Discussion of Franchising Impact on Business

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Introduction

Franchising is a marketing strategy that is usually used for business expansion in which one party (a franchisor) gives another party (a franchisee) rights and authorities regarding the sale of certain goods or products. The two parties enter into a contractual agreement for the sale of specific goods or services through the use of a trademark or brand name in exchange for royalties or other form of compensation. The franchisee pays to the franchisor a commission or a one-time fee for the trademark use, and a certain percentage of the revenues henceforth. In such a relationship, sustaining profitability through the growth of the chain is important. The franchisor benefits from a franchising fee and royalties while the franchisee benefits from the brands reputation and experience. The role of the franchisee is to manage the daily operations of the business in a manner that meets the standards of performance and operation set by the franchisee. A successful franchising agreement is one in which the two parties involve derive value and form a long-term business relationship. Two advantages of franchising as a growth strategy include capitalized expansion of brand as little money is invested and faster brand development as the franchisee provides the labor needed. Disadvantages include increased risk of conflicts due to differences in management models and the risk of a franchisors brand-reputation deterioration. Three key traits that franchisees should possess include transparency, self-leadership, and the ability to follow instructions.

Advantages and Disadvantages of Franchising

It is the responsibility of a franchisor to attract new partners to enhance the value of the business brand. Franchising has grown in popularity over the past decades because of factors that include saturation, increased competition, diminished profits in domestic markets, an increase in the number of industrialized countries in the global marketplace, and the liberalization of markets in foreign countries (Baena, 2018). Expansion and growth have three main benefits: it increases the visibility of a business, enhances survival, and signal the profitability of a network (Lucia-Palacios and Bordonaba-Juste, 2014). One of the ways that a franchisor can attract new investors is by signaling the system potential value. This is accomplished by first, learning about the franchisees perspective of the meaning of value and how to create it. Successful relationships are based on how well a franchisor manages the franchise system to satisfy their interests and those of the franchisees (Lucia-Palacios and Bordonaba-Juste, 2014). Trustworthiness, transparency, and security through sustained support are important for successful partnerships, which in turn benefit the franchisor in various ways. These include capitalized expansion and brand development.

Advantages

One of the major advantages of franchising from a franchisors perspective is capitalized expansion as franchisees provide local market knowledge, capital, and human resources. The expansion of a business for growth requires the investment of resources and capital that could be unavailable or difficult to raise (Gonzalez-Diaz and Solis-Rodriguez, 2012). In that regard, franchising serves this purpose by licensing a franchisee to expand the business through a contractual agreement (Ghantous and Das, 2018). This approach allows entrepreneurs to leverage their brand and business experience to gain access to a wider market and attain economies of scale (Ghantous and Das, 2018). The franchisor mainly provides both tangible and non-tangible assets to the franchisee for the successful management of the business unit. Important services include product supply, training, marketing plans, information, management experience (control and coordination), and brand awareness (Baena, 2018). Signaling is one of the ways through which franchisors can attract potential franchisees. According to signaling theory, business entities radiate certain signals that could be used by potential franchisees in the decision-making process (Baena, 2018). Franchisors usually possess critical information about their businesses profitability and viability. Therefore, they need to signal potential franchisees regarding the viability of their chains, as well as their potential for profit and robustness.

Franchisors benefit immensely from franchising because they get the opportunity for brand development, especially in international and emerging markets. According to research, franchising is a popular retail format in the United States; it comprises of approximately 3,000 franchise entities that are worth over US$2.1 trillion (Paswan et al., 2014). This strategy for business growth is gaining momentum in other parts of the world. For example, it accounts for 53%, 32%, 16%, 3%, and 1.6% of the retailing sectors in Australia, Germany, Brazil, China, and India respectively (Paswan et al., 2014). In Canada and the United Kingdom, there were about 78,000 and 44,200 franchise entities in 2015 respectively (Kang et al., 2018). Many franchises are located in emerging economies that are experiencing high rates of industrialization. Therefore, they offer brand owners an opportunity to expand their businesses into new economies that are growing rapidly (Kang et al., 2018). For example, Ray Kroc (McDonalds) and Dave Thomas (Wendys) transformed their brands from small to public corporations using the franchising model (Gillis et al., 2020). They receive an up-front fee and ongoing royalties in exchange for offering entrepreneurs the opportunity to build profitable enterprises around the world. Franchisees invest in their outlets and self-monitor to maximize the performance of their business units (Madanoglu et al., 2019). The result is rapid growth that is essential in the development of brands.

