How the Franchise is not going to be a monopoly

Abstract

The terms franchise and monopoly are common business terminologies. They can be used concurrently given that a franchise can operate like a monopoly while a monopoly can franchise its business operations to other places. Franchising has become the greatest and fastest growing mode of doing business. This kind of business happens to almost every country across the globe. Franchising involve a business established or operated under an authorization to sell or distribute a company’s goods or services in a particular area. On the other hand, a monopoly involves a market in which there is only one seller with hardly any close substitutes for the products sold by the monopoly. Monopoly is technically used to give an implication of a monopolistic market although the concepts are widely used by single business firms. A franchised business can as well operate like a monopoly but there could be several limitations. This research looks at how the franchise is not going to be a monopoly. The main reason why a franchise may not be a monopoly is that regulations exist that may limit its operations and growth.

Introduction

Franchising is known to have its own benefits to the business owners but it limitations may hardly give the firm a chance of dominating a market and creating various traits of a monopoly. Besides the benefits, franchising has its own pitfalls that are constraints to its growth in a point of dominating a market. In franchise businesses, franchising chains may exist. In any case, the has to be a ground from which the business operates. Given that the franchise operates in new business areas that are characterized by new and different political grounds and societal aspects, an established franchise relationship with the society has to exist. The business has to make considerations in terms of the franchising and the society as well as the franchising system’s operations. The franchise business, the system, and the relationship with the society work in regard to three constructions of the franchising that include franchise initiation, the performance of the franchise, as well as inclination to the franchise. The three constructions are mainly taken from a point of different theories that revolve around agency and scarcity of resources. Franchising business operation is based on resource utilization and capital establishment in regions characterized by adequacy of the same.

There exist regulations that prohibit franchisors to carry out the appointment of franchisees in which case the two cases would have a direct control relationship or an indirect control relationship. The direct or indirect relationship acts as a basis for providing more opportunities for businesses wishing to become franchisees and thereby preventing the aspect of one of the many business actors taking the position of a monopoly by controlling all business activities in the industry. The kind of control relationship that may exist and that is most preferred is ensuring that shareholders are common but hardly the relationship initiated through management. Business license provides that franchisees be only allowed to operate in business lines that are specified and indicated in the franchising business license. Some of the franchised businesses deviate from their licenses but regulations provide that franchisees’ operations should be strictly based on the provided license. Business franchising can grow in strength to a point of behaving like a monopoly given that regulations are hardly strict as to the point of operation or the kind of employees to hire.

At the same time, there could be the local content requirement that brings out a major controversial in that the use of local components such as raw materials and human resource is regulated to a certain percentage. The regulation on local inputs is also extended to merchandise and business equipment that the franchisees need to make use of. A specific percentage may not be stipulated but a limit may set to let businesses operate within the limit that has been laid down. Initially, it was required that all franchisees utilize the local components in a smaller percentage than the other resources or components. Regulations have however been made loose buy setting the regulations to a slight percentage below 100 percent. The regulations require that local components be consisted of business equipment, raw materials, as well as merchandise.

In some cases, permissions may be issued to give permission to allow the domestic production of goods and services for a less than a given percentage. The limitations could be placed in all aspect of the franchised business including business equipment and sales. The minimum percentage is usually set in terms of the value of items or the number of items used in each outlet. The control could be set in terms of the region or country to imports the firm’s inputs o where to sell its products. There would certain limitations as well on the percentage of sales that would be done locally. In franchising, it could be required that the franchisors corporate with local businesses whether small or medium. These small or medium businesses may function as suppliers or franchisees given that they are in a position of satisfying the franchisor accordingly.

Elements of a franchise system could include those generating a positive impact on its growth. The original franchise practice should be adhered to by the franchise system. Some key elements include the franchise practice, the franchise financing, the startup cost, and piloting of the system, its growth orientation, and other elements. Each of the various elements provides a ground for developing grounds for the franchise business to grow in its operations. In many cases, it comes out that franchise businesses have insignificant positivity in perceiving the value of franchisors than the reflection on their early expansion. The survival of the franchising system as a whole as well as its positive aspect of surviving new chains of franchising is seen to have a positive influence in contracting efficiency and the adoption involved in exclusive territories specifically by franchise chains that could be new in scope and various aspects (Azoulay & Shane, 2001). The efficiency of the franchise system is also considered in this case.

