11.

4 ENTERING A FRANCHISE SYSTEM

franchise is an arrangement whereby the originator of a business product or operating system

(commonly referred to as the franchisor) gives a prospective small business owner (the
franchisee) the right to sell these goods and/or to use the business operations system on the
franchisor’s behalf.

There are two basic types of franchise. A product franchise gives a small business operator the
right to sell a commodity or set of goods. In this arrangement, the franchisee is used as a
distribution mechanism for a good or service, and has a large measure of independence as to how
the business will be set up and operated. The franchisor’s role is limited to ensuring that
sufficient stock is made available and that the franchisee is selling the product at a satisfactory
price and providing customers with suitable after-sales service and support. business system
franchise is a more detailed agreement between the two parties. In this arrangement, the
franchisor not only supplies the product but also gives comprehensive guidelines on how the
business is to be run. The franchisee is expected to follow a predetermined set of rules about all
aspects of managing and operating the business.

The main bene t of the system franchise is that all aspects of organising and operating the
business have already been investigated, pre-tested and successfully implemented by the
franchisor, and the viability of the franchise has also usually been assessed in advance.

Advantages of franchising: New business owner does not have to develop their own operating,
staffing, marketing systems, less time wasted ‘learning by mistakes’, Product/service is already
well established, Franchisors provide continuing training and support, Lower costs of raw
materials and supplies, raising capital can also be easier

Disadvantages of franchising: More expensive than start-up ventures, Purchase price is often
quite high, Franchisees must pay a proportion of their profits to the franchisor, Franchisees are
restricted to a geographical area, must comply with franchisor directions, Limited duration of the
franchise agreement

11.5 COMPARISON OF OPTIONS

There is rarely a clear best choice among the three different types of business avenue; when
deciding, it’s important to consider several factors. These factors include: market/customer base,
advertising and pricing strategy, future growth possibilities, risk of failure, goodwill costs,
among others.

11.6 PROCEDURAL STEPS WHEN STARTING A BUSINESS VENTURE

Once the decision to start a new business has been made, there are several steps which, if
followed in a logical manner, provide a useful framework for evaluating and then acting on the
intended project.

Undertake market research: determine if the idea is viable 2. Check the statutory requirements:
can you meet all the regulatory requirements to proceed, the legal structure of the business? 3.
Access suitable core resources: can you obtain all needed for example: facilities, equipment,
insurance? 4. Critically evaluate options: buy, start-up or franchise: which will best help you
succeed in business. 5. Work out financial projections: is it viable. 6. Prepare a business plan:
put your ideas on paper.

11.7 GOING GLOBAL

Before deciding to go global, a company faces several key decisions, beginning with the
following: • determining which foreign markets to enter• analysing the expenditures required to
enter a new market • deciding the best way to organise the overseas operations.

Levels of involvement

After a firm has completed its research and decided to do business overseas, it can choose one or
more strategies: 1. exporting or importing 2- entering into contractual agreements such as
franchising, licensing, and subcontracting deals. 3- direct investment in the foreign market
through acquisitions, joint ventures, or establishment of an overseas division

Strategies of note

Countertrade: barter agreement whereby trade between two or more nations involves payment
made in the form of local products instead of currency

Franchise: contractual agreement in which a franchisee gains the right to produce and/or sell the
franchisor's products under that company's brand name if they agree to certain operating
requirements

Foreign licensing agreement: international agreement in which one firm allows another to
produce or sell its product, or use its trademark, patent, or manufacturing processes, in a specific
geographical area in return for royalties or other compensation

Subcontracting: international agreement that involves hiring local companies to produce,

distribute, or sell goods or services in a specific country or geographical region

Importers and exporters: when a firm brings in goods produced abroad to sell domestically, it is
an importer.

International direct investment: Investing directly in production and marketing operations in a

foreign country is the ultimate level of global involvement.

Joint venture: partnership between companies formed for a specific undertaking

From multinational corporation to global business

A multinational corporation (MNC) is an organisation with significant foreign operations.

11.8 DEVELOPING A STRATEGY FOR INTERNATIONAL BUSINESS

Global business strategies

In a global business (or standardisation) strategy, a firm sells the same product in essentially the
same manner throughout the world. Can be appropriate for some goods and services and certain
market segments that are common to many nations.

Multidomestic business strategies

Under a multidomestic business (or adaptation) strategy, the firm treats each national market in a
different way. It develops products and marketing strategies that appeal to the customs, tastes,
and buying habits of a national markets.