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Franchising Strategies

THE BORIVLI EDUCATION SOCIETYS


MATUSHRI PUSHPABEN VINUBHAI VALIA COLLEGE OF COMMERCE
M.K.SCHOOL COMPLEX, FACTORY LANE, BORIVALI (W), MUMBAI-400092.

A PROJECT
ON
FRANCHISING STRATEGIES
In the subject STRATEGIC MANAGEMENT

SUBMITTED TO

UNIVERSITY OF MUMBAI
FOR SEMESTER-II OF
MASTER OF COMMERCE
BY
KISHORE SUSHIL AGARWAL
DIVISION B, ROLL NO- 201

UNDER THE GUIDANCE OF

Prof.Sumita Shankar
ACADEMIC YEAR 2013-14

Franchising Strategies

THE BORIVLI EDUCATION SOCIETYS


MATUSHRI PUSHPABEN VINUBHAI VALIA COLLEGE OF COMMERCE
M.K.SCHOOL COMPLEX, FACTORY LANE, BORIVALI (W), MUMBAI-400092.

DECLARATION BY THE STUDENT


I KISHORE SUSHIL AGARWAL student of M Com Part-1 Roll Number 201 hereby declare that the
project on FRANCHISING STRATEGIES in the subject STRATEGIC MANAGEMENT
Submitted by me for Semester-II during the Academic year 2013-14, is based on actual work carried out by
me under the guidance and supervision of Prof.Sumita Shankar. I further state that this work is original
and not submitted anywhere else for any examination.

Signature of the Student

EVALUATION CERTIFICATE
This is to certify that the undersigned have assessed and evaluated the project on FRANCHISING
STRATEGIES in the subject STRATEGIC MANAGEMENT submitted by Kishore Sushil Agarwal,
student of M Com Part-1.
This project is original to the best of our knowledge and has been accepted for Internal Assessment.

Prof.Sumita Shankar
Internal Examiner

Prof. V. Manikandan
External Examiner

I/C. Principal

Franchising Strategies

PREFACE
I am pleased to write a Project Book on the subject called FRANCHISING
STRATEGIES. This book is basically written by the students of M.COM-I for their
semester studies under the guidelines of University of Mumbai. As I am well known
about the fact that writing a project book is obviously a challenging task under any
certain circumstances, henceforth I have tried my level best to pull up certain realistic
details with regards to some valuable statistics & also included good number of research
based examples, which is definitely going to be a better scope for them to grab the subject
matter much more easily & efficiently. I hope that the readers will find these useful for
different purposes.
I hereby would like to thank one and all, from the bottom of my heart, those who have
helped me & constantly motivated me for writing this Project Book. I also thank each &
every resources from where I collected all the information & certain numbers of
innovative idea to end up writing this one.

Franchising Strategies

ACKNOWLEDGEMENT
The satisfaction and euphoria that accompany the successful completion of any task is
incomplete without the mention of people who made it possible.
So I take this as a great opportunity to pen down a few lines about the people to whom
my acknowledgement is due.
It is with the deepest sense of gratitude that I wish to place on record my sincere thanks to
my project guide Ms.Sumita Shankar for providing me inspiration, encouragement,
guidance, help and valuable suggestions throughout the project.
I extend my gratitude towards the Principal V. Manikandan for his timely suggestion and
guidance throughout Semester II of M.Com Part I.
I hereby would like to thank one and all, from the bottom of my heart, those who have
helped me & constantly motivated me for writing this Project Book.

Franchising Strategies

TABLE OF CONTENTS
1

INTRODUCTION.................................................................................................. 6

METHODOLOGY OF DATA COLLECTION..7

OBJECTIVES OF THE PROJECT.7

SCOPE OF STUDY8

IMPORTANCE OF PROJECT.......8

LIMITATIONS OF THE STUDY....11

BUSINESS GROWTH .........................................................................................12

FRANCHISING AS A GROWTH STRATEGY..................................................16

HOW TO FRANCHISE YOUR BUSINESS35

10 STRATEGIES TO COMBAT EMPLOYEE TURNOVER..42


11 THE ROLE OF THE FRANCHISOR AND FRANCHISEE.45
12 HOW TO FRANCHISE YOUR BUSINESS.47
13 FRANCHISING IN INDIA50
14 KEY SUCCESS FACTORS IN FRANCHISING..56
15

RESEARCH PROCESS .....................................................................................60

16

FINDINGS OF THE INTERVIEWS .................................................................64

17

DISCUSSION AND RECOMMENDATIONS .................................................74

18

CONCLUDING REMARKS ..............................................................................80

BIBLIOGRAPHY .......................................................................................................81

Franchising Strategies

INTRODUCTION
Aku & Ada is a clothing store that sells brand clothes in Leppvirta, a town of a little
over 10 000 inhabitants close by Kuopio. The owners are a mother and a daughter;
both of them having a strong experience of the industry and a business education as
their background. The target group for the company are young and youthful adult
women and men. Aku & Ada provides all encompassing clothing services; they sell
clothes, accessories (bags, belts, and jewellery) and shoes. In addition they give clothing advice to people with strong experience in fashion, they even organise fashion
nights, help customers to find their personal style etc. The new store opened in March
2010 and so far the business has been operating satisfyingly. Even to the extent that
the future options of growing the operations interest the owners and this thesis will
provide information on one of the possibilities.

Research always has a purpose or a function. The purpose guides the strategies for the
research (Hirsjrvi et al. 2009, 137). The research question was what requirements are
needed for Aku & Ada to become a franchise business. A year ago Riikka Pitknen,
the chief executive officer of Aku & Ada was writing a business plan for a clothing
store which was also her bachelor thesis. Behind the business operations are Riikka
Pitknen along with her mother Ulla Pitknen. The former owned a clothing store in
the same town with the same name during the 1990s. After pondering with the idea of
opening the store up again and considering the experience Riikka Pitknen has
received of the industry and the BBA degree they decided to go for it and start Aku &
Ada again, this time as an ltd. During the process of writing the business plan also
franchising was brought up as a possible strategy in the future. The main focus of this
research is to introduce franchising as a potential growth strategy for the company. As
well as analyse what possibilities franchising offers for Aku & Ada.
This thesis is a qualitative research on what requirements are needed for a company in
a clothing industry to expand its business operations by becoming a franchise
business. First covered are the theoretical aspects of growth of a company and
different options for growing. Then the theory concentrates deeper to franchising
operations; its history, terminology, contract types, advantages and disadvantages,
women and franchising, franchising in Finland and the current state of franchising.

Franchising Strategies
After the theoretical part there are presented the research methods and findings. The
research is based upon two qualitative interviews, first one of the two owners of the
company and sec- ond one the executive manager of the Finnish Franchising
Association. Finally there are the analysis and conclusions with recommendations for
the company.

In a nutshell franchising is examined from theoretical perspective, from authoritative


perspective and applied to a growing companys perspective. As a result from all the
three perspectives are gathered the conclusions and summarised the requirements for
beginning franchise operations.

METHODOLOGY OF DATA COLLECTION


The methodology of data collection I have used for my project is secondary data and it
is collected from various sources like books, journals etc.
Secondary data largely collected from different websites of the Internet.

OBJECTIVES OF THE PROJECT

1. To gain in-depth perception about franchising strategies

2. To study the changing trends of franchising strategies

3. To get the knowledge of new concepts of franchising strategies

4. To study the position of existing units who have undertaken franchising strategies.

Franchising Strategies

SCOPE OF STUDY
The result of this study is applicable to different firms of business organizations. It can
also apply to the customers, students, financial institutes and to the government.

IMPORTANCE OF PROJECT

Five Franchising Strategies


Owning and operating isn't the only way to build a franchise biz. Here are
five other strategies to get you in the game.
You'll find many routes to owning a small business and several intriguing paths to
participating in a franchise business. It's not "one size fits all"--not even close. If you think
of franchising in one dimension, you'll limit your opportunities. There are so many ways to
get into franchising beyond building and operating a new pizza restaurant. Keep your ears
open for opportunity, and prepare to be flexible. With the right approach to franchising,
you'll quickly find yourself on the road to career satisfaction and financial success.
Here are the five most common ways you can participate in a franchise program:
Go the Classic Route. This is how most people think of franchise opportunities: You buy
a new franchise, find the location and build it out yourself. It's all new, and it's all yours.
You roll up your sleeves and plunge into your new business as an owner/operator.
This is the classic route because it is precisely how so many thousands of franchisees
built their multiunit empires, and it describes how much of the franchise world still
operates. Newer (and hotter) franchise offerings usually provide the classic route to
business ownership.
"We're a young franchise program, and we're opening new markets all over the country.
Most of our owners have no experience in publishing a fashion magazine," says Tyler
Allen, CEO and franchisor of a new publishing venture, Industry magazine, based in
Orlando, Florida. "Opening a new market and starting from scratch is currently the only
way someone can own anIndustry magazine franchise."
Among the advantages of this approach is the full new term of the franchise agreement,
allowing you the maximum time you need over the term of the agreement to recoup your
investment. You also have the opportunity to build your business from scratch. When you
open the location, it's brand-new and ready for business; any mistakes made in the
establishment of the business will be your own. You don't inherit anyone else's problems
or hiring mistakes. You hire your entire team, and your direct involvement will make you
the owner, manager, boss and unquestioned captain of the ship.
The best upside: The new concept could take off and become a smash success--and you
got on the elevator at the lobby level.
There is always a downside, of course (business imitating life?). With the classic route,
the biggest possible downside is the untried location. It can make or break a retail
business, and you may have a substantial sum of money riding on that outcome. Second,
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Franchising Strategies
your team is untried, so the training and opening support had better be solid. The startup
phase of the franchise at a new location will drain your cash until the operation's growing
revenue begins to carry the payroll, inventory and other expenses; so plan carefully, and
never go into a startup franchise undercapitalized.

Buy an Existing Franchise


The strongest advantage of buying an existing franchise business is that you have a
chance to examine its performance numbers. You know what the sales and expenses
were in the past year--and even earlier, assuming the records are accurate (ask the
franchisor to provide a royalty payment record so that you can cross-check the key sales
numbers). You have an opportunity to discuss the business with the owner, interview key
employees and observe the operation. You can research the industry and gain an
understanding of objective valuations in that business sector. In an important sense, you
also lower your investment's uncertainty . . . and your own risk.
Where will you make your money? Maybe you can identify a struggling franchise that
needs a new shot of leadership and enthusiasm for the business. If you're successful,
you'll build a strong business out of a weak one, and reap the financial benefits.
Buying an existing franchise business means that you're subject to the transfer provisions
of the existing franchise agreement, which can be very restrictive. Many franchisors
reserve the right of first refusal on all proposed transfers, so it's possible that you can end
up putting a big effort into a formal purchase offer only to have the franchisor match it and
take you out of the picture.
The franchise agreement might also impose a hefty transfer fee, often expressed as a
percentage (5 to 15 percent) of the purchase price. This will, of course, fall on your
shoulders, so include it in your calculations and your price negotiations. You might also
negotiate with the franchisor on the transfer fee, especially if you're buying a troubled
franchise. A new, enthusiastic owner may be the answer to the franchisor's prayers; the
company may be more than willing to lower or eliminate the transfer fee altogether just to
help you take over the ailing franchise.
Your major risk: hidden problems of the previous owner's making. No one likes surprises
in a new venture, and these hidden problems will cost you money you didn't plan on
spending. They range from unhappy supply vendors to dishonest employees to defective
equipment--and they simply come with the territory. Add an "unexpected problems" line to
your opening budget, and plan for the unexpected.
Some may call the act of selling a house in California, purchasing another in Florida, and
buying a franchise--all within a two-month period--a midlife crisis; but for Sonja and Mike
de Lugo, it was an opportunity they couldn't pass up. They had been looking for an
existing franchise to purchase when a FastSigns franchise went on sale in Gainesville,
Florida--an ideal location, since it was close to Mike's family.
Taking over a franchise that had been in business for seven years granted the de Lugos,
both 41, a comprehensive database of existing customers who were already familiar with
the FastSigns franchise--which specializes in signs and graphic solutions. However, they
were also left with a negative reputation to correct, due to what Mike calls "lack of
managerial enthusiasm." They immediately purchased new equipment to increase their
production rate and informed the community of the change in ownership.
Though nervous about buying a failing franchise, the couple was confident in the system
since two of their family members were already FastSigns franchisees and could testify to
the franchisor's willingness to help. Also, Mike used his previous 20 years of experience
as a general manager at hotels in the Hilton chain to his advantage. He knew the
business, knew how to talk to people and had contacts, so the couple targeted the
hospitality industry as primary customers.
Within eight months, the de Lugos had managed to triple the revenue from the year
before; they ended 2004 with estimated sales of $800,000. The de Lugos' success has
solidified their opinions about existing franchises. "There may be locations where there's
not much competition and it would make sense to put in a new one," says Mike. "But it's
just my own personal opinion that I would stick with the resale."
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Franchising Strategies

Buy Master Franchise Rights


If you're looking for a more aggressive role in the franchise system, you could check into
becoming a master franchisee. The details of the master franchisee concept differ from
one system to the next, but the basics are the same: A master franchisee is appointed to
serve as a local or regional representative of the franchisor, providing training and field
support, and is compensated for those services, often by receiving a percentage of the
royalty revenue generated in the assigned territory. The master franchisee may also have
recruiting responsibilities, generating commissions on franchise sales made from his or
her efforts.
The appointment as a master franchisee is usually extended to existing franchise owners
who prove successful in their operations and are interested in expanding their
involvement in the system. If you enjoy teaching and want to super-size the return on your
franchise investment, inquire about master franchise programs.
It's the involvement in franchise sales that draws many investors to master franchise
programs, and it is there that the law imposes the most restrictions. As a third party
participating in a franchise sale, the master franchisee will be considered a "franchise
broker" and, as such, must be included in the company's Uniform Franchise Offering
Circular, disclosing business experience and litigation history. The franchisor must submit
a "salesman disclosure" form to most registration states. In a few states, a broker must
independently register with state authorities.
A master franchise is often confused with a subfranchising program, but there's one
important distinction: A subfranchisor offers and sells franchises directly, for its own
account; and, of course, a master franchisee does not sell franchises directly. A master
franchisee typically generates leads, meets with and qualifies prospective franchisees,
and sends them on to the franchisor for closing.
A master franchisee is the utility infielder of franchising. Success is measured by the
ability to manage, teach and recruit, while continuing to operate your own franchise
business successfully.
When Rich Giannini became involved with Action International, a hands-on business
coaching franchise, not only did he lack any previous franchise experience--he barely
understood the franchising concept. Nevertheless, in 1999, he confidently assumed the
role of master franchisee of the Nevada territory and took on the responsibilities of
marketing the business, finding entrepreneurs to purchase franchises, and providing
success coaching to franchisees. "As a master franchisee, you have two fundamental
roles," says Giannini, 34. "The first is to find suitable franchisees; the second is to help
them become successful."
Giannini enjoys the freedom that being a master franchisee grants him. Because he is
free to set his own schedule, he can juggle working at Action's head office--helping other
master franchisees--with running additional businesses on the side, including a real estate
and investment business. "There's a fairly quick educational process," says Giannini.
"What's important is that you've got that entrepreneurial attitude--that you'll go out there
and get it done, whatever it takes." He points out that his royalty from the sale of each
franchise is fixed. In contrast, a regular franchisee chooses the monthly rate to charge
clients and is, therefore, more in control of his or her income.
Giannini advises potential master franchisees to look ahead 10 years, examine their
vision, then speak with different franchisees. Giannini says of becoming a master
franchisee, "I [believed] I could help people more by being able to sell multiple franchises
and have a lot of people helping business owners rather than just me. My vision better
suited the master franchisee side than the individual franchisee side."

Absentee Ownership & Conversion Franchises


Be an Absentee Investor. For the right kind of business, with the right employees
running that business, it is entirely possible--though rare--to own a franchise business and
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Franchising Strategies
not be directly involved in its management. Rare, I think, because it is hard enough to own
and operate a successful small business even when you're on the floor every day.
What type of business lends itself to absentee ownership? First, it must be a business
that doesn't have valuable inventory. I once had a senior executive of a muffler franchisor
tell me his shops couldn't be run by employee managers because too much of the
inventory would leave at the end of the workday. Only an owner on the premises is
sufficiently motivated to prevent that from happening.
Second, the business must have sufficient margins to be profitable after the expense of
having a reliable manager. So many franchise businesses have razor-thin margins that
allow for the owner to take out not much more than a modest salary. So the key question
then becomes: What drops to the bottom line for the owner?
Service businesses with training programs that can support an employee manager may
meet these qualifications. It would be a mistake to assume that any franchise can prosper
with an uninvolved owner, but with the right program and a handpicked management
team, it can work.
Buy Into a Conversion Franchise. A conversion franchise allows an existing
independent business to affiliate with a national brand. The classic conversion program is
Century 21 Real Estate Corp., which converts independent real estate brokers and allows
them the benefits of a strong brand affiliation while allowing them to continue using their
individual identification. Affiliation programs have been launched by a variety of
professional service providers, such as handymen, home-repair programs and hotel
chains.
Conversion franchise programs offer an attractive balance of brand identification and
buying power. If you're operating an independent business and long for the competitive
advantages of being tied in to a national reservations system or receiving local leads
generated by a national or regional advertising campaign, you may want to consider
joining a franchise affiliation program in your business category.
Can you use your current business name, or do you have to completely identify with the
franchisor's brand? That depends entirely on the system. The real estate affiliation
programs often split the identification between the national brand and the name of the
broker/franchisee. This is the approach taken by one of the newest real estate franchise
systems in the market, Envirian LLC, in Reston, Virginia. Lee Konowe, founder of
Envirian, doesn't insist on rigid uniformity with the solitary display of the Envirian name.
"We are flexible on how the Envirian name is combined with the broker's name or the
town name, or both," says Konowe. "We want our brokers to capture the value they've
built in their names, so they can maximize their marketing power as members of the
Envirian system."
Often, the fees paid for an affiliation program are considerably lower than those of
traditional franchise systems, reflecting the fact that the franchisee is an experienced
business owner and needs less training and less support than someone new to the
business.
Franchising doesn't exist in a single investing dimension; it has developed in ways that
allow virtually any level of investor in any business situation to participate. The lesson is
clear: Keep looking until you find an investment that's well-structured for your interests
and needs, and you'll probably find it in the franchise arena.

