Systems of franchising
Also there are systems of franchising that can connect the following
types of market:
- Constructor with another constructor
- Constructor with a wholesaler
- Constructor with a retail seller
- A wholesaler with another wholesaler
- A wholesaler with a retail seller
- A retail seller with another retail seller
- A provider of services to another provider of services.
To a franchise system between a constructor and another constructor, the constructor that has invented a method of production is the franchisor and the constructors that purchase this method are the franchisees. At this situation the franchisees are almost entirely free to make their business plans or purchase the equipment they like to run their business.
(Nikolas Siropolis, “Dioikisi Mikron & Mesaion Epixeiriseon”, 6th American Edition, Ekdoseis Papazisi A.E.B.E, Athens 2001).
Another type is the franchising between a constructor and a retail seller. This type is very popular, especially between car industries and markets of cars. The franchising between constructors and wholesalers, wholesalers and wholesalers and between wholesalers and retail sellers are cooperating with the same way.
Last but not least are the franchises of service providers, that the franchisee is a continuation of the franchisor. The franchisee’s business is the same with the franchisors, but the investment of money has been made by the franchisee and not the franchisor.
(Norman M. Scarborough- Thomas W. Zimmerer, “Effective Small Business Management”, 6th edition, Prentice hall Inc, New jersey, 2000).
The franchisor
The franchisor is the company which owns an established brand name and sells this name, or method of production to others that are interested in doing the same. This means that the franchisor sells the rights to her goods or services and the accompanying business system to future entrepreneurs, who use their own capital to expand the franchise.
Advantages to the franchisor
The franchisors obtain several benefits and these are:
- The franchising allows the franchisor to increase the number of distribution outlets for his organization’s product or service for minimal capital investment. It is the franchisee who provides the capital with their investment risk in the business.
- The franchisee owns his business and this assumes that he will be highly motivated to maximize his profits. A successful franchisee with increasing profits can be expected to contribute to the ultimate success of the franchisor.
- Franchisors receive income from franchisees through franchise fees and royalties.
(Colin Barrow, “The complete Small Business Guide: Sources of Information for New and Small Business”, 5th edition, Capstone Publishing, 2003).
- A franchised unit that is being locally owned is accepted as a local business, even though if the franchised unit is owner- managed.
- The franchisor has limited payroll, rent and administrative overheads, because franchisees are self- employed. This means that the franchisees are responsible for the staffing arrangements and the operating costs of their own business.
- If the franchisor achieves a wide distribution network for his product or service, the contracts of franchise will ensure that the franchisees are “tied” to him. This happens with the Mc Donald’s restaurants, where the franchisees are obligated to purchase their equipment from or through the franchisor and also they have to purchase the necessary ingredients that will make up the final product
- The franchisor is ensured that no one else can use his name and benefit from the selling power established through its reputation.
- The name of franchisor is close associated with an established good or service.
(Antony- w. Dnes, “Franchising: A Case- study Approach”, Avebury, 1992).
Disadvantages to the franchisor
Despite the advantages a franchisor has, there are many disadvantages to own a franchise system. The disadvantages for the franchisor are the following:
- It is claimed that company- owned units are tending to be more profitable to the parent company than franchised outlets. This means that franchise may allow a company to expand its distributions quickly and with less of money, because the franchisor only receives a percentage of the gross profits, but this company would be more profitable to the franchisor if was owned outright and managed by an employee- manager.
- It is difficult for the franchisor to control over the franchisees, because they are not his employees and cannot be supervised. If one outlet has a poor reputation, in quality of services or products, can damage the general trade name and the franchisor’s reputation, and in general the whole franchising system.
(Kathy Rooney, “Good Small Business Guide”, Bloomsbury, 2003.
- The franchisor can’t be sure if the franchisee is declaring the true level of business activity. In order to be more secure many franchisors employ a central accounting system, but this is not always successful.
- If the franchisor is not satisfied by the way a franchised outlet is running, can’t do anything about it, as long as the franchisee is running the business according to the terms of his contract.
(Colin Barrow, “The complete Small Business Guide: Sources of Information for New and Small Business”, 5th edition, Capstone Publishing, 2003)
- The management of the franchising company is limited in its flexibility. Companies owned by independent owners can move in any direction to exploit market potential, when a modified selling strategy is required. However, to bring about such changes can be lengthy and cumbersome operation when dealing with individual owned franchised outlets. The changes need to be carefully handled to avoid conflicts stemming from perceived threats to the franchisee’s independence.
- There may problems of information feedback from the franchisee to the franchisor. This can result from the franchisee’s need of independence
(Norman M. Scarborough- Thomas W. Zimmerer, “Effective Small Business Management”, 6th edition, Prentice hall Inc, New jersey, 2000).
