Part I

Introduction

Franchising plays a very significant role in the national economic growth considering the amount

of employment opportunities that it creates and provision of services. Franchising is a relatively

new phenomenon that was initially used by manufacturers in the private sector to expand the

distribution of their products. It is a business format in which the trademark is licensed along

with operational methods. For businesses, growth is linked with maintaining and securing a

sustainable competitive advantage through which the business is able to outcompete others in the

industry. Entrepreneurs consider growth as a positive thing but for that purpose, the

entrepreneurs ought to have a realistic perspective of the growth related to business risks and the

associated challenges and complexities of growth.

In the context of small businesses, it is imperative to have a more diverse view. With growth,

follows change, which requires planning and managing capital, people and processes so that the

endeavor is successful. International expansion requires expanding the company operations to

the market of the home country (Barringer and Ireland, 2010). Franchising is a particularly

attractive method of expansion for small entrepreneurs that have limited capital available to them

yet, they aim to grow rapidly. The system of franchising allows small entrepreneurs to become a

part owner of other businesses. This objective of the research is to explore the reasons why

franchising with chosen as a strategy for international growth along with the discrepancies. It

will also analyze certain qualities that franchisors seek in potential franchisees for their firm.

Franchising
One of the most used method of global expansion chosen by businesses today is franchising, that

allows a business to expand into wider markets through endeavors with its business partners in

the new markets (Stanworth et al., 2004). Franchising has become a widely linked notion due to

the win-win situation it creates for both parties conducting the business. The franchisor or the

owner seeking to grow the current business has to make little financial input while the franchisee

gets to do a business that already has a well-established image. Franchising is a comprehensive

relationship that involves franchisor grants the right to operate and sell the goods and services

developed by the franchisor to the franchisee by utilizing an operating system used and identified

by the franchisor's trademark (Barringer and Ireland, 2010).

It is in fact a privilege given to an individual or a group to do a commercial activity while the

business is expanded and its products and services are distributed in the wider market under the

already established brand image. The expansion objectives with suitable positioning is what

results in the rapid development of franchising. By having an existence in the domestic market is

considered to be crucial for the success of a business in the international market. To ensure that

the franchising is prolonged, sustainable and successful, both organizations must cooperate to

form a collaborative alliance (Stanworth et al., 2004). In contrast to other retail channel

arrangements, a deeper coordination exists in a franchise network between the franchisor and the

franchisee. Cooperation is highly significant as the profitability of the business is being affected.

Advantages to Franchisor

Similar to other businesses, franchising also has its own advantages and disadvantages. From the

franchisor's point of view, the biggest advantage is that by choosing franchising as a growth

strategy, the business is able to expand at a much faster rate as compared to growing
conventionally by company-owned units. Rather than investing own resources in a new market,

the franchisor is able to gain the support of an experienced partner without making direct

investments (Reinford, 2017). Expanding into new markets involves high level of risk and by

choosing a franchisee, the franchisor is able to enter the new market at a rapid pace through a

partner that deals with the business operations. The franchisor is able to acquire a greater

geographical presence with minimal risk involved. By choosing a suitable franchisee, the

franchisor is able to speed up the process of international growth without even being involved in

the day-to-day operations (Grossmann, 2017). It also allows to increase brand equity for the

business by exploiting the knowledge, expertise, resources and skills of the franchisee, who

operates the business and adds value to the brand. The franchisor is able to acquire control on the

market even without getting directly involved (Barringer and Ireland, 2010). Furthermore, it

becomes easier for the franchisor to enter several new markets by opening multiple franchises at

the same time, leading to rapid growth.

It is also a method to raise capital since most capital is brought in by the franchisee. Entering

with a minimum investment, the franchisor is able to earn steady cash flows from royalties while

all the burden and risk is being dealt by the franchisee. The franchisee business units are also

able to get supplies from similar source in the local market which means that the costs of

handling the distribution channels will be reduced (Grossmann, 2017). Furthermore, it is the duty

of the franchisee to ensure marketing efficiency and take other decisions, which further

minimizes the financial risks. With shared costs, and efficient marketing, the franchisor raises

capital for the global business and earns revenues at smaller risks. With more frnahcisees, there

can be more marketing of the brand, leading to increased brand awareness while the financial

returns are higher in return for relatively little risk (Reinford, 2017). Even when more locations
are being added, the franchisor has to put in relatively little money, unlike opening company-

owned outlets. The expansion capital is easily raised through choosing more franchisees.

Disadvantages to Franchisor

Similar to other methods of business expansion, there are also certain disadvantages of

franchising. The profits that are generated, are shared and the franchisor cannot enjoy them in a

way similar to from a company-owned unit. Not only the costs, but the profits are also shared.