LIMITATIONS OF STUDY
Since the study is short term project and due to money and time problem it was not
possible to conduct and collect information through primary data for completion of the
project.
The process and topic is very lengthy but few words of procedure are explained in the
project.
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Franchising Strategies

BUSINESS GROWTH
The main theme of this thesis is franchising. Before getting into the theory of
franchising, some other aspects of growing the business and options for growing the
operations are presented.

G r o w t h entrepreneurship

Growth entrepreneurship is usually described as a company that is innovation based


and has internationalisation as a wider goal. Growth is not the purpose for a company
but a result of competitiveness, knowhow and innovativeness, which makes it difficult
to give a specific definition for the concept. In some economies when a companys
turnover exceeds 20 per cent on average it can be called a growth enterprise. At the
same time the same economy might only be producing few innovative companies that
might grow their turnover by 100 per cent (MEE Publications Innovation 42/2009 The report of the growth and entrepreneurship monitoring group).

The growing companies that have the exact goals of growth and innovativeness, and
invest into the right knowhow will affect the economy around them by increasing employment, national production and productivity. Fast growth also requires attitude and
knowledge. Therefore humane capital that is ready to adapt to a fast pace of change is
an essential factor in growth, and as a result growth enterprises employ highly educated labour force more often than other companies (MEE Publications Innovation
42/2009 -The report of the growth and entrepreneurship monitoring group).
Especially in small home markets growth requires a fast internationalisation. Therefore the ability to operate in the global markets is essential for a growing company.
Another requirement for growth is finance. For high risk projects it can be difficult to
get a loan which is why venture capital finance is popular and essential for growth
enterprises. Growth enterprises also typically have cooperation with universities and
universities of applied sciences as well as research institutes. It is typical for a growth
enterprise that the possible profits of the company are kept for the growth and
development of the company rather than taken out as revenue and salary for the
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Franchising Strategies
entrepreneurs (MEE Publications Innovation 42/2009 -The report of the growth and
entrepreneurship monitoring group).

To compare the magnitude of the growth internationally can be demanding due to the
differences in measuring growth. Growth can be in turnover, revenue or personnel, it
can be fast or long-span, it can be organic or base on buy-outs. Also the definition of
growth enterprises varies which makes it very difficult to compile statistics on the
subject (MEE Publications Innovation 42/2009 -The report of the growth and
entrepreneurship monitoring group).

G r o w t h in smaller scale

Before going international it is typical for the business first to expand the operations in
the home countrys markets. This can be done in several ways and the same operations
can be executed in a larger scale as well.

Internal growth can mean several improvements and/or operations implemented within
the company in order to increase sales, revenue and profitability of the company.
Product development can mean to come up with a whole new product in order to extend the product line or improve an already existing product or service. Increasing
market penetration could be achieved by greater marketing efforts or increasing
production capacity and efficiency, which both can lead to increased sales (Barringer,
etal. 2010, 482-486).
Geographic expansion is considered when the company cannot expand in the present
location but has reasons to believe that product/ service attracts the consumers in other
location as well. Company owned outlets require large capital and direct managing on
all the aspects of the business, which makes this a slower way to grow in size and the
return on investments are slower compared to franchising. When opening a company
owned unit in another location the manager has to balance between the already existing and the new unit. This can cause a lack of attention to the original unit and be
harmful for the business operations. On the other hand there are no middle men (franchisees) in between if/when the profits start to flow in (Barringer, et al. 1998, 467,
471; Keup 2007, 65; Barringer, et al. 2010, 521).

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Franchising Strategies

An alternative that does not grow the business but can be considered an option is to
continue the business in the same way as before and avoid the hassle of expanding
production, starting franchising operations or other cooperation with other
entrepreneurs. The costs stay the same and the owner gets all the profit that come in.
The downside is that the companies that do not develop often fail in their businesses
and the business owner also loses out on all the good aspects of growing for
example trough franchising (Keup 2007, 65).

G r o w t h with bigger goals

After the company has grown from the inside and desires to grow even larger, the
company may reach for international markets and seek expansion prospects with other
companies. External growth strategies are based on developing a relationship with
third parties, this can be done for example through mergers, acquisitions, strategic
alliances, joint ventures, licensing, and franchising (Barringer, et al. 2010, 489).

Association alternative consists of dealerships, licenses, incentive programs, partnerships and joint ventures. These are often results in negotiations and cooperation of two
parties that have same interests and become to agreement through compromises on
how to settle things. Downsides are the compromises, of which in the case of
franchising the franchisors are safe, they do not have to be so flexible since they are
the ones setting down the rules and franchisees simply sign the papers. Some
partnerships and sister corporations may easily seem like franchising which can cause
problems with law at least in the US (Keup 2007, 66-67). One successful company that
has only a few franchised outlets out of the thousands of stores around the world is
Starbucks Coffee Company. They have made agreements with companies such as
United Air- lines, Nordstrom, Barnes & Noble and Wells Fargo Bank. They also
operate side by side with Chapters and Costco (Evancarmichael.com; Starbucks
Coffee Company).

Merges and acquisitions are both ways to grow for entrepreneurial companies. The
first one is more like melting two or more companies that have similar interests
together. In an acquisition one company that wants to benefit from another outrightly
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Franchising Strategies
purchases the other. The latter is more commonly used among entrepreneurial
companies. The company implementing acquisitions can accomplish a number of the
companys goals for instance expanding its product lines, gaining access to
distribution channels, achieving economies of scale, and/or spread out the companys
geographic area. Acquisitions can also be used to buy out the competitors like when
Google acquired YouTube in 2006 (Barringer, et al. 2010, 491).

Franchising is a way to grow business operations as are the former presented


strategies. It offers a little bit different approach to business ownership, but cannot
create immediate miracles. Franchising allows a business to get its products or
services to wider markets through the endeavours with the business partners (Murphy
2006, 11; Barringer, et al. 2010, 514). This subject will be discussed in detailed in the
following section.

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Franchising Strategies

FRANCHISING AS A GROWTH STRATEGY


Franchising has been conquering the world during the past few decades without the
masses really knowing of its existence. It is a poorly comprehended type of business
ownership and method to grow existing business. Today it is studied by business students and also entrepreneurs are aware of the term. In order to completely understand
what franchising is all about one really has to closely study the concept and/or throw
oneself in and experience it first handed (Barringer, et al. 2010, 512). The beauty of
franchising is in the win-win situation that both parties have in the business; franchisor
(owner) who seeks to grow the existing business with little financial input and
franchisees who are ready to spend the money in order to do a business without having
to start from scratch (Bennett, et al. 2008, 11-12).

History
The way franchising works is nothing new to our civilisation. The earliest rights to do
business in other parties names dates back to the Middle Ages (476 A.D. 1453 A.D.)
when the feudal lord gave rights to the crafts men and other professions to do business
such as operate ferries or hold markets. A more recent and recorded early form of
franchising took place in Germany. In 1845 brewers and tavern owners started
conducting business relations in a way of exclusive distribution rights of beer
(Bennett, et al. 2008, 10).

After beer came sewing machines. The first commercial franchise came from Isaac
Singer after he developed his first sewing machine in 1858. There were two problems
to be solved before Singer Sewing Center could exist. Mr. Singer lacked the capital for
mass production and the customers did not know how to use the machines. He grasped
the idea of selling the rights to other business men to sell the machines and also train
the new users. When he got money from the licensing fees he could finance the
manufacturing and he did not have to figure out the cost or time of hiring. In this way
the business expanded rapidly and is still well known in many parts of the world
(Dugan 1998, 7).

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Franchising Strategies
The next big step in franchising came because of a need for a huge distribution network. As Henry Ford started mass producing his cars in the assembly line in a pace
one had never seen before everything had to adapt to the new culture. There were cars
accessible for the masses; cars need gasoline, parts and services. Now people could
live in a larger area, drive to other towns, they needed accommodation, places to eat
and so on. In the early 1940s a lot of business started blooming; automobile dealers,
travel lodges, oil companies made deals with convenience stores etc. This started the
expansion of franchising the way we know it today (Dugan 1998, 8).
The early franchisees in the 1940s did not look alike, they had characteristics of their
own and the franchise agreements were about 3 pages long, nothing too strict or
complicated. About 10 years later Ray Kroc introduced the cloning method to
franchising. He is also the founder of the worlds most well known business and
franchise. It all started with milkshake mixing machines and 15-cent hamburgers in San
Bernardino.
Back then it was called MacDonalds, somewhere along the way they dropped the A
from the Mac. Mr. Kroc brought the assembly line method to food industry and
created the concept of fast-food. He believed that controlling every single aspect of
the business, from how to run it to the decor of the store and everything in between
will make the business successful when expanding it to new locations. He was right.
The idea is to make sure the customers gets the same thing every time they walk into a
McDonalds. After the finding of cloned franchising business some have tried to
franchise without cloning the business and mostly failed. In the 1960s already existing
franchise businesses started adapting to the cloning method by wearing same uniform
and standardising their businesses. Today the franchise agreements are a lot longer
than 3 pages (Dugan 1998, 9-10).
From the mid 1900s franchising has come a long way. The International Franchising
Association (IFA) was founded in 1960, today there are more than 75 industries
operating in the franchising format. Several countries have their own local franchising
associations and even outside of the official associations there are individual
franchisors operating franchised businesses. All in all there are thousands and
thousands of franchisors and franchisees around the world. Franchising is the easiest
way to spread the business around the world, just like McDonalds and their golden
arches have proven (International Franchising Association).

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Franchising Strategies

The key concepts


In order to be able to discuss more deeply about the franchising concept it is good to
start with the basic terminology. First there is the introduction of the word franchise
and the origin of it, then different definitions for the concept of franchising from
different points of view and finally presented are the two parties in a franchise
agreement; franchisor and franchisee.
Franchise is actually a loanword from the French language and it translates to
freedom, privilege, and exemption (Barringer, et al. 2010, 513). Franchise, spelled as
in French, is also a word in English, Finnish, Hungarian and German and has similar
spelling styles in other world languages (sanakirja.org).
The term Franchising can be opened up in several ways. Bennett, et al. (2008, 9) quoting Cheryl Babcock, director of the International Institute for Franchise Education as
Nova Southeastern University in Fort Lauderdale gives quite comprehensive definition
and also notes the existence of the two parties in the operation. Tuunanen (2005, 19)
takes more technical point of view in his version whereas Keup (2007, 55) sums the
term in a practical way. The different ways to describe the term franchising are in the
table 1.

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Franchising Strategies
Table 1. Franchising definitions from different perspectives

Franchisor is usually the creator of the business concept, the one that has developed
and launched the operations (Tuunanen 2005, 19). Once successful in the business, the
business owner lends rights to do business under the same name to another business
owner using the original method and/or trademark for a predetermined period of time
set in a contract (Barringer, et al. 2010, 513).
Franchisee is the receiver of the right to conduct business invented by the franchisor.
Franchisee can also be called a franchise owner (Tuunanen 2005, 19). Bennett, et al.
(2008, 9) quotes Babcock summarising the roles of the two parties:
Franchisee pays the franchisor a royalty fee and, often, an initial fee, for the right to
utilize the franchisors brand name, operating system, and ongoing support, and agrees
to conform to quality standards.

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Franchising Strategies

D i f f e r e n t types of franchising
There are different ways of implementing franchising type business. The main
separation is between product and trade name franchising and business format
franchising.
In Europe only business format franchising is regarded as franchising and the former is
not included in the statistics. In the US both are equally seen as franchising and since
there would not be the latter without the former here are explanations for both. Product
and trade name franchising is franchising as it was in the early days. The franchisor
has a product that is distributed to the end-users by the franchisees. Singer had sewing
machines and GM had cars, this has not changed; newer product and trade name
franchisors are Coca Cola Company and British Petroleum (BP). Coca Cola Company
gives the right to bottle the cola drink in various countries around the world and sell
the drink as Coca Cola. Coca Cola Company does not give rules on how the company
should be run etc. This is a good example of how the franchisor (Coca Cola Company)
gives the licensed Coca Cola trade name and logo to the use of the franchisee (the
bottling factories that also distribute the drink to the retailers) and the franchisees
(factories) run their business the way they please and sell the product to whom they
please. The factories buy the concentrate/syrup from the Coca Cola Company,
add filtered water, bottle it and sell it to the retailers who then sell it to the end-users.
The Coca Cola Company gets their income from selling the concentrate/syrup to the
factories and the factories get their income from selling the drink to the retailers.
(Coca Cola Bottling Franchise; Tuunanen 2005, 18, 141; Barringer, et al. 2010, 514;
Bennett, et al. 2008, 9)
In business format franchising the idea is taken a step further from product and trade
name franchising. This time all aspects of the business are determined by the
franchsor. As mentioned earlier, McDonalds was the first company to start business
format franchising and is a perfect example of this type of franchising. The franchisor
pro- vides the entire formula of the business to the franchisee; this comes with a
specific plan on how to conduct business, training on how to operate the business,
support along the way, and depending on the business even the words that are used in
the cus- tomer service might be supplied by the franchisor, so basically everything is
covered. Also marketing is done by the franchisor, sometimes the franchisee can
market the local business as well but mainly the marketing is nation wide and
conducted by the franchisor. In return of a complete (and successful) business model
the franchisee pays royalties and franchising fees for the franchisor. Even though this
20

Franchising Strategies
type of franchising might be demanding and inflexible for the franchisee it is more
commonly used among the entrepreneurs than the former (Tuunanen 2005, 18;
Barringer, et al. 2010, 514-515; Bennett, et al. 2008, 9-10).
Tuunanen (2005, 68) has listed criteria to check in order to find out if the operations
fulfil the qualifications for business format franchising. Criteria 2 to 7 deal with the
legal criteria. Criteria 1 and from 8 to 12 cover the theoretical/practical side. In order
to pass as a franchise in the screening the minimum requisites to fulfil are 1 to 4, and 5
or 6, and 7.
1. There are outlets operated by the franchisee(s) i.e. not totally company
owned channel of distribution.
2. A written (standard) franchise contract exists between the parties.
3. The franchisee pays an initial franchise fee and/or s/he pays royalty on
continuing basis to the franchisor.
4. The franchisees operate under the same brand/trade name and their outlets
have a uniform outfit.
5. The franchisor provides relevant and classified know-how by training and/or
other significant assistance to the franchisees.
6. The franchisor offers an operational manual(s) to guide franchisees business
operations.
7. The franchisor supplies technical and/or commercial support (i.e. ongoing services) to the franchisees.
8. The franchisor does not own (substantial) share of the franchisees companies.
9. The franchisor acknowledges franchising as its operational form and/or
searches for new franchisees.
10. An exclusive right for a territory may be granted to a franchisee in the
franchise contract.
11. The franchisor controls and monitors franchisees business operations on a
continuing basis.
12. The franchisee may not sell, lend, transfer or grant the franchise or any related
rights to a third party without franchisors approval.

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Franchising Strategies

Different types of franchising arrangements


In franchising like in any kind of business, there are different ways to conduct the cooperation between the parties. Here the three main contract types between the
franchisor and franchisee are introduced; individual franchise agreement, area
franchise agreement and master franchise agreement.

Individual franchise agreement is the most widespread type of contract between


franchisor and franchisee. In this simple cooperation a franchisor sells a single
franchise to a franchisee for one specific location (Barringer, et al. 2010, 515).

Area franchise agreement covers more than one location in one address. This is a
popular type of franchising agreement because it gives exclusive rights (no
competitors from other franchisees of the same franchise) for the area and it gives
challenge for the franchisee by increasing the responsibilities etc. With this kind of
agreement the franchisor sells the franchisee rights to own and operate predetermined
number of units in a specific territory (Barringer, et al. 2010, 515; Bennett, et al.
2008, 282).

Master franchise agreement also known as subfranchising can work in two different
ways. In a nutshell the franchisor sells the franchisee the right to become a franchisor
in a specific geographic area in exchange for royalty payments or a portion of the
franchise fees collected from these additional franchisees. One way of implementing
this is that the franchisee must operate at least one unit themselves and at the same
time act as franchisors for the others in the area. The other way of executing this is that
the franchisee becomes a franchisor and only takes care of the franchisors job in the
area.
This type of arrangement is usually used when expanding to other countries after the
original franchisor has successfully expanded the business through franchising in
smaller area. Another functioning way of utilizing this concept is for example real
estate business, where the people doing the business are professionals in doing it already and only need to change into a different coat to sell real estate under a bigger
name (Murphy 2006, 164; Barringer, et al. 2010, 515; Bennett, et al. 2008, 283; Keup
2007, 90).
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Franchising Strategies

Multiple-unit franchisee is a term used for an individual who owns and/or operates
multiple units of the same franchise, whether through an area or a master franchise
agreement. Both of these two multiple-unit franchising techniques have their shortcomings to the original franchisor who may lose control of the sales process and will
have his/her hands bounded in terms of expansion in that area for the time set in the
franchising contact. On the other hand, there is reduced total number of franchisees to
manage, also less training and other tasks concerning starting up a new franchise when
every new unit will not need the guidance from the original franchisor (Murphy 2006,
165; Barringer, et al. 2010, 515; Bennett, et al. 2008, 283).

Barringer, et al. (2010, 516) has visualized the different agreement types with
organization charts. First is the individual franchise agreement, in figure 1, which
involves the sale of a single franchise for a specific location. Here are only two parties
and they are directly connected with each other.

