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Individual Assignment Questions

Student's Name

Institution Affiliation
INDIVIDUAL ASSIGNMENT QUESTIONS 2

Individual Assignment Questions

Part B: Question 2: Essay

Franchising as a Business Growth Strategy

Introduction

When considering on growing and expanding a business, one has to consider many things. A

business owner must seek to get as much information as possible to determine the best method

for the growth of their business. When a person is considering franchising, one must consider a

lot of information and opinions out there. Some of the information and opinions may be right,

while some may be wrong. Other information may be irrelevant and confusing. Therefore, when

franchising is the only likely method for growing and expanding a business, the information a

business owner should look out for include one that relates to whether or not franchising is the

right for the venture in question (Emerson & Trautman, 2020). Other information to consider

include what it will take for one to franchise their business, how to get started, some of the

mistakes to avoid, and some of the secrets one should know that make franchising a success

(Emerson & Trautman, 2020). Therefore, this essay will explore franchising as a business

development strategy by focusing on its advantages, disadvantages, and tensions.

Franchising

The best way to know if franchising is the best development strategy for any business is by

first learning its definition and what it is all about. According to Kavaliauskė and Vaiginienė

(2011), franchising is a type of business that entails an agreement between the franchisee (buyer)

and the franchisor (business owner). This means that the franchisee targets a successful business

owner in their line of business and proposes an arrangement. Kavaliauskė and Vaiginienė (2011)

further note that once the franchisors agree with the deal, they grant licenses to the franchisee
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and authorize them to sell their goods, services, and products. In this case, the franchisee is also

granted the IP rights and brand name to operate independently.

Authors such as Kavaliauskė and Vaiginienė (2011) have also noted that franchising is the

best alternative for business growth, especially when the business owners and founders do not

have an idea of their business' purchasing power and potential of their selected target markets.

The reason behind this is that one cannot be extremely sure of their business potential after

startup. Franchising is also recommended when product adaptation demands great expenses and

when the political situation is unstable.

Even though franchising may be suitable for many businesses, franchisees are recommended

to watch out for a few conditions before choosing a franchisor. According to Kavaliauskė and

Vaiginienė (2011), one of the conditions is that the franchisor must be registered, protected, and

have a popular brand name. This is because a business system that is clearly formed and

protected and especially from the competitors gives a better chance for a franchisee to sell their

products and services. Also, such protection goes a long way in ensuring business effectiveness

and attraction to consumers. Kavaliauskė and Vaiginienė (2011) further suggest that it is

recommended for franchisees and franchisors to have high levels of interaction. This is because

high levels of interactions provide long-term, legally, and economically effective relations

between separate business units.

Advantages of Franchising

Lower Failure Rate and Minimized Business Risks

According to Tang (2017), one of the merits of franchisees is that they have a lower failure

rate than starting a business from scratch. The reason behind this is that that unlike starting a

business from scratch followed by learning from mistakes, franchisees tend to enjoy the benefit
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of established brand names and products developed by the franchisor. The franchisee tends to

enjoy lower risks because the parent company has already resolved most of the risks (Tang,

2017). In essence, even though the franchisor might have encountered problems in its systems

and procedures, they resolve most of them, if not all. For example, Kentucky Fried Chicken is a

successful brand internationally. This means that franchisees operating under its brand name use

the business' menu items, recipes, logos, trademarks, and display signage, which results in

uniformity of products. As such, franchisees operating under Kentucky Fried Chicken have an

increased probability of business success.

Energy and Time Saving on Product and Marketing Development

According to Calderon-Monge, Pastor-Sanz, and Huerta-Zavala (2017), the other advantage

associated with franchising as a business development strategy is that it helps the business

owners save large on the amount of energy and time needed in exploring, operating, and

developing a new business system. In other words, new business owners do not have to start

from scratch. Also, since the parent business is already there, one does not need to provide some

goodwill as everything needed to start the business is already there. Calderon-Monge, Pastor-

Sanz, and Huerta-Zavala (2017) further note that n franchising, the trademark, the brand, and

business reputation are already there, and this means a franchisee can start their business by

giving a license to market their products with brand consumers are already familiar with. After

all, most of the franchisors such as KFC, McDonald's, and Starbucks have instant brand-name

recognition, which has created a loyal following among consumers. Because of their quality of

products, they make it easy for franchisees to start their businesses.

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Business Support and Training among Other Pre-Opening Benefits

As noted earlier, franchisee opts to get into an agreement with established franchisors.

According to Calderon-Monge, Pastor-Sanz, and Huerta-Zavala (2017), the reason behind this is

that when a business owner is opening a franchise, the franchisor provides assistance like help

with setting up equipment, furnishing, and shopfitting. The franchisor also goes a long way in

helping the franchisee select the appropriate inventory for opening the business. Calderon-

Monge, Pastor-Sanz, and Huerta-Zavala (2017) further note that many franchisors offer training

to the franchisees to retain and maintain the production and sale of quality products.

Disadvantages of Franchising

Market Saturation

One of the franchising's greatest limitations is market saturation, especially for franchisees

that are not offered territorial protection (Tang, 2017). In such a case, the franchisors set new

franchises in close proximity to the existing ones. Tang (2017) further notes that many

franchises' main goal is to see greater growth and less market saturation. However, this goal has

not been met and is all attributed to the fact that there are limited locations. For example, if there

are two franchises in the same street with an approximate of only 100 meters distance, the

market is oversaturated sales in such a case are suffering.

