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Abstract
Franchising is one of the most effective strategies through which businesses can attain the desired level of growth and competitive advantage. Its effectiveness emanates from the view that it is based on a tested business model.
Despite its effectiveness in promoting financial sustainability, the franchising business model has been criticised extensively by various scholars due to its standardisation requirements, which demand the adoption of similar business practices across different markets.
The standardisation requirement may hinder the ability of franchises to align their operations with the prevailing market conditions, especially in geographically dispersed markets.
Therefore, it is imperative for franchises to adapt to the prevailing market conditions. This report highlights the various issues associated with the standardisation and adaptation of franchises. The report emphasises the importance of establishing a balance between standardisation and adaptation. Thus, the report argues that franchisors should not limit the franchisees’ decision-making capability.
Introduction
The contemporary business environment is experiencing a significant evolution arising from diverse macro and micro environmental forces. These forces may affect an organisation’s long-term survival (Truitt 2006). Therefore, achieving competitive advantage is one of the fundamental aspects that organisational leaders should emphasise in their pursuit for sustainable business operations.
Investors and organisational leaders must ensure that their firms have incorporated effective strategic and operational management practices. One of the issues that should be taken into account relates to the integration of effective business format (Rundh 2003).
Previous studies conducted by researchers and business experts have led to the development of different retail formats that organisations could adopt. One of the examples of business format is franchising, which entails a contractual business relationship between two legally independent businesses [the franchisor and the franchisee] (Tuunanen & Hyrsky 2001).
Cox and Mason (2007, p.1053) emphasise that the ‘contractual agreement gives the right to trade under the franchisor’s name and use the franchisor’s products or services’.
However, the franchisee must adhere to operational regulations and procedures stipulated by the franchisor. Moreover, the franchisee accesses different forms of support from the franchisor such as training and marketing support in order to enhance business success.
The franchising business format is increasingly gaining recognition amongst investors due to its numerous benefits. Over 3,000 franchise systems have been established in the US, which represents over 901,093 franchisees. These franchisees have created employment to over 18 million citizens (Dant, Grunhagen & Windsperger 2011).
Franchising is associated with a higher rate of success as compared to green field start-ups. Businesses benefit from franchising due to the established business name. Moreover, franchising leads to the attainment of competitive advantage as the franchisee becomes a part of an extensive network. Franchisees receive a constant flow of business ideas, which enhance their ability to attain competitiveness.
Stanworth et al. (2004) assert that franchising benefits are not only limited to financial capital, but also an extensive knowledge of the labour markets and geographic locations within which the firms operate.
It is projected that franchising, as a business format, will experience remarkable growth into the future. A study conducted by the PriceWaterhouseCoopers (2011) shows that franchisors in Australia are projecting a 37% growth in revenue over the next 3 years.
Despite the aforementioned benefits associated with franchising and the projected growth, the concept is not free from challenges. Stanworth et al. (2004) emphasise that the retailing industry is characterised by an increment in the number of firms exiting the franchising business concept after few years of trying it out. Subsequently, the industry is experiencing a high rate of failure.
One of the major criticisms associated with the high rate of failure amongst franchises relates to the concept of standardisation and adaptation. Previous studies have identified standardisation and adaptation as one of the core aspects in franchising.
Sidhpuria (2009) argues that the franchisees’ operations are based on well-defined procedures, which define the product and service design, product offering, store location, tools and equipment, interiors, and space.
Furthermore, the concept of standardisation also entails specification of the strategies that the franchisee must adopt. An example of such strategies include employee training. Biethahn et al. (2013) are of the opinion that standardisation is aimed at enhancing the effectiveness and efficiency with which franchisors and franchisees achieve the desired level of market growth due to the well-known business procedures.
The success of franchising is subject to the nature of relationship established between the franchisor and the franchisee. However, the concept of standardisation and adaptation stifles the franchisees’ creativity and innovation, which is contrary to the level of independence that franchising claims to offer.
The franchisee has a duty to adhere to the standards set by the franchisor. Under the franchising system, the franchisor has the power to influence the franchisees’ operating decisions (Biethahn et al. 2013).
On the other hand, Cox and Mason (2007, p.1054) contend that some ‘franchisee have developed the perception that owning a franchise unit gives them the right to exercise entrepreneurial initiatives rather than conform to the franchise norms’. The strategy advocated by the franchisor may lead to operational inefficiency, hence affecting the contractual agreement.