Figure 1. Individual franchise agreement (Barringer, et al. 2010, 516)


The second type is area franchise agreement (figure 2) which allows a franchisee
to own and operate a specific number of franchisees in a particular geographic
area. In this chart all the 3 franchisees are operated by the same franchisee
individual in the specific area under the same contract.

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Franchising Strategies

Figure 2. Area franchise agreement (Barringer, et al. 2010, 516)

Thirdly there is the master franchise agreement (figure 3) in which a franchisee


owns and operates a specific number of franchisees in a particular geographic area
AND provides the franchisee the right to sell to other new franchisees
(=subfranchisees), who find and manage their own franchisees.

Figure 3. Master franchise agreement (Barringer, et al. 2010, 516)


3.5 Advantages and disadvantages

For every type of business and organization there are advantages and disadvantages,
the same goes with franchising. In franchising there are two parties in the contract

24

Franchising Strategies
which means that there are good and bad sides from both view points; franchisors and
franchisees. Here the main concern is the franchisor and there for the advantages and
disadvantages are presented from the franchisors point of view (Murray 2004, 16;
Murphy 2006, 183).

Franchising expands the business much faster than growing through company owned
units, this is because there is a greater amount of money and individuals involved in
franchising operations than if company should invest own resources in growing the
operations. On the other hand there might be a loss of control over the network if it
grows so big that the franchisor cannot handle everything anymore. The franchisor
might also create an illusion where he/she would not have to take that much interest in
the daily operations of the business because of the franchisees are doing all of that
kind of work (Francoise 1997, 14-15; Murray 2004, 19-21; Keup 2007, 56-58;
Murphy 2006, 185-193; Barringer, et al. 2010, 522). Figure 4 shows the good and
bad sides of the expansion aspect.

+
-

Figure 4. Advantages and disadvantages from growth perspective


Franchising can also be seen as a method to raise capital, where franchisor does not
invest own money in the same quantity as opening company owned branches, because
every franchisee brings their capital to start their part of the business. This also
guarantees a set income from the fees and royalties for the franchisor. The greater
amount of business units getting their supplies from a same source also cuts down the
25

Franchising Strategies
costs in the same way as handling the financials through the same channels etc. Not to
mention the efficiency of marketing that affects every business operating under the
same name; one town/nationwide advertisement that works for all the stores and saves
in costs, time and work effort in marketing. All in all the financial risks are rather
small. The downsides are that the profits that do come are not all for the franchisor, but
the franchisees get their portion of the profits as well, which makes the profits smaller
for the franchisor than if the business would only have company owned units. There
are also costs of operating franchised business such as legal expenses and training etc,
so be- fore getting any profits, the franchisor is required to invest on these aspects.
Similar to other kind of business operations, in franchising, it takes time to start
making a profit,
as most of the franchises take at least half a year to break even (Francoise 1997, 14-15;
Murray 2004, 19-21; Keup 2007, 56-58; Murphy 2006, 185-193; Barringer, et al.
2010, 522). In figure 5 there are the financial aspects gathered from both positives and
negatives.

+
-

Figure 5. Advantages and disadvantages from financial perspective


When growing business to new geographic areas through franchising the franchisees
from new locations bring local knowledge from the local markets, this show
franchisees importance especially when entering to new countries. Another good aspect
of the relationship between franchisor and franchisee are the research and development
facilities that come in in form of reports from the franchisees. When the franchisees
deal with hiring and other direct managing responsibilities of the business it gives
more time for the franchisor to concentrate on the big picture of running the company.
26

Franchising Strategies
Peo- ple usually also mean problems; in franchising the franchisor and franchisee look at issues
from different points of view and might have different goals in operating their part of the
business. The franchisor needs to keep in mind that franchisees are not their employees but
independent operators with a franchising contract. The relationship is a leap of faith in a way;
franchisor needs to be able to trust to the franchisee and give up part of the business operations
to a stranger. Just like in any relationships there will be disagreements on various issues,
especially when things do not work the way one ex- pects them to, these are problems that just
need to be faced and solved as they come. Lastly, if disputes that cannot be agreed upon when
they arise, the franchisee might leave and use the experience in opening own business and
become a competitor with knowledge of your business (Francoise 1997, 14-15; Murray 2004,
19-21; Keup 2007,56-58; Murphy 2006, 185-193; Barringer, et al. 2010, 522). Figure 5 sums up
the dilemmas and the benefits of the relationship between franchisor and franchisee.

+
-

Figure 6. Advantages and disadvantages from relationship perspective


In any relationship both parties come to it with their own history and experience of life. In
franchising a good aspect is that every franchisee has knowhow and ideas on management,
marketing, fresh motivation etc. But the differences that they bring can be the cause of friction
when everyone thinks they know the best (Murray 2004, 19-21; Keup 2007, 56-58; Barringer,
et al. 2010, 522). In figure 7 are shown the both sides of the background that the franchisees
bring to the business with them.

27

Franchising Strategies

+
-

Figure 7. Advantages and disadvantages from experience perspective

In business there are always risks involved, that is what business is about, taking risks.
In franchising a lot of negatives originate from the relationship between the franchisor
and the franchisee. If the relationship works the business will work more smoothly as
well. Franchising really is like marriage; it all comes down to selecting the right
partner to grow together. When there is trust and agreement between the parties life
is much easier and everyone is heading to the same direction. In franchising, no matter
how perfect the concept is, if you argue with the franchisee constantly it will be unsuccessful in implementation (Murray 2004, 21). An important matter to remember is
that if it is not broken, do not fix it. If you are not ready to expand, and yet you try, you
might end up ruining a good thing, so be prepared. (Murphy 2006, 183)

Reasons for starting franchising

Tuunanen in his research conducted in 1999 looked for reasons why entrepreneurs in
Finland have started franchise operations. The questions were open questions so
Tuunanen has arranged 13 different groups from the results, and they are as follows:

1. Rapid growth, Geographical spreading, Market coverage (14%)


2. Solution to the principal-agent problem (12%)
3. Copycat Strategy method copied from abroad or competitors (7%)
4. Economies of Scale, Benefits from Co-operation (7%)
5. Control and organizational issues (7%)
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Franchising Strategies
6. Cost management and efficiency (6%)
7. Do not know/decline to answer (6%)
8. Access to financial capital (5%)
9. Access to human capital, Local market knowledge (5%)
10. Pilot operations and R & D (3%)
11. Go with a flow, no specific reason (3%)
12. Risk sharing (2%)
13. Miscellaneous reasons (1%)
(Tuunanen 2005, 70)

A companys growth is followed by two factors. Firstly, their product or service is


successful and becomes well known. Secondly, when the company has been making
profit and has the financial capability to expand. The companies should consider
franchising as an option to grow when they have something that others do not in terms
of trademark and a strong, well designed business model. The willingness to grow
ought not to be underestimated either. One important aspect of the business is that is
should be able to be standardized; this is the core idea in franchising, no matter where
you walk into a store under certain name you expect to receive the same product,
service, atmosphere etc. (Barringer, et al. 2010, 518; Murray 2004, 13).

Franchising suits best for young companies that might lack the financial capital where
the franchising fees and royalties will bring in some of the needed funds. It is also
important to keep in mind that franchisees are looking for a proven product at least to
some extent, so when beginning franchising the business should have been well tested
and the company should have experience of outlets that are company owned and
successful (Barringer, et al. 2010, 518, 523).
Not always is franchising the way to grow. Franchises that are sold need to be
affordable for the franchisees and the concept needs to be able to be written open in
the con- tract. In huge chains that have large units such as Wal-Mart (comparable to
Prisma in Finland) it is not possible to keep the opening costs in reasonable limits for
an entrepreneur nor is it achievable to write down all the policies and procedures there
are to run such a business. For this kind of cases franchising rules out of options
(Barringer, et al. 2010, 518).

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Franchising Strategies
An important aspect of deciding on starting a franchise is whether the entrepreneur is a
business person fit to be a franchisor. It is different to run a business from running a
franchise; franchisor is a business person as well as an educator, trainer, psychologist,
perpetual hand-holder and looking after what/how things are done. A franchisor needs
to remember that he/she is not looking for employees but independent business people
who will be part of the franchising chain as individuals operating the business
according to the instructors given by the franchisor (Keup 2007, 59).

W o m e n and franchising

IFA, The International Franchise Association was founded in 1960, it is a US based


organization and it is a membership organization for all the parties of franchising;
franchisors, franchisees and suppliers. In 1996 they formed a WCF, Womens
Franchise Committee to inspire and courage in franchising (International Franchise
Association). Nowadays women in franchising are so common that they are not
considered as a minority. As a matter of fact women are establishing new business
operations twice as fast as men. Before there were more obstacles for women to be part
of business life such as getting finance and recognition (Bennett, et al. 2008, 272-277).
These reasons are still behind the willpower for women to want to be their own bosses
by starting businesses. The attraction to franchising for women is that even though
they are running a business on their own they are not alone but have diverse support
net- work behind them (especially as a franchisee). Women are also better fit for the
role of franchisee due to the general nature of female being able to listen, follow
detailed pat- terns to work and implement business and accept that franchisor has the
experience and knows what is talking about. In addition franchising offers flexibility
for mothers with a family to run (Murray 2004, 111-112; Tuunanen 2005, 106).
Moya Hammond, a managing director of a British wedding bouquet franchise says:
Women have the skills to manage and grow a small business, but some lack the
confidence to try...Women do not always recognise their capabilities particularly if
they have taken a career break lasting several years. For such people franchising is
ideal. It can provide the support necessary to enable the individual to develop her skills
within a safe environment. (Murray 2004, 113).

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Franchising Strategies

Franchising in Finland
Compared to the history of franchising in US and Europe, Finland is a beginner in
franchising with the first franchising concepts from 1970s (Tuunanen 2005, part II/I
47). In his doctoral thesis Tuunanen, discusses closely the franchising scene in
Finland. According to the statistics from 2003 there were 177 operating franchise
systems with a total of 6 608 outlets in Finland, from the fields of retail, service and
restaurant. Retail being the biggest individual segment with 76 chains, service
following not much behind with 71 chains. The total number of franchise systems in
Finland has grown from 30 chains in 1999 to 177 in 2003. When looking at the
increment of the franchise outlets by business categories from 2002 to 2003 retail
grew the most by
15,2 per cent (871 outlets). The Finnish franchising association was founded in 1988,
so this was just a small example of how fast franchising has been growing in Finland.
Tuunanen also explains how the numbers are only directional because during the years
from 1999 to 2003, 10 franchise systems had been ceased, only one due to bankruptcy.
This also tells how safe franchising is; even if the franchising system would end, the
business often still continues. In addition, sometimes the franchise systems might
emerge what happened with the example of the 10 franchise systems mentioned
(Tuunanen 2005, 71-75).

Tuunanen compares the amount of domestic franchises and foreign franchises in


Finland. In 2003 out of 177 franchise systems 133 (75, 1 %) were Finnish origin and 44
(24,9 %) foreign. Tuunanen states that in Europe Finland has an average amount of
foreign franchises in the country compared with the local franchise system and that
most of our 44 foreign franchise systems come from Scandinavia and Western Europe
with only few from North America. These along with the Baltic countries and Russia
were also the countries where Finnish franchises have spread. 21 per cent, one fifth, of
Finnish franchise systems had expanded abroad by 2003. This is a large number even in
an international contrast (Tuunanen 2005, 74-75).
Female entrepreneurship in Finland

Since there is little to no statistics of female franchising in general, and even less of
female franchising in Finland. And since franchisees in Finland are part of the general
entrepreneurial statistics, here are some data of Female entrepreneurs in Finland. By
female entrepreneurship in Finland is simply meant a company that is established by
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Franchising Strategies
woman/women, or where woman/women have over 50 per cent ownership and/or
where woman is a head of the company (MTI Publications 11/2005 Women
Entrepreneurship Present Situation and Proposals for Measures).

There are only few statistics about female entrepreneurship and they are from different
sources, composed in different styles. This makes it very challenging to compare
different existing statistics (MTI Publications 11/2005 Women Entrepreneurship
Present Situation and Proposals for Measures). But to show some figures; in Finland
in 2003 out of all the entrepreneurs 33 per cent were women. In comparison with other
countries in Europe in the EuroStat statistics, Finland was in first place in the amount
of female entrepreneurs in 2003(non including agriculture). With agriculture included
Finland was in second place after Portugal (Entrepreneurship Survey 2004, MTI
Publications 18/2004). Out of all the chief executive officers about 16 per cent are
female and nearly half of franchising entrepreneurs female (Uranus.fi; MTI
Publications
11/2005 Women Entrepreneurship Present Situation and Proposals for Measures).
The former Finnish ministry of trade and industry undertook a research whereby the
companies owned by women in Finland are typically small and financially sound as
well as having the foundation and base of their company base on professionalism
(MTI Publications 11/2005 Women Entrepreneurship Present Situation and Proposals for Measures).
In 2010 a released report of female entrepreneurship by ministry of employment and economy
were researched different aspects of entrepreneurship which one of them being strategies and
leadership. According to the report a little over half of female entrepreneurs set tangible goals
to the company and the time span of the goals was often short, in half of the cases only about a
year. Nine out of ten companies were fo- cused on domestic markets. The competitive strategy
was invariably the quality of the products and services, nearly as important was the knowhow of
the staff (including the entrepreneur). Nearly a third was planning on expanding the operations
in the current company; about every tenth company was looking at closure of the business,
suspension of the business or selling of the business (MEE Publications. Employment and
entrepreneurship 33/2010. - Business practices and profitability of women owner enterprises).
The same research report discloses that over the past three years most of the female
entrepreneurs had offered new or improved products and/or services, often the ideas
came from the customers. The development was usually done by the company and the
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Franchising Strategies
investments had been put into machinery, as well as into marketing and the training of
staff were put effort into. The mentioned problems with development were the overall
economical situation, too small market segments, the high price of development and
lack of proficient staff (MEE Publications. Employment and entrepreneurship
33/2010. - Business practices and profitability of women owner enterprises).

Also the development of business operations was under the female entrepreneurship
research. The factors of success were seen as quality and versatility, expertise and
knowhow, customer satisfaction and established customer relations as well as good
service, flexibility and trust. The needs that were mentioned were especially in
information technology, accounting, marketing and planning of the business
operations. The development of business operations was often associated with
productisation of services, new ideas and marketing. The strategies mentioned were
cooperation with subcontractor, the development of the organizations operations and
expanding the operations (MEE Publications. Employment and entrepreneurship
33/2010. - Business practices and profitability of women owner enterprises).

3.10 The current state of franchising


Lastly here are some future prospects of franchising scene internationally and in Finland.
Franchising has been growing constantly since the mid 20th century and there is no change to be
seen at the moment. Newly graduated business students are drawn to the industries that are
governed by franchised businesses. There are new tools to conduct business which are
favourable for franchising, in addition franchising affects also other businesses in the economy.
Everything seems to be on behalf of franchising and the regulators with franchise associations
are to be boosting the prospects for franchising (Barringer, et al. 2010, 539).
Internationally franchising is growing all over the world; this is the biggest trend in
franchising in general at the moment. The reason for global franchising success is
globalization and the effects of it. People want recognition by identifying themselves
with world famous brands as symbols for quality and success. Franchising has also
taught consumers to demand consistent service quality and value (International
Franchising Association).

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Franchising Strategies
Tuunanen in his research has studied franchising and particularly franchising in
Finland very closely from 1996 to 2004 and in his thesis 2005 sums up what the future
of franchising could encase:

Franchising will become more common and important for the economy

There will be more variety in the new franchise systems such as technology
and knowledge
Franchise systems will work together more and multiple unit franchise
agreements will become more common
Awareness, reputation, franchise know-how and interest towards franchising
will grow
Businesses will start franchise operations younger as part of their strategy to
grow
Not only the quantity but also the quality of franchise systems will increase,
there will be more consulting, training, research etc.
(Tuunanen 2005, 103-104)

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Franchising Strategies

How to Franchise Your Business?


Franchising is a complex business model; its not a case of
simply putting together some legal documents.
How to Franchise? The Mind Shift
The objective of franchising is to grow your business. However becoming a franchisor is not about
simply generating a set of legal documentation. Franchising as a business model provides a lot of
advantages and helps solve two fundamental problems of growth, raising funds and finding people
to run your business. Franchising is and will continue to be one of the most complex business
models. You need to have an intimate understanding of your entire business, your value chain and
all the interactions that come into play. Quite simply, to be a successful franchisor, you have to
change the way you view your business. This mind-shift means you go from working in your
business to on your business. In becoming a franchisor, you should start to look at How can I
construct a network where every participant is able to benefit from their initial investment?
Why? Because a well-structured franchise relies upon healthy profits for the franchisees, as well as
ensuring the same for the franchisor.

How to Franchise? Your Business Model


Growing your business with franchising also means that you are looking at ways in which you
create a valuable business for yourself and your franchisee. Look at your sales figures and levels
of profitability. Ask yourself where are you major sources of revenue coming from? How profitable
are those revenue streams? Do you understand your supply chain and your role in the entire
chain? These are some of the questions you need to answer. This is a critical in formulating a
franchise value proposition or your franchise opportunity. Creating a financial model and then
developing the commercial strategies that underpin a sustainable and profitable business model for
your franchisee and yourself ensuring you are not dependant on the franchise fees but the
ongoing royalty fees. Doing this means you are able to deliver on your promise of support to
franchisees. A happy franchisee is also your best reference for growing your network and building
your brand.

Legal Documentation

Branding & Marketing

Recruitment Strategies

How to Franchise? Legal Documentation


Basically, your franchise legal agreements need to be founded on the commercial realities and growth
strategies of your business. Often, franchise agreements are developed with legal only considerations.
When developing legal documents define the nature of your business model first, plan for contingency and
enable effective compliance measures. The best approach is to have commercial strategies and legal
frameworks developed at the same time. If you combine these two from the start you end up creating a
streamlined business model and that is protected and secured by your legal documentation. This means you
avoid difficult conversion type scenarios. For example imagine having to renegotiate 20 franchise legal
agreements with franchisees that have invested heavily into your business and when you add all the
relationship dynamics and it becomes a mess. It would be tough enough to talk about a change in royalty

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fees, let alone adding supplier conditions and fit out changes, even though this may be critical to the survival
of your franchise network people dont like change that will place more pressure on them.

