Franchising as a Strategy for Small Business Growth

Franchising as a system for Small Business harvestThis paper is an investigation into whether franchising is as effective a method acting of magnification for a beautiful rail line as it is for deepr much established backupes.To test this theory a lawsuit study of two bank linees was prep atomic number 18d, Interlink Express and the Cornish Oggy Oggy Pasty Shop. The exemplar studies on the shapings were compiled from the discipline on their web sites. Both agreements atomic number 18 a member of the British Franchise crosstie.These case studies were compared to the literary carrefourions on the topic. Through exploreing the topic iodine factor was revealed as being a study step forward in franchising, this was the stag.Both the institutions that were studied are successful at bottom their markets in the UK, and therefore be to be good examples of franchising. The organisations had different motives for using this method for harvest-festival.The paper concl udes that with the right fault, clear business gutter be just as successful at franchising for expansion as their rangyr counter occasions.IntroductionThis paper go away investigate whether franchising is as effective a method of expansion for a small business as it is for broadr more than than(prenominal) than established businesses. There are umteen different methods that organisations give the axe use to hyperbolise some of these touch on raising large amounts of capital, which is not always an viable option for the little business.Businesses whether large or small, must(prenominal) plan what their future needs leave behind be, to move forward. Strategy is the direction and screen background of an organisation over the long term which achieves advantage for the organisation. The strategy answers both(prenominal) the motions where do you want to go? and how do you want to get there? Incorrect or too few resources is a major(ip) factor of failure for an organisa tions strategy (Mullins L 2005).Once an organisation has developed its strategy, it can then review the methods open to it for maturement. yield can be achieved by direct expansion, mergers with similar firms, franchising or diversification. Some companies choose to grow, not by developing in the conventional way, but by granting a license to former(a)s to sell their fruit or service. There are clear advantages to this, the market is tested, and larger well-established prerogative operations leave behind deliver matter advertising campaigns and a solid trading name (Price, S. 1997).Franchising is essentially the permission given by one person, the franchisor, to an otherwise person, the certificatione, to use the franchisors pot name, trade tag and business system, in return for an initial payment and further regular payments. In relation to any other small business, franchising has proved to be successful, with 96% of units still direct profitable businesses 5 years bl ast the line.To test the theory on expansion and franchising a case study approach was chosen. Both organisations be given within the UK in different market orbits. The small business that was studied is the Cornish Oggy Oggy Pasty Shop, a local organisation from Cornwall this organisation is expanding by franchising alone.The larger organisation chosen is Interlink Express this organisation is well established and has its roots in other countries, therefore it is solo their UK operation that was studied. Within the UK it has utilized franchising to successfully expand their operation.The backbone of the paper is the literature review. This discusses contemporary theory on organisational strategy, expansion methods and focuses on franchising within the UK. A lot of articles are written for the USA markets, these were not used as they had little relevance towards the UK.Franchises operations are apparent on each high street in the UK. bingle of the just about important facto rs is the bulls eye name. This what attracts and retains the customer therefore is it viable for a small business to franchise. The immenseness of the brand became apparent whilst re seeking this paper.Kotler (2000) described a brand as a name, term, symbol, or design (or a combination of them) which is intended to signify the goods or services of the seller or groups of sellers and to differentiate them from those of the competitors This brand is a valuable asset to all organisations when franchising. Although, the brand name is often not as unshakable with a small business as it is with their larger counterparts.Franchising originated from the USA, with major players such as McDonald entering the UK market. Franchising for the individual as a small business infrawent massive growth in the UK until 2000. This growth has slowed conquer, but there are still plenty of opportunities for businesses to expand.This paper concludes that given the right small business, expansion is po ssible though franchising. This franchising must be controlled to uphold the organisations ethos, and the brand they trade with.This chapter discusses the research methods used for the project and the acknowledgment for the choice of methods. It discusses methods that were not used, with justification of why they were not included. Included is a critique