For example, the agreement may be based on the sales revenue. Consequently, the franchisee will be focused to maximising the sales revenue. However, following the strategy advocated by the franchisor may hinder attainment of profit maximisation objective.
Cox and Mason (2007) are of the view that the tension between the franchisor and franchisee may be increased by the existence of geographically differentiated markets, which may force the franchisee to deviate from the set operational standards.
Rationale of the study
The modern retail industry is characterised by remarkable changes, which are driven by diverse macro-environmental factors such as the increment in the rate of globalisation and economic changes.
Despite this aspect, firms in the retaining industry have a responsibility to accomplish their profit and wealth maximisation objectives. Consequently, organisations are under intense pressure to develop substantial competitive advantage. Therefore, the importance of adopting optimal strategic management practices has increased substantially.
In an effort to achieve the desired competitiveness, organisations are increasingly venturing into the international market through the adoption of various internationalisation strategies (Hoy & Stanworth 2014).
Some of the internationalisation strategies being adopted include the non-equity modes of entry such as export and contractual agreements. Franchising is one of the contractual agreements that firms in the retail industry are increasingly adopting due to its effectiveness in stimulating business growth (Twarowska & Kakol 2013).
Twarowska and Kakol (2013, p.1006) further argue that firms ‘that venture into the international and global markets have an obligation to adapt to the local business environment’.
The operational strategies adopted in the local market may not be effective if replicated in the international market. Therefore, the overemphasis of standardisation as one of the core aspects in franchising might not be effective if applied in geographically dispersed markets.
Objective
This report intends to evaluate the concept of franchising as one of the business formats that are gaining significant market recognition. The study focuses on the elements of standardisation and adaptation as some of the core elements in franchising. The report intends to achieve a number of objectives, which include
- To assess how geographical factors affect the implementation of franchising business format.
- To analyse the extent to which franchisors allow franchisees to adapt to the prevailing environmental conditions.
- To evaluate how the franchisees integrate the concept of adaptation in their effort to carry out the franchising system.
Scope of the report
In order to achieve the above objectives, the report has taken into account a number of issues. First, a review of existing literature is conducted in order to illustrate some of the core issues that have been evaluated by various scholars on the concepts of standardisation and adaptation in franchising. Some of the issues evaluated in this section include the factors that motivate companies to adopt the franchising strategy.
Additionally, the various types of franchising that organisations can adopt are evaluated. The report also details the various factors that companies should take into account in determining whether to adopt the franchising strategy. Additionally, the report details a review on the concepts of standardisation and adaptation amongst franchises.
An effective methodology is used in conducting the study by employing the qualitative research design due to the exploratory nature of the study. Furthermore, data is collected from credible secondary sources, which include peer-reviewed journals and company websites. The data obtained is analysed and presented using charts and graphs.
This study has adopted a theoretical perspective by taking into account two main theories of franchising, which include the agency and the resource scarcity theories. Furthermore, the study seeks to provide franchisors and franchisees with insight on how to manage the franchising system.
Literature review
The business format adopted has a remarkable impact on the organisations’ ability to succeed in their respective industries. The choice of the legal format is subject to diverse factors, for example, the desired level of market growth, capital requirements, and the prevailing business environment (Dant, Grunhagen & Windsperger 2011). Franchising is one of the internationally proven business models.
The decision to adopt the franchising business model varies amongst companies and individuals. Buchan (2013) argues that diverse factors motivate companies to adopt franchising. One of the core reasons entails the need to overcome the monitoring and financing challenges encountered in business operations.
Standardisation is one of the strategies used in attaining cost minimisation by the franchisee and the franchisor. Cost minimisation is achieved through various strategies such as reduction in the amount of time required to monitor the firms’ operations. Additionally, franchising leads to the development of economies of scale.
Secondly, companies franchise in an effort to leverage on the support system associated with franchising. For example, the franchisees gain different entrepreneurial skills. On the other hand, Dant, Grunhagen, and Windsperger (2011, p.258) assert that individuals ‘become franchisees because of the perceived lower risk and greater rewards’.
The standardisation requirement of the franchising enhances the effectiveness and efficiency with which an organisation formulates and implements its marketing strategies. For example, standardisation enhances the franchises’ public image due to consistency in communicating the business concept. Consequently, customers develop the perception that they can access the same product in different markets (Chary 2009).
Therefore, consumers seeking a common consumption experience develop a high level of loyalty towards the franchise. Dant, Grunhagen, and Windsperger (2011) emphasise that standardisation is paramount in sustaining brand integrity.