Developing the Franchise Opportunity


In franchising terms, the process of finding potential franchisees is referred to as franchise
recruitment.
In ensuring efficient and well-developed franchise recruitment, all franchisors will face the concept
of value proposition. But what is value proposition? By definition, value proposition is simply the
franchisor saying to the potential franchisee if you invest in my franchise network, you will receive
a return of ____ . However, in considering value proposition, franchisors should ask themselves:
What can I offer franchisees? As a franchisor, you are trying to find the most valuable franchisees
for your network. At the same time, as investors, franchisees are trying to find the most valuable
investment. Once again, franchisors must ask themselves: Why would potential franchisees buy
my brand? How does my network compare to other franchise opportunities in the market?

Kitchen table economics Franchise Opportunities


The most valuable franchisees will weigh up their potential investments on the simplest of terms, a
concept known as kitchen table economics. Prospective franchisees want to know:

How much they will need to invest in a specific franchise opportunity? (establishment costs)

When will they receive the funds they invest back again? (payback period and return on
investment)

Whether they will receive a fair return for their labour in the business? (salary)

What they might receive when they exit the business? (business asset value)

Essentially, you want franchisees who ask themselves: Will this decision ensure a comfortable
standard of living for me and my family? These are the franchisees that will last.

Established Costs Franchise Opportunities


Franchisors need to ensure that establishment costs are within a reasonable boundaries for their
particular franchise opportunity. This is because many franchisees fund their investment through
leveraging some kind of personal equity. This can mean taking out a mortgage on the family home,
utilising a severance package or even simply drawing from savings or family inheritance.
When establishment costs begin to rise, the number of potential franchisees declines, meaning it is
essential to create value propositions most suitable to your pool of prospective franchisees.

Fees, Levies and the support offer Franchise Opportunities


The biggest reason franchisees pay ongoing franchise fees and levies to the franchisor is because
they are using their brand, business practices and so forth. However in any franchise network,
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Franchising Strategies
franchisors have a certain obligation (because of these fees and levies) to support their
franchisees. With this in mind, franchisors need to articulate a support offer in great detail to
franchisees in the early stages of the franchise agreement.
In developing the support offer, franchisors must consider the roles and responsibilities of the
franchisee and the skills and capabilities required of them. For example: if providing strong levels
of customer service are required of the franchisee, the support offer should contain training on this
issue. On top of this, the franchisor must provide support in terms of sales, product
management/innovation, employee management, financial management and so on.

Branding & Marketing Franchise Opportunities


The nature of the franchise system means that franchisees naturally have a huge incentive to
market the franchise brand. However, franchisees also want to know where marketing funds are
being spent and that they are being spent effectively. For this reason, having a fair, welldocumented system of pooling and later utilising marketing funds is crucial.

Branding and Building Brand Equity


Branding is not only about a logo, its also about the offer
and experience.
How We Work
Our consultants will work with you to define your brand. We help create a meaningful value
proposition, unique product and service experience, and appealing visual style. Throughout the
branding process, we integrate our teams diverse experience, across the legal, marketing and
finance disciplines to engineer a brand that represents value. A brand that has a compelling value
proposition, considers the customer journey, its touch points and has a design look and feel to
match.

What Is Branding?
The word brand is thrown around loosely and often only refers to its cosmetic attribute the logo,
design and or communicational style. However, and more importantly, brands are much more than
that. Branding should create an emotional connection. Brands need to build their promise on a
clear and differentiated value proposition, a well-crafted product and service experience, and a
visual and communicational strategy. Companies that only focus on one of these three areas are
either beautiful but shallow or deliver incredible value but never really capitalise on the benefits
they offer.

Great Brands Are Like Great Leaders


Great branding emanates great leaders. They each have a vision, know how to communicate that
vision and deliver on that vision. These brands lead by example and are consistent. The emotional
connection they create with people gives them purpose. The challenge however, is to remember
that like any relationship, you have to keep up the effort. If you lose your way, people will lose trust
in you and thats hard to rebuild.

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Our Process
Above all, branding needs to deliver value. Providing value is not a case of slapping together a
fancy website or logo. Each component needs to deliver a return We package your objectives
around a unique design and visual aesthetics giving you purpose and style all in one. In short we
build great brands.

Value Proposition

Product Experience
Design

Trademarks

We Start By Defining The Why? Your Value Proposition


A brand is not just about choosing a logo and name then presto, you are the next Louis Vuitton, Apple or
Virgin. Branding is, and most importantly begins with, an understanding of your mission and vision. Why
should a customer consider you over someone else? What value are you bringing across the value chain?
What is the market pain or opportunity are you looking to solve or address? What do your customers look
like? Without purpose your brand is shallow. You need to figure out your purpose first.

Franchise Digital Strategy


Its not only about your Website, its about your Brand and
how you sales.
Drive Franchise Growth with your Digital Strategy
Your website needs to deliver tangible results; drive sales, and/or generate leads. It needs to
impact the bottom line. Reaching these goals is not easy. Often, the process leads to a host of
questions about your digital strategy and leaves many small business owners and growing
franchisors confused. And the lack of a thoroughly thought through online marketing plan,
inevitably leads to lack of results and disappointment about your websites and social medias
apparent waste of precious time and money.

1. Why it fails? The Biggest Issue When Developing a


Digital Strategy
There tends to be a mismatch between the needs of the business and the ability of the web
developer / designer to actually meet those needs.
A lack of understanding around the technology needs within your company, your brand message,
and your customer/client base further complicates matters.
If you add the management component that you may have to deal with a brand strategist from
one firm, a creative copy writer from another, a web developer, a social media strategist, a
technology consultant and an internal marketing assistant, all these add up and increase
complexity. The budget balloons out of scope and your site goes live 3 months later, if you are
lucky!

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Franchising Strategies
If you want to avoid these common headaches you need to consider a full-service firm that
understands franchise growth, one that initially focuses on your business strategy, sets priorities
and follows through to execution and campaign management.

2. Start with the Why Define the Purpose of Your Digital


Strategy
Before creating a website, you need to understand your market, think of the relationship you want
and who you want to attract.
Have a look at your customer behaviours: What does their decision process look like? What
devices do they use? Where do they live?
It is just as important to look at how you drive your marketing efforts offline as well as online.
Everything you do is inter-connected and should compliment your overall marketing strategy.

3. Be Memorable and Have Presence Communication


and Branding Strategy
This is where your brand and communication strategy makes all the difference. When someone
with presence comes into a room, people notice them. There is a small silence and a change in
energy. The same principle should apply to your presence online. A carefully crafted website does
the same thing. As with a charismatic individual, the details are key. In this context, its about the
communication style, the design and consistency across all online mediums and how user friendly
the website is. Its about having a holistic approach. If you are memorable, your clients/customers
will start a relationship with you and ultimately this will lead to sales.

4. Next Steps Validate Your Digital Strategy


Once you have defined the relationship you want and understood what makes your brand unique,
the next step is to set your business objectives and determine a way to measure them. Are you
establishing an e-commerce site, or are you looking to generate leads and build awareness? Be
realistic. There are tools like Google Keyword Estimator and Google Trends that allow you to
validate some of your ideas objectively.
Additionally, some financial modelling can help the decision and planning process. Using business
tools and mapping your process, the way your business works, will really allow you to understand
the dynamics you need generate, so that you can turn your online strategy into results. It also helps
you keep things simple and keep you focused.

Summary A Final Note


In franchising, having an online presence is the way you set yourself apart from other franchise and
non-franchised brands. It is fundamental to the franchise growth of your customer base and your
franchise network. You can drive sales for your franchisees, increase productivity, cut operational
overheads and even identify prospective franchisees. Look at the whole picture, while staying
focused on your objectives.

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Franchisor Exit Strategy


Selling your Network?
Franchisors, Selling your Network?
What is your business worth? Who will buy it? and How can you maximise the value of your
Franchise network? Buyers look for franchise networks that can operate without their constant
involvement. By putting in the time and money to construct a well-functioning and relatively
autonomous franchise network, you maximise the number of would-be buyers, as well as the
potential sale price.

Franchising and Revenue


Many franchisors particularly in the past, saw the up-front franchise fee as one of the principal
attractions of franchising, looking to grant as many franchises as quickly as possible to maximise
that revenue. And as a result they didnt understand that the real business value is achieved in
nurturing in their networks to develop significant ongoing revenue.

Recurring Revenue
Upfront franchise fees occur only once. Trying to mark them up as far as possible in the beginning
jeopardises the ongoing revenue streams. To earn a continuing stream of money into your
franchise network, your have to look beyond the initial franchise fees for each store. With a
reasonable franchise fee and ongoing royalties that continue for many years, the risk for the buyer
goes down, theres a monthly income stream for you and in the meantime, the value of the
business goes up.

Franchising and Group Buying Rebates


Rebates that are part of a group buying benefit can be a tricky subject between franchisors and
franchisees. Franchisees may feel that as the suppliers are specified by the franchisor, the benefit
should be shared with them. However, a franchise network as a whole gets a buying group benefit
because of the franchisors skill, effort and intellectual property in first developing and then growing
the brand. So why shouldnt the franchisor capture as much value as they can from the extent of
the network they have built? Of course, the deal for the franchisees needs to be fair, profitable and
provide incentive as well. The franchisor is then able to generate additional revenue streams
through product rebates, add significantly to the value of the franchise and keep franchisees
happy!

Franchising and Buyer Risk


The recruitment of good franchisees is not only essential to the success and profitability of your
network operationally, it is also an important factor potential buyers will assess. They want to be in
good company. Just one bad egg can spoil it for everyone else and give the franchise brand a
bad name!
To safeguard against dispute and litigation and the destabilising effects this can have on your
franchise network, franchisors must ensure that all their legal agreements relating to the granting of
franchises and the franchisee recruitment processes are well developed, fully documented and
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Franchising Strategies
consistent. Maintaining this strategy as well as compliance with the Franchising Code of Conduct
increases the business value and decreases risk for potential buyers.

Franchising and Reliance on the Proprietor


In most franchise systems, one of the franchisors main roles is running the business. Buyers
consider how much of the business success is directly linked to the current owners involvement
and how that business will continue to operate independent of the proprietor.
You increase the value of your business and alleviate potential buyers risk by ensuring that
franchisees are well supported, trained and managed with clear standards to uphold, and that your
business personnel, systems and manuals are also well supported and up to date
Dcstrategy.com
Entrepreneur.com

Franchising as a Growth Strategy


More and more businesses are discovering the franchise model as a method for increasing
sales and brand visibility through independent business owners. Over the past two
decades, franchising has been one of the largest growth industries in our nations
economy, with a net annual economic impact close to one trillion dollars. Franchising is
no longer just for roadside motels and quick service restaurants; today, companies are
franchising their businesses in industries as diverse as mortgage brokerage firms, medical
spa treatment centers, auto repair shops and veterinary clinics.
If you are thinking about growing your business, either within Las Vegas or on a broader
(state or national) scope, you may want to consider franchising as a way to reach your
goals. While most people have general knowledge about franchising from their
experience as consumers, not many understand how it works. Simply put, a franchise is a
license granted to an individual or business entity (the franchisee) to market a companys
(the franchisor) goods or services in a particular territory using the franchisors business
systems, trademarks and methods of operation.
There are many reasons that businesses decide to franchise. Franchising offers the
potential for rapid growth with a relatively low capital investment.
Moreover, franchise companies retain a significant level of control over the use of their
brand and system, while at the same time having the comfort of knowing that each
location is being operated by an independent business owner that is highly motivated to
maximize the sales and profits of the business. A business is a good candidate for
franchising when the company has a method of doing business or system of operations
that is easily reproduced and can easily be adopted by others through training. It should
have a proven track record of economic success with a unique trademark with a distinct
identity the brand. Indeed, many business owners begin to consider franchising when
customers begin to ask about other locations and business opportunities with the brand.
Importantly, there are many legal considerations that go along with a businesss decision
to franchise its concept. Franchise relationships are regulated under a variety of state and
federal laws and under the Federal Trade Commissions Franchise Rule.
Aside from having a well-written franchise contract, a franchise company is required to provide
each of its franchisees with information regarding the franchise in the form of a Franchise
Disclosure Document. As a result, its a good idea to contact an attorney who understands
franchising before taking your business to that next level.
Franchising is a powerful model that has a proven history of helping business owners and
individuals to realize their dreams, but its not for everyone. As a result, it is important to have

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a good understanding of how franchising works and what it will mean to your business
operations before you take that leap.

Strategies to Combat Employee


Turnover
Despite the difficult economy, think of how many of your employees left in the last year or two. For all
franchise owners, employee turnover is a major issue that affects quality of service, staff morale and
brand reputation. But for multi-unit owners hoping for future growth within the parent organization, the
bottom line implications of each employee departure make it even more of a priority concern. Many
franchisees only calculate turnover as a cost derived from time spent interviewing, finding a new
employee and training them, but in practice the costs are far greater. In fact, one of the largest
expenses can be incurred when customer service slips because of mistakes from a new employee,
mistakes which wouldnt have been made by a veteran employee. When all factors are added together,
did you know that each departing employee that walks out your door has likely cost you between $700$1,000?
Finding new ways to keep employees happy, engaged, motivated and committed to working for the
company can be a full-time job on its own and some proposed solutions can often cost as much as the
challenge to be solved. For franchise owners who own several franchise locations and operate in
multiple industries, the greater challenge is that what might work in one industry may not work in
another, so your investment is limited. This only succeeds in fueling the frustration.
With a rebounding economy, no one can afford to ignore or put off the search for a solution. For some
industries, like quick-service restaurants whose average turnover for hourly workers hovers around 130
percent, the latest surveys paint a staggering picture. Job-hunting firm Manpower found that 84 percent
of all employees plan to look for a new position in 2011 regardless of industry. These findings combined
with the naturally high rates of departure in most franchise organizations could mean the economic
rebound is poised to pose a significant drain on potential profits, not to mention creating a significant risk
to the customer experience.
Each departing employee that walks out your door has likely cost you between $700-$1,000.
To be sure, turnover is a complex problem with no single magic bullet solution. But, when building a
strategic plan to streamline training, adopt new motivational tactics and refresh the hiring process,
owners should consider the role that individual employee personality can play. Easy to use, industryagnostic, and cost-effective, a behavioral assessment program can provide new insights and tangible
data that will lend new perspectives on employees and ultimately create a workplace environment that
far fewer are willing to leave.

The Person Behind the Position


Retaining employees begins with hiring the right people. Simple enough, but reference checks and a
basic interview are often the only ways employers determine who should be hired. During the interview
process, an owner or manager might explain the role to be filled and its primary responsibilities, but how
can they be sure the person will be a natural fit for the demands of the role? In a typical retail franchise,
for example, almost every employee is in front of the customer in some capacity. The tasks and
expectations when it comes to customer service are dramatically different from the sales associate to
the stock room assistant. Armed with a more specific set of behavioral requirements for each position,
franchise owners can develop a more defined sense of characteristics needed for success in each role
and use that knowledge to seek similar traits in reviewing prospective employees.

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Assessments arent an elimination tool. Instead, they provide valuable information that quite simply
cannot be obtained through the interview process. How often have you hired the ideal candidate for a
front-of-store position, only to have them leave a month later saying, I dont like being in front of
people. Instead, armed with insight into their natural tendencies, interviews can address potential
discrepancies up front, or identify other open positions that the prospective employee may not have
considered, but might be better suited to fulfill.
Insights into individual employee behavioral drivers are not limited to just new hires. Across a sevenunit SUBWAY franchise organization, turnover was regularly averaging 70 percent. After conducting a
round of employee behavioral assessments using an assessment tool developed by an IFA Supplier
Forum member, one immediate observation was that many current employees were working in the
wrong positions. For example, an employee stationed in the first position, a key customer-facing role
charged with greeting customers and taking detailed orders, had a profile that suggested he would be
more successful in a behind-the-scenes role. Given the mismatch, the team shifted the employee to a
food preparation and kitchen management role, and the change was immediately embraced by the
employee. Not only did the change begin positively impacting the overall workflow, the individual
became noticeably more productive.
Sure the employee was happier, but did the investment in the assessment program really help
overall? In this multi-unit SUBWAY franchise, the application of a behavioral assessment program
reduced turnover from 70 percent in any given location, to an average of 42 percent across all
locations. In fact, four locations reached all-time turnover lows of 32 percent, incredible results for an
organization where the industry average is at 130 percent. Additionally, the more positive customer
service experience created by having the right people in the right place has been attributed to the
stronger sales growth at each location and an uptick in customer return visits. And what are the bottom
line results? The fewer employees walking out the door saved an estimated $15,000 or more a year in
training costs alone.

Making the Most of Behavioral Insights


In just five to 10 minutes, assessments can provide all kinds of valuable insights into a candidate, from
natural behavioral characteristics to the different factors that can help motivate them as an
employee. The advantage of adding a behavioral assessment tool to a strategic set of employee
management tactics is easy to see, but the long-term value is in the versatility of the investment. Even
if only used initially to realign current employees and help select better new hires, once the data is
gathered, plenty of additional cost savings and opportunities for growth will emerge from the findings.
Training.
Companies and brands are more cognizant than ever of how each employee is a direct representation
of their reputation and brand to customers, which makes the amount and complexity of training for each
new employee even greater. Everythingfrom the proper way to greet customers to advanced guidance
on job performanceis now the training standard within most franchise operations. Behavioral insights
into the traits most commonly associated with key jobs can identify areas where training programs may
not be resonating as effectively. For instance, a pre-recorded DVD training program would not be the
most effective way for the more socially oriented employees who are naturally best suited for customerfacing positions to retain all the critical information they will need for the job. It is also a missed
opportunity when considering that this training is often an employees first exposure to the organization.
Just like with customers, the more you create an appealing, motivating first impression, the more likely
they are to stay.
Team Dynamics.
How a team interacts and works together has a profound effect on productivity, speed of service,
customer experience and employee morale. Introducing employees to the idea that each of them might
have a distinct approach to communication or task management will help create a more positive work
environment and stronger team dynamic. By creating ways for employees to share their own behavioral
profile pattern, on nametags or lockers, fellow team members are instantly equipped with insights into
the best way to approach, correct or support their fellow teammates.