- The franchisor may have difficulty in recruiting suitable franchisees, which see franchising as an attractive method of operating a business, are motivated by the prospect of self- employment and have the necessary capital available for investment.
(Clifford M. Baumback, “Basic Small Business Management, Prentice- Hall Inc, Englewood Cliffs, N. J., 1983).
The franchisee
The franchisee is the person that buys the rights of owning a small business by the franchisor. He gets the opportunity to have a complete business quickly and, because of the brand name of the franchisor, the opportunity to reach the break- even point faster that an independent company.
As happened with the franchisor, franchisees also have benefits and limitations.
Advantages to the franchisee
- Franchisees benefit from the experience of the franchisor. In fact, the experience is what franchisees buy to start their business, because the franchisors are providing specialized knowledge that is compensated by a training program organized by the franchisor. The franchisor also can supply professional managerial advice and leadership to overcome the problems that any small business is likely to face.
- Franchisees gain a great satisfaction of their job, because it is something that they choose to do for living.
- The franchisee’s product or service is known by a brand name, and if this name is an established success, then the franchisee isn’t anxious with the promotion of the product. The franchisors most of the times undertake national and local advertising campaigns in order to keep franchisees’ products firmly in the public mind, and this promotion scale is of course away from the scope of an individual or a small business.
(Colin Gray, “Small Business in the big market: Small firm owner’s view on likely effects of the single market, Small Business Research Trust, 1992).
- The franchisees are paying a less capital than if they were to start their own business, because of the assistance the franchisor provides. The franchisor helps the franchisee to the selection of the site, the problems of planning, the training of the staff and the opening of the business and its smooth run.
- The franchisees are facing a less risk when they open the business. This doesn’t mean that they are exposed to no risk, but because of the hard work the franchises have is more likely to be successful.
- The franchisee is receiving the benefit to obtain a continuous research and developing programs in order to improve the business and keep speed with consumer demand related to technological change.
(Norman M. Scarborough- Thomas W. Zimmerer, “Effective Small Business Management”, 6th edition, Prentice hall Inc, New jersey, 2000).
- The franchisees operate within a distinct territory which involves the franchisor giving a responsibility not to set up another competing outlet within a given geographical area.
- The franchisee is independent in so far as he owns his own business and its success is to an extent dependent upon the amount of work he puts into it.
(Clifford M. Baumback, “Basic Small Business Management, Prentice- Hall Inc, Englewood Cliffs, N. J., 1983).
Disadvantages to the franchisee
Despite of the advantages or benefits a franchisee gets pleasure from, there are also disadvantages and limitations that a future franchisee must really consider before he determines that he is going to buy a particular franchised company. These disadvantages are the following:
First of all is the disadvantage of control that is exercised by the franchisor in order to regulate the way in which a product or service is presented to the consumer. This control leaves little opportunity for a franchisee to inflict his own personality on his own business. But if the franchisee is willing to succeed, then he must accept that much of his success is achieved by good worth of the franchisor.
(Justin G.Longnecker-Carlos W.Moore-J. William Petty, “Small business management”, 9th edition, South Western Publishing Company, 1994).
Another important disadvantage is that the services that are provided by the franchisor may add a heavy expense to the franchisee. The franchisee may be duty-bounded to purchase equipment and ingredients from the franchisor which he could have bought more cheaply from other sources.
Also if the brand name of the franchisor is being marked, maybe from mismanagement from the franchisor, then there is a possibility that the franchisee will suffer because the public might connect the franchisee with the organization in question.
Last but not least, a major disadvantage is that on the death of the franchisee, their children may not have the opportunity to run the business. It is possible, depending to the contract, that a sale must be obliged.
( Kathy Rooney, “Good Small Business Guide”, Bloomsbury, 2003).
Advantages to the consumer
Not only the franchisors and the franchisees are obtaining benefits from franchising, but consumers, who are the market power, also gain benefits from the franchising system. So the advantages that a consumer receives are the following:
- The extended hour’s service that is offered from some franchisors to consumers.
- Even though the franchise outlets are separated and independent, the consumer can locate them under their brand name. He can apply his knowledge of one outlet to all the others because of uniform presentation and consistent standards of quality.
- If the consumer is dissatisfied with the product or the provided service, he doesn’t have to try the other outlets, and spend his time and money.
- Small business is kept alive by franchising. It provides opportunities for the “would- be” small businessman or woman and maintains variety of choice for the consumer in a period of increasing business concentration.
(Colin Barrow, “The complete Small Business Guide: Sources of Information for New and Small Business”, 5th edition, Capstone Publishing, 2003).