Types of franchising
Organisations and individuals can adopt two main sub-categories of franchising. These formats include
- Traditional format franchising
- Business format franchising
Traditional format franchising
The traditional format franchising is the oldest franchising model, which entails establishing a contractual relationship between a franchisee and a company. The contractual agreement gives the franchisee exclusive rights to distribute or deal with the company’s products. The franchisee benefits from the distribution network established by the franchisor.
Yudoko (2012) asserts that traditional franchising format is mainly common amongst firms that deal with finished or semi-finished products. The franchisees’ operations entail reselling the company’s product to other firms or the final consumer.
The franchisor receives a certain percentage of the sales made by the franchisor. Some of the companies that have adopted traditional format franchising include the British Petroleum service stations, Avon Cosmetics, and the Coca-Cola Company.
Business format franchising
This format entails licensing a tested business model to the franchisee. The franchisee is required to pay a certain fee for using the business model. Abell (2009) asserts that business format franchising is more complex as compared to the traditional format franchising.
Abell (2009, p.16) notes that business format franchising ‘encompasses the right to adopt an entire business model, with predefined roles and responsibilities, operational standards and procedures, quality control, and product distribution’. The franchisor’s revenue is based on the total sales. Business format franchising is mainly common in the restaurant and hospitality sector.
Factors considered in franchising
Developing a franchising system is a challenging undertaking. Therefore, firms planning to adopt franchising as their expansion and growth strategy must assess the ‘franchisability’ of their business. The assessment criteria should be based on a number of issues, which include the level of profitability, flexibility, transferability of the business model, and standardisation.
Profitability
Franchisors must assure the franchisees that adopt the franchising model will enhance the firm’s level of profitability. Therefore, the franchisor must prove that its franchising system is based on a proven business model. Sidhpuria (2009, p.54) asserts that the ‘business model should be profitable and not in the concept stage’.
Transferability of the business model
Firms intending to attain the desired level of market growth through franchising must ensure that the model adopted can be transferred to the franchisee, which is dependent on the complexity associated with the franchising system.
Simpler franchising systems take relatively shorter duration to transfer the required knowledge to the franchisee as compared to complex franchising systems. Dant, Grunhagen, and Windsperger (2011) assert that the acceptability of the franchising system depends on the duration required to transfer the necessary skills and knowledge.
Flexibility
One of the common practices in franchising entails standardising various aspects such as the product offering, store ambience, pricing and promotional strategies, and policies. However, standardisation increases the level of rigidity in the franchising system, which limits the franchisees ability to offer products that align with the local market requirements.
Lack of flexibility has adverse effects on the franchisees’ growth potential, which might eventually make the franchising strategy an unviable business proposition. The franchising model should provide the franchisee with an opportunity to accommodate the consumers’ tastes and preferences.
Despite the product standardisation requirement, franchising should be characterised by a substantial level of product customisation.
Sidhpuria (2009, p.55) asserts that the ‘flexibility of the franchising system should allow the franchisors to tailor all their marketing efforts to meet not only the legal requirements of the local market in case of internationalisation of the franchise system, but also the cultural and behavioural aspects of the local market’.
In an effort to align its operations with the prevailing market conditions, the McDonald’s, which is a renowned fast food multinational company, introduced a vegetarian burger in order to penetrate the Indian market through franchising.
Consequently, the firm was in a position to align its operations with the prevailing behavioural and cultural market requirements. Moreover, the McDonald’s has also adjusted its promotional strategies to align with the local market requirements.
Standardisation
Franchisors must develop an effective and well-defined procedure outlining how it intends to conduct its business operations. Standardisation plays a fundamental role in enhancing consistency and uniformity of operations within the franchising system.
Prototype
Franchising should be based on a well-developed and tested prototype. Findings of a study involving 40 franchises conducted in the UK shows only 27 of the firms were based on a tested business format (Stanworth et al. 2004). Prospective franchisors should undertake a comprehensive test on the applicability of their franchising system in different locations before inviting franchisees.
The objective of franchise system piloting is to ascertain whether the system can be replicated in different locations. However, Stanworth et al. (2004, p.553) assert that many ‘franchise systems are far from being ‘tried-and-tested’ in their early days and thus they still have much to learn’.