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This is an especially important factor at the management level, as the traditional role of a manager
cannot be taken as a one-size-fits-all title. Instead, the job requirements of a franchise manager should
be a direct function of the behavioral characteristics of the people who work there. Because of this,
owners need to give special attention to the store dynamic when they are hiring or promoting a given
managernot just the managers personality or style.
Leadership Development.
Any franchise owner knows that their success and growth are heavily reliant on the people helping them
run the day-to-day operations in each location. Not only will a more data-supported understanding of
individual behaviors provide current insights, but the information can also be used to help uncover new
leaders for existing or future locations. After conducting the assessment initiative to help mitigate
employee turnover in the multi-unit SUBWAY franchise, two manager profiles emerged, The Problem
Solver and The Maintainer.
The Problem Solver manager is excellent operationally, but also has a higher dominance drive where he
will naturally assume ownership of, and directly address, any issues that arise. This quality also
includes a much stronger emphasis on the need to do things by the book. Knowing this, the franchise
owner gained a better understanding of which managers, and prospective managers, would be more
effective managers at struggling locations.

A more data-supported understanding of individual behaviors can also be used to help uncover
new leaders for existing or future locations.

The Maintainer manager is also operationally strong, but has a much more team-oriented approach in
the work environment. This management style excels in locations that have a more established, closeknit team that is at its best when working closely together. The stronger drive of the maintainer to seek
a collective, more open approach to a challengerather than to just take complete controlallows the
manager to more easily integrate himself into the functioning team dynamic where he is better able to
motivate and drive overall success.
Motivation.
Every contact a manager or franchise owner has with an employee is an opportunity to motivate or not
to motivate. Not everyone responds in the same manner or is looking for the same reward. While some
employees are motivated by praise, others need a challenge to meet. Imagine the motivational power
managers would have if they knew which employees needed more public recognition for their work and
which employees would rather quit than have their photo posted to the wall praising their efforts or
success. Often all it takes is something small, like a low-cost gift card or early paid leave, so long as it
has meaningful value for the employee.

More Food for Thought


Creating a culture of employee and job satisfaction combined with a scientific-based approach to hiring
and job role definition can have dramatic, positive effects on employee turnover and customer
service. Assessments are one important piece to consider adding to the arsenal of tools for combating
the revolving door inherent in a growing job market and creating a consistent, increasingly positive
customer experience.
To sustain a culture of employee excellence and low turnover, however, franchise owners need to truly
be committed to employee satisfaction and happiness in their daily roles. Many times slogans, pep talks
or fancy marketing materials take the place of genuinely caring for an employees well-being and
success. If reducing turnover is the ultimate goal, a more comprehensive, positive approach is needed
and is achievable. All it takes is the ability to show that each individual employee matters. Simply put,
employees that care about their jobs and know their managers or owners care about them as individuals
will come to work wanting to contribute to an organizations success day in and day out. As famous

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football coach and successful businessman Joe Gibbs once said, People who enjoy what they are
doing invariably do it well.

THE ROLE OF THE FRANCHISOR


It is important to understand that not every business should be franchised. It is equally important
that when you decide to become a franchisor that you do so in a way that maximizes the unique
character of your business. Successful franchisors are rarely the product of a packaged approach
as each element of your franchise system should be developed in a way that supports your
franchisees so that they can deliver consistently to your brand's customer your Brand Promise.
MSA's methodology in developing emerging franchisors is what has made us the leading and most
respected franchise consulting firm in the world.
Successful franchisors share some common attributes. They are motivated to share their
experience and know-how with their franchisees. They provide their franchisees with the tools
needed to operate their businesses to brand standards and, are focused on ensuring that each
franchisee operates to system standards. Great franchisors have all made their share of mistakes
and have survived them. It is their hands-on knowledge of the business they are franchising that is
of the greatest value to franchisees as franchisees benefit from the franchisor's proven experience
which hopefully allows franchisees to avoid some of the minefields that plague many start-up
businesses.

Franchisor vs. Franchisee


The franchisor owns the brand and the operating system that they license to their franchisees. The
terms of the franchisee's license is contained in the franchise agreement they sign and it is
important that the franchise agreement be based on a highly structured strategic plan designed for
the uniqueness of the franchisor's offering. Only after developing the franchise strategy should a
franchisor begin the development of their Franchise Disclosure Document and Franchise
Agreement. Working with qualified franchise lawyers is essential to ensure that your legal
agreements provide you and your system with the protection and brand controls required and
equally important, are marketable to prospective franchisees.
The franchisee invests in the right to use the franchisor's expertise, brand name, operating
methods, and initial and ongoing support. The franchisor grants the franchisee the right to operate
business under the franchise system's trademarks and service marks and enforces the brand
standards of the system.
Great franchisors provide training to new franchisees and their management and provide support in
the training of the franchisee's staff. Franchise systems will provide their franchisees with a library
of operations manuals, field consulting, consumer marketing and other support and provide each
franchisee with the tools needed to operate their businesses to system standards.
MSA works with our emerging franchisor clients to first assist them in evaluating whether or not
franchising is an appropriate expansion strategy for their company. Only then do we begin the
process of designing the franchise strategy, developing the tactical elements required to manage
and support the franchise system and provide our clients with the guidance in marketing to
prospective franchisees and closing the franchise sale. It is our experience as franchise
management and also our experience in consulting with some of the world's leading franchisors
and non-franchisors that makes MSA the most respected franchise consulting firm in the world.

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THE ROLE OF THE FRANCHISEE


Joining an established and well-managed franchise system can be rewarding, profitable and
provide a level of safety that may not be available to non-franchisees staring their own independent
businesses. As a franchisee, you are responsible for the day-to-day management of your business
to the brand standards of your franchisor. Not all franchise opportunities are equally sound
investments. When you are making your decision to become a franchisee you should look closely
and determine whether the franchisor can provide you with:

A tested and proven method of doing business


A clearly defined Brand Promise and a recognized brand name that you can capitalize on in
your local market
An extensive library of operations manuals and training programs for you and your
management team and support for the training of your other personnel
A headquarters and field support team that is focused on improving your bottom line
performance as well as enforcing its brand standards at each of its company owned and
franchised locations
An active research and development program geared to developing new products and
services to keep you ahead of the competition
A local and national advertising and marketing program that supports your business
The opportunity to invest in additional locations
A return on investment that meets your expectations

Franchisee vs. Franchisor


A franchisee doesn't actually buy a franchise although they own the underlying assets of the
business which may include the land, building and equipment. As the owner of their business the
franchisee enters into a license agreement with the franchisor and obtains the right to do business
using the franchisor's operating methods, brand name, trademark and servicemarks in offering the
systems products and services.
Before you make the decision to become a franchisee, do your homework. Engage the services of
a recognized franchisee lawyer as your advisor. We have included on this web site a publication
called Making the Franchise Decision which you should download and use as your guide in
conducting your due diligence on the franchise opportunity. You should also spend some time
educating yourself on franchising. A good tool to use is Michael Seids book Franchising for
Dummies now in its second edition. Above all, take your time in evaluating a franchise opportunity
and do not rush into any investment without first getting professional guidance and making certain
that the franchise system is right for you.

THE POWER OF THE FRANCHISOR'S BRAND


Franchisors invest a lot of time, energy, and financial resources in developing and supporting their
brands. They do this so that consumers understand exactly what to expect before they even walk
through the door of any of their locations. Great franchisors want to ensure that their customers are
satisfied each and every time they shop at a franchised location. In the consumer's mind, a
franchisor's brand equals the company's reputation. It is the experience they perceive they will
haveand expect to have - that is essential to protecting the value of the company's marks. This is
true regardless of whether the location is company owned or franchisee owned. Consistent
execution to brand standards is expected in each locationthey visit regardless of where the
business is located.

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The brand is the franchisor's most valuable asset. Customers decide which business to shop at
and how often to frequent that business based on what they know, or think that they know, about
the brand. Consumers really do not care who owns the assets of the business. Great franchisors
provide the tools needed by the system's local operators and enforce system standards simply
because they understand that in the customer's mind, they're shopping or eating at a branch of
trusted chain.
To illustrate further... When one sees an advertisement for a Wendy's hamburger, they
immediately associate it with the experience of ordering and eating a franchised Wendy's
hamburger. The experience of visiting a franchised Wendy's, supported by the message in its
advertising, communicates and reinforces to the public just what Wendy's is. The same goes for
other franchising companies, such as Meineke. When you see an ad for brake services, one can
almost feel their car stopping more safely at the light.

WIDER ADOPTION SPURS FRANCHISE GROWTH


The number of industries bringing goods and services to customers through franchising is growing.
In fact, franchise growth is becoming a significant force in the U.S. economy thanks to its wider
adoption as a successful business expansion model.
Franchised businesses operated more than 828,000 establishments in the United States in 2007,
according to the International Franchise Association's Economic Impact Study. These businesses,
run by both franchisees and franchisors, provided franchise growth in the form of more than 9.1
million jobs, $802 billion of product output, and contributed more than $468 billion of gross
domestic product for the benefit of franchise growth.
Moreover, franchise growth supplied about the same number of jobs in 2007, as all manufacturers
of durable goods, such as computers, cars, trucks, planes, communications equipment, primary
metals, wood products, and instruments
The economic impact of this considerable franchise growth goes beyond activities inside
franchised businesses when one considers franchises purchase products and services from nonfranchise suppliers and their owners and workers spend income earned from franchising on
personal purchases.

HOW TO FRANCHISE YOUR BUSINESS


MSA has been fortunate to work with both start-ups and mature businesses in a variety of market
segments. Some businesses seek our advice regarding when is the best time to franchise your
business while others inquire how to franchise your business successfully once the timing is
good. Heres the franchising advice we offer:
For start-ups and smaller businesses...we recommend that a company have an operating
business before franchising their business. In order to franchise your business, a prospective
franchisor must show that the business is profitable and scalable. They need to establish an
estimated investment that is competitive for expansion and will remain profitable once franchise
fees and royalty payments are added. Lastly, understanding the ebb and flow of ones business for
at least one-year is also a benefit toward planning to franchise your business.
For mature businesseswe work with mature organizations to create a franchising system that
not only helps business owners reach their goals, but is sustainable and profitable for the
franchisee. We counsel business owners on the value of a comprehensive strategy that properly
47

Franchising Strategies
documents the franchising relationshipand helps both parties avoid costly legal and professional
issues later.

EACH BUSINESS NEEDS ITS OWN FRANCHISE STRATEGY


The development and implementation of any franchise strategy today can be complex. The legal
documentsFranchise Disclosure Document (FDD) and the franchise agreementare fairly
straightforward, but the business decisions that support what's stated in these legal documents
need to be well-thought through. Getting guidance from a professional franchise consultant can be
extremely beneficial.

Why a Solid Franchise Strategy is Important


The good news for potential franchisors is that the market readily accepts great products, services,
and concepts that provide consumers with what they wantin the way they want it.
The challenge is to know what is working in franchising today and what is not then designing a
franchise strategy that is both attainable and adaptable. For instance, a business franchise
strategy needs to beattainable in its financial assumptions and short- and long-term projections,
which can be accomplished by doing a Gap Analysis. A franchise strategy must also
be adaptable in how it reaches a local market, evolves its product and service offerings, motivates
its franchisees and enforces its brand standards.
Some franchisors try to save money by ordering franchise strategy self-help kits with fill-in-theblank forms for franchise agreements and FDDs from companies who are unqualified to serve as
professional franchise consulting firms. Others take someone else's franchise strategy and simply
copy or modify it for their use, which carries a high risk for both the franchisor and the franchisees.
Each business is unique and therefore each franchising strategy should be also.

BEWARE OF PACKAGERS: WORK WITH A QUALIFIED FRANCHISE


CONSULTANT
Franchise packagers do not provide the same level of service as qualified franchise consultants.
Instead of helping a prospective franchisor evaluate, design, and develop a franchise strategy,
packagers deliver franchise disclosure documents based on a boilerplate template.
While an inexperienced prospective franchisor may think they have found a simple way to become
a franchisor and fulfill their dreams, they quickly learn otherwise. The franchise disclosure
documents do allow a new franchisor to legally sell franchises, but the documents dont address
other important areas, such as the relationships and growth strategy that will help them avoid
litigation issues later.

Benefits of Qualified Franchise Consultant


Engaging a qualified franchise consultant can make the difference between a franchise system
succeeding and failing. MSA ensures that ones franchise offering, its structure and its brand
promise is all in alignment with a franchisors business goals and objectives.
Working with a professional franchise consultant not only provides higher-quality guidance,
expertise and services, but offers these services for a comparable cost of a packager.
So steer clear of packagers and work with recognized franchise consultants, like MSA.

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Franchising Strategies

VERIFY EXPECTATIONS WITH FRANCHISE CONSULTING


A significant benefit of working with MSAs franchise consulting firm is our breadth of franchise
experience; our strategic planning expertise; and our tactical implementation service and support
that our clients have come to depend on.
MSA conducts a GAP analysis as part of their engagement process. The franchise consulting
analysis helps business owners in multiple ways:

Identifies differences (or gaps) in potential opportunity with actual performance benchmarks
based on real industry franchising metrics
Reveals planning, direction, or other shortcomings, so that strategy and expectations can
be adjusted early in the franchise consulting phase
Identifies tactical planning goals and objectives to maximize opportunities
Offers a reality test or confirms ones franchisability before further investments (financial,
people and other resources) are made

Be More Prepared
Additionally, a franchise consulting GAP analysis spotlights what areasfrom operations and
marketing support to technology and real-estate investmentsthat need to be addressed in the
development of a franchisors business infrastructure while the legal documents are being
developed.

Becoming a franchisor requires a sizable financial investment for a sustainable and scalable
infrastructure. Working with a franchise consultant upfront, avoids the guesswork and better
prepares the franchisor for whats ahead.

EXPAND THROUGH INCREASED FRANCHISE SALES


Once a franchise is operating well, many franchisors choose to increase their franchise
sales efforts for increased growth and expansion. Whether they are considering domestic
or international franchisingexpansion, we emphasize the importance of having a focused, wellthought out franchise sales strategy in place.

Are you looking for more domestic franchise sales?


If youre a franchisor who is considering ramping up your domestic franchise sales program, we
recommend you carefully select the best target market for expansion based on: competition,
demographics, plus its proximity to your headquarters and regional support staff.

Are you considering international franchising expansion?


If your company is considering international franchising, you must first have a stable and
profitable domestic operation in place and an organization that can support an international
franchising presence. Once you have this, there are other scenarios and issues that will need to
be addressed, such as:

Potential product changes, system modifications and edits to training materials that support
culture and local tastes
The availability and cost of qualified local labor
Government stability or instability, local laws and legal systems
Compliance with the Patriot Act for international franchising
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Franchising Strategies

Tariffs, currency-exchange and transfer restrictions

Franchising In India
Franchising - The fastest Growing and ever changing Industry in India
Though at a nascent stage the industry has witnessed 30 to 35 per cent growth in the last 4-5 years
Home to over a billion people, including a flourishing class of urban consumers possessing considerable amounts of
disposable income together with the continued growth of the economy have strengthened Indias claim to be a
viable and beneficial destination for a foreign franchisor. In the USA, almost a third of the retail sales come from
franchised outlets, with sales of trillion of dollars while in India, the industry is few million.

An important aspect which determines the feasibility of any franchising business in a country relates to the class of
consumers it caters to. India is a multi ethnic country with the second largest population in the world. Indian
consumers have experienced the standard of services offered overseas and have sufficient exposure through
media, which has further fuelled their expectations.

There are approximately 1150 national and international business format franchise systems in India in 2007.
Around 8 to 10 per cent Indian franchise systems have entered international markets.
There are an estimated 70, 000 units operating in business format franchises.
The growth rate in franchised units from 2005-06 to 2006-07 was 30 to 35 per cent for the last 4-5 years.
Some 500000 persons are employed in business format franchise organizations.
Franchising contributed less than 4 per cent to Indias Gross Domestic Product (GDP) in 2007.
Annual turnover is approximately us$ 4 billion.
Almost every product or service has a market in India but sometimes, innovative strategies like Indianisation of
its products and marketing techniques must be employed by a foreign franchisor to further access the sizable
market of India. In a franchised business, over 90 per cent succeed. This success rate usually lures entrepreneurs
with no experience but with a surplus capital and a will to succeed towards franchising. The franchisee benefits
from a tried tested and proven business concept, which can dramatically reduce the chances of failure.
Franchising potential in India:
Though the Franchising in India is at a very nascent stage, but this industry has clocked the growth rate of 25-30
per cent, the second fastest growing industry. Organized retailing though only at 6 per cent of the retailing, will
take off in a very big way. The Indian middle class is slowly expanding and now buys consumer appliances with
more disposable income. India offers lot of potential for the franchising community. Apart from Indians being very
entrepreneurial, franchising as a way of doing business has been well accepted.