Profit-Sharing and Franchise Fees

Different franchisors demand varying fees and capital. According to Tang (2017), some

franchisees are always willing to pay for the startup costs and for the right to use the parent

company's name. Other additional costs that may be covered by the franchisees include

construction, site purchase and preparation, fixtures, signs, management assistance, equipment,

and training. Tang (2017) further notes that in some cases, some franchisors demand ongoing
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royalty fees. These costs may be so much for the franchisees and end up discouraging some

businesses. Ioanna and Maria (2013) further note that some franchisors demand franchisees to

pay a certain percentage of the monthly gross sales back to the parent business, and this means

that franchisees do not have full control of their profits. The fee paid by the franchisees usually

involves a percentage of the gross sales and a required minimum. Again, this shows that even

though the franchises enjoy some benefits losing control of the way they spend their profits can

inhibit the attainment of goals in the future.

Less Freedom

According to Calderon-Monge, Pastor-Sanz, and Huerta-Zavala (2017), one known fact about

franchisees is that there is little freedom, which means that franchisees have little space to

practice innovation. In addition, once a business owner has engaged in an agreement with a

franchisor, they have no room but to do things the franchisor's way. Tang (2017) further notes

that when franchisees buy a franchise, they sign a contract agreeing to sell the franchisor's

products and services by following a definite and prescribed formula. For example, in the event

that a business gets in agreement with Starbucks and the latter decides to roll out a new product,

the franchisees have to put the product's menus and signs on. In essence, Tang (2017) notes that

the franchise contract has restrictions on how the franchisees should run their business and not

allow franchisees to make any changes. As such, the franchisee may not have an option but be

dependent on the franchisor. Therefore, for business persons who want to be their bosses and

cannot condone control from others then the franchise is not the best route for expanding and

developing their businesses.

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Tensions That Might Arise Between A Franchisor and A Franchisee and What

Strategies Could Be Used To Resolve These Tensions

Control of Management

One of the tensions that occur in franchises is related to the control of management.

According to Tang (2017), history and experiences based on transaction theory are that there are

rule problems that have occurred between franchisees and their headquarters. Most of the

problems include operational control, decision-making, and design of incentive mechanisms.

However, these kinds of problems are mainly critical when a well-known brand is in the

equation. As such, Tang (2017) notes that the franchise headquarters need more control to

prevent the franchisees from having and adopting free-riding behavior. In such a case, the well-

known brand tends to assume control and direct management and all associated operations.

When this happens, the franchisee may feel that they are sidelined. It could also result in a lack

of credible commitment and communication between the involved parties in the franchise. It

could also result in uncertainty of management and increased transaction costs. The best way to

address this is by establishing clear patterns and systems of communication (Yakimova, Owens

& Sydow, 2019). Also, from the beginning, the involved parties should lay down their

expectations.

The conflict between the Franchisees and Franchisors

In business, the relationship between franchisors and franchisees as important as the

relationship between businesses and their consumers. Even so, different authors have looked into

the issues of conflicting relationships between the franchisors and franchisees, with Tang (2017)

noting that it is all attributed to information asymmetry and ethical risks. Specifically, tension

arises when there is a goal conflict in the franchise. According to Tang (2017), the main factor is
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that the franchisor and franchisee may have different risk preferences, all attributed to varying

risk attitudes. This also trickles down to decision making. As such, Tang (2017) notes that

franchises encounter three main problems, which include adverse selection, hold-up, and moral

hazard. In essence, this means that there are hidden information and action. According to

Giddings, Frazer, Weaven and Grace (2009), hidden information means that the franchisors

agree with information asymmetry elements with the franchisees. In such a case, it is evident that

the franchisors hold critical information that franchisees could use to make the best interests of

decisions. The best way to avoid conflict between the franchisors and franchisees is to email and

discuss the terms of engagement in detail before closing the contract (Antia, Zheng & Frazier,

2013). Every party should be given a chance to speak out on what they do not feel they can abide

by and reach a consensus.

Conclusion

In conclusion, the essay has explored franchising as a business development strategy by

focusing on some of its advantages, disadvantages, and tensions. From the essay, the main theme

is that franchising is a good business development strategy only on the condition that both the

franchisor and franchisee are willing to communicate openly. More so, the franchisee must be

willing to take most of the franchisor's orders because the experience gained by the latter is what

has enabled them to maintain the strong brand name.

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References

Calderon-Monge, E., Pastor-Sanz, I., & Huerta-Zavala, P. (2017). Economic sustainability in

franchising: a model to predict franchisor success or failure. Sustainability, 9(8), 1419.

Emerson, R. W., & Trautman, L. J. (2020). Lessons about Franchise Risk from Yum Brands and

Schlotzsky's. Lewis & Clark L. Rev., 24, 997.

Kavaliauskė, M., & Vaiginienė, E. (2011). Franchise business development model: Theoretical

considerations. Business: Theory and Practice, 12(4), 323-331.

Tang, M. (2017). Research on Franchising Model in Small Business. China-USA Business

Review, 287.

Giddings, J., Frazer, L., Weaven, S., & Grace, A. (2009). Understanding the dynamics of conflict

within business franchise systems. Australian Dispute Resolution Journal, 20(24), 24-32.

Antia, K. D., Zheng, X., & Frazier, G. L. (2013). Conflict management and outcomes in

franchise relationships: the role of regulation. Journal of Marketing Research, 50(5), 577-589.

Yakimova, R., Owens, M., & Sydow, J. (2019). Formal control influence on franchisee trust and

brand-supportive behavior within franchise networks. Industrial Marketing Management, 76,

123-135.

Ioanna, S., & Maria, K. (2013). Information transfer through training in franchising

enterprises. Procedia-Social and Behavioral Sciences, 73, 625-633.