The franchisor does not profits from each dollar that goes to the bottom line of the franchisee

(Barringer and Ireland, 2010). This revenue is merely a fraction of what could have been earned

if the franchisee wasn't present. In the case of a company-owned location, the ownerships of the

profit would be 100 percent. But as a franchisor, the revenues are the result of combining the

royalties, rebates, product sales etc. (Siebert, 2015). To earn the financial gain similar to one

company-owned operation, the franchisor would require selling at least 4-5 franchises.

Moreover, before getting the profits, it is also the duty of the franchisor to bear the costs of

operating the franchised business which includes the legal expenses, training costs etc. So, the

profits earned are neither high nor immediate for the franchisor while also being shared.

Second key disadvantage is the huge risk of getting the brand image tarnished by the franchisees

since the franchisor has minimal control of the situation. By franchising the system, even though

a well operated and highly efficient system is already laid out, but the very trusted model is being

operated by the independent franchisee. The franchisor has no right whatsoever to dictate the

franchisees to do certain things similar to how one tells own employees. The franchisees is the

owner of the unit and has the right to take all decisions according to their own understanding and

ability (Grossmann, 2017). While this lessens the burden and risk for the franchisor in a new
market, but it simultaneously raises the level of risk for potential damage too. The franchisor has

no say while decisions regarding hiring, training, scheduling, monitoring, compensation or even

employee termination are being made. Even the supplier choice and pricing decisions are being

made by the franchisees. Unlike terminating an employee, it is not easier to terminate a

franchisee until and unless some kind of violation of the franchise agreement is shown. So,

losing control and being vulnerable to potential risk of losing brand image and market share is

also a downside of franchising for the franchisor.

Suitability of Franchisees

Since the franchisor puts time, money and reputation at stake when choosing a franchisee, they

make the decision very carefully. Selecting an appropriate franchisee brings extraordinary

results. Choosing a wrong person or business for the franchise can incur huge damages to the

image and brand of the business (Boulay and Stan, 2012). There cannot be universal standards

that every business may consider while choosing to expand internationally through franchisees

since the key to success for every business is unique. However business owners do consider

certain set of skills that are required for sustainability and growth of the business (Ramírez-

Hurtado, Rondán-Cataluña, Guerrero-Casas and Berbel-Pineda, 2011). Since both partners have

their unique approaches, goals and tactics to business, there always exist a potential of conflict in

the franchise system. while the profits are shared between both partners, there are certain

expectations that franchisees have with regards to the participation and control of the process that

they operate (Boulay and Stan, 2012). The franchisors ought to choose the franchisees that have

compatible characteristics so that any potential conflict can be avoided in the relationship.

According to Edward Kushell, President of The Franchise Consulting Group, "many of the

qualities will vary according to the specifics of each franchise offering". For instance, he added,
"a real estate franchise [might] require excellent sales skills; an automotive repair business might

require certain mechanical abilities; a beauty salon might require creative and customer

satisfaction skills" (Axelton, 2021).

The first trait that every franchisor looks for in a franchisee is the adequacy of available capital.

before considering any other factors, a franchisor always ensures that there the franchisee meets

a minimum level of net worth and capital requirements (Brookes and Altinay, 2011). This is one

of the key requirements of the franchisors as identified by Kushell, "[Franchisees need] the

ability to provide the necessary initial capital, plus a commitment for contingency finds. Things

never go as planned" (Axelton, 2021). There is always a financial risk when a new business is

initiated and the franchisor has to ensure that the franchisee has the necessary capital to minimize

these associated risks. Not only having capital, but the franchisees must also have the necessary

understanding of basic accounting and finance so that they are able to manage the capital and the

financial statements of the franchise. The capital should be sufficient to initiate a single unit,

which means that until the business is able to break-even, there is huge financial risk and nobody

is willing to lend the money. So, the franchisors have to perform due diligence by evaluating the

financial situation of the franchisees and choose the best applicant that won't run short on capital

before reaching its break-even point.

The success of the franchisors is due to honing their core business and established it into an offer

that can be identified easily and has an efficient process of working with loyal customer base. It

has already been made sure that the process can be easily replicated. Dan Rowe, President of

FranSmart, a franchise development company, "More than anything, I would want a franchisee

who is going to follow the system at a very high and enthusiastic level. For example, Elevation

Burger doesn't really need franchisees who went to culinary school. They need franchisees happy
to follow the system that Elevation already has for making the food taste like it is supposed to"

(Axelton, 2021). When the franchisee is willing to follow everything that they are told by the

franchisor, then even if they do not possess the necessary marketing or accounting skills, it

doesn't matter as functional experts can be hired anytime (Brookes and Altinay, 2011).

Franchisee must not be "too entrepreneurial" which means that they must not have better

knowledge to make changes into the system. Franchisor must be active in checking the

background of the prospective franchisees to ensure that the franchisee must be diligent in

following all the business rules, operating system and training manuals given by the franchisor

(Mitchell, n.d.).