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Franchising Strategies
U.S.
Isaac Singer, in the 1850s, who made improvements to an existing model of a sewing machine,
was among the first franchising efforts in the United States, followed later by Coca-Cola, Western
Union, etc. and agreements between automobile manufacturers and dealers. Modern franchising
came to prominence with the rise of franchise-based food service establishments. In 1932, Howard
Deering Johnson established the first modern restaurant franchise based on his successful Quincy,
Massachusetts Howard Johnson's restaurant founded in the late 1920s. The idea was to let
independent operators use the same name, food, supplies, logo and even building design in
exchange for a fee.
The growth in franchises picked up steam in the 1930s when such chains as Howard Johnson's
started franchising motels. The 1950s saw a boom of franchise chains in conjunction with the
development of the U.S. Interstate Highway System.
In the U.S. the (FTC) Federal Trade Commission requires that the franchisee be furnished with a
Franchise Disclosure Agreement by the Franchisor at least ten days before money changes hands.
The final agreement is always a negotiated document setting forth fees and other terms. Whereas
elements of the disclosure may be available from third parties only that provided by the franchisor
can be depended upon. The U.S. Franchise Disclosure Document (FDD) is very lengthy (300-700
pp +) and detailed (see Uniform Franchise Offering Circular (UFOC) for elements of disclosure),
and generally provides audited financial statements of the franchisor in a particular format,
although audited financial statements may not be required under some circumstances, such as
where a franchisor is new. It will include data on the names, addresses and telephone numbers of
the franchisees in the licensed territory (who may be contacted and consulted before
negotiations), estimate of total franchise revenues and franchisor profitability. The States may
require the FDD to contain specific requirements but the requirements in the State disclosure
documents must be in compliance with the Federal Rule that governs federal regulatory policy.
There is no private right of action of action under the FTC Rule for franchisor violation of the rule
but fifteen or more of the States have passed statutes that provide this right of action to
franchisees when fraud can be proven under these special statutes. The majority of franchisors
have inserted mandatory arbitration clauses into their agreements with their franchisees, in some
of which the U.S. Supreme Court has dealt with.
There is no federal registry of franchises or any federal filing requirements for information. States
are the primary collectors of data on franchising companies, and enforce laws and regulations
regarding their presence and their spread in their jurisdictions.
Where the franchisor has many partners, the agreement may take the shape of a business format
franchise - an agreement that is identical for all franchisees.
The UK
In the United Kingdom, there are no franchise-specific laws; franchises are subject to the same
laws that govern other businesses. For example, franchise agreements are produced under regular
contract law and do not have to conform to any further legislation or guidelines. There is some
self-regulation through the British Franchise Association (BFA).
However there are many franchise businesses which do not become members, and many
businesses that refer to themselves as franchisors do not conform to these rules. There are several
people and organizations in the industry calling for the creation of a framework to help reduce the
number of "cowboy" franchises and help the industry clean up its image.

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Franchising Strategies

On 22 May 2007, hearings were held in the UK Parliament concerning citizen initiated petitions for
special regulation of franchising by the government of the UK due to losses of citizens who had
invested in franchises. The Minister of Industry, Margaret Hodge, conducted hearings but resisted
any government regulation of franchising with the advice that government regulation of franchising
might lull the public into a false sense of security. The Minister of Industry indicated that if due
diligence were performed by the investors and the banks, the current laws governing business
contracts in the UK offered sufficient protection for the public and the banks.
Europe
Franchising has grown rapidly in Europe in recent years, but the industry is largely unregulated.
Unlike the United States, the European Union has not adopted a uniform franchise disclosure
policy. Only five countries in Europe have adopted pre-sale disclosure obligations. They are France
(1989), Spain (1996), Romania (1997), Italy (2004) and Belgium (2005).
The Code of Ethics of the European Franchising Federation is self-enforced in seventeen European
states where their national franchise associations are members of EFF members, and UNIDROIT.
All formal disclosure countries are required to give Contract Summaries to be furnished,
highlighting:
the object of the contract
the rights and obligations of the parties
the financial conditions
the term of the contract
Legal consultation is a must to enter and finalize the agreement(s) as it in all regions. Most often
one of the principal tasks in Europe is to find retail space, not so significant a factor in the US. This
is where the franchise broker, or the master franchisor, plays a significant role. Cultural factors are
also significant as the populations tend to be homogeneous.
France
France is one of Europes largest market. Similar to the United States, it has a long history of
franchising, dating back to 1930s. Growth came in the 70s. The market is considered tough for
outside franchisors because of its cultural angularities; yet, McDonalds and Century 21 are found
everywhere. There are some 30 US Firms involved in franchising.
There are no government agencies regulating franchises. The Loi Doubin of 1989 was the first
European Franchise Disclosure law. Combined with Decree No. 91-337, they regulate disclosure,
although the decree also applies to any person who provides to another person a corporate name,
trademark or trade name other business arrangements. The law applies to exclusive or quasiexclusive territory.
In brief, the disclosure document must be delivered at least 20 days before the execution of the
agreement or any payments are made.
The specific and important disclosures to be made are:
the date of the founding of the franchisor's enterprise and a summary of its business history
and all information necessary to assess the business experience of the franchisor including
bankers,
a description of the local market for the goods or services,

52

Franchising Strategies
franchisor's financial statements for the previous two years,
a list of all other franchisees currently in the network,
all franchisees who have left the network during the preceding year, whether by termination
or non-renewal, and
the conditions for renewal, assignment, termination and the scope of exclusivity.
Initially, there was some uncertainty whether any breach of the provisions of the Doubin law would
enable the Franchisee to walk away from the contract. However, the Supreme Court (Cour de
cassation) eventually ruled that agreements should only be annulled where missing or incorrect
information affected the decision of the franchisee to enter into the Agreement. The burden of
proof is on the franchisee.
Dispute Settlement features are only incorporated in some European countries. By not being
rigorous, franchising is encouraged.
Italy
Under the Italian law franchise is defined as an arrangement between two financially independent
parties where a franchisee is granted, in exchange for consideration, the right to market goods and
services under trademarks. In addition, articles which dictate the form and content of the
franchise agreement and define the documents that must be made available 30 days prior to
execution. The franchisor must disclose:
a summary of the franchise activities and operations,
a list of franchisees currently operating in the franchise system in Italy,
year-by-year details of the changes in the number of franchisees for the previous three
years in Italy,
a summary of any court or arbitral proceedings in Italy related to the franchise system, and
if requested by the franchisee, copies of franchisor's balance sheets for the previous three
years, or, since start-up if period is shorter.
China
China has the most franchises in the world but the scale of their operations is relatively small. Each
system in China has an average of 43 outlets, compared to more than 540 in the United States.
Together, there are 2600 brands in some 200,000 retail markets. KFC was the most significant
foreign entry in 1987 and is widespread. Many franchises are in fact joint-ventures, as at their
forming the franchise law was not explicit. For example, McDonalds is a joint venture. Pizza Hut,
TGIF, Wal-mart, Starbucks followed a little later. But total franchising is only 3% of retail trade
which is hungry for foreign franchise growth. The year 2005 saw the birth of an updated franchise
law, "Measures for the Administration of Commercial Franchise". Previous legislation (1997) made
no specific inclusion of foreign investors. Today the Franchise Law is much clearer by virtue of the
2007 law, a revision of the 2005 Law. The laws are applicable if there are transactions involving a
trademark combined with payments with many obligations on the franchiser. The Law comprises
42 Articles and 8 chapters. Among the franchisor obligations are:
the FIE (foreign-invested enterprise) franchisor must obtain registration by the regulator
The franchisor (or its subsidiary) must have operated at least operated two company-owned
franchises in China (revised to anywhere)for more than 12 months ("the two-store, one-year rule)
the franchisor must disclosure any information requested by the franchisee.
cross-border franchising, with some caveats, is possible (2007 law).sments for rich ar
the standard franchise agreement, working Manual and working capital requirements,

53

Franchising Strategies
track-record of operations, and ample ability to supply materials, and

the ability to train the Chinese personnel and provide them


long-term operational guidance.
he franchise agreement must have a minimum three-year term
Among other provisions is:
the franchisor will be liable for certain actions of its suppliers
monetary and other penalties apply for infractions of the regulations.
The Disclosure has to take place 20 days in advance. It has to contain: Details of the franchisors experience in the franchised business with scope of business
identification of the franchisors principal officers
litigation of the franchisor during the past five years
full details about all franchise fees
the amount of a franchisees initial investment
a list of the goods or services the franchisor can supply, and the terms of supply
the training franchisees will receive
information about the trademarks, including registration, usage, and litigation
demonstration of the franchisors capabilities to provide training and guidance
statistics about existing units, including number, locations, and operational results, and the
percentage of franchises that have been terminated; and
an audited financial report and tax information (for an unspecified period of time)
Other elements of this legislation are:
the franchisees confidentiality obligations continue indefinitely after termination or
expiration of the franchise agreement.
Australia
In Australia, franchising is regulated by the "Franchising Code of Conduct", a mandatory code of
conduct made under the Trade Practices Act 1974.
The Code requires franchisors to produce a disclosure document which must be given to a
prospective franchisee at least 14 days before the franchise agreement is entered into.
The Code also regulates the content of franchise agreements, for example in relation to marketing
funds, a cooling-off period, termination and the resolution of disputes by mediation.
The federal government is currently considering recommended changes to the Code of Conduct
contained in the report, "Opportunity not Opportunism: Improving conduct in Australian
Franchising" tabled by a Parliamentary inquiry into franchising on 4 December 2008.
Some experts have warned that any push to increase regulation of the franchising sector, could
make it a less attractive means of doing business.
New Zealand
New Zealand is served by over 350 franchise systems giving it the highest proportion of franchises
per capita in the world. There is no separate law covering franchises, so franchises are covered by
normal commercial law. However, the self-regulatory Code of Practice introduced in 1996 by the
Franchise Association of New Zealand contains many provisions similar to those of the Australian
Franchising Code of Practice legislation.

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Franchising Strategies

Russia
In Russia, under chapter 54 of the Civil Code (passed 1996), franchise agreements are invalid
unless written and registered, and franchisors cannot set standards or limits on the prices of the
franchisees goods. Enforcement of laws and resolution of contractual disputes is a problem:
Dunkin' Donuts chose to terminate its contract with Russian franchisees that were selling vodka
and meat patties contrary to their contracts, rather than pursue legal remedies.
Brazil
In 2008, there were about 1,013 franchises with more than 62,500 outlets, making it one of the
largest countries in the world in terms of number of units. Around 11 percent of this total is
foreign-based franchisors.
The Brazilian Franchise Law (Law No. 8955 of December 15, 1994) defines the franchise as a
system in which the franchisor licenses the franchisee, for a payment, the right to use a
trademark/ patent along with the right to distribute products or services on an exclusive or semiexclusive basis. The "Franchise Offer Circular" or disclosure document is mandatory before
execution of agreement and is valid for all of Brazilian territory. Failure to disclose voids the
agreement with refunds and serious damages.The Franchise Law does not distinguish between
Brazilian and foreign franchisors. The National Institute of Industrial Property (INPI) is the
registering authority. Indispensable documents are the Statement of Delivery (of disclosure
documentation) and Certification of Recording (INPI). The latter is necessary for payments. All
sums amounts may not be convertible into foreign currency. Certification may also mean
compliance with Brazil's antitrust legislation.
Parties to international franchising may decide to adopt the English language for the document, as
long as the Brazilian party knows English fluently and expressly acknowledges that fact, to avoid
translation (but it follows). The Registration accomplishes three things:
It make the agreement effective against third parties
Permits the remittance of payments
Qualifies the franchisee for tax deductions
India
Franchising of goods and services, foreign to India, is in its infancy. The first International
Exhibition was only held in 2009. India is, however, one of the biggest franchising markets
because of its large middle-class of 300 million who are not reticent on spending and because the
population is entrepreneurial in character. In a highly diversified society, (McDonalds is a success
story despite its fare differing from the rest of the world. So far, franchise agreements are covered
under two standard commercial laws: the Contract Act 1872 and the Specific Relief Act 1963,
which provide for both specific enforcement of covenants in a contract and remedies in the form of
damages for breach of contract.
Kazakhstan
In Kazakhstan franchise turnover for 2010 is 1 billion US$ dollars per year. Kazakhstan is the
leader in Central Asia in the franchising market. There is a special law on the franchising of 2002,
there are about 300 franchise systems and franchises near the 2000 outlets. Kazakhstan franchise
began with the emergence of a factory "Coca-Cola", opened to sublicense Turkish licensor of the

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Franchising Strategies
same brand. The plant was built in 1994. Other brands that are also present in Kazakhstan through
the franchise system include Pepsi, Hilton, Marriott, Intercontinental, Pizza Hut etc.
Social franchises
In recent years, the idea of franchising has been picked up by the social enterprise sector, which
hopes to simplify and expedite the process of setting up new businesses. A number of business
ideas, such as soap making, whole food retailing, aquarium maintenance, and hotel operation,
have been identified as suitable for adoption by social firms employing disabled and disadvantaged
people. The most successful example is probably the CAP Markets, a steadily growing chain of
some 50 neighborhood supermarkets in Germany. Other examples are the St. Mary's Place Hotel in
Edinburgh and the Hotel Tritone in Trieste.
Social franchising also refers to a technique used by governments and aid donors to provide
essential clinical health services in the developing world.
Event franchising
Event franchising is the duplication of public events in other geographical areas, while retaining the
original brand (logo), mission, concept and format of the event. As in classic franchising, event
franchising is built on precisely copying successful events. Good example of event franchising is the
World Economic Forum, or just Davos forum which has regional event franchisees in China, Latin
America etc. Likewise, the alter-globalist World Social Forum has launched many national events.
When The Music Stops is an example of an events franchise in the UK, in this case, running speed
dating and singles events

Key Success Factors in Franchising


Key Success Factors in Franchising Pre-Tested Model Franchising earns good results if done by
organizations after creating a brand and testing. Retail organizations ought to look at establishing
a Company-Owned and Company-Operated (COCO) model successfully before seeking expansion
by taking the franchise route.
Transfer of Knowledge The franchisers, who provide their valuable inputs gained by their rich
experience in retailing which includes training, store design and advertising and promotion, will
produce good results.
Single Face to Customers The franchisee has to carry on his operations by playing the role of
the principal brand. The store's image elements and product portfolio have to be carefully
maintained. This also includes the upkeep of various standards in the areas of customer service,
store presentation, operating processes and store personnel skills which will enable the transfer of
the total brand experience to the customer. This seamless integration of the franchiser and the
franchisee to present one single 'face' to the customer will ensure successful store operations.
Win-Win Situation The franchiser gets a partner in the franchise to establish his business and
shares with the franchisee such tested technologies, product offerings and processes. Sharing
investments and returns through mutually agreed means will enable the growth of both the
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Franchising Strategies
franchiser and the franchisee, covering the risks at the same time
Ownership and Responsibility Franchisees fail when the franchise retail business is not owned
by the franchisee. They often feel that the franchiser has the responsibility of ensuring success. So
there must be clearly defined responsibilities for both franchiser and franchisee.
Review Regular reviews of performance and planning actions for implementation by both parties
will ensure successful franchise operations. Besides, such periodical reviews will bring to light gaps
in any area of deliverables on the part of either the franchisee or the franchiser that have to be
dealt with urgently.

Understanding the nature of franchisor-franchisee relationship

I present myself to you in a form suitable to the relationship I wish to achieve with you.
Luigi Pirandello

Franchisors have selected franchising as a distribution method to gain market share for their
brands. The relationship between a Franchisor and Franchisee , on the surface, is a legal
relationship based on a franchise agreement. The basis for creating this relationship is the business
of the franchisor that the franchisor wants to grow and the franchisee wants to participate in.
However, the moment you interject people, you are confounded with the complexity of the
relationship, a combination of legal, business and people.

A Franchisor, in order to achieve its objective of increased market share through franchisees, has
no choice but to make this relationship, regardless of the complexity, be effective by ensuring that
results are obtained harmoniously.

A Franchisor cannot approach this important topic of EFFECTIVE FRANCHISE RELATIONSHIP from
the vantage point of what will I (the Franchisor) only gain from the relationship. Instead, the
Franchisor must approach the relationship from What must I (the Franchisor) do to make this
relationship both harmonious as well as effective in achieving the intended results.

At Franchise Mind we define Effective Franchise Relationships in the following manner:


When the Franchisor and Franchisee work harmoniously together, respecting each other,
appreciating and accepting the efforts and roles each has to play in their respective success,
recognizing their dependency on each other, operating their businesses with integrity and the
highest standards and putting forth their best effort to preserve and nurture their special
relationship in order for both of them to achieve more than their intended objectives.Harish
Babla, Franchise Mind

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Franchising Strategies

A good number of problems in the Franchisor-Franchisee relationship emanate from incorrectly


labeling the relationship:

Franchisor
says
My Partner
My customer
My friend
My
franchisee

Franchisee thinks

??

You are responsible for my success


I cannot be refused because the customer is always
right
Friends get special treatment
The importance of the inter-dependent relationship with
roles, responsibilities and obligations for both parties

?
?
?
?

In essence this business relationship should be kept business. There is nothing wrong in being
friendly, gracious, warm and even to get to know franchisees and their families at a personal level.
In fact there is nothing wrong in having a spirit of partnership, customer or family however
labeling the relationship as such makes it difficult for a Franchisor to deal with the business aspects
of this complex relationship.

Importance of Effective Relationships


When the Franchisor-Franchisee relationship is effective and harmonious there are many benefits
that emerge for the Franchisor as Franchisees will likely:

1.
2.
3.
4.
5.
6.

Expand market share into other territories


Open additional units
Validate the company to prospective franchisees
Participate enthusiastically in company programs
Contribute ideas for overall system growth
Take a leadership role in helping other franchisees

Culture of control
The company culture helps define the level of control a Franchisor wants to exercise. The two
extremes would be:
1. Independent (loose) control
2. Dependent (tight) control

The Independent culture says to the franchisee we will teach you our system, follow it to the best
of your ability. If you need help, call us, we are available. A Franchisee has a lot of freedom in
this franchise system.
A Dependency culture on the other hand, says to a franchisee You will do exactly everything we
teach you and in the manner we show you. A Franchisee in this culture has very little freedom in
this franchise system.