of methods selected, and with hindsight identifies any changes that would wee enhanced the research.This paper evaluates the growth in franchising in the UK, and whether this method of expansion is viable for small and large organisations. Selection of the topic was stimulated and formed out of aware(predicate)ness of the many franchised issues. On nearly ein truth high street there are numerous fast food outlets, which are franchised, more and more businesses are using this moodl to expand. The nature of the research was discussed with colleagues and fellow students this not only added practical root words and suggestions, it overt raw(a) avenues of thought. This was the discussed with lecturers sounding out ideas, gauging opinions and clarifying the question.The research topic was still wide therefore other methods were used to form the research question. Focusing in on the question was obtained by employing relevance trees, constraining the research area. This gave direction to the research, although with reviewing the literature this changed several times (Buzan, J. 1995).Next, a research proposal was compiled, with the benefit of organising ideas and context a time-scale for research. Theoretically, the proposal would highlight any difficulties with the research question and access to data. Creating a time-scale would focus on targets and meet deadlines in the completion of the paper.The literature review, discussing theories and ideas that exist on the topic formed the foundation of the paper. The findings from the research are then tested on theories for validity (Saunders, M. et al 1997). The literature review was challenging, there is very little research in books that focuses on small businesses and franchising. Journals and newspaper articles were the backbone for the review, together with Internet sites and reports.A lot published articles are written for the American Market, although they can give useful information, they refer to the American market (Saunders, M. et al 1997).Tertiary data sources, such as library catalogues and indexes were used to scan for collateral data. This produced journals and newspaper articles, and Internet addresses. With the amount of literature, it took time to sort out relevant material to the research. Narrowing down the search Bells (1993) six points parameters was applied. Applying cardinal words that were identified in the first search produced relevant and up-to-date material (Bell, J.1993).A limitation on the literature search was the amount of time to read all articles and books on the assailable. Whilst reviewing the literat ure references to other publications were followed and reviewed. Bells checklist on identifying the relevance of literature found was a practical method to reduce the amount of reading (Bell, J. 1993).To compare two organisations it was indomitable to do case studies. The organisations chosen both offer franchising in the UK, actively promoting it on their web sites. The case studies of organisations will be reviewed and compared to the literature. The small organisation is expanding though franchising, the larger global organisation uses franchising as part of its overall strategy. These organisations break both applied the franchising business type to their expansion strategy. These organisations were selected from the British Franchise Association web site.Other methods of data collection were considered and rejected. Interviewing owners of franchises would not have revealed the overall organisational strategy, and the success of their expansion methods. The idea of Focus gro ups would have offered free flowing information this could have been facilitated with discussion led by the researcher. This method was rejected due to the circumscribed contacts within the chosen organisations this in any case it could have been considered unethical to coiffe bosom on their goodwill. The majority of information on their strategies is readily available on the organisations web sites. This information proved valuable when compiling the case studies.This section of the paper will discuss flow theory on franchising and fundamental management theory. It discusses choices that are open to organisations when deciding on a strategy, for both small and large organisations. This section will focus on franchising in the UK this information will be then compared to the case studies.Organisational strategy is the pattern of decisions that determines and reveals to stakeholders the organisations intent this is achieved with their objectives, purposes, and goals. The organi sation identifies where they strategically want to be, and introduces policies and procedures which put in place to achieve these goals. When the strategy is formulated, it will allocate the resources ground on its relative internal competencies and shortcomings, and predictable changes in the environment. Strategies are developed at the top take aim of management, with instructions to the dismount levels of management to implement them. Johnson Scholes (1997) cogitate strategic intent is the desired future state of the organisationwhich seeks to focus the energies of the members of the organisation (Johnson J Scholes K 199715).All organisations require strategic plans to move them forward some are essential