figure shows the decision process that leads to a purchase of franchise. The decision to become a franchisee is related with a number of other decisions, which generally is associated with the decision to become a self-employed. As we see on the diagram, the decision to become self-employed is affected by Individual factors (gender, personality traits, previous work experience etc), Social and Family factors (networks, culture-based components etc) and Economic factors such as alternative employment opportunities. Now that the individual has decided to become a self-employed, the decision over the organizational form and industry sector comes after. The individual decides whether to operate a franchise or an independent business (choice of organizational form) and chooses the type of business that will be operated (choice of industry sector). However, Kaufmann (1999) argues that “the sequence of the decisions has significant consequence for the model”. Once the decision to become a franchisee has been made, the brand decision concerning franchisor’s reputation, brand power etc. has to be taken, Kaufmann (1999).
Figure 2: The decision to purchase a franchise: Process Model.
Source: Kaufmann, P. (1999). ‘Franchising and the choice of self-employment’.
According to Peterson and Dant (1990) the general individual advantages are not specifically related to franchising theory but mostly related to self-employment theory. The reason behind this is that the decision to become self-employed is made prior to the decision to become a franchisee. The individual is firstly seeking to become a self-employed – opting for independence, ‘to be your own boss’ etc. - and on the way he/she chooses the option to undertake a franchise opportunity as a way of self-employment.
Motivation Theory in Franchising:
According to Kaufmann (1999) previous researchers based their studies on the motivations of those individuals who had already chosen the franchising route – therefore ignores the individuals who had changed their minds about franchising – and prospective franchisees (ignores the ultimate decision). Kaufmann (1999) states that the more people cared about the financial issues associated with franchising, the more likely they’ll choose it. A reason for this could be the case of franchisors presenting an attractive financial picture to prospective franchisees. Last but not least, franchising offers greater choice of sectors and industries than any other form of self-employment. It is a fact that 70% of franchisees chose a sector outside their area of expertise.
The following table shows the reasons for choosing the franchise route in ranking:
Table 2: Structured scale items on reasons for choosing the franchise route.
Source: Franchising Lecture 3 by Joanne Larty, Lancaster University.
Case Studies: What are the motives that lead individuals go into franchising?
Case 1: Go Kart Party Franchise
The first case study is about Claire Perera, a 30 years individual who was previously working in the consultancy sector. The franchise opportunity that she chose is the Go Kart Party franchisee. According to Claire’s interview, the chance to choose her own working hours as she is a mother of two children, and the boredom she was feeling from her previous working style had played a crucial role in her decision to become a franchisee. Claire she can choose on her own how many proposals to undertake and how many hours she wants to work. Claire is usually doing 3-4 parties a weekend, and she feels secure with the competition, as her franchisor is very strong with protecting the territories of his franchisees. (Online source from: ).
Case 2: Popstars Academy
Keziah Straw who was previously been working as a Party Dance Instructor for The Popstars Academy was enjoying the academy so much that she wanted to open her own franchise. 'I started working for the Popstars Academy on a part time basis and was instantly struck with the professionalism of the Directors and their passion for the Business and staff. Nothing is too big or small a problem, they are positive, reliable, understanding and always available to speak to. I really enjoy running my own business knowing I have the full support and guidance from the team at Head Office’. Keziah said to BFA. Keziah enjoys running her own business that fits her lifestyle and is definitely more profitable than her previous work. Her core motivation was the desire to be her own boss and the love she had for the Popstars academy she was working for. (Online source from: ).
Franchise opportunity from both franchisor and franchisee perspectives:
Academic literature shows a preference on the franchisor’s decision and is less occupied with the franchisee’s decision to purchase the franchise. On the other hand, business publications are more concerned with the franchisee’s decision. However, according to Kaufmann (1999) franchise contract is just as important for the franchisor as it is for the franchisee. When the franchisor is offering a contract to a franchisee, the risk is shared between them.
Differences in ‘franchisor’ and ‘franchisee’ entities:
We are now going to examine the differences in ‘franchisor’ and ‘franchisee’ entities in order to prove that research (both business and franchise) should focus on the franchisee’s decision process rather than sharing the focus on both entities. To begin with, the ‘franchisor’ entity is a corporate entity even when the founder of the corporation is still controlling the company. On the other side, the entity of ‘franchisee’ is usually a physical (not legal) person (Oxenfeldt and Kelly, 1968). Moreover, franchisees have their own family and a finite lifetime, limited income and personal goals. Issues like succession and retirement are very crucial points of concern for franchisees, whereas in contrast these issues are not concerning the franchisors. Lastly, the ‘franchisee’ entity has idiosyncratic life experience and skills that cannot be acquired with the same ease as a company can get them (Kaufmann, 1999). As we see, the ‘franchisee’ entity is a more ‘sensitive’ entity and has a lot of constraints and limitations relative to ‘franchisor’ entity. The academic and business research should definitely analyze the ‘franchisee’ entity in more depth as it is the one with the more issues to be taken into consideration when coming to the decision point of taking a franchise opportunity.
In the previous sections of this essay we went into depth and concluded that prospective franchisees have many advantages from the franchise opportunities and that generally it is worth going for it. For our final section we will examine whether the franchisor should correctly accept a franchise opportunity or not.
Is it really worth it for the franchisor?
The following table shows the advantages and disadvantages that a franchisor is facing when going for a franchise opportunity:
Table 3: Advantages and disadvantages for franchisors. Source: Franchising Lecture 10 by Joanne Larty, Lancaster University.
From the above table, we can conclude that franchisors have many advantages and that it is worth accepting franchise opportunties. I strongly recommend that the franchisor should accept the right opportunities with of course suitable franchisees. Such opportunities enlarge the business reputation and scope and reinforce the brand name. Of course initial costs of training and other suport have to be taken into consideration but generally it is a positive opportunity.
CONCLUSION
The central focus of this essay was the examination of whether the discovery of franchise opportunity differs from the discovery of an entrepreneurial one. We have also proved that the purchase of a franchise is part of a larger more complex process; a process that begins with the decision to become self-employed and ends with the decision to become a franchisee. The final conclusion that the discovery of a franchise opportunity differs from the discovery of business opportunity was made. Opportunity for prospective franchisees involves the support and training from franchisors, whereas an entrepreneurial opportunity implies that the entrepreneur is basically in business on his/her own. Further, it is really important that the distinction between a franchise and entrepreneurial opportunity is made. To reinforce the essay with real life examples we have demonstrated two case studies of franchisees and their motives of going into franchising. These motives were linked to the theory of motivation. Lastly this essay examined the franchisor perspective and questioned whether the advantages of franchising for the franchisors are more than the disadvantages.
In a broader scheme, the theory reflects the reality. My personal experience with entrepreneurship (founding an entertainment company and organizing several events in London and Lancaster) helped me to get a better insight into it. That is why I would like to see more case studies of real franchisees and entrepreneurs in theory and university entrepreneurial modules.
However, it is true to say that knowledge is the platform of success. The knowledge of theory is very crucial and I have definitely learnt a lot about franchising and entrepreneurship during my two entrepreneurial modules in Lancaster University. Moreover, the preparation of this assignment taught me many important aspects of franchising that is why I would definitely recommend this course to prospective students.
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