Organizational Behavior & Leadership

Franchise

LT No. 8

Submitted by: Fakhar Imam

Iqra Shahzad

Sidra Masood

Submitted to: Dr. Aamir Khan

Submitted on: 8th April, 2020

Sir Rafay in today’s class told us about Franchise. As per him, franchise is the agreement or

license between two legally independent parties, which gives a person (franchisee) the right to

trade in a designated area under the trademark of franchisor. The franchisee has the right to

market a product or service using the operating methods of the franchisor. The franchisee has an

obligation to pay the franchisor fees for those rights. The franchisor has the obligation to provide

training and continual support and guidance to the franchisee. Franchising is a method for

expanding businesses and distributing products and services. It is based on a relationship

between the brand owner (franchisor) and the local operator (franchisee).

The Franchisor is the company that is franchising its business. The Franchisee is the person who

buys the franchise rights from the franchisor. Franchising can be defined as a method of

distributing products or services. At least two levels of people are involved in a franchise system:

(1) the franchisor, who establishes the brand’s trademark or trade name and a business system;

and (2) the franchisee, who pays a royalty and often an initial fee for the right to do business

under the franchisor's name and system. Technically, the contract binding the two parties is the

“franchise,” but that term is often used to mean the actual business that the franchisee operates.

1. Business Format Franchise

This type of franchise is perhaps what most people refer to as a classic franchise. This type of

franchise is when the franchisor gives the rights to trade names, trademark, business process and

the system in order for the franchisee to sell the product, for a fee. The franchisor is heavily

involved in terms of how the service is provided and the business is run. This type of franchise

comes with certain guidelines and expectations from the franchisor, which the franchisee has to

follow. There is also a binding agreement between the two parties to bind the two for a certain
period. The great thing for franchisees is that ongoing support, advice and training is given by

experienced franchisors.

2. Hard Franchise

A much more common model is the hard franchise, so named because solid and hard agreements

are made between the franchisor and franchisee. Each location is very similar, helping create

trust for the success of franchise. The hard agreements ensure each party knows where they

stand, but leaves little room for individual actions and creativity. One example of hard franchise

is of McDonalds. All branches of McDonalds have to follow the guidelines set by the original

McDonalds.

3. Soft Franchise

In a soft franchise, the agreements are much more flexible and leave a lot of room for the

individual entrepreneurship of the franchisees. Often only, a logo or name is shared and it is

difficult to recognize the business as a franchise. There are, however, also cases with stricter

agreements and controls. In a soft franchise, minimum standards are set and it allows the

franchise to set their own standards.

4. Master Franchise

A master franchise is a franchising contract in which the master franchisor hands over the control

of the franchising activities in a specified territory to a person or entity, called the "master

franchisee". One of the benefits of Master franchising is that you will receive a significant

percentage of the initial franchise fees and the ongoing royalty fees. For example, in Pakistan

there are master franchisors of KFC and McDonalds.

Benefits to the franchisor include regular royalty payments, expansion with reduced financial

risk, and a greater geographical presence. Franchisee benefits include lower risk, lower startup

costs, existing brand recognition, and parent company marketing support.

Conflicts can occur between franchisors and franchisees due to many reasons. For instance; to

save costs, some franchisees may decide to use products that are not approved by the franchisor.

This does not only cause major conflict but could also harm the brand, which guarantees

adherence to certain standards for its customers. The franchisor resolves this conflict by

explaining franchisee the ROI of each product and service suggested by the franchisor. There can

be problem of quality standardization due to different practices of employees in franchises. A

franchisor's key target is to manage quality benchmarks all through its whole establishment

framework. Neglecting to set up the benchmark and maintaining the quality may ruin the

established brands. However, if done accurately, quality control can help enhance an established

framework.

Some of the students also asked questions from Sir Rafay, following are some of those questions:

1. Moeezah asked if the whether the franchisee franchisor relationship is like a boss

subordinate relationship. Sir Rafay answered by saying that it depends on the type of

contract if between the franchisee and the franchisor. If one wants freedom then they

should go for soft franchising. Friction exists when there is a hard franchise contract and

that sometimes leads to conflict between both but if the terms and conditions are

explained well then that it is in their favor too.

2. Ali asked whether there is a special employee training and retention as compared to west.

Answer was that in Pakistani context it is much difficult to retain then as they hope. As most

employees change their job when they are offered a job with an increase in pay of only Rs.
 200 to Rs.300. In order to combat this, employee training and hiring is under continuous

improvement.

3. Since franchisees require hefty amount of initial investment to get their business off the

ground, so how do franchisors help them in this regard?

It varies from contract to contract. In general, franchisors work with suppliers to reduce their raw

material costs and manage internal expenditures for the same reason. This way they help

franchisees to reduce operating costs by getting services at negotiated price.