to surpass particular problems within the organisation or the market place. These are long term management decisions that are aimed to place the organisation where the members have decide will be the most strategic place for them. It is the matching of the organisation to the environment this will lead to strategic fit This is the ideal environment for the organisation to operate within (Reader, A 1998).Managerial decisions are made to identify what is required to implement the new strategy. Are new resources are required? I.e. property, finance or employees, then the put on the line should be assessed for its long-term treasure to the organisation. Strategies should not only be considered on how they will affect animated resource capabilities, but withal if needed new resources and how they will be controlled. The costs to the organisation should be weighed a do goodst the long-term gains, and if needed it can be reviewed, accessed and amended accordingly (G, Johnson K, Scholes, 1997).Therefore strategic decisions will affect the operational level of an organisation, which needs to be in tune with long term goals of the organisation. This factor is important in decision-making firstly if the operational level is not in line with the strategi c level this can cause conflict and jeopardise the strategy, secondly it is at the operational of an organisation that the real strategy is achieved. Procedures and policies should be constantly reviewed, to ensure correct carrying into action of the strategy (G, Johnson K, Scholes, 1997).Strategy is the direction and scope of an organisation over the long term which achieves advantage for the organisation by means of its configuration of resources within a changing environment, to meet needs of the markets and fulfil stakeholder expectations. The strategy answers both the questions where do you want to go? and how do you want to get there? The first question is answered when the goals are set the second is answered when the strategies are planned. The traditional approach basically focused on the first question although equal grandeur should be given to both questions. Incorrect or too few resources is a major factor of failure for an organisations strategy (Mullins L 2005).A portfolio analysis will review the current position of the organisations reapings within the chosen markets. Ansoff (1987) developed a reaping growth matrix, which reviews current convergences and their markets this will also highlight new markets that entry to can be considered. Ansoff considered reviewing the portfolio as only one part of the equation for a successful strategy To formulate a successful strategy more than one review of their current position will clearly identify any problematic areas. The great the information gathered the greater the chance of success of a new strategy (Ansoff (1987) cited in Groucutt, J. et al 2004212).Organisations need to continually review their strategic position, and then decide how and when to grow. Robbins (1995) define growth (expansion) as feeler in operation of an organisation, including in general measurements, such as more revenue, increase staffing and market share. Growth can be achieved by direct expansion, mergers with simi lar firms, franchising or diversification (Robbins, S 1995).The traditional growth moves for organisations are acquisitions, mergers, international expansion, or price increases, these it is argued have largely run out of steam. Therefore for most organisations pursuing new growth opportunities should be the number-one priority. Growth moves fall along a spectrum, ranging from traditional product innovation ie. improving features and brand extensions to longer-term strategies such as taking core capabilities to new markets. Managing new growth requires an active feedback loop of constantly monitoring the progress of each initiative, its changing probability of success, and its shifting risk profile (Burnes, B. 2000)Mergers and acquisitions were an enormous factor of the nineties growth, as MA activity grew sevenfold from 1994 to 1999. exactly acquisitions rarely produce new value and sometimes lead to disaster. International markets, are often viewed as a rich field for growth, i n reality they hold little opportunity for future sustained gains in many industries. Markets in Western Europe and Japan are as competitive and mature as in the United States. And emerging markets, are characterized by weak consumer and industrial purchasing power, inefficient scattering channels, and protectionist laws that favour local players (Burnes, B. 2000)Mergers combine two or more companies into a single corporation. In business, a merger is achieved when a company purchases the property of other firms, thus absorbing them into one corporate building that retains its original identity. This differs from a consolidation, in which several stirs are dissolved in order to form a completely new company, or a takeover, which is a purchase of a company against its will. In a merger the purchaser may make an outright payment in cash or in company stock, or may decide on some other arrangement such as the exchange of bonds. The purchaser then acquires the assets and liabilities of the other firms. When two companies directly competing with each other merge, it is