CHAPTER 2

FRANCHISING
AS STRATEGY
STRATEGY
Strategos – Greek word means general of an army
Strategia – army general
Strategie – France
It means the plans and the tactics of deploying armed
forces and to deceive enemy on the war fronts.

In business context, strategy means devising plans to

augment and allocate firm’s resources in order to win
customer in the market front.
GROWTH STRATEGY FOR RETAILERS
GROWTH STRATEGY FOR RETAILERS
MARKET PENETRATION
Market penetration is a strategy of achieving growth with the help of
existing products in the existing market. From the perspective of retailers,
the existing product means their existing retail offerings. Products that are
commodities and are aimed at fulfilling the most basic needs of the
consumers (such as food, medicine, etc.) Usually enjoys a continuous demand.

MULTIPLE-UNIT FRANCHISING
Multiple-unit franchising refers to an organizational arrangement in
which franchisors grant franchisees the right to own and operate more than
one unit in the same franchise system. Though recent studies have indicated
the popularity of this growth strategy, most have focused upon advantages
associated with the traditional single unit model.
 Product Development is an option that retailers may adopt in order
PRODUCT
to claim moreDEVELOPMENT
share of wallet of(FORMAT DEVELOPMENT STRATEGY)
their shoppers.

1. The Range of Merchandise – Variety and Assortment

2. Pricing – Upscale or mass or value-pricing or any other pricing strategy
3. Location of the store – independently located, or located in a mall, in
city or outside the city
4. Communication – local or national media, print or electronic media
5. Customer Service – self-service or full-service or any other combination
6. Design and Display – No-frill design and interior of the store or
elaborate/lavish design and interior of the store or ethnic or traditional
interior of the store, etc.
A new format development could be in response to certain environmental
changes:
(i) Changing Buying Habits of the Consumer – the way consumers like to
shop compels retailers to develop a new format.
(ii) Buying Most Under the Single Roof (One Stop Buying) – traditionally,
shoppers used to move places in order to buy desired products for their
requirement. With the buyers’ preference shifting more and more
towards branded products, they feel there is no point buying things
from multiple stores. Rather, they now expect the convenience of
shopping under a single roof.
(iii) Technological Change – it is well-accepted notion that buyers had to
go to a service-provider in order to obtain a service. Advancement in
Information and Communication technology (ICT) has transformed the
way services are sold to the consumer. This technological advancement
compelled retailers to develop an electronic front via Internet to
transact with their customers.
(iv) Competitive Pressure – sometimes retailers are compelled to adopt
multiple formats in response to the competitors’ move towards customers
with the help of innovative format.
MARKET DEVELOPMENT
Market development is viewed as the least costly and least risky of
all the strategic options available to a firm. This strategy consists of
offering the existing products – with or without minor or cosmetic
modifications – to customers in related market areas by adding channel of
distribution.
Some of the specific market development approaches to market
development:

1. Launching Products into additional geographic markets:

(a) Local to Regional Expansion
(b) Regional to National Expansion
(c) National to International Expansion
2. Targeting existing products to other market segments:
(a) Modifying product to appeal to their segments
(b) Entering other channels of distribution
(c) Advertising in other media
DIVERSIFICATION
A firm is diversified when it is in two or more lines of business that
operate in diverse market environments. When a firm has opportunities to
expand into industries whose technologies and/or products complement
existing business, it thinks of related diversification. A firm also thinks of
related diversification when it can leverage existing competencies by
expanding into related business.

Economies of scope – the cost advantage emanating from cross-business

value chain linkage.
Related diversification offers certain benefits as enumerated below:

1. Retailers achieve risk diversification over a broader base of

businesses.
2. Retailers harness competitive advantage through transfer of
existing skills and knowledge and thus by lowering the cost of
operation.
3. It helps the retailers preserve strategic unity over multiple
businesses.
4. Retailers usually achieve a consolidated performance that is more
than arithmetic summation of multiple businesses would have
generated individually.
The linkages in value chain offers firms cross-business strategic fits
in following areas:

• R&D and technology Activities

• Supply Chain Activities
• Manufacturing Activities
• Distribution Activities
• Sales and Marketing Activities
• Managerial and Administrative support activities
Supply chain strategic fit provides following benefits:

• Offers to retailers increased bargaining power in negotiating

with common suppliers and thus reduce procurement cost.
• Retailers can collaborate with supplies and go for Quick
Response delivery system.
• It helps retailers in securing volume discounts with the
transporters and thus in making logistics more cost effective.
Firms go for unrelated diversification on account of the following
reasons:

• It helps the firms spread risk over multiple business

opportunities.
• It allows firms direct with big profit potential are acquired for
diversification, shareholder wealth can be enhanced.
• A spread over multiple businesses offers stability of profits by
internal offsetting of good times and hard times.
Two major challenges of unrelated diversification:
1. Demanding Managerial requirement:
The greater the number and diversity of businesses, the harder it
is for managers to employ capable managers to manage a diversified
portfolio of business. It also becomes difficult to decide what to do
when one or more businesses do not perform well.
2. Limited Competitive Advantage Potential:
There is no cross-business strategic fits between multiple
businesses. This leaves a very limited scope for gaining competitive
advantage. Sometimes, the consolidated performance unrelated
businesses may not be better than the sum of individual businesses.
 RETAILING AND VERTICAL MARKETING SYSTEM

Place – is one of the most vital elements that determine the success
of the marketing.

Marketing channel comprises of following members:

• Manufacturers/Service Providers
• Wholesaler (Distributors, Dealers, Agents)
• Retailers
Retailers are the final link in the Vertical Marketing System (VMS). It
can be classified based on the degree of its integration:

1. Fully independent Vertical Marketing System

In an independent VMS, all the channel members operate as an
independent entity. Retailers who ultimately help the firms serve their
customers are also independent in terms of what to retail from their
stores. Manufacturers or the wholesalers do not have any control over
the retailers in terms of the type, quantity and territorial aspects of
retiling of any product. Firms marketing including rural markets usually
prefer to distribute through fully independent vertical marketing
system.
2. Fully integrated Vertical Marketing System
A fully integrated VMS develops when either a manufacturer
integrates forward and attempts to reach the consumer or retailers directly
by a process called disintermediation or a retailer integrates backward and
gets access to a supply chain that improves its ability and efficiency to serve
the customers. The manufacturers, typically invests resources to create a
channel by way of company-owned stores manned by their employees.

3. Partially integrated Vertical Marketing System

In a partially integrated system, two of the three channel partners
(Manufacturer and wholesaler, wholesalers and the retailers) combine their
operations in order to harness better efficiency out of the VMS. The
manufacturers or wholesalers or even the retailers attempt to achieve partial
integration by way of a contractual arrangement. Such contractual
arrangement might take one or more of the following.
(a) Wholesaler-sponsored Group of Retailers – a wholesaler
brings together a group of independent owner retailers, who
together would offer a well-orchestrated programme provide
the retailers services such as store design and layout, store site
and location analysis including trade area analysis, inventory
management, assistance in promotional activities, and employee
training programmes. In return, the retailers agree to act as a
virtual chain of stores and make their purchases from the
wholesaler. It is voluntary arrangement in the sense that there is
no formal membership or franchise or license fee and not
legally binding to either party. Associated wholesale grocers
(ACG) in the US acts as such group.
(b) Retailer-owned Cooperatives – retailer-owned cooperatives are
owned and organized by the member retailers and offer various
services to the member retailers in order to help them compete better
with the corporate chain of stores by harnessing competitiveness through
scale economies.
(c) Franchises – the third and most important contractual arrangement of
a partially integrated VMS is franchising. This is a unique type of a
licensing arrangement where the firm willing to expand in multiple
geographic markets enters into a contractual agreement with the local
retailers/businessmen and transfer them the right to do business under
that firm’s banner. The firm – known as franchisor under the agreement
gives away the rights to the local retailers/businessmen – known as
franchisee to carry out business of the franchisor.
Licensing – allows a license to pay for the rights to use a particular
trademark.
Difference between a Franchisee and Licensee

Features Franchisee Licensee

1. Business identity and Trade Business of a franchisee is identified Business of licensee may not be
Name Usage with the trade name of franchisor. identified with the trade name of
E.g. Titan, Tanishq, Pizza Hut. licensor.

1. Degree of Managerial Support
Receive extensive support such as
site selection, ambiance design,
staff training, promotion, finance,
technology, brand name usage, on a
continuous basis
Usually receives a technical support
for manufacturing the licensed
product or other products under the
licensed process or technology. It is
very little and not on a continuous
basis.