Disadvantages

One of the major disadvantages of franchising from the perspective of a franchisor is the risk of conflict due to differences in management models or the failure to attain the set standards of operation and performance. According to agency theory, franchising involves the signing of an agreement between the principal (franchisor) and the agent (franchisee), in which the former delegates certain responsibilities to the latter, owing to the lack of resources, time, or skill (Jang and Park, 2019). The theory recognizes the probability that both parties could have divergent interests that could be a source of conflict (Chien, 2014). In certain cases, the agent could fail to perform the delegated responsibilities in a satisfactory manner. Franchising is disadvantageous whenever the goals of the franchisor and those of the franchisee differ (Crosno and Tong, 2018). In such cases, it becomes difficult or expensive for the former to evaluate the performance of the latter (Madanoglu and Karadag, 2016). The franchisor can solve this problem by spending additional resources to observe and monitor the franchisee, which could introduce unnecessary business expenditures (Jang and Park, 2019). Agency theory defends franchising as a means of business expansion because the issue of conflicting goals can be mitigated by researching costs; this approach evaluates potential franchisees to find the most appropriate one (Dada and Onyas, 2021). Franchising necessitates the development of skills for the detection and mitigation of agency problems (Chien, 2014). The franchisee might develop opportunistic behavior, especially in geographically distant markets.

Another disadvantage of franchising is the increased risk of ruining the reputation of a franchisors brand. As mentioned earlier, franchising is important because it facilitates expansion, growth, and survival. However, it creates an incentive for franchisees to take advantage of the franchisors brand without the struggle of building one from scratch (Lucia-Palacios and Bordonaba-Juste, 2014). The costs of brand advertising are split between the two parties. However, the franchisor loses because the franchisee enjoys the benefits of servicing customers alone (Perrigot et al, 2015). In that regard, the latter benefits in cases where the quality of services or goods is below par, even though they share the costs of advertising with the partner (Gillis et al., 2020). An increase in the number of dissatisfied customers is one of how franchisors suffer from engaging in franchising (Bordonaba-Juste et al., 2011). This could originate from a lack of facility upgrades, understaffing, high prices, substandard employee training, concealing critical information, and refraining from conducting promotions and new product introductions (Gillis et al., 2020). This free-riding behavior has been shown to have negative effects on the franchisors brand reputation.

Three Qualities to Look for in Potential Franchisees

Attracting the right and the most qualified franchisee is the key factor that determines the success of a franchise. Research has shown that poor recruitment processes lead to failed franchises because of discrepancies in the goals and objectives of the franchisor and the franchisee. The proper alignment of the goals of both parties is necessary for the success of a franchise partnership (Hajdini and Windsperger, 2019). Franchisors should look for certain traits in franchisees because those qualities are strong indicators of business success. They include transparency, self-leadership, and the ability to follow instructions.

Transparency

Transparency is one of the most critical qualities that a franchisor should look in potential franchisees. This incorporates several business activities, including open communication, dissemination of earnings information, business plans, and organizational strategies. Optimal value in franchising is created when a franchisee applies the franchisors business format and model without making alterations (Watson et al., 2020). This provides consistent and high-quality customer experience that is critical to the growth of the brands reputation. In contemporary business environments, innovation is an essential success component. For instance, certain MacDonalds major products such as the Egg McMuffin and Big Mac were created by franchise owners (Watson et al., 2020). However, many franchisors limit their franchisees innovative activities to maintain network consistency within the franchise system. In that regard, many franchisees implement innovations secretly to seek autonomy to foster growth (Parsa, 1999). Investors who innovate secretly and conceal information regarding sales and marketing lack integrity, and therefore, they are risky to the brand reputation of a franchisor. A franchisee should be able to articulate their perceptions of value in an honest manner before agreeing. According to Grace and Weaven (2011), a franchisees perception of lack of value in a franchise results in misalignments that could result in non-compliance with the franchisors standards and diminished levels of satisfaction. In that regard, the franchisee should explain clearly their perception of value so that the franchisor can be able to determine whether they are a proper fit for their business model (Grace and Weaven, 2011). Perceived value is a key determinant in a franchisees willingness to adhere to set standards and strive toward the desired performance outcome.