Research Questions

1. Establish the various types of franchise businesses
2. Indicate the characteristics of a franchise system
3. What are the characteristics of monopoly
4. Show the differences between a franchise system of business and a monopoly
5. To what extent can a franchised business gain power to operate like a monopoly
6. Discuss the factors that may hinter a franchise from becoming a monopoly

Research Objectives

1. To establish the various types of franchise businesses
2. To indicate the characteristics of a franchise system
3. To discuss the various characteristics of a monopoly
4. To show the differences between a franchise system of business and a monopoly
5. To indicate the extent at which a franchised business can gain power to operate like a monopoly
6. To discuss the factors that may hinter a franchise from becoming a monopoly

Background of McDonalds

The franchising concepts have been highly associated with companies like the Coca Cola and McDonalds, which have a great capacity to grow throughout the world. These companies are termed as not being the first in franchising their businesses but have developed greatly out of franchising their businesses. The history of McDonalds could be related to two brothers, Dick and Mac McDonald sometime in the 1940s. Their idea was generated by the two brothers from whom they opened the first restaurant in 1940 in San Bernadino’s route 66 (Franchise Direct). They had only twenty-five offerings in their menu. They started by offering much of outside catering to teenagers waiting in their cars. The chain of restaurants has today grown to become the world’s leader in food service retailers, in which case there are more than thirty thousand restaurants established through franchising. These restaurants are as well estimated to serve more than fifty-two million consumers across the world. The business has also been franchised in more than 100 countries. The business has offered to give an allowance of 70 percent of all restaurants to be fully owned by franchisees who are independent operators (Franchise Direct).

McDonalds as a chain has grown significantly from a single unit store to almost the most popular and most successful franchised operation on the globe. The growth and success of the franchised system of the McDonalds could be attributed to several factors including good managerial skills and adequate cooperation with franchisees. Some of the restaurant’s growth could be attributed to Raymond Kroc, who gets credit for having contributed greatly to the growth of McDonalds and its success in franchising its business operations in various parts of the world (Franchise Direct). According to the Franchise Direct website, Raymond Kroc hardly started as a restaurant owner. He centrally started as a supplier of equipment to various restaurants franchised by McDonalds. Through his attitude of increased savings, he was capable of being innovative with his supplies as seen in the famous Multimixer, a maker of milk shake.

It was in the year 1954 that the McDonalds had caught the attention of Kroc due to the restaurant’s increased use of multi-mixers, which were benefiting from an increased business operation by giving room to serve many people at the same time. From this aspect of increased operation and elevated demand for the McDonald’s products and services, the two McDonalds brothers began to franchise the restaurant concept. Franchising began with setting at least four key locations. The franchised concept brought in a greater opportunity of selling more multimixers thereby making a proposal to the two brothers to give him a chance of franchising the business outside California as the original home base for the restaurant business. McDonalds had also impressed other people including the founder of Burger King, McLamore and Taco Bell’s founder Glen Bell (Franchise Direct).

The efforts by Kroc saw him being in a position to launch the McDonalds Systems Inc, which he established as a legal structure running his franchise. In the year 1961, the Brothers of McDonalds agreed to sell their right to the restaurant business to Kroc for about $2.7 million but the company became a public company in around 1965. According to Franchise Direct the first of McDonalds numerous franchised restaurants was opened outside the United States into the British Columbia in Canada particularly in 1967. This was the marking of the restaurant’s franchising system to various parts of the world (Franchise Direct). McDonalds has succeeded in its franchise system through a contribution of various factors such as its consistency in ensuring high standards of its products. Another one of the many factors contributing to its success in franchising is its aspect of working under the inspiration and vision established by Kroc when establishing his restaurant business (Franchise Direct). The restaurant ensured high quality in products and service, high degree of cleanliness, as well as value generation through the company’s motto. Franchising was based on the customers’ belief that the motto would remain and that the motto would be observed irrespective of the company’s location through franchising. The motto of ensuring quality and cleanliness by the McDonalds franchise system was one concept mainly established to place the company in a high competitive position while ensuring that franchisees would not go through any losses after acquiring the rights to run their own businesses under the name of McDonalds. Various strategies that were considered as winning strategies were used by Kroc as brilliant marketing insights. The move was great and determined as seen in the idea of Kroc by launching the Hamburger University that was established to offer training in management specifically in all aspects of managing McDonalds. Strategies also included target groups such as families as the best market share thus generating a debut of the Ronald McDonald’s debut, a clown character viewed on television in around the year 1963. This television program created a marketing ground for the restaurant business thereby aiding its growth and franchising.

Another concept that was highly applied by McDonalds in achieving its success was an adaptation of a system that worked towards meeting consumer demands. The restaurant and its franchising system had a clear system of working innovatively as well as adapting to changes in market conditions (Azoulay and Shane, 342). The adaptation to various conditions made the restaurant expand its menu from a list 25 offerings to over fifty items to be offered by every franchisee around the world. The menu expansion was mainly as a way of meeting the various consumer demands that had thrived due to changed locations and climatic conditions, culture, social class distinctions, and economic variations (Azoulay and Shane, 346). The expansion of the menu was also as a result of demands based on religious grounds such as the introduction of Filet-of-Fish, a sandwich that was meant to be consumed by those Catholics who hardly consumer meet on Fridays. Most of the additional items added to the standard menu of McDonalds are as a result of the creativity or innovativeness of franchisees as they try to meet the demands of their customers. Examples of these additional items that are as a result of franchisees include Big Mac, introduced by Jim Delligatti, an early franchise system of McDonalds. Another one of the key items of consideration has been the Egg Mcmuffin, which was developed in 1973 Her Peterson, a McDonalds’ Franchisee. On another hand, the McFlurry was an item of the McDonalds products invented by a Canadian franchisee.