Management competency
The growth of organisations irrespective of their area of operation is influenced by the managerial competency of the organisational leaders. Managerial competency has an impact on an organisation’s ability to develop and introduce new products into its existing and new markets. Managing inorganic organisational growth strategies for example franchising is relatively more complex as compared to managing inorganic growth.
Franchising; standardisation versus adaptation
Franchising has gained recognition by different researchers. Combs, Michael, and Castrogiovanni (2004) argue that the significance of franchising varies across different stakeholders. Entrepreneurs are of the opinion that franchising is one of the most effective ways of achieving business ownership.
On the other hand, marketers perceive franchising as one of the most effective ways of attaining competitive advantage with regard to product distribution. The strategic management perspective considers franchising as one of the most effective organisational form (Combs, Michael & Castrogiovanni 2004).
The available literature on franchising cites autonomy and operational independence of franchisees as one of the issues that have been researched on extensively. The interest on the area has emanated from the inherent contradiction on the relationship between the franchisor and the franchisees (Cox & Mason 2007). Some scholars argue that independence is one of the fundamental elements of franchising.
Consequently, Cox and Mason (2007, p. 1054) posit that franchising ‘is promoted as a means of being your own boss’. Despite this assertion, the provision of standardised products and services across different locations is considered as one of the fundamental elements in the franchising system.
However, Hoy and Stanworth (2014) assert that franchisors may not endure the franchisees’ decision to deviate from the set operational standards. Thus, franchisees do not have an opportunity to develop their business ideas.
Franchisors have the exclusive right with regard to decisions associated with the system’s operating procedures, supply of inputs, promotion activities, and trademarks.
The standardisation requirement restricts the franchisees’ decision-making autonomy to issues associated with the firm’s local operating policies, for example, working hours, product pricing, store location, and how to recruit employees (Combs, Michael & Castrogiovanni 2004).
Cox and Mason (2007, p.1054) accentuate that the ‘existence of misalignment of incentive structures creates a further source of tension between franchisors and franchisees’. For example, the contractual agreement between the franchisor and the franchisee may require the latter to pay the former a certain proportion of the total sales revenue.
However, following the marketing strategy stipulated by the franchisor may hamper the effectiveness with which the firm attains profit maximisation. This situation may occur if the franchise operates in an area characterised by a low rate of market growth. However, the firm may increase the level of profitability by adopting different strategies rather than what is stipulated by the franchisor (Michael 2000).
The tension between the franchisor and the franchisee is augmented by the existence of geographically differentiated markets (Cox 2002). Moreover, Cox and Mason (2007) assert that resource availability increases the pressure on franchisees to diverge from the concept of standardisation. Franchising is considered as one of the most effective ways of entering geographically dispersed markets.
Geographical dispersion exposes organisations to varied market conditions, which can lead to the attainment of the desired level of competitiveness. Hence, the importance of adapting an organisation’s operational policies and procedures to the local market environment in order to maximise performance cannot be underestimated (Sorenson & Sorensen 2001).
However, contradiction exists with regard to the uniformity of the operational strategies and adaptation. Some of the studies conducted show that the uniformity and consistency associated with the franchising system enable organisations to increase their customer base.
Additionally, Sorenson and Sorensen (2001, p.320) posit that some ‘customers transfer goodwill they associate with the quality of one outlet to others operating under the same trademark’.
The various franchise units, which constitute the franchising system, should operate interdependently. Thus, developing a consistent reflection is fundamental in the success of the authorisation structure due to the potential effect of one of the units on the other firms in the charter scheme.
Some studies show that the uniformity requirement of franchising systems increases the likelihood of free riding due to the spill over effects (Michael 2002),. For example, the existence of shared brand name amongst franchise outlets leads to the transfer of benefits amongst the various outlets (Combs, Michael & Castrogiovanni 2004).
Deviating from the standardisation requirement can erode the franchise’s trademark. Additionally, deviating from the set operational standards can adversely affect the quality of product and service offered.
Another criticism of accommodating the franchise system is illustrated by the view that adapting to the local market conditions may have a negative impact on the franchise system’s ability to innovate (Sorenson & Sorensen 2001). The inability to innovate arises from the view that the knowledge generated by the various franchise units may be of less value in different geographical locations.
Coping with the local market circumstances minimises the chances of benefiting from cross-fertilisation of information due to lack of operational practices across the franchising scheme (Cox & Mason 2007).
On the contrary, some studies show that the uniformity of operational strategies as advocated by the standardisation requirement in franchising cannot lead to the optimisation of organisational performance in geographically dispersed markets (Dada 2013). Organisations are gradually adopting the franchising strategy in their pursuit for competitive advantage in the international market.