Disadvantages to the consumer
Of course as happened with everything in life, the consumers beside the benefits they obtain from franchising, they also obtain disadvantages. Two characteristic disadvantages the consumer obtains from franchising are the following:
The first disadvantage to the consumer is that, franchising can act to remove elements of competition and therefore consumer’s choice. As it mentioned at the advantages a franchisee obtains from the system of franchising, the franchisees usually have protected territories. At this territories, although, they can operate with uniform prices recommended by the franchisor. Franchisees are usually considered to be independent, but the truly independent businessman can decide own his own for the price of the product or service he presents to the consumer. Also, because of his independence, has a greater flexibility to adapt the price to the needs of the individual consumer.
The second disadvantage the consumers are facing in franchise is that franchisees may be deficient in managerial skills and/ or training. This may result in organizational inefficiencies which manifest themselves in the quality of the service to the consumer. Such problems may be exaggerated when the franchisee is called upon to employ and train his employees. This may violate consumer expectations built up through contract with other outlets licensed by the franchisor.
(Colin Gray, “Small Business in the Big Market: Small firm owns’ view on likely effects of the single market”, Small business research trust, 1992).
En example of a franchised company
Ray Kroc was the founder of the Mc Donald’s company. This company was founded at 1954 and continues to be strong as a company. At this time is the world’s leading food service retailer with more than 30,000 restaurants in 119 countries and serves 47 million customers each day.
Is one of the world’s most well- known and valuable brands and holds a leading share in the globally branded quick service restaurant segment of the informal eating- out market in virtually in every country in which there are Mc Donald’s.
The Mc Donald’s has always been a franchising company and as a company always was relied on its franchisees. This fact played a major role in its success. The Mc Donald’s are still committed to franchising as a predominant way of doing business. The 70% of the Mc Donald’s restaurants worldwide are operated by independent businessmen and women, the franchisees.
The Mc Donald’s continues to be recognized as a premier franchising company all around the world. Because of the fact that Mc Donald’s listens to its franchisees, is perennially named as Entrepreneur Magazine’s “Number one franchise”.
().
The characteristics a future franchisee should have
When franchisors are looking for a franchisee, they are looking for a person with the following characteristics:
- Experienced
- Hard working
- Team player
- With management and leadership skills
- Well- educated
- With a desire to succeed.
Conclusions
Although all franchises have at least three elements in common, such as the brand, the operating system and the requirement payment to the franchisor, differences between and among franchise structures are many. Moreover the reasons that companies offer franchises vary considerably among the companies.
Because no two franchises are identical, a prospective franchisee must thoroughly evaluate all aspects of franchises he is considering acquiring, and of the franchisors with which he is considering affiliating. Understanding the differences and how they will affect business operations, financial risks and financial return is critical to the prospective franchisee.
Also most franchises succeed because the founders of franchising companies have developed a successful business and have a vision which enables their business to expand and to seize the competitive opportunities. Successful franchise organizations are always attuned to development within the market place and always are searching for ways to position the products and services which their franchisees offer so as to take advantages of marketplace changes. Franchisees have the benefit of this “vision” and business perspective which usually exceeds their own.
Of course, franchise ownership does not include a guarantee that the strategies adopted by the franchisor will succeed in coping with the new challenges.
More over, coping with challenges may require a redefinition of the business which could fundamentally change the way products and services are delivered.
Nothing guarantees that the strategy the franchisor selects, if any, will be superior to others or even to a strategy that an individual franchisee may prefer. In other words, when franchisors and franchisees link themselves through franchise agreements, that commitment is usually been made “for better or worse”.
Bibliography
-Norman M. Scarborough- Thomas W. Zimmerer, “Effective Small Business Management”, 6th edition, Prentice hall Inc, New jersey, 2000, pp.102.
-John Stanworth- Brian Smith, “The Barclays Guide to Franchising for the Small Business”, Basil Blackwell Ltd, 1991.
-Clifford M. Baumback, “Basic Small Business Management, Prentice- Hall Inc, Englewood Cliffs, N. J., 1983.
-Justin G.Longnecker-Carlos W.Moore-J. William Petty, “Small business management”, 9th edition, South Western Publishing Company, 1994.
-Nikolas Siropolis, “Dioikisi Mikron & Mesaion Epixeiriseon”, 6th American Edition, Ekdoseis Papazisi A.E.B.E, Athens 2001.
-Colin Barrow, “The complete Small Business Guide: Sources of Information for New and Small Business”, 5th edition, Capstone Publishing, 2003.
-Antony- w. Dnes, “Franchising: A Case- study Approach”, Avebury, 1992.
-Kathy Rooney, “Good Small Business Guide”, Bloomsbury, 2003.
Colin Gray, “Small Business in the big market: Small firm owner’s view on likely effects of the single market, Small Business Research Trust, 1992.
.