McDonalds may have developed a monopoly power in a few regions but the power died out eventually as regulations increased to give room to other investors within the Fast food restaurant industry. Its operation like monopolies has been seen from its aspect of thriving even during boom times as well as during economic recession periods. The business has successfully developed to respond to consumer reactions and the changing behaviors. Although monopoly restaurants would hardly post nutritional information, the aspect of McDonalds doing this was in favor of its development and growth in an international scope. In this way, it doomed its efforts of achieving monopoly power in various aspects.

Promotional Aspect of McDonalds

The McDonalds Restaurant has established some feature that strengthen its power to an extent of remaining the market leader through a long period without facing stiff competition. Monopolies usually work by ensuring that perfect information is not available to consumers. To a great extent, the restaurant has employed the same concept in some of its promotional efforts such as in the Monopoly Game of McDonalds. The game of MacDonald’s Monopoly involves a promotional effort through charity sweepstakes of both McDonald’s and Hasbro. The game uses a theme of letters in the board game monopoly. This kind of promotion has been offered in various countries including the United States, the UK, and other nations in which the restaurants have been franchised. The game is mainly meant to draw customers into the restaurants. This trend and game is known to have been used by many merchants but McDonalds specifically makes use of sweepstakes in its attempts of drawing customers into the organization’s restaurants. The company has been working under the guidance of law by clearly understanding that the laws governing such businesses forbid any attempts to administer own company contests as a way of preventing fraud. The law also ensures that prices for the restaurant’s products and services are given away in such a manner that customers would not face any harm.

In this kind of promotional efforts, McDonalds ensured that playing the game was done under special rules. The player has to select some food items from the restaurant including two game pieces that are attached to a container or cup. Selecting an item of choice would represent the selection of large and medium sized drinks as well as a super size fries. In this case, the restaurant customers are guaranteed to obtain at least one set of the pieces on a value meal that is made to be regular. One would get a super-size meal given that he or she selects an item representing the same value.

Why McDonalds’ Franchising efforts can hardly make the company a monopoly

For various reasons, McDonalds can hardly be described as a monopoly business. The brands from McDonalds have dominated many markets but the aspects of taking over the lead in various aspects do not imply that the firm is a monopoly. The franchised system of McDonalds has hardly any characteristics of a pure monopoly. The feature of a pure monopoly involves a seller who has a complete control over a commodity sale or supply. McDonald is far from acquiring this feature given that there are many competing brands that are problematic to every franchisee. Besides, the franchise does not operate in regions characterized by no close substitutes of its products. In the case of McDonalds, close substitutes are seen from Burger King, Pizza Hut, and other restaurant brands in almost every region McDonalds has been franchised (Friedman, 206 ).

The establishment of McDonald outlets hardly creates any aspects of preventing free entry while at the same time, a franchise running under McDonald can free enter the market at any given time and leave the market if the economic conditions are unfavorable. All franchisees operate their businesses in a business environment characterized by complete negation of competition. Although McDonald’s outlets are in apposition of controlling prices as the market leaders, they are never price makers in any way. They sell their products in accordance with prevailing forces of market supply and demand. The reason behind this aspect is that there is no single firm in the market operated by McDonalds (Friedman, 208 ). This aspect also implies that the firms and the industry are two different entities. Unlike monopolies, the franchise ensures that consumers obtain satisfaction according to the prices they pay for their products and service purchases. In a monopoly firm, prices are set higher than the compensatory aspect of the good or service sold. Since McDonald’s quality is ensured by every franchisee irrespective of the country hosting the outlet, it does not operate poor operational methods that diminish its efforts in ensuring efficiency in production. A monopoly sells its products at a price that is higher than what is supposed to reflect its equivalence in product or service quality.

A monopoly would always be a single firm that sells all its outputs in a given market without facing any sort of competition. One of the major reason why the firm operating as a monopoly may not face any tough competition is that it deals with unique products or services (Friedman, 207 ). Although McDonalds products are unique in several aspects from those of its competitors, the degree of uniqueness is not too great to a point of not being in a position to be created by other firms.

In a monopoly, a product or service is so unique that its production by another firm would be costly due to the associated costs, skills, or capitals that is required. Besides, McDonalds does not face any form of restrictions especially in terms of its factors of entry and exit of the fast food industry. The franchise gives room for other potential organizations in the restaurant business and industry to have access to its basic information. The various characteristics of a monopoly give an implication that a monopoly is extensively controlling the market a.............