This trend is mainly evident in the retailing sector (Levy & Weitz 2007). Franchise systems penetrate the international market through two main phases. The first phase involves entering into neighbouring countries characterised by similar culture, for example, the expansion by US-based firms into Mexico and Canada or by Japanese firms into neighbouring Asian countries.
The second phase entails venturing into countries characterised by different political systems and national culture. In a bid to succeed in such markets, it is essential for franchisors to take into account the various cultural components such as customs, language, and tastes (Pisant & Lerner 2003).
According to Dant, Grunhagen, and Windsperger (2011), developing franchise units in geographically dispersed locations is one of the major avenues that franchise firms are adopting. Multi-unit franchising is increasingly being adopted by franchising system in an effort to achieve the desired level of growth. However, the success of franchise units in the domestic market is not a guarantee of succeeding in the foreign market (Megan 2010).
Some of the factors that might affect the international operation relate to the variation in the degree of economic and political risk and high cost of operation. Furthermore, the firm may experience challenges arising from the existence of communication problems, which are increased by geographic, cultural, and language differences (Ryans, Grittith & While 2003).
According to Cox and Mason (2007), market dimensions vary from one market to another such as the consumers’ tastes and preferences, intensity of competition, and income levels. Additionally, geographically dispersed markets are characterised by variations arising from the factors of production.
Findings of previous studies conducted by Cox and Mason (2007) show that most small and medium sized enterprises do not remain passive towards the constraints and pressures originating from the external business environment. However, they formulate operational strategies that are intended to overcome the market constraints (Cox & Mason 2007).
Theories of franchising
Most studies conducted on franchising are based on two main theories, which include the agency and the resource scarcity theories.
Agency theory
This theory explains the relationship between two parties [the principal and the agent]. The concept of franchising is based on a well-designed contractual agreement between the franchisor and the franchisee. The contract outlines the rights and responsibilities of the franchisee and the franchisor.
Moreover, the contract is aimed at protecting the franchisors’ and the franchisees’ financial interests (Combs, Michael & Castrogiovanni 2004). The agency theory is one of the extensively applied theories of franchising due to its effectiveness in undertaking theoretical examination on the impact of hybrid organisational arrangements on organisations’ growth and long-term survival.
According to Pisant and Lerner (2003, p.910), ‘the relationship between the franchisor and the franchisees results in the creation of an agency problem for the franchisor delegates local decision making to outlet managers whose interests are not perfectly aligned with the franchisors’. However, adopting the franchising strategy is considered as one of the most effective ways of dealing with the agency problem.
The concept of franchising offers ownership allocation to the franchisee rather than salary compensation. First, the franchisor avoids the complexity associated with monitoring the franchisees’ activities. Franchisee may misrepresent his/her abilities. Secondly, the principal [franchisor] minimises the moral hazard associated with the agency problem.
Allocation of ownership also fosters the franchisor’s ability to achieve cost minimisation. The franchisee is charged with the responsibility of undertaking the various activities associated with improving human capital such as employee recruitment, selection, and training in order to achieve the desired level of growth (Michael 2003). Franchising is based on a contractual agreement, which the franchisee is required to follow.
Thus, franchisees have a duty to meet the stipulated operational criteria. Despite the increased application of the agency theory in explaining franchisor-franchisee relationship, critics claim that the theory does not take into account the relational complexity.
The theory assumes that the contractual agreement is long-term in nature. However, there is a high probability of the relationship undergoing short-term changes (Croonen & Brand 2012).
Resource scarcity theory
This theory suggests that the adoption of the franchising strategy is motivated by the need to deal with resource scarcity. The theory mainly emphasises the managerial and financial resources (Stanworth et al. 2004). Achieving growth is one of the major challenges faced by businesses especially for start-ups.
One of the main sources of challenges arises from the inability to access the required financial capital from the traditional markets such as banks and the capital market (Stanworth, Healeas & Purdy 2002).
Moreover, start-up businesses experience challenges in developing the necessary market knowledge and managerial talent. Nonetheless, achieving rapid market expansion is one of the essential elements in businesses’ efforts to achieve economies of scale, and hence their competitiveness (Combs, Michael & Castrogiovanni 2004).