horizontal integration when suppliers and customers merge, the process is vertical integration (Johnson, G Scholes J 2004).Growth through price increases worked over the prehistoric decade in industries such as airlines, chemicals, financial services, and consumer products, as underlying demand was bolstered by the 1990s economic expansion. But in all of these industries, companies have run out of room to push through reflexive price increases as demand has slackened and competition has intensified (Johnson, G Scholes J 2004).For a small set of companies new growth is not an immediate concern, as their current growth strategies remain robust. But for most organisations pursuing new growth opportunities is the number-one priority. Today most products, even complex ones such as PCs or airplanes, are largely undifferentiated in terms of performance so improved product functionality offers little. Fortunately, in most industries a wide range of higher-order customer needs is go unmet. These needs involve the broader economic issues surrounding the product rather than the strictly functional needs met by the product itself (Burnes, B. 2000).Growth moves fall along a spectrum of categories, ranging from traditional product innovation moves such as improving features and brand extensions to longer-term strategies such as taking core capabilities to new markets. Most companies tend to over-invest in areas they are long-familiar with and have well-established processes and systems (Johnson, G Scholes J 2004).Over the past two decades, the franchising industry has experienced a pattern of renewed expansion and overlayd growth, the advent of new forms of franchising has further added to this growth. Globalisation accounted for much of franchising expansion mingled with the 1960s and the 1980s, new industry segments, such as funeral homes and car repair garages, have been adopti ng franchising as a means to conduct business fanny on its standardisation promise. The expansion of older industry segments into non-traditional sites, such as airports, colleges, and hospitals, has allowed for another push in the growth of franchise systems. Through all of these developments, a major portion of the more new-fangled growth can be attributed to the emergence of franchise owners who own more than the traditional single outlet (Grnhagen, M and Dorsch, M 2003).BrandsA valuable asset to all organisations, is the brand name of the product, this is then a vital component when franchising. Kotler (2000) described a brand as a name, term, symbol, or design (or a combination of them) which is intended to signify the goods or services of the seller or groups of sellers and to differentiate them from those of the competitors (Kotler (2000) cited in Groucutt, J et al 2004275). The brand is part of the products tangible features, it is the verbal and physical clues that fun ction the consumer identify what they want and to influence choice (Groucutt, J et al 2004).The actual word brand is derived from a Norse word which means to burn. It is assumed that this means to imprint ideas or symbols on a product. This then gives the product identification and leaves a lasting mark on the consumer (Groucutt, J et al 2004). Because product features are easily imitated brands have been considered a marketers major tool for creating product differentiation. Even when differentiation based on product characteristics is possible, often consumers do not feel motivated or able to give out them in adequate depth. Therefore the combination of brand name and brand significance has become a core competitive asset in an ever-growing number of contexts. Brands incite beliefs, evoke emotions and prompt behaviours (Aaker, D. (1991) cited in Kotler, P Gertner, D. 2002249).Once a brand is established it requires nurturing, to bring out the full potential and add value to the organisation. Kashani (1999) believes that powerful brands are built over time through a conscious management effort. This is achieved through strategic decision-making and appropriate actions. All brands need to be based on determine and attributes that are permanent wave and, purposeful and fundamental to its strategy (Kashani (1999) cited in Groucutt, J et al 2004285). Therefore by creating such values in an organisation it will provide direction and a future for the brand.A brand with strong brand equity is a valuable asset to an organisation. This asset is difficult to measure although it has emerged as key strategic asset. A powerful brand enjoys a high level of consumer awareness and loyalty, with the organisation benefiting from lower market costs relative to revenues. Consumers expect more outlets to carry strong brands therefore the organisation has more leverage when bargaining with retailers. This all adds to the brands equity, which needs to be managed by the organisa tion (Kotler, P. et al 2005).This brand asset management is a concept that is closely related to positioning, since certain brands are central to a companys current and future performance. They need to be managed, enhanced and protected as assets. This allows brand names wish Coca-Cola, Sony, Intel and Disney to extend into new product categories, and produce product variants and services (Kotler, P. 2004).What is Franchising?The term