Self-Leadership

According to Lee (2017), self-leadership is one of the most important trait that franchisees should possess. It is defined as the process and strategy through which self-direction and self-motivation are attained to complete tasks. It comprises behavior patterns and cognitive strategies that foster personal effectiveness and performance (Gillis et al., 2020). Self-leadership focuses on the capabilities of individuals to cognitively control their thought pattern and actions (Lee, 2017). Research has shown that the successful management of mental activities leads to increased individual and organizational performance. Common traits that are characteristics of individuals who possess self-leadership include self-goal setting, self-planning, self-rewarding, and self-observation (Lee, 2017). Self-goal setting involves the creation of specific goals that improve an individuals impetus for higher performance. Self-planning involves the articulation of the strategies and activities that are required for the accomplishment of goals (Gillis et al., 2020). Self-observation encompasses the activities that facilitate information collection for enhanced comprehension of the origin and effects of ones behavior. Self-rewarding refers to the act of giving oneself gifts to celebrate the achievement of specific goals. These traits are indicators that a franchisee has self-leadership, and therefore, is fit to manage a franchise. It is also important for franchisees to be conversant with knowledge-sharing mechanisms because that is one of their fundamental roles. Self-leadership allows them to identify gaps between the present and the projected business state, and as a result, create ways to apply self-motivation and self-direction to mitigate the discrepancy (Lee, 2017). Research has established a positive association between franchisees with a strong sense of self-leadership and the dissemination of knowledge within the system.

Ability to follow Instructions

The ability to follow instructions or compliance is an essential trait in a franchisee. It can be defined as the degree to which an investor adheres to the rules, policies, and requests of the franchisor. Following instructions originate from a commitment and motivation to stick to the rules as they are outlined in the contractual agreement (Paswan et al., 2014). Compliance is beneficial because it allows the franchisor to satisfy customer needs, fulfil their expectations, and attain a desired base level of performance (Lee, 2017). The success of a franchise is largely based on the capability of the franchisor to create and enforce policies, rules, and standards across the franchise network. The major challenge is to obtain compliance with the set guidelines among all franchisees. In that regard, one of the trait that franchisees should possess is the ability to follow instructions without causing conflict or initiating rebellion. The perception of self-interest or opportunistic motives on the side of the franchisor could cause conflicts, non-compliance, and behaviors that strive for autonomy (Lee, 2017). Therefore, franchisors should ensure that they standardize business operations and enforce rules and policies that cater to their interests and those of the franchisees. A study conducted by Lee (2017) revealed that knowledge sharing is one of the strategies that franchisors can implement to promote adherence to standards and rules. Brand positioning is achieved through adherence to certain values and attributes that are associated with a brand in the market (Yakimova et al., 2019). Compliance ensures that franchisees collaborate with the franchisors to strengthen and augment the brand positioning in a recommended manner.

According to Nyadzayo et al. (2016), one of the most critical components of a franchises success is brand building. In that regard, a franchisee should be willing to align their behavior, strategies, and identity with the franchise brand (Nyadzayo et al., 2016). Franchisors grow their brands by determining the values and norms that should be associated with it in the marketplace. This is achieved by establishing specific branding and marketing activities that are aimed at presenting a product or service to consumers in a specific way. Consistency in branding is achieved only if franchisees follow the guidelines that franchisors give them regarding the marketing and branding processes (Bordonaba-Juste et al., 2011). A franchise brand gives a franchise business a competitive advantage that facilitates its differentiation in the marketplace (Sun and Lee, 2019). Therefore, choosing the right partner can be the link between a successful and a failed franchise. In many instances, the locations involved in franchising are geographically dispersed, sometimes around the world (Sun and Lee, 2019). Therefore, partnering with a franchisee who can follow instructions lowers monitoring efforts and costs, and improves cohesion within the system.

Conclusion

Franchising is one of the most effective growth strategies that entrepreneurs apply in their businesses. This concept has gained more popularity in the past decades, primarily due to globalization and technological advancement. Franchising involves the signing of a contractual agreement between two parties, a franchisor and a franchisee. The franchisor is the owner of the business that is a recognized brand while the franchisor is the other party who gets the right to build an enterprise based on the products and services of the other party. A brand owner receives a one-time fee and royalties on the sale of the product or service henceforth, and the franchisee benefits from the brands reputation and experience. From the perspective of a franchisor, franchising has several befits. Two benefits include capitalized expansion and accelerated brand development. The arrangement has disadvantages too: conflicts due to differences in management models and the risk of ruining the brands reputation. To reap the full benefits of franchising, franchisors should look for certain traits in potential franchisees. These include transparency, self-leadership, and the ability to follow instructions (compliance). The proper alignment of the goals of both parties is necessary for the success of a franchise partnership. Therefore, franchisors should look for the aforementioned traits because they are strong indicators of business success. Self-leadership initiates self-motivation and self-direction while transparency ensures that franchisors reveal all the information that is critical to the success of the partnership. Compliance refers to adherence to the rules, policies, and requests of the franchisor.

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