According to Combs, Michael, and Castrogiovanni (2004, p. 910), the theory contents that firms ‘seek to access the capital and managerial resources that franchises provide when they build and manage outlets, even though returns might be higher among firm-owned outlets’. Firms adopt franchising in order to achieve economies of scale.
The above literature review on the concepts of standardisation and adaptation amongst franchises shows the existence of a significant gap. For example, the existing theoretical framework shows that the concept of franchising is based on an agency relationship between the franchisor and the franchisee. The relationship should result into mutual benefits between the two parties.
However, there is a high probability of the relationship between the franchisor and the franchisee experiencing difficulties, which might lead to an ineffective performance by the franchisee due to constrains arising from the standardisation requirements. Thus, the relationship between the franchisor and the franchisee may be affected by the existence of the agency problem between two parties.
On the other hand, the resource scarcity theory argues that franchising enables franchisees to access various managerial and financial resources, which enhance their competitiveness. However, franchisors may be hesitant to offer the requisite resource assistance if the franchisees do not adhere to the standardisation requirement as stipulated in the franchising contract.
Methodology
Research design
This study aims at exploring the choice on whether franchise firms should adapt to the local market conditions or standardise their operations across geographically dispersed markets.
The study is based on qualitative research design due to its exploratory nature. Adopting qualitative research design provides the researcher with an opportunity to gather substantial amount of data from the field hence making the study extensive (Maxwell 2005).
The data used in conducting this study is obtained from secondary sources such as company websites. Furthermore, the study will rely on the data documented in various reports and studies on standardisation and adaptation amongst franchise firms.
However, the researcher will ensure that only credible reports are utilised. Subsequently, the study will rely on peer reviewed journals and other literature available from credible online sources in order to enhance the credibility of the study’s findings. Using secondary sources provides the researcher with an opportunity to gather substantial data.
One of the studies used in compiling this report relates to survey conducted by Dr. Colin Mason and Dr. Juliet Cox, who are renowned experts with regard to franchising on firms operating in the fast food, industrial, commercial distribution, personal services, and the retail sectors.
In the process of conducting the study, the authors relied on interviews as their primary methods of collecting data. Furthermore, their study was comprised of a sample of 40 franchisors operating in the UK. The franchisors were obtained from the United Kingdom Franchise Directory.
In order to illustrate the choice of standardisation and adaptation amongst franchise firms, the study evaluates literature on the operation of the McDonald’s, which is a renowned multinational franchise company across the world.
The data collected from the secondary sources will be analysed using Microsoft Excel to enable the researcher condense the voluminous data collected. Data collected from company website will be presented and analysed using tables and charts.
Findings
Firms operating in different economic sectors in the UK have integrated the concept of franchising. Furthermore, most firms that have integrated the concept of franchising have been in existence for over five years, which underscores the importance of developing adequate managerial competence. However, the number of franchise firms reduces with age.
The reduction in the number of franchises might indicate an increment in the rate at which firms that previously operated as franchise units are adopting other formats of operation. Graph 1 below illustrates the trend in the number of franchises over time.
Table 1 (Cox & Mason 2007)
Furthermore, the study shows that the franchising strategy is mainly common in the distribution and personal services sectors as opposed to the retail, fast food, business-to-business, industrial, and commercial sectors as illustrated by graph 2.
Table 2 (Cox & Mason 2007)
Furthermore, most franchise firms considered have adopted the concept of multi-unit franchising, which is evidenced by the number of outlets that have been established as illustrated by graph 3 below.
(Cox & Mason 2007)
In an effort to optimise their performance, most franchisors evaluated had established outlets in different geographical regions. However, most firms had entered the South East and South West regions of the UK as illustrated by table 3 below.
Table 3 (Cox & Mason 2007)
An analysis of available literature from the McDonald’s company website shows that the firm has adapted its products [hamburgers] across the different markets in which it operates. Furthermore, the firm has standardised its marketing activities across the various international markets in which it operates. The McDonald’s has adjusted its hamburgers in order to meet the prevailing market demands.
Analysis
All the franchise firms considered in this study were required to adhere to the franchising contract. Subsequently, the firms were under pressure to standardise and maintain uniformity in their operations. Despite this aspect, the franchisors experienced intense pressure to deviate from the contractual requirements due to their inability to respond to the prevailing market conditions.
According to the franchisors, firms that have expanded their operations into different regions in the UK experience challenges arising from the geographical market variations.