franchising has been used to describe many different forms of business relationships, including licensing, distributor and agency arrangements. The more popular use of the term has arisen from the development of what is called business format franchising. Business format franchising is the granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade under the trade mark/trade name of the franchisor and to make use of an entire package, comprising all the elements needful to establish a previ ously untrained person in the business and to run it with continual assistant on a pre determined basis (Kotler, P, et al 2005).The principle is simple some companies choose to grow, not by developing in the conventional way, but by granting a license to others to sell their product or service. There are clear advantages to this, the market is tested, and larger well-established franchise operations will have national advertising campaigns and a solid trading name Some franchisors can also uphold secure funding and discounted bulk buy supplies for outlets when you are in operation (Price, S. 1997).Each business outlet is owned and operated by the franchisee however, the franchisor retains control over the way in which products and services that are marketed and sold, and controls the quality and standards of the business. The franchisor will receive an initial fee from the franchisee, payable at the outset, together with on-going management service fees, usually based on a percent age of annual turnover or mark-ups on supplies. In return, the franchisor has an obligation to oblige the franchise network, notably with training, product development, advertising, promotional activities and with a specialist range of management services (Kotler, P, et al 2005).Franchising is essentially the permission given by one person, the franchisor, to another person, the franchisee, to use the franchisors trade name, trade marks and business system, in return for an initial payment and further regular payments. In a UK franchise industry currently worth 9.1 billion and comprising 718 franchised units (Nat West UK British Franchise Association Annual sketch of Franchising 2004). In relation to any other small business, franchising has proved to be successful, with 96% of units still operating profitable businesses 5 years down the line. Only 66% of small firms survive the first 3 years (Small Business Service Report 2005). There is (some) evidence to suggest that franchises are less plausibly to fail than other types of small business organisations (Small Business Service Report 2005).A franchise is defined as a long-term, continuing business relationship in which for a consideration, the franchisor grants to the franchisee a licensed right, subject to agreed requirements and restrictions, to conduct business utilising the trade and/or service marks of the franchisor and also provides to the franchisee advice and assistance in organising, merchandising, and managing the business conducted to the licensee (Price, S. 1997).The franchisor develops a special product, service, or system and gains national recognition. The franchisor then grants a right or license to small, independent businessmen throughout the country to merchandise this service or product under the national trademark and in accordance with a proven, successful format. This increases the franchisors exposure for more national business and gives the franchisee a greater chance for success in a given field with a smaller amount of capital investment (Price, S. 1997) reckon of Ethics for FranchisingThe UK encipher of Ethical Conduct in franchising takes as its foundation the Code developed by the European Franchise Federation. In adopting the Code, the Federation recognised that national requirements may necessitate certain other clauses or provisions and delegated responsibility for the presentation and implementation of the Code in their own country to individual member National Franchise Associations. The Extension and Interpretation, which follows the European Code, has been adoptive by the British Franchise Association, and agreed by the European Franchise Federation, for the application of the European Code of Ethics for Franchising by the British Franchise Association within the United Kingdom of Great Britain and Federal Ireland (www.thebfa.org).The European Franchise Federation, EFF, was constituted on 23rd September 1972. Its members are national franchise associations or coalitions established in Europe. The EFF also accepts affiliates, i.e. non-European franchise associations or federations, and other professional persons, interested in or concerned with franchising. Affiliates have no voting rights and cannot be appointed officers of the EFF (www.thebfa.org).The EFF also comprises a Legal Committee, composed of two lawyers from each national member association or federation and highly qualified in franchise matters. The EFF has, furthermore, installed a Franchise Arbitration Committee, which is at the government of parties preferring to submit their disputes to the latters determination. The evolution and the ever-growing importance of franchising in the EC economy as well as the EC Block Exemption Regulation for franchise agreements, entered into force on 1st February 1989, prompted the