Advantages and Disadvantages of Expanding a Business through the use of Franchisees.

Advantages and Disadvantages of Expanding a Business through the use of Franchisees.

Introduction

A franchise can be described as a business agreement in which the franchiser (business owner) allows others (the franchisees) to own as well as operate a business on his/her concept and trade name. According to Tassiopoulos (2009), franchising is a proven business strategy developed by a franchisor that permits the franchisee to make use of its established trade names, propriety business strategy, and methods of carrying out business; in return for a recurring payment that involves a given percentage of gross profits or gross sales, along with a yearly fee.

The concept of franchising has over the last couple of decades expanded internationally and has now become a common entry mode for numerous establishments. According to Tassiopoulos (2009), franchising comes along with advantages and disadvantages, with the underlying advantages and disadvantages being able to be presented at a domestic and international level. This particular paper therefore seeks to discuss the advantages and disadvantages of expanding a business through the use of franchisee.

One of the biggest advantages offered as a result of expanding a business through the use of franchisees is self-funding expansion. According to Talloo (2007), a franchiser is able to expand the business rapidly without incurring much additional cost since the initial costs of creating and providing the franchise such as launch support, training, intellectual property rights, software license and site selection are normally recovered by the franchisee. Additionally, investment requirements to open each business operation, including vehicles and staff recruitment, lease, store fittings, is undertaken directly by the franchisees.

The ongoing costs of marketing, promotional activities, sales, websites, ongoing communications, providing support and managing the franchise network are also met by an ongoing management service fee provided by the franchisee, normally as percentage of the franchisee’s turnover. The only costs met by the franchisor are that of the overheads that are not met by the franchisee’s opening franchise fee (Moschandreas, 2000).Franchising as a business expansion strategy therefore requires less capital outlay compared to other business expansion strategies. Additionally, as a result of the self-funding expansion, franchisers find it easier to open multiple units, thus, gaining the competitive advantage on any prospective competitors. The multiple developments of units increase the firm’s advantage within the marketplace.

Marks & Spencer, one of the United Kingdom’s leading retailers of home products, clothing financial services and food represents an example of internationally franchising firm. Marks & Spencer opened its first store in Greece in the year 1992, working in partnership with the Marinopoulos Group, a company having business interests ranging from pharmaceuticals and supermarkets to multimedia (Marks & Spencer Company Website,2011).Marks & Spencer has now approximately 155 stores that are managed under franchise in 28 regions, mostly in Asia, Europe, Middle and the Far East, as well as stores in Hong Kong, Ireland and a United States supermarket group, King supermarkets. This has helped them exploit the potential of the Marks & Spencer brands within their local territories (Marks & Spencer Company Website, 2011).

Another advantage offered as a result of expanding a business through the use of franchisees is in terms of risk minimization. According to Li-Tzang & Kansas State University (2007), previous research has indicated that franchise arrangements arise largely out of the need to share risks. Investing in a new a business is normally risky and most studies reveal that more than 90% of new investments fail within 3 years. Franchising substantially reduces the possibilities of business risks.

As highlighted by Spencer (2010), a franchisor is able to plan for these business risks and is able to reduce their exposure through contractual stipulations such as performance standards, clauses that shift legal responsibilities to the franchisees, restrictions on the use of intellectual assets as well as reporting requirements. The franchiser is also able to use a contract form as well as its provisions not only to protect the brand, but also to protect his/her business against risks of conflict or failure in the relationship.

Moreover, franchising allows franchisers to maintain their control over profitable units with more predictable returns while shedding fairly risky locations with uncertain revenues. To a franchise business therefore, franchising, implies spreading business risks by increasing the number of locations through the franchisees’ (other people’s investments).This implies faster expansion of networks and a better opportunity to put focus on the changing market needs, which in turn means reduced effect from business competitors (Tassiopoulos,2009).

Tesco, a UK supermarket brand present an example of a firm that has employed franchising to help it minimize business risks. The supermarket opened 18 franchise stores outside the UK and has seen it and the franchisees share the cost of opening the stores as well as the subsequent profits (Fletcher, 2010).

A franchisor also accrues the benefit of rapid expansion and increased market strength bye using the investment money provided by the franchisees. As a business growth strategy, franchising enables an existing firm to rapidly expand in terms of the number of outlets for its products and services without investing excessive capital or practical managerial input (Tassiopoulos,2009). This means that the franchiser is able to have his business expand rapidly with minimal capital outlay as compared to the cost of opening up new branch offices. At the same time, the franchiser does not loose his/her control over the products, marketing and delivery as in the case of a licensed agreement. Franchising therefore gives the franchiser an easier opportunity to exploit various geographical areas that would not otherwise be within reach.

An aspect of the rapid expansion of such firms as a resulting of franchising and increase its sale is that the expanded business as a whole gains market strength. The enhanced market strength often comes with advantages, including bulk buying from various suppliers of products and services. This business expansion strategy has made it possible for giant firms like MacDonald’s and Marks & Spencer to grow rapidly, while at the same time, increasing their market strength globally. For instance, McDonald’s chain of fast food restaurants has currently more than 2000 outlets globally, with only 25% being company owned. According to Moschandreas (2000), MacDonald’s reliance on widespread franchising has been a strategy that the firm has taken on after some experimentation given the fact that the proportion of the firm-owned stores increased from 9% of the total number of stores in the year 1967 to 33% in 1976.

Expanding a business through the use of franchisees also offers operational benefit to the franchisor. Franchised firms are normally larger in terms of outlet numbers. In international operations, distance and time increases uncertainty levels due to the information gap (Whitehead, 2010). It is therefore difficult and expensive to gather as well as receive information about foreign business operations on time. In addition, cultural differences may also increase the cost of gathering information. Franchising therefore offers the franchisor with an opportunity to have a smaller central organization instead of owning locations themselves. As a result, franchisers are able to easily manage their operations even within foreign markets and with minimal invest.............