Firstly, the various geographical regions in the UK are characterised by different socio-economic composition, with regard to the consumers’ level of income, lifestyle, and status. Moreover, consumers in different regions in the UK have different tastes, culture, and preferences. In addition to the above issues, the intensity of competition varies from one region to another.
In order to succeed in these markets, the franchisors have appreciated the importance of adjusting their operational strategies. Subsequently, the firms have observed a high level of flexibility in implementing their strategies. However, the franchisors are required to adhere to some issues associated with the franchising business format such as the company image.
Product mix variation
The McDonald’s operates as one of the largest fast food companies in the world. The firm’s headquarters are located in the US. Currently, the firm operates over 33,000 retail outlets in over 120 countries. It is estimated that the firm sells hamburgers to over 68 million customers daily. The firm has adopted the concept of franchising in an effort to enter the international market.
The firm has developed a broad product portfolio, which is comprised of shakes, cheeseburgers, snacks, soft drinks, French fries, and various breakfast items.
The firm’s operations are based on a number of core values, which include quality, customer focus, cleanliness, and service. Moreover, the firm’s operations are based on an effective philosophy, which entails providing customers with high quality fast foods and ensuring consistency in the preparation of all the fast foods.
Some of the markets that the McDonald’s has entered through the establishment of multi-unit franchises include India, South Africa, Australia, and Canada. In an effort to succeed in its respective markets, the McDonald’s has adapted its operational strategy to the prevailing market conditions. This move has been facilitated by the need to align its operations with the prevailing market conditions and culture.
For example, in its Indian market, the McDonald’s does not offer beef burgers. This decision arose from the appreciation of the view that Indians do not consume beef. On the contrary, the firm markets burgers, which are made of vegetables, fish, and chicken meat.
Additionally, the firm ensures that the burgers are fortified using local cuisine, for example, the McAloo Tikki. Through such adaptation, the firm has been in a position to align its products with the prevailing market needs (Fock 2001).
The McDonald’s has also adopted the concept of standardisation in its international marketing. One of the main areas in which the firm has adopted this strategy relates to product packaging. The firm’s products are packaged using the same logo across the different markets in which it operates.
The significance of adapting the product or services offered to the prevailing market conditions is further illustrated by the findings of the 40 franchisors in the UK. The franchisors granted the franchisees the autonomy to vary their product mix in order to meet the customers’ tastes and preferences.
Subsequently, the franchisors have considered adaptation as a tactical strategy through which franchisors can succeed in geographically dispersed markets. The need to adjust to the local market conditions underscores the view that companies intending to venture into geographically dispersed markets must think globally, but act locally in their operation.
Thus, franchisees should exploit the benefits associated with franchising in exploiting the market opportunities available in their local markets. Moreover, franchisors should prevent occurrence of agency problem by relaxing the contractual agreement between the franchisor and franchisees.
For example, franchisors should be given the autonomy to adjust their product mix in order to meet the local market demands. Such autonomy will enhance the likelihood of exploiting the local market conditions, hence optimising performance (Dada 2013).
Human capital
The franchisors considered in the study argue that the franchises operating in different regions of the UK operate as independent businesses.
Consequently, they have the capacity to make decisions associated with various human capital issues such as the reward system to be adopted [salaries and wages], working hours, and recruitment strategies. However, in the event of having trouble in formulating either of the human relations policies, the franchisees can adopt the strategies stipulated by the franchisor.
Pricing requirements
Product pricing is one of the major elements that influence the success of an organisation in the market. Consequently, the importance of adopting effective pricing strategy cannot be underestimated. In accordance with the standardisation requirement, franchisees are constrained to adopt pricing strategies similar to those of the franchisors.
This strategy may adversely affect the franchisees’ ability to generate sales, and thus influence the franchise’s level of profitability. However, some franchisees may benefit from the existence of policies governing the operation of franchisors. For example, franchisors in the European Union, which the UK is a member, are restricted from stipulating the pricing structure to be adopted by the franchisees.
On the contrary, they can only make recommendations on their preferred pricing structure. Therefore, franchisees have the power to determine the pricing strategy to adopt in marketing their products and services in the local market.
Marketing strategies
The existence of market variations in different geographical locations calls for limited standardisation in the franchisors’ marketing activities. For example, in an effort to succeed in its Indian, Canadian, and South African markets, the McDonald’s, which has adopted the concept of multi-unit franchising, ensures that its product strategy varies across the various markets.