Along with having the flexibility and the willingness to adapt the system of the franchisor, the

franchisee has to play the role of employer and so, the appropriate leadership and communication

skills should be present. A leader is someone who has the knowledge, vision, influence,

analytical, and decision making abilities while having excellent communication skills to motivate

and lead the employees. Following the franchise model is necessary but the franchisee ought to

possess the right skills to lead the business to be successful. The franchisee must manage the

staff, which includes hiring local workforce and ensuring that they are able to meet the franchisor

standards (Mitchell, n.d.). The franchisee should be able to make the right balance between being

a leader and a team player. The franchisor is depending upon the franchisee to run the business

smoothly, so, seeking good leadership and management skills is imperative so that a candidate is

chosen that ensures smooth and effective running of the day-to-day business operations. As

indicated by Pitman Training, "You want someone who is fairly driven to be successful and

competitive. Because the staff are an integral part of the business you will need to be able to

manage and motivate staff" (Mitchell, n.d.). It also involves having the knowledge and the skills
to handle the local market while growing both the brand and the company overall in the new

market.

In conclusion, for a small business to grow, it is a critical decision to choose the method for

growth. Franchising, like other methods has its own pros and cons. The paper focuses on

describing how a small business can make the decision to expand globally through franchising.

The franchising strategy has been analyzed by considering the basic advantage and

disadvantages for the franchisor. The study also provides a detailed analysis and insights to how

a franchisor can find a suitable franchisee. There are certain qualities that a franchisee ought to

possess and those qualities and attributes have been explored in detail from the point of view of

the franchisor. No matter what, global expansion is highly imperative for the sustainability of the

businesses today. Every business seeks to have a global presence, and there is always an

associated risk involved when the business is being franchised. But if the most appropriate and

suitable franchisee is chosen, the franchisor can add value to its brand image and enjoy the

benefits of global presence with minimal risks at a rapid pace. Even though there are other

methods to expand globally, but for small businesses, franchising is still one of the most

preferred method. It involves less investment, lesser knowledge of the host market, and chances

to get easily established in the new market while maintaining a global footprint.
 BIBLIOGRAPHY

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 Part II

McDonald's, being one of the largest global fast food brand is mainly operated by its franchisees.

Ray Kroc, upon becoming involved in the fast-food restaurant envisioned McDonalds's as

achieving highest levels of success by expanding globally. Along with strong brand equity, it has

a strong and impressive global presence. Operating a fully-franchised system can be challenging

but McDonald's has been successful in managing its large uniform system with high level of

synchronization. The company aims to transition towards 95% of franchised restaurants in the

long term. With the core focus on customer preference and convenience, McDonald's ensures

consistency, innovation and resilience (Bailey, 2020). Franchising has enabled the company to

grow significantly and achieve a global brand identity. Operating in more than 120 countries,

through the existence of franchisee outlets, McDonald's has millions of loyal customers

(Harford, 2020). The monthly fee and rent that the franchisees pay worldwide is one of the key

sources of income and revenue for McDonald's, which can be further reinvested in the business

for the purpose of expansion.

Being a franchisor, the primary business of the company is to sell the right to operate its brand.

According to its 2018 annual report, "McDonald's is primarily a franchisor and believes

franchising is paramount to delivering great-tasting food, locally-relevant customer experiences

and driving profitability. Franchising enables an individual to be his or her own employer and

maintain control over all employment-related matters, marketing and pricing decisions, while

also benefiting from the financial strength and global experiences of McDonalds's. However,

directly operating restaurants is important to being a credible franchisor and provides Company

personnel with restaurant operations experience" (McDonald : MCDONALDS CORP

Management's Discussion and Analysis of Financial Condition and Results of Operations (form

10-Q), 2020).

While choosing a franchisee, it considers the business experience, commitment to franchising

and the ability to develop and carry the business plan. Although the franchisees are chosen from

among the local culture of the location, but every outlet portrays the best practices specific to the

brand. Every franchisee is bound by agreement that requires them to adhere to certain policies

and standards. In order to generate more revenue, the company focuses on considering the

customer preferences in each country. To meet the standards and tastes of the customers,

customization is a necessity (Vignali, 2001). Since customer preference is the priority of the

brand, McDonald's gave power to this franchisees to adjust and alter the menu based on sales

pattern and consumer choices. This was particularly with regards to breakfast-offerings. With

this policy, the franchisees can choose to vary and select different breakfast sandwiches at

different time periods of the day (Khan, 2020). Furthermore, the franchisees have also been

given the power to choose the menu offerings so that specialized menu items can be introduced

that are popular in the particular country. The franchising model allows McDonald's to keep the

overhead costs down while letting the local owners deal with individual units (Ganti, 2019). This

allows to keep the costs of food and service low but fast. Since the franchisees are own

employers, so all matters related to pricing, marketing and employment are controlled by them,

giving sufficient freedom to test innovation and implement successfully (Khan, 2020).
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