Neither positions is right or wrong. It is an issue of company culture and keeping sight of the
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Franchising Strategies
objectives of the business. Where in the control spectrum is the Franchisor comfortable in ensuring
the success of the franchise system, the consistency of the customer experience from one outlet to
the next and the achievement of somewhat similar operating results from one Franchisee to
another.

A Franchisor oriented towards tight control has the responsibility to ensure that every aspect of the
business is addressed without gaps.

A Franchisor oriented towards loose control has to be comfortable that from time to time, a
Franchisee may take actions that cause the franchisor angst.

Changing nature of the relationship


As in any relationship, the Franchisor-Franchisee relationship goes through changes in thinking, in
attitude and feelings towards each other.
Franchise Mind identifies four major stages in the relationship:
1. Pre-franchisee stage
2. Pre-opening stage
3. Launch stage
4. Operating stage

Since the Operating stage is the longest, Franchise Mind breaks this stage into 4 phases:
1. Confident phase: I can do this
2. Ego-driven phase: I am great and the system is okay
3. Resentment phase: Its me and not the franchise
4. Inter-dependent phase: Together we can accomplish more

Each of the stages and phases can be recognized by several criteria as perceived by the
Franchisee:
1.
2.
3.
4.
5.
6.

Overall satisfaction with the business


Sense of loyalty towards the franchise system
Confidence in the ability to meet their various goals and objectives
Confidence in themselves
Confidence in the business
Confidence in the Franchisor

Final thoughts
The Franchisor is the senior in the Franchisor-Franchisee relationship and must take responsibility
to make this relationship effective. This means that the relationship achieves the intended results
and is harmonious.
When the relationship is effective the franchise system will derive many benefits and grow.
As in any relationship, this relationship too will go through different stages and phases.
Recognizing those highs and ebbs will allow a Franchisor to deal effectively with the changing
attitudes and feeling emerging from Franchisees.

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RESEARCH PROCESS
Research is a process that people start when they need to find out about a certain issue in a
systematic way and in this way increase their knowledge of the issue. The collection of data
alone does not compose a research; it has to be collected systematically and with a clear
purpose. Also an assembly of data from different sources in one document with bibliography
is not enough to make it a research; this is a part of the research that is concluded with
interpretation of what the data tells (Saunders, et al.2009, 320).

Research methods

The main separation of different kinds of research is the division between quantitative
and qualitative methods. With quantitative research methods the research generates
and/or uses numerical data in the process and with qualitative research methods the
research generates and/or uses non-numerical data in the process (Saunders, et al.
2009, 151). For this research process the natural choice was qualitative methods since
the research question concerned the requirements for franchise operations. Requirements are best disclosed by using non-numerical data.

A starting point in qualitative research is a description of realistic life. This includes a


thought that life is diversified. In a research one must take into consideration that
reality cannot be dismembered arbitrarily into pieces. Occurrences shape each other
simultaneously and it is possible to find numerous connections. A qualitative research
aims to study the subject as comprehensive as possible. In a qualitative research the
goal is to find out or reveal facts rather than verify already existing facts or claims
(Hirsjrvi et al. 2009, 161).

An interview is a unique way to collect information due to the direct linguistic


interaction with the source of information. The biggest advantage is the flexibility that
it brings to the data collection. In qualitative researches an interview is usually a main
method of data collection. The reliability of interview undermines the fact that
interviewees tend to give socially acceptable answers (Hirsjrvi et al. 2009, 204-206).

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Interview is one type of conversation. In a normal conversation the parties are (or think that
they are) in equal position in asking questions and giving answers. Inter- views for research
purposes are to be understood as systematical form of data collection. This type of interview
has goals and it aims to gain as reliable and valid information as possible (Hirsjrvi et al. 2009,
207-208). Interview can also be an easier way to receive data from managers. It has been argued
that managers are more willing to take part of a research when they are interviewed than to
complete questionnaires. An interview offers them an opportunity to go through the topics
without having to write anything down (Saunders, et al. 2009, 324).
There are different ways to implement interviews. Main separation is structured; using
standardizes questions in highly formalised way, unstructured; informal more like
conversations, and semi-structured from between the two previous ones. (Hirsjrvi et
al. 2009, 208-209; Saunders, et al. 2009, 320-321). In this research the most suitable
and therefore the used interview style is a semi-structured interview. The reasons for
this come clear next. It is typical for a semi-structured interview that the themes of the
interview are set beforehand but the exact questions and order of questions is not
known. Also the themes and questions can vary from interview to interview and do not
have to be repeated (Hirsjrvi et al. 2009, 208; Saunders, et al. 2009, 320). In this
research the interviewees got to see the questions (see appendices 1-2) beforehand,
some of the questions were skipped along the way, but the main idea with the themes
were dealt with in both cases. The themes were different in each interview due to the
differ- ent aspect that was being looked for from the different interviewees.
An interview can be implemented as individual interview, couple interview or group
interview. Individual interview is used most often, there present are the interviewer
and the interviewee. A couple interview is a sub-form of a group interview. Grnfors
(1982, 109) has stated that interviewees are a lot more emancipated and liberated
when there are more people present (Hirsjrvi et al. 2009, 210). In this research one of
the interviews implemented was a couple interview and one was an individual interview. The couple interview because there were two owners of the company and it was
natural to interview both of them at the same time. The individual interview because
there was only one executive director/representative to interview from Finnish
Franchise Association.

Sometimes it may not be possible to have a face-to-face interview. In order to


disregard issues with time, distance and costs it may be more efficient to conduct
inter- views by telephone. When the parties are not physically in the same space it may
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be more difficult to establish trust and therefore the reliability may become an issue if
the participants are not as engaged to the interview as in face-to-face situation or
might not want to participate at all. In addition when talking on the phone the
interviewer cannot witness the non-verbal behavior of the interviewee. Furthermore
the time used in the interview may be shorter than in face-to-face interview and the
questions might become less complex (Saunders, et al. 2009, 349). In this research one
interview was implemented as a phone interview due to issues with time and distance.

Data collection and analysis

In this research there were three interviews planned. In the end only two actualised.
Both of the interviews were implemented in Finnish since all the participants speak
Finnish as their first language. The interview of Ulla and Riikka Pitknen, the owners
of Aku & Ada took place in Leppvirta, in the store on October 25th 2010. As the main
research problem is to find out if franchising is possible for the companys future it is
only expected to have the owners interview as the base. The second interview was
implemented as a phone interview on October 27th 2010; the interviewee was Juha
Vastamki, the executive manager of Finnish Franchising Associations. Finnish
Franchising Association being the official operator for franchising in Finland is a
natural continuance to find out more about franchising and the operations in Finland.
Both interviews would probably have been face-to-face interviews if timing would
have worked out more smoothly. With the second interview, scheduling was a
problem, thus a phone interview was carried out in order to overcome the timing
issue. Unfortunately the third point of view of a company that has succeeded in
implementation of franchising their business operations was left out due to the
reluctance of the interviewee. The two interviews that did take place went smoothly.
All the interviewees talked a lot and did not need to be pushed to answer. They even
gave some of their own comments outside of the actual questions. The fact that all
three interviewees have their hands full of work all the time did not show in their
attitudes at all, everyone gave full answers and provided me with a lot of data to work
with.

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As a result of these two interviews there are about eight pages of material which will be
analyzed comparing the data to the theory. The material is divided according to the themes in
the interview questions (see appendices 1-2). The interviews are not com- parable with each
other due to the difference in the nature of the interview, first one being more to find out of the
companys situation and the second focusing more to the format of the business strategy. Both
interviews are based on the theory and conse- quently all the three (theory and two interviews)
are linked to each other.

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FINDINGS OF THE INTERVIEWS


Here is the data from the two interviews; first the interview of the owners of Aku &
Ada and second the executive manager of Finnish Franchising Associations. All the
questions were divided under different themes. Here the questions are opened under
each theme on the same order as in the interview (see the questions from appendices
1-2).

5.1 Results concerning Aku & Ada

The responses of the first interview with RiikkaPitknen, the chief executive officer of
Aku & Ada and UllaPitknen, the chairman of the board of Aku & Ada are as follows.
The themes start with background of the entrepreneurs and the company, going
through the present operation of the company, the possibly future growth of the company and finally their relation to franchising.
Background of the entrepreneurs

The chairman of the board (COB) has a vocational qualification in business and administration from a commercial institute. After the basic education she has been taking
courses on her own time to deepen her knowledge on the field of textile business;
purchasing, styles, marketing, colour training, stylist etc. She considers that the extra
training has given her energy and enthusiasm to continue and move forward into new
challenges. The chief executive officer (CEO) is a newly graduated bachelor of
business administration specialised in entrepreneurship.

The COB has a long experience in the field. The first clothing store she worked in
Leppvirta was called Katri asuste, the COB was involved with Katri asuste from1982
to 1989. From 1989 to 2001 she started and ran her first own clothing store in
Leppvirta, first edition of Aku & Ada. In 2001 she was involved with opening and
setting up a larger clothing store in Kuopio called Nina and worked there until 2004 as
the store manager. Between 2004 and 2005 the COB had a small internet enterprise
called Up style; she worked as a stylist and went shopping with her customers and
helped them to find their style and clothes. During this project she got to know the Vero
Moda shop closely in Varkaus since she went there often with her customers.
She received a phone call from The Varkaus Vero Moda store and they asked her to
host some customer nights which led to her becoming the store manager for the shop

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between years 2006 and 2009. During that period of time she arranged the whole store
and started everything from the scratch there.

The CEO is a daughter of the COB so she has less experience in years, nevertheless
impressive amount of experience of the industry behind her. She started as a teenager
helping out her mother in the first edition of Aku & Ada and was also working in Nina
in Kuopio where her mother was involved. After this she has been working in inter
alia: Dinsko, Dress Man, Vero Moda, H & M, Sportland, Only. She has worked as a
sales person, visualiser, responsible sales person and in Vero Moda she was
responsible for the same tasks as a store manager.

The COB wanted to become an entrepreneur because she wanted to do things in her
own way in order to make things work instead of just watching from the side. She
wanted to do something that was her own, her character is strongly entrepreneurial and
she does not stay working for someone else for a long period of time. The CEO has
grown in very entrepreneurial atmosphere, having both of her parents being
entrepreneurs. She is also excited to see what she is able to do on her own and finds it
interesting to be able to make decisions herself and being in charge of things.

To sum this part; both the COB and the CEO have extensive experience of the field
considering their ages. Both have business education and both have been working in
some sort of managerial tasks. In addition both are also entrepreneurial as nature and
have the attitude to run a company.

Background of the company

The idea of opening Aku & Ada by the CEO and COB has been alive for couple of
years. Everything took concrete shape during summer/fall 2009 when the CEO was
working on her thesis with a subject that did not interest her. In addition to that she
was thinking about opening Aku & Ada with her mother again. After a conversation
with her supervising teacher she decided to write a business plan as her thesis and
from there onwards everything started to quickly unfold. Already in October 2009
they had premises for the company in another location in Leppvirta but due to
situations beyond their control they lost the premises and had a little set back in their
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enthusiasm as well. The COB kept on searching for a suitable place for store and
found the present location which was not in a condition fit for opening a business
and needed major renovations. These premises were also smaller than the original
place and therefore they decreased the merchandise categories from the original
plans of also having childrens clothing, house decoration etc. in their selection. The
renovations began on January 2010 and the final step was to furnish and stock the
shelves for the grand opening on March 25th 2010.
This is the first Ltd for both parties of the company and they received assistance with
the establishing of the company from entrepreneur center Wlkky. Most of the
finance was provided by Finnvera, a specialized financing company owned by the
State of Finland, as entrepreneur loans and female entrepreneur loans. In addition they
also took a small bank loan. At the moment Aku & Ada employs the CEO and the
COB.

To make a long story short, the idea of the company had been alive for a while already. At the time of the CEOs graduation from university of applied sciences everything else just fell into the right places and as a result the mother and the daughter
opened Aku & Ada again, this time together as an Ltd.

Operation of the company


After about half a year from opening the store it can be said that the companys operations has
started off successfully. The first month when company was making profit was July. In
September there was a little downturn in the profits due to the buy-ins. The owners agree that
this would not be possible without strong experience from the field. The COB has brought a lot
of knowledge that has been vital to the success, the profit margins have been set to correct level
to bring incomes, the buy-ins were successful even though they were made late in the
circulation of the industry. In addition Leppvirta had no other clothing store which means a
huge demand for the company right from the beginning. The previous Aku & Ada was still in
the memories of the locals and they waited for months for the opening of the new store.
Customers come from further away as well, some even from the big Kuopio city 50km away.
Also the young CEO is a point of interest for the locals and she brings a fresh breeze to the
town, she has learned a lot during this year and is still learning new things all the time. Both the
CEO and the COB are seeking for their own place in the company. The COB cannot do
everything even if she would like to make sure and check that everything is correct. She needs
to give space to the CEO and both need to focus on what it is that they do best.
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The biggest challenges have been the buy-ins, also the marketing needs to be focused
in a correct way and the CEO is learning what kind of clothing is saleable and match
each customer with the correct products. The easiest things for the COB has been
selling and serving the customer as well as buy-ins, for the CEO the painless things
have been visual things, to draft the advertisements, using the computer and take care
of the office work. The pleasant aspects of entrepreneurship have been the freedom of
making own decisions and the flexibility to adapt for example if there is a quiet day
the other one can have a day off etc. From the other point of view, the irritating issues
include dealing with difficult customers, however, after being able to find clothes and
make them happy also these customers bring feelings of success. The other issue
mentioned was the unevenly distributed labor when the COB is handing all of the
accounting and much of business at the store as well. The COB confessed that she is
still in the excitement of the beginning and wants to be involved with everything.

A regular working day is from 9am to 6pm; in the morning they clean up the store and
during the day they serve the customers and unload the deliveries. A couple times they
have had customer nights outside of the regular opening hours of the store and on
Sundays the COB keeps the accounting up to date. The unique thing for Aku & Ada is
the easygoing atmosphere, taking customers as they are, serving them till the end and
the strong and long experience of the COB.
As a summary of the operation of the company, so far everything has started off well and the
roles and tasks of COB and CEO are still in progress. At the moment the COB wants to have a
look at everything and keep everything under her control in some ways. The CEO is learning
new things all the time and is making her part of the business with the skills she possesses.
The original Aku & Ada had a branch store in Kuopio in the 1990s but it was not
successful and did not last for long. The biggest issues are the restrictions set by the
brands; in one city/town there can only be limited number of stores that can sell
certain brands products. This means that if all the brands Aku & Ada is selling in
their present store would be in the supply of the possible new stores, the location of
these stores should be in smaller towns that do not have stores already selling the
same brands. As Aku & Ada is at the moment, it is not possible to transfer the store in
Kuo- pio, which is the largest city close by.

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The reasons behind the willingness to grow are firstly about the profit that it would
bring. The second rationale is that when there is more than one store it would make it
possible to divide the big buy-in deliveries between the stores and have more
variations in products. The idea of franchising came about already in the process of the
CEOs thesis which was the business plan for Aku & Ada; an already existing
franchise chain that specializes in youth clothing had approached her and offered their
chain and business opportunity which was turned down. Another growing strategy that
has been thought over is a possible ecommerce store of Aku & Ada; this would then
possibly require a third person to work for the company. Also importing some new
brands to the Finnish markets would be inspiring option for the CEO and the COB to
expand their business operations. No major expansions are of current interest. First
they want to pay out their debts and then when the time is right and the companys
stage is more stable, cautiously take a step at a time, and always know what lies ahead.
Provided that Aku & Ada will open stores in new geographical locations it would be
somewhere in eastern Finland, with the ecommerce store the possibilities for
expansion are theoretically unlimited.
The biggest obstacle in growing the business is the restrictions by the brands in each
geographical area. Therefore, if other stores are opened narrowing down the brands should
probably be the first thing to do. Money and practicality are reasons mentioned for the desire to
grow business operations. For now there is no need to start expanding. At first the business
needs to grow strong as it is and become financially stable.
The CEO and COB agree that their business concept should be modified in case
franchising would become their strategy to grow. The brands should be defined and decreased and the segmentation should be more focused. Also more knowledge about
franchise operations should be acquired, at the time of the interview the CEO or the
COB knew only a little of the basics of franchising. When it comes to actually giving a
part of the responsibility of the business operations to someone else, they should carefully select a skilled textile fields expert whom they can trust. The COB trusts to new
people easily but once the trust has been broken, there will be no change for that.

Results concerning Finnish Franchising Association

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Here are the responses from the interview with the Finnish Franchising Associations
executive manager, Juha Vastamki. The themes start from beginning of franchise
operations, followed by franchising in Finland, women and franchising, advantages
and disadvantages of franchising, Finnish franchising association and lastly the future
of franchising.

To begin franchising operations

There are no official statistics on how long companies have been operating before
starting with franchise operations. As an example the executive manager (EM) of the
Finnish Franchising Association gave an approximate figure of five years after
operating on its own and then choosing franchising as a growth strategy. The main
concern is that the company should be able to prove that the business works and
should able to sell the idea to the franchisees. Everything starts from defining the
profile of the company as well as defining what kind of entrepreneur the company is
looking for. Only after all the basic things are dealt with can the focus turn to search
process of the possible franchisees; they can be found via newspapers, internet,
recruitment services etc.
A rear situation would be if the franchisor and the franchisee knew each other from
before; though that would only be an advantage but not many entrepreneurs have such a
large network to choose from.
There are no set financial figures that the company should fulfill in order to start with
franchising operations. Everything depends on the business plan and varies from case
to case. The company does not have to be free from debt as long as the situation is
under control and there is a plan. Franchising is not the only growth strategy. Sometimes company owned units can be a better option. A professional in franchising
should analyze whether franchising suits for the company or not. Franchising is also a
strategic question for the company including the finance and management of the chain
etc. Franchising is also ruled out if the operations do not fulfill the model of business
format franchising but is based on one specific product or is some sort of joint marketing cooperation. Another important aspect is that in franchising the franchisor provides the support for the franchisees, thus if the entrepreneur does not want to be supporting others but work in the front line, franchising might not be the best solution for
the growth.