1. Financial Transavtions
Often gets finance from the
franchisor for setting up the business
and required to pay a part of its
revenue/profits as royalty
payments during the currency of
business.
Rarely gets finance for setting up
the business and payment is based
on purchase of components/raw
material rather than sales.
PROS AND CONS OF THE FRANCHISE SYSTEM
 ADVANTAGES OF THE FRANCHISE SYSTEM

To the Franchisors

1. Allows a retailer (franchisor) to expand into different geographical

market in a cost-effective way.
2. Allows better control over their franchisees in the conduct of the
business.
3. Allows franchisors gain competitive advantage over rivals by
synergistically blending their management expertise with the franchisees’
knowledge about local market.
4. Allows franchisors to perform only the critical value chain activities
and thus improve their overall performance.
To the Franchisees

1. Allows an easy entry in to a business with established

products/services having a widespread brand reputation and a proven
business model.
2. Franchise business have an increased chance of becoming successful
and hence offer a reduced risk business with assured returns.
3. It offers greater pre-start and ongoing managerial support and thus
increases the chance of success.
4. A franchise business usually has more public awareness and hence
provides ready market to the franchisees at local level.
5. It offers the franchisees a ready access to the supply chain of the
franchisors.
 DISADVANTAGES OF THE FRANCHISE SYSTEM

To the Franchisors

1. It is difficult to manage relationship with the franchisees.

2. Sometimes, franchisees are not sufficiently motivated to perform up
to the mark and thus do not allow the franchisors to achieve desired
results.
3. Some franchisees may not deliver in accordance with the set
procedures and may thus spoil the image of the franchise system.
To the Franchisees

1. The franchise system offers limited freedom to the franchisees as

they have to operate in accordance with the terms of the franchise
agreement and the procedures laid down in the operating manual.
These restrictions include product/service offering, pricing, geographic
territory.
2. A franchisee is required to pay regular payment in term of royalty
payment during the currency of the business.
3. The system does not allow any flexibility to the franchisee to cross-
sell or up sale even if there is an opportunity.
4. The franchise business may not deliver the promises with which the
business was started.
5. The duration of franchise business agreement is limited and the
franchisees have little or no say about the terms of termination of the
agreement.
COOPERATIVE STRATEGY
Franchising can be viewed as one of the strategic option availably
when a company considers corporate level cooperative strategies.

At corporate level, a company can think of following three option:

1. Synergistic Strategic Alliances – this helps the allying partners’ joint
economies of scope between two or more companies. This usually
achieved through cross-functional synergy or cross market synergy.
2. Diversifying Strategic Alliance – this allows firms to expand into new
products or new market areas without completing a merger or an
acquisition.
3. Franchising – this is a cooperative strategic arrangement of
spreading the risks and using the resources. It is a contractual agreement
executed between two parties - the franchisor and the franchisee.
MODES OF FRANCHISING
5 TYPES OF INTERNATIONAL FRANCHISING MODES
1. Direct Franchising – the franchisor grants franchises to individual
franchisees in the foreign country through execution of an international
contract.
However, a potential franchisor should consider several strategies issues pertaining to this mode
of franchising.
a. The basic issue that may confront a potential franchisor is the problems associated with the
kind of control a franchisor would like to exercise over the franchisees in another country.
b. Second issue is with regard to transfer of knowledge and the assistance to be provided to the
franchisee during the currency of the contract. Therefore, the local regulatory framework
pertaining to the intellectual and industrial property rights needs to be examined.
c. Another issue is pertaining to taxation matters. The incidence of tax would depend on how the
agreement has been structured and also on the international treaties existing between the
countries.
d. A very important issue is concerning the choice of law and jurisdiction. Franchisors may have a
tendency to see that their home countries law apply even if the franchise exists in another
country.
2. Subsidiary or Branch Office – a subsidiary is a separate legal entity
controlled by the franchisor, whereas a branch office could be a
marketing office or simply an extended arm to ease coordination and
control in the host country. It does not have a separate legal entity.
3. Area Development Agreements – a franchisor gives the developer
the right to open a multiple number of outlets according to a
predetermined schedule and within a given geographical area.
4. Master Franchise Agreements – the franchisor grants a person in
another country, the sub-franchisor, the exclusive right within a certain
territory to open franchise outlets itself and/or to grant franchises to sub-
franchisees.
5. Joint Ventures – a foreign franchisor forms a joint venture with the
local partner and creates a separate legal entity in that country.
Miscellaneous forms of franchising
1. Multi-unit Franchising
2. Affiliation or conversion Franchising
3. Franchise within a Franchise
4. Subordinated Equity Arrangements
5. Management Agreement
6. Franchise Buy-ins