Franchising as a strategy for small business development

Franchising and How it Can Help Small Business Development

How Franchising can aid Small Business Development

From the middle of the 20th century franchising has become one of the most popular forms fo small business origination and growing for risk averse people, and one of the most successful expansion methods for big companies whishing to increase their prevalence in one market and widen their markets in general. This form of business has become especially favourite in retail and services sector with chains using it the most often out of other business structures. As any other form of business organization, franchising has its' bonuses to both the franchisor and the franchisee, as well as some drawbacks of this form of entrepreneurship must be also concerned when considering this business opportunity.

This work aims at studying the franchising as business organization form and estimating the pluses and minuses of it. The method applied during the study process is the qualitative research by means of relevant recent literature review. Theoretical bodies of literature were studied to summarize this business opportunity and analyze it to explain them with economic and behavioural theory. As the quantitative analysis is extremely time and funds consuming requiring access to quality internal data, for the purposes of empirical proof conclusions from the empirical studies of the results of using the franchising business form were analyzed and are provided within this work.

The research is organized as follows. The first part is devoted to theoretical and empirical literature review. The second will focus on the main franchising advantages resumed from the extensive pool of relevant sources. The third part will single out the possible drawbacks of this business form. After that, the discussion will focus on estimating whether the advantages outway the disadvantages and which cases franchising should be preferred to other business forms. The conclusion will summarize the findings.

Literature review

Franchising is defined in literature as a business organization form in which 'a business owner (a franchisor) sells the licensed rights to duplicate the business to a business operator (a franchisee) in exchange for a continuing service fee'. (Record, M 1999 p.117). When discussing franchising, it is important to understand the concept of business format franchising. 'Business format franchising is the type of business arrangement in which one party (the franchisor) grants a licence to another individual, partnership, or company (the franchisee) which gives the right to trade under the trade mark and business name of the franchisor'. (Clarke, G 1999 p.3). There are currently over 570 business format franchisors offering investment opportunities in the UK and in one of the most developed economy of the U.S.A. franchising sales attribute up to 50% of all the retail sales. The four main types of franchising include franchising of a business format, or business organization type, franchising a product or service offered to the clients, acquiring licence to manufacturing type, finally, franchising total business opportunity venture.

Buying a franchise is recognised by numerous scholars as an ideal way to start a small business but with all the advantages of a larger commercial operation. Among the advantages, authors enumerate such as that a franchisor 'refers to the owner of the business system and any associated trademarks/trade name who allows others (the franchisees) to use these under licence in a designated (but not necessarily exclusive) area, whilst providing continuing support'. A franchisee 'refers to the party who buys the right (and obligation) to run the business from the franchisor, using the trademark and trading system. The franchisee is essentially self- employed, but must operate the franchise outlet according to the procedures by the franchisor'. Other advantages include better raising finance opportunities due to lower risks associated with already prevalent brand expansion, employee training by a franchisor, overall reduction of business risk to the franchisee, external benefiting from the expansion of the franchisor brand and chain, less expenses on advertisement and Public Relations campaign and access of the franchisor to most public advertisement resources, business insurance and further on. The study of Barrow, Golzen and Kogan accents that 'In the U.S.A., for example, McDonald's, one of the world's largest franchisors, spends more on TV advertising than Kellogg's, and virtually the same as the Ford Motor Company'. (Barrow, Golzen & Kogan 2000 p.37). As the franchisee operates in local to him market, he is able to exploit this insight knowledge and outperform the market prevalent competitors. According to Mendelsohn, 'Sales in 1997 reached £7 billion, compared with £5.2 billion in 1990, which represents somewhat less than the 50% increases in systems and franchisee numbers over the same period'. (Mendelsohn, M 2001 p.321).

The operations manual provided typically by a franchisor to the franchisee benefits them both. 'The operations manual is a complete description of all the operating policies, procedures, methods and systems used to run the business'. (Clarke, G 1999 p.30). The operations manual enables the franchisor to make sure, that although each business is independently owned and operated, the same levels of quality and customer service are consistent throughout the network. A small business that is thinking about becoming a franchisor can illustrate how they want the business to be run on a day-to-day basis through the operations manual. An operational manual may include some of the following sections; opening hours and days, pricing policies, accounting, advertising, staff duties, payment of franchise fees, stock control procedures, staff schedules and rotas and cash control and banking procedures. The operational manual is very useful to the franchisee in that it helps them with the day-to-day running of the business. Also if there are any changes made to the running of the franchise the operations manual will be updated accordingly. A franchisor like Kentucky Fried Chicken (GB) Ltd. may include the following sections in their operations manual; 'cleaning routines, recipes, methods of preparations of food, kitchen procedures and customer complaints procedures'. (Mendelsohn, M 2001 p.69).