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To summarise the requirement for getting into franchising the company should have a
working and successful business model that is able to be copied. There should be a
clear profile of the company and a business plan. The finance of the company should
be controlled and planned ahead. Finally the owner should be ready to step into a role
of franchisor and be able to support and manage the franchisees, the whole chain and
the operations.

Franchising in Finland
Product and trade name franchising is not a franchising type in Europe or Finland. This is a
general interpretation of franchising in Europe and therefore Finland follows the European
style. Compared to the US Europe has focused more on business activities. From the Finnish
perspective it also makes things simpler since franchising as a word can be confusing. When it
comes to legislation issues, there are no specific laws controlling franchising operations.
Franchising is covered by general business laws. Vastamki does point out that this is a topic of
current interest and conversation. Sweden already does have some legislation concerning
franchise agreements in particular. The issues that are under legislation in Sweden are covered
by the ethical rules of franchising in Finland.
There are no general figures on how much the starting up costs for franchise
operations are in Finland or abroad for that matter. Only the sky is the limit and there
is no minimum capital required either. The costs naturally vary from industry to
industry and can be whatsoever. As an example the fastest grown franchising chain
in the world, Curves, female fitness center, started with one fitness gym in Harlingen,
Texas, US in 1992. At the moment there are over 10 000 Curves fitness centers
around the world in over 80 countries. Behind all of this is a marriage couple who
started with franchising three years after the beginning of business with an initial
capital of USD 10 000 (Curves -health club and fitness centers).

It is typical for a franchising chain to have at least one own unit that they can try out
and invent new business ideas for the chain. Only a small portion of chains does not
have own units, in Finland an example is kiinteistmaailma, real-estate business. The
most important thing in starting up franchise operations from new franchisors point of
view is the business idea/concept. If the concept is not successful and entrepreneurs
are not ready to pay for the concept and start up running business under the same name
it is not fit for franchising. In all kinds of business the core foundation is always the
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business plan, same goes for franchising. After the basics are taken care of there are
multiple steps to take in starting with franchise operations such as; writing manuals,
looking for business locations, finding entrepreneurs to become franchisees etc.
To conclude, Finland follows the style Europe has set for franchising to consider only business
format franchising as an official type of franchising. At the moment there are no specific laws
considering franchising in Finland but all the franchise chains that belong to Finnish franchise
association must follow ethical guidelines in their operations. The costs to start franchising
operations are not set, but vary from industry to industry and business to business. In most
franchising chains the franchisor runs at least one unit him/herself to try out new ideas etc. The
most important issue is to start with is a business plan, after the basics are clear and the concept
able to be copied the process of starting up a franchise can begin.
Women and franchising
Once again, there are no statistics on how many female franchisors there are in Finland
or anywhere in the world. Out of the franchisees internationally female represents
about one third and in Finland more than one third. Compared to entrepreneurship
there are more than double the amount of women involved with franchising. The
franchising concept attracts women for it is seen as a safer option and women
appreciate the network and support they get from franchising, whereas men want to do
everything on their own and make decision themselves. Furthermore, as women do not
generate many business ideas, or they do not have the courage to implement their own
ideas in the same way as men do, franchising provides an option to avoid taking risks.
There
are also a lot of industries that are dominated by women within franchising chains
such as the cleaning industry, restaurant and caf etc. service industries. If a woman
wants to earn more money than as being an employee for someone else but not start a
business on her own franchising is a convenient option for that. Or if a cleaning lady
wants to advance on her career becoming a franchisee can offer that advancement for
her.

When it comes to financial supporting female entrepreneurs starting franchise


operations the rules are same as starting any business operations. When the franchise
chain is already well known for example R-kioski in Finland, it is easier for the
franchisees to get finance when opening up a franchise unit compared with a private
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convenience store. Therefore it is important for the franchisor to build contacts and
make oneself well known, this will make it easier for the new franchisees to get
finance and join the chain.
To sum the topic up there are not much statistics on women in positions of franchisors but from
the point of view of franchisees there are one third of female franchisees globally and a bit more
in Finlands scale. A lot of the industries that franchising has been successful in are dominated
by women and therefore a lot of women have seen it as a good option and possibly a career
advancement to buy a franchise. In Finland women get the same financial aid as when starting
up any business operations, in that light franchising is seen as a business operation like any
other business. It might be easier to get finance as a franchisee when joining to a large, well
known chain than when beginning business operations as an individual. This is because the
finance companies know the risks of the franchised chain better than of an entirely new
business.
Advantages and disadvantages of franchising

The advantages of franchising compared to accustomed entrepreneurship are the fast


pace of growth, the input franchisees bring with them; finance, entrepreneurial
attitude, motivation, they bare their share of the risks and perform better than hired
labor. On the contrary the franchisor will share the profits with the franchisees, to find
the perfect franchisees might take time and franchising only really works when the
goals to grow are voluminous. For a franchisor the tasks are different from only
running a company when there is a whole chain of companies to run. The franchisor
develops, guides, supports the franchisees and the operations, also things like
customer feed- back, quality standards, sales figures etc. are responsibilities of the
franchisor.

Finnish Franchising Association

The base members of Finnish Franchise Association are the franchising chains, in
addition there are associate members that offer services for the franchising chains.
Furthermore the Finlands franchise association is also a member of Federation of
Finnish Enterprises, in this way they want to be part of the entire sector. There are
about 100 members in the association at the moment. Every franchising chain in
Finland is not automatically a member of the association. Only after the application
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period the chains that operate according to the ethical guidelines are accepted as new
members. This is a policy that all the franchising associations around the world work
according to. As a member of Finnish franchising association a chain will receive
membership services such as seminars, assistant with recruitment, networking,
coverage in a yearbook and online, revision of franchising contracts and a wide
international network if/when expanding franchise operations abroad. About one third
of Finnish franchising chains operate also abroad and another third of the franchising
chains are on their way abroad. There are very minor downsides of belonging to the
Finnish franchising association except for the membership fees.
The future of franchising

For the past 20 years the franchising business has been building success stories in
Finland and the positive growth is only continuing. The changes in the economy
makes people think about the career choices they have made. If a person is
inexperienced in entrepreneurship but is interested in owning a business they often
seek for a franchise to start with.

The future development in the field of franchising will come from the growth of
service and care sectors. Also new concepts will appear especially from the care
sector when the population will age and need more services. There are no visible
signs for a downturn in the trend of franchising. Franchising does not fit for every
business, this will not change. Also, Finland being a big in size and sparsely
populated limits the possibilities for the operations to grow or in some cases even to
begin the operations.

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DISCUSSION AND RECOMMENDATIONS


The following chapters present the findings and conclusions of the research as well as
recommendations of what kind of actions the company could take next, subjects for
possible further studies and also an outlook of the reliability of this research.

Summary and conclusions

In this part the main findings are discussed based on the two interviews and the theory.
The research question was what requirements are needed for Aku & Ada to become a
franchise business. This is the starting point where to look at the results. Table 2 sums
up the main findings concerning the requirements; what the situation is now, what is
required of a company from Finnish Franchising Associations Executive Managers
point of view and what does the literature states.
Aku & Ada was opened on 25th of March 2010. It employs the two owners of the company and
financially is still getting started and is establishing the foundations. The two owners have both
worked in the industry major part of their lives and both have business related education and
experience from managerial tasks from before. The business idea of the store is to sell a mixture
of quality clothes from different brands and help the customer to find what is right for her/him.
The entrepreneurs enjoy the freedom and flexibility of being able to make their own decisions
and run the operations their way. They find it challenging to face customers with a poor attitude
towards themselves but get feelings of success when every customer is being helped and
satisfied. Also the tasks are not divided equally between the two owners; this has been
discussed and there should be a change coming.
According to Juha Vastamki, the EM of Finnish Franchising Association a company
that is looking into franchising as means to grow the operations should be able to
prove that the business works and is able to sell their business idea to the franchisees.
The tasks of franchisor are to develop, guide and support the franchisees, as well as
mange the entire chain as a whole. The business idea should be clear, written down
and duplicable. The advantages of franchising operations are the rapid growth, the
contribution of franchisees; they bring capital, entrepreneurial attitude, they have
strong motivation to make their investment grow and thereby share the risks of the
operations. In contrast a franchisor does share the profits with the franchisees and it

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might take a lot of effort and time to find the right franchisees to trust part of the
business to.

From theoretical perspective franchising suits best for young companies that might
lack the financial capital where the franchising fees and royalties will bring in some of
the needed funds. Franchisees are looking for a proven product, so when beginning
franchising the business should have been well tested and the company should have
experience of outlets that are company owned and successful (Barringer, et al. 2010,
518, 523). An entrepreneur who is considering becoming a franchisor should posses
qualities that fit for a descriptions of an educator, trainer, psychologists, perpetual
hand-holder and a manger, for franchisors need to be able to provide assistance to
franchisees in every aspect concerning the business (Keup 2007, 59). As the benefits
of franchising Barringer (2010, 522) has mentioned rapid, low-cost market expansion
and income from franchise fees and royalties, Murphy (2006, 186) brings up the lower
risk for franchisor and business talent in form of franchisees and Francoise (1997,
1415) mentions the knowledge of local markets by the local franchisees. As the
hindrance of franchising brought up are things like profit sharing and lost of control
(Barringer 2010, 522), the relationship with the franchisee requires trust and it might
become fraught (Murray 2004, 20-21), Francoise (1997, 17) also points out the
possible loss of control over the network.

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Table 2. Abstract of the key findings

Present situation
Aku & Ada
A young (8months),
small company,
operating in a small
town

Requirements
Juha Vastamki
Able to prove that the
business works and to
be able to sell the
idea to the franchisees

Theory

Entrepreneur

Entrepreneurial,
business education,
strong experience of
the field of the industry

The franchisor develops, guides, supports


the franchisees and
the operations, also
things like customer
feedback, quality
standards, sales figures etc. are responsibilities of the franchisor.

Business idea

Selling brand
clothes to young and
youthful women and
men. Providing personal customer service.
Freedom and flexibility of entrepreneurship

Clear, written down


business idea, able to
be cloned

Franchisor is a business person as well as


an educator, trainer,
psychologist, perpetual hand-holder and
looking after
what/how things are
done. Franchisees are
not employees, but
entrepreneurs working
under the same name.
Successful and proven
to work, concept able
to be standardized;
this is the core idea in
franchising

Themes
Operations of
the company

Advantages

Disadvantages

Inequality between
division of tasks

Fast pace of growth,


the input franchisees
bring with them;
finance, entrepreneurial attitude, motivation, they bare their
share of the risks and
perform better than
hired labor
Shared profits, finding of the perfect
franchisee

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Tested and experience


of outlets that are
company owned and
successful

Fast expansion, method to raise capital,


shared costs, efficient
marketing, local
knowledge from franchisees, business
knowledge and fresh
ideas from franchisees
Shared profits, loss of
control over the network, troublesome
relationship with franchisees, difference in
the business skills,
underperformance

Franchising Strategies
In conclusion, Aku & Ada is not in a state where a business should be in order to begin
franchising operations according to the theory and the EM of Finnish Franchise
Association. Their business concept is not yet proven to be successful in a wider scale;
in addition they have only one store which is still in a phase of settling down. The
owners are entrepreneurial and hard working, but they need to think carefully if they
have what it takes to be on top of a franchise chain; manage the operations and the
franchisees. Also, it is recommended to evaluate the business idea and recognize if it
is duplicable, if not, identify what should be changed or modified. As a revision most
central requirement to start with for a company getting into franchising operations is a
clear and successful business concept that is able to be copied and that franchisees are
willing to buy.

6.2 Recommendations and propositions

Theoretically once the business is strong financially and surmounted the first year or
two there is no reason why franchising could not be an option. Companies grow
followed by two things. Firstly, their product or service is successful and becomes
well known. Secondly, when the company has been making profit and has the
financial capability to expand. The companies should consider franchising as an
option to grow when they have something that others do not in terms of trademark and
a strong, well designed business model (Barringer, et al. 2010, 518; Murray 2004, 13).

Aku & Ada has already proven that at least in Leppvirta they have a service that is
successful and their operations are already well known even outside of Leppvirta. For
the qualifications to grow they still need the financial stability. When it comes to
franchising and having something that others do not have and a strong business model,
their concept at least in a small town of Leppvirta is working and therefore this
criteria is also fulfilled to some extent. If they are expanding to larger cities the key
problem will be with the limitations of the brands in each city and town. This is a
strategy which needs to be carefully planned. Perhaps as the owners stated in the
interview they should narrow the brands down and the segmentation should be more
focused. This will probably lie ahead of them whether they choose franchising as a
growing strategy or choose to expand in some other way. The owners are well aware
of their present situation and for now the main focus is establishing good foundation
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Franchising Strategies
for their business. After the financials are stable the time to consider different options
for growth is more current. Franchising is one option if they figure out how to make
their concept duplicable. Other option that were thrown in the air during the interview
were importing new brands to Finland that are not available for the consumers yet,
ecommerce of Aku & Ada and even a company owned unit in some other city/town.
The last one mentioned could also be a step towards franchising operations depending
how the other store thrives in another location.
Reliability of the research

Any research aims at avoiding mistakes and yet the reliability and the validity of researches can fluctuate. By the reliability of a research is meant the consistency of the
findings (Hirsjrvi et al. 2009, 231; Saunders, et al. 2009, 156). It can be assessed by
reviewing the following questions (Easterby-Smith et al. 2008, 109):
1. Will the measures yield the same results on other occasions?
2. Will similar observations be reached by other observers?
3. Is there transparency in how sense was made from the raw data?
To answer to these question concerning this research, the first one is naturally no. If
the company had been running for longer and was financially more stable and possibly
would have expanded already to another location the results could easily be different.
The question number two can be a little controversial since everyone observes
situations by using their own background and knowledge mixed with the occurrences.
In this case I think that the interviewees made their point clear enough for another observer to come to similar conclusions and therefore the answer to the question number
two would be yes. For the third question concerning the transparency I would also
answer yes. The used research methods are discussed, it has been made clear when,
how and who have been interviewed, the findings are disclosed in detail and the summary is based on straight to the interviews and the theory. Also the interview questions
can be found from the appendices, for the interviewee they were naturally presented in
Finnish.

Another measurement of research is the validity. This concern whether the research methods
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Franchising Strategies
are measuring what was supposed to be measured (Hirsjrvi et al. 2009, 231; Saunders, et al.
2009, 157). The validity of a qualitative research can be achieved through an accurate
description of the implementation of the research (Hirsjrvi et al.2009, 232). This has been
carried out in this research and therefore an endeavor for the validity of the research has been
undertaken. A further point of view is a generalisability, or external validity, and it refers to
how well the results of a research are generalisable. By this is meant how applicable the
research results are to other organizations. When conducting a research for a specific company
one should never claim the results could be generalised (Saunders, et al. 2009, 158). In the
conclusions of this study there is no mentioning of the results being applicable to other
situations.
Subjects for further studies

In general this research has proven that there is a big lack of research of franchising
from franchisors point of view, especially from of female franchisors. In Finland
Tuunanen has basically been the only one publishing research of this form of business
operations. When there are only a few studies from a subject they tend not to be
focusing on specific theme but cover the subject more comprehensively. Tuunanen
(2005,103-104) and Vastamki agree that franchising will grow and conquer new
industries etc., taking this into consideration franchising ought to be receiving more
attention from the researchers as well as businesses and other officials.
From Aku & Adas standpoint further studies could be exploring of other growth
strategies, such as importing of new brands, product/service development or
geographic expansion by company owned outlets. If franchising is chosen to be a
potential growth strategy then a closer study on the next steps should be made that
includes for example what should be altered in the business concept and which
location the business could be taken etc.

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Franchising Strategies

CONCLUDING REMARKS
This thesis was assignment from a clothing store called Aku & Ada. It is still a young company
in a textile industry but growth will possibly be ahead of them sooner or later. It is good to
explore the possibilities before making decisions and this thesis presents the owners one
possibility for the future which includes growing through franchising operations.
From my own point of view this research gave thorough basic knowledge of
franchising for the owners of Aku & Ada. Based on the information they receive they
can form better judgments and opinions towards franchising. No matter what the final
results of the research are, what really matters is the opinion of the entrepreneurs
towards franchising with the information they can gain from the theory and the
interview of the EM of the Finnish Franchising Association.

This was an interesting process for myself as well, since I did not know very much of the
subject beforehand and it is a current topic in business life and touches the lives of every
consumer in some way. The process was carried out in a quite short period of a time, and
therefore it was a bit stressful, but this was a decision I made and do not regret the time frame
set for the process. If something could be done differently I would have decided of the third
interview from the very beginning of the process and then have had more time to look for an
alternative when the original interviewee did not cooperate. Now the results are only from two
perspectives and the third point of view would have been very complementary for the big
picture. Personally I also find the theoretical part a bit ponderous to read; same it was to write,
not as a whole, but partially. This is an academic research and therefore it must be as it is and
the readers can make their own decisions what parts are of their interest and find useful to read.
All in all in my opinion I have succeeded in the process and hope that this will be useful for
the owners of Aku & Ada in some way now or in the future.

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Franchising Strategies

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Articles
Barringer, R. B.; Greening, W. D. 1998. Small business growth through geographic
expansion: a comparative case study. Journal of Business Venturing 13, 467-492.
Interview
Pitknen, Ulla; Pitknen Riikka 2010. Owners of Aku & Ada Oy. Interview 25.10.
Vastamki, Juha 2010. Executive Manager of Finnish Franchising Association. Phone
interview 27.10.
83