''Franchising is the practice of using another firm's successful business model''.

The word 'franchise' is of anglo-French derivation - from franc- meaning free, and is used both as a noun and as a (transitive) verb.[1] For the franchisor, the franchise is an alternative to building 'chain stores' to distribute goods and avoid investment and liability over a chain. The franchisor's success is the success of the franchisees. The franchisee is said to have a greater incentive than a direct employee because he or she has a direct stake in the business.

In many respects, franchising is similar to [[Licensing]], although franchising tends to involve longer-term commitments than licensing. Franchising is basically a specialized form of licensing in which the franchiser not only sells intangible property to the franchisee (normally a trademark), but also insists that the franchisee agree to abide by strict rules as to how it does business. The franchiser will also often assist the franchisee to run the business on an ongoing basis. As with licensing, the franchiser typically receives a royalty payment, which amounts to some percentage of the franchisee's revenues. Whereas licensing is pursued primarily by manufacturing firms, franchising is employed primarily by service firms.12 McDonald's is a good example of a firm that has grown by using a franchising strategy. McDonald's has strict rules as to how franchisees should operate a restaurant. These rules extend to control over the menu, cooking methods, staffing policies, and design and location of a restaurant. McDonald's also organizes the supply chain for its franchisees and provides management training and financial assistance.13

!Advantages
The advantages of franchising as an entry mode are very similar to those of licensing.
* The firm is ''relieved of many of the costs and risks of opening a foreign market on its own''
** Instead, the franchisee typically assumes those costs and risks. This creates a good incentive for the franchisee to build profitable operation as quickly as possible. Thus, using a franchising strategy, a service firm can build up a global presence quickly and at a relatively low cost and risk, as McDonald's has.

!Disadvantages
The disadvantages are less pronounced than in the case of licensing:
* Franchising ''may inhibit the firm's ability to take profits out of one country'' to support competitive attacks in another.
* A more significant disadvantage of franchising is ''quality control''.
** The foundation of franchising arrangements is that the firm's brand name conveys a message to consumers about the quality of the firm's product. Thus, a business traveler checking in at a Hilton International hotel in Hong Kong can reasonably expect the same quality of room, food, and service that she would receive in New York. The Hilton name is supposed to guarantee consistent product quality. This presents a problem in that foreign franchisees may not be as concerned about quality as they are supposed to be, and the result of poor quality can extend beyond lost sales in a particular foreign market to a decline in the firm's worldwide reputation. For example, if the business traveler has a bad experience at the Hilton in Hong Kong, she may never go to another Hilton hotel and may urge her colleagues to do likewise. The geographical distance of the firm from its foreign franchisees, however, can make poor quality difficult to detect. In addition, the sheer numbers of franchisees--in the case of McDonald's, tens of thousands--can make quality control difficult. Due to these factors, quality problems may persist.

One way around this disadvantage is:
* To set up a subsidiary in each country in which the firm expands.
** The subsidiary might be wholly owned by the company or a joint venture with a foreign company. The subsidiary assumes the rights and obligations to establish franchises throughout the particular country or region. McDonald's, for example, establishes a master franchisee in many countries. Typically, this master franchisee is a joint venture between McDonald's and a local firm. The proximity and the smaller number of franchises to oversee reduce the quality control challenge. In addition, because the subsidiary (or master franchisee) is at least partly owned by the firm, the firm can place its own managers in the subsidiary to help ensure that it is doing a good job of monitoring the franchises. This organizational arrangement has proven very satisfactory for McDonald's, Kentucky Fried Chicken, Hilton International, and others. 
bag
mbi_public
created
Thu, 05 Jan 2012 13:19:17 GMT
creator
dirkjan
modified
Thu, 05 Jan 2012 13:19:17 GMT
modifier
dirkjan
tags
M21
Term
creator
dirkjan