CHAPTER 7:

TERRITORIAL STRATEGIES
Shane, S.A. (2005). From Ice Cream to the
Internet: Using Franchising to Drive the Growth
and Profits of your Company. Pearson Prentice
Hall: pg. 123-139.
 CHAPTER OBJECTIVES
• To discuss the right strategies in managing
geographical territories by the franchisor.
• To examine the strategy of multiunit
franchising pertaining to master franchising,
area development agreements, or sub
franchising.
• To discuss exclusive territories as a kind of
territory strategy.
 INTRODUCTION
• To be successful as a franchisor, the franchisor need
to determine the right strategy toward managing
geographical territories.
• Franchising tends to occur in industries in which
sales and profit growth come from the addition of
outlets to the system rather than the expansion of
operations at existing locations.
• Consequently, figuring out how to expand the
geographic reach of the system is crucial to success.
• In general, an effective territorial strategy has three broad
components.
• The first involves deciding whether to engage in multiunit
franchising.
• The franchisor need to determine whether they will engage
in master franchising, area development agreements, or
sub franchising.
• The second component involves what kind of territory to
offer to your franchisees. Specifically, you need to figure out
whether to provide franchisees with exclusive territories. If
so, you need to determine the size of those territories.
MULTIUNIT FRANCHISING
MASTER FRANCHISING, AREA
DEVELOPMENT, AND SUB
FRANCHISING
 MASTER FRANCHISING
 Master franchising is an arrangement in which the franchisor sells to
another party (the master franchisee) the right to collect some portion of
the up-front franchise fee and ongoing royalties in return for recruiting,
training, and supporting the franchisees.
 Master franchising offers several advantages to franchisor:

1) Accelerating the rate of growth of franchisors’ franchise system by

allowing them to establish outlets with very few headquarters personnel.
Because someone else recruits, trains, and supports franchisees,
franchisors’ system can grow very quickly if they use master franchising.
Wendy's, for instance, used this strategy to grow from 2 units to 1,400
units in only nine years.
2) Master franchising also reduces the conflict between franchisors and
franchisees that occurs with the addition of outlets to the system -
fundamental conflict occurs because franchisors maximize system-wide
sales and franchisees maximize outlet-level profits.
 MASTER FRANCHISING
3. Master franchising also facilitates the buyback
of franchised outlets because there are fewer
parties with whom you must negotiate to
repurchase outlets.
If franchisors’ strategy is to franchise
temporarily to build a large chain and because
lack the capital and human resources to build
the chain through company-owned outlets,
master franchising might be right for franchisor.
 MASTER FRANCHISING
4. Master franchising provides an effective way
to obtain a partner with information about
markets especially when expanding into
foreign markets, where franchisor often lack a
good understanding of the local culture,
economy, or legal system.
DISADVANTAGES OF MASTER FRANCHISING

• Master franchising is particularly problematic for new

franchisors. Amongst of them are:
 undermines franchisee incentives (the franchisors forfeit their
right to pick the franchisees that get the rights to purchase
additional outlets)
 exacerbates the problems of selecting the wrong partners
(picking a loser master franchisee is much greater than that of
picking a loser franchisee)
 creates unrealistic development plans with poor incentives
(many franchisors have run into trouble setting unrealistic quotas
for the master franchisee without an understanding of what the
market could bear – especially in new market).
 AREA DEVELOPMENT
• An area development agreement is a contract to provide a
franchisee with the right to develop a territory that would hold more
than one outlet.
• Advantages of Area Development:
 reduce the number of franchisees that the franchisor need to attract
to the system (Finding a good franchisee in a region is likely to be
less expensive than finding 20 good franchisees)
 to achieve economies of scale at the mini chain level (supplying raw
material, advertising & promotion).
 the benefit of knowledge transfer from one outlet to another
because solutions that the area franchisee learns can be applied in
multiple outlets within the same area.
 free riding disadvantage of franchising is minimize when franchisees
have areas to develop (franchisee won't free-ride on advertising).
• Disadvantages of Area Development:
 area development creates a shirking problem
(the people running the outlets compensated
from salaries, not from profits).
 it increases the power that franchisees have
over franchisor (bargaining position is much
stronger if franchisor have a large number of
small franchisees than a small number of large
franchisees).
 SUB-FRANCHISING
• Subfranchising is a strategy in which a
franchisor sells someone the rights to resell
outlets to franchisees.
• the sub-franchisor becomes responsible for
training the franchisees, setting them up in
operation, and collecting royalties.
Advantages of Sub-franchising
• Enhances growth
 Disadvantages of sub-franchising
• By using this arrangement, you create partners with
significant power over you because subfranchisors account
for more revenue and operate more outlets than individual
outlet operators.
• Thus, negotiations with subfranchisors are much more
difficult than negotiations with individual franchisees.
• difficult for you and your sub-franchisor to come to an
agreement about the right development schedule for your
system due to marketing strategy.
• the difficulty of identifying qualified subfranchisors due to
higher financial demand than individual franchisees.
 Stop! Don’t do it…..
• Don't try to sell additional outlets to new
franchisees when you have high-performing
franchisees eager to expand.
• Don't forget that giving franchisees the right
to expand in their territories is a powerful
incentive to perform.
 Exclusive Territories
• a geographic location within which the franchisor
agrees not to add a company-owned outlet or to sell
an outlet to another franchisee.
• Exclusive ter­ritories are more valuable when
franchisees are relatively more important to the
system, which is true early in the chain's life.
• When the product or service that the franchisor sells
is new and customer do not know much about it,
franchisee efforts are very important for selling to end
customers.
 Advantages of ET
• Exclusive territories make your franchisees
less worried that you will threaten to put new
outlets in their geographic areas.
• Exclusive territories minimize competition
between outlets within the chain for the same
customers.
 How to determine size of ET
• the size of the geographic area
• the number of people in that area
• wealth or income.
 REVISION
• Franchisor needs to select the right strategy in
order to expand their business.
• There are several strategies – multiunit
franchising, right to expand and exclusive
territories.
• Multiunit franchising – master franchising, area
development & sub franchising.
• Each strategies have advantages and
disadvantages respectively.