EFF to revise its existing Code of Ethics (www.thebfa.org).The motives differ between small and large organisations when they are using franchi sing for growth. Franchising is fast fit one of the most popular entry mode strategies for international retail companies when moving into international markets. though initially slow to respond to this practical phenomenon occurring in the international retailing domain, the academic community has also been gradually turning its attention to the nature of international franchising, in the context of retailer internationalisation (Quinn, B Alexander N 2002).Despite this increase in the practical use of franchising, academic attention has only recently been afforded to the nature of international franchising in the context of retailer internationalisation. Control is an issue of serious concern for international franchise companies. It is becoming a particularly important issue for international organisations as they continue to employ franchising as a mode of expansion in internationally diverse economies, and in locations geographically distant from the home market (Quinn, D Doh erty A 2000).In terms of market entry mode strategies available to international retail companies, franchising has proved an increasingly popular mode of operation in recent times (Burt, 1993 cited in Quinn, D Doherty A 2000) Franchising has historically been a favoured mode of expansion among service sector companies, particularly the fast food restaurant business.However, a diverse range of retail companies has become aware of the advantages for international expansion, which the franchise strategy may bring. Therefore, the strategy has been adopted not only by recessional retailers, for example, Benetton, Body Shop and Yves Rocher, but also other retailers such as Casino (France), GIB (Belgium) and UK conversion stores Marks Spencer and BhS, where it has been employed as only one of a range of entry strategies (Quinn, D Doherty A 2000).Studies have identified how complex the expansion practiced in small busines is and how it can strategically gain a competitive advantage ove r a competitor. Although these studies have also conluded that expansion is often seen as peripheral to some small firms requirements. Research has found some small businesses use sophisticated marketing strategies and others use no form marketing (Klemz, B and Boshoff, C 2001)The small firm has always been viewed as the budding large firm, and Alfred Marshalls analogy of the young plant in the nursery seedbed is applicable today as it was in the nineteenth century, of course most of these tender young shoots are destined not to survive. trade of products and service can develop the business, increasing turnover and profit (Alfred Marshall cited in Day J 2000).Smaller firms share a number of characteristics differentiating them from larger organisations, that lead to marketing problems. These include, limited customer base, limited activity, fewere resourcrs, owner/managers marketing competency, no formalised planning and evolutionary marketing, and, innovation, niches and gaps. Th e relationship and affinity that many SME owners/managers have with their customer base has frequently been cited as an advantage. It is considered that the best strategy a small business can adopt is to fully appreciate and exploit any existing customer base, prior to attempting an expansion of this base (Klemz, B and Boshoff, C 2001)One argument with marketing in SME,s is that it differs from the larger organisation, it requires more intuitiveness, creativeness, networking is of higher importance and more about operating under extreme time pressure. Day J (2000) stated, Encouraging small firms to act both intuitively and flexibly is not tantamount to condoning sloppy and careless thinking, nor equally, is it an excuse to raise rigid and conservative business school models on them Therefore the smaller businesses require their own models to be based on (Day. J. 20001036)For these SMEs to reach international achievement, they not only have the appropriate product and strategy, but the decision makers must have the appropriate attitudes as well (Calof, 1994). It is these attitudes that determine how decision makers grasp the benefits, costs and risks of internationalisation (Calof (1994) cited in Chetty, S and Campbell-hunt.C 2003). These attitudes that will shape international decisions are based on the decision-makers past experiences (Chetty, S Campbell-hunt. C. 2003)Resources or the allocation of resources are a key factor to the success of any marketing strategy. There are a number of different theorisations of processes of development in a firms international operations. Cavusgil and Nevin, (1981) considered internationalisation to be a gradual, sequential process through different stages, with the firm increasing its loading to international operations as it proceeded through each stage The most often used model is the Uppsala process model. It emphasises learning by focusing on market knowledge and commitment. To minimise risk and overcome uncertain ty, it says that firms internationalise in a step-by-step process. As firms gain market knowledge they commit more resources to the market (Cavusgil and Nevin, (1981) cited in Chetty, S and Campbell-hunt,