Similarly, the 40 UK franchisors considered in the study have also provided the franchisees with the discretion to adopt the most effective marketing strategies. However, the firms have maintained a significant degree of rigidity with regard to some issues, which differentiate the franchise from the competitors. Some of the major system identifiers include the trade name and branding of the outlets.
Despite this aspect, the franchisees have the discretion of deciding the most effective strategy to adopt in creating market awareness. This assertion arises from the view that the effectiveness of a particular market communication strategy may not be applicable in other markets due to various factors such as infrastructural developments.
In order to improve the performance of newly established franchises, the well-established franchisors may assist franchisees in the formative stages in formulating and implementing aggressive competitive strategies. Such assistance plays a fundamental role in fostering the success of franchisees.
Conclusion
Firms, especially business start-ups, can achieve numerous benefits through franchising. Some of these benefits include accessing managerial and financial resources. Furthermore, the contractual agreement between the franchisor and the franchisee allows the latter to deal in the franchisors’ products.
Subsequently, the franchisor benefits from well-established brand name. Additionally, the franchisee becomes a part of an extensive network, which increases the likelihood of benefiting from spill over effects. Thus, the likelihood of achieving competitive advantage is increased.
The franchising strategy gives franchisees and franchisors an option on the franchising format to adopt. Some of the two common formats include the business format and the traditional format. The traditional format involves offering franchisees the right to deal in the franchisors’ products.
Examples of firms that have adopted this format include BP and Coca Cola. On the other hand, business format franchising involves obtaining the right to adopt the ‘tested-and-tried’ business model of the franchisor. Consequently, the franchisee has a responsibility to adhere to the stipulated operational procedures, policies, and control measures.
Before making the decision to adopt the franchising strategy, it is imperative for organisations to assess the ‘franchisability’ of their business. This goal can be achieved by evaluating different aspects, which include the standardisation requirement and the level of profitability that can be accrued through franchising.
Moreover, an effective franchising system should lead to the attainment of high level of profitability or return on investment. Subsequently, it should be based on the operations of a prototype.
In addition to the above factors, it is essential for a firm to assess the extent of flexibility associated with adopting the franchising system. Another major factor that should be considered related to the effectiveness with which the business model can be transferred to different regions. The success of franchises is also influenced by the managerial capability of the entrepreneur due to changing market conditions.
The study cites agency theory as one of the core issues in franchising. However, the theory has largely ignored the importance of providing the franchisees’ with a certain degree of autonomy in managing their firms. On the other hand, the resource scarcity theory underscores the importance of adopting the franchising strategy in order to achieve growth.
This aspect arises from the view that franchising exposes the franchisee to diverse managerial and financial benefits. The study has also identified standardisation and adaptation as some of the core aspects in franchising. Standardisation emphasises the importance of adhering to the contractual agreement between the franchisor and the franchisee.
Ordinarily, the franchisors outline a number of issues that the franchisees should follow in their operations. Some of these issues relate to marketing strategies, employee recruitment and development, store location, working hours, and store design. On the other hand, the concept of adaptation emphasise the importance of providing the franchisees with the discretion to make decisions that suit the local market conditions.
The literature review conducted shows that markets are characterised by varied market conditions. Thus, standardisation has negative impact on the ability of franchisees to optimise their performance. For example, the product strategies stipulated by the franchisor may be ineffective in some markets, hence limiting the franchisees’ ability to maximise sales revenue.
However, adapting to the local market enhances the performance of franchises in geographically dispersed markets, which is evidenced by the high rate at which some franchisors, such as the 40 franchisors in the UK and the McDonald’s, have successfully ventured into different regions and the international market.
Recommendations
Franchising is one of the most effective strategies that organisations can adopt in their quest to achieve growth by venturing into the international market. However, the standardisation requirement of franchising leads to rigidity in the franchisees’ operations.
In order to enhance the relationship developed between the franchisor and the franchisee, it is imperative for franchisors to provide franchisees with the autonomy to formulate their own strategic decisions with regard to marketing and human resource management issues.
For example, franchisors should allow the franchisees to develop products that align with the local market tastes and preferences. Moreover, franchisees should have the capacity to make decisions affecting their service delivery such as how to train their workforce.
Providing such operational autonomy will enhance the success of firms in geographically dispersed markets due to their ability to respond to the local market through product innovation and development.
Consequently, the relationship between franchisors and franchisees will be improved. In addition to the above issues, it is essential for franchisors to establish a balance between the concept of standardisation and adaptation as they are both valuable in the operation of franchises despite their geographical operations.
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