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Entry Mode to Franchising

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Franchising
Expansion into overseas markets is a goal that most businesses strive to achieve. Firms

considering international expansion should think about the best markets to enter and the best

timing to do so. The scope of the market's involvement, as well as the size of the company

involved, must be taken into account. Firms can enter a foreign market in a variety of methods,

each with its own set of benefits and drawbacks that must be considered before proceeding

(Cumberland & Litalien, 2018). Firms might pick from a variety of choices, including

franchising, exporting, completely owned subsidiaries, turnkey projects, joint partnerships, and

licensing. Therefore, this paper analyses franchising as a mode of entry into a foreign market and

analyzes its advantages and disadvantages, how it is affected by the need for control, importance

of flexibility, attitude towards risk and cost influenced and provides one company that has

utilized this mode successfully.

How Franchising Works

There are over 700 thousand franchises in the US which employ up to 10 million people.

Common examples of franchises operating in the US include McDonald’s, KFC, Subway and

711. Franchising involves an owner of a business (franchisor), allowing an individual the right to

start and operate a premise with the same brand name and deal with the same line of goods

(Gitman et al., 2018). The individual allowed the rights to operate a similar business is referred

to as a franchisee. The franchisee is simply an entrepreneur who would like to evade the trials

and tribulations associated with starting a business from scratch. The franchisor therefore asks

for an initial payment from the franchisee who then starts operating the franchisors business in a

similar manner as the franchisor.

An organization can therefore enter a foreign market by approaching entrepreneurs in that

particular country and allow them to establish business with the same brand name and deal with
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the same type of goods and services. The franchisor then offers particular terms and conditions

that the franchisee should follow while operating in the foreign market. The franchisor offers

constant support to ensure that business activities continue normally in the foreign market. The

support offered may include training activities that will ensure that the quality of goods and

services offered by the franchisor is similar to that offered by the franchisee in the foreign

market. Apart from the initial payment made to the franchisor, the franchisee pays regular fees to

the franchisor from the profits made as part of the agreement for a given franchising period. At

the end of the franchise period, the franchisee can choose to renew the agreement or not.

Constant communication between the franchisor and franchisee is essential in the success of the

franchise.

Advantages and Disadvantages of Franchising

Franchising is associated with several advantages. First, the franchisor is able to

distribute goods and services in a foreign country with minimum investment. The franchisee

meets the investment cost through payment of the initial franchising cost. Also, the franchisor

meets limited costs like administrative overheads, rent and restricted payroll since franchisees

operate as self-employed and meet the rest of the costs like staffing and operating costs of their

branches (Hill et al., 2018) Most franchisees work towards maximum profits resulting in overall

increased profitability for the franchisor. In the case of a fast food franchise, franchisees are

often required to purchase their equipment from or via the franchisor, as well as the necessary

components that make up the finished product. Because the franchise name is a protected trade

mark, the franchisor knows that no other company can freely modify and profit from its

reputation's selling power.

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Franchising, on the other hand, is associated with several disadvantages. First,

franchisees are less profitable than other outlets directly managed by the franchisor. Franchisees

only allow for widespread distribution of the franchisor’s goods and services but does not

guarantee high profits. Franchisors also have little control over franchisees since they consider

themselves more independent than employees hence cannot be closely monitored. Therefore, bad

reputation of one franchise outlet is binding to all other franchisees and the franchisor. A

franchisor will never know if a franchisee is reporting his or her level of business activity

honestly. Some franchisors utilize a central accounting system to combat this, while no system

can be expected to be 100% effective. Furthermore, conflicts may arise between the franchisor

and franchisees who lose their initial motivation but operate within the agreement terms;

franchisors therefore have little control over these franchise outlets. Finally, it is difficult to

recruit suitable franchisees and replace those who lost initial motivation.

Factors Influencing Franchising

The need for control drive organizations to approach entrepreneurs in foreign countries

with major business gaps to distribute their goods and services under their terms. Franchisors

therefore use these entrepreneurs as their franchisees who are initially motivated to make large

profits. They therefore run these foreign markets under the control of their franchisors who

ensure that they succeed through their support. Most entrepreneurs who establish themselves as

franchisees for organizations in international markets utilize the importance of flexibility that

franchising offers (Hool, 2019). These entrepreneurs evade several challenges that most business

starters undergo. Most costs are already met by the franchisors; they also receive most of their

training from these franchisors and deal in the line of products and services already offered by

the parent organization.

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Besides, attitude towards risk drive most organizations to utilize franchising since they

will incur minimum costs in case franchisees fail to perform. Venturing in unfamiliar foreign

markets through franchising ensures that the parent organization studies the market and the risks

available through franchisees. Likewise, franchising is associated with low cost influence hence

most organization managers use franchising to invest in international market since franchisees

pay initial franchising fee followed by regular payments which may partially meet the influence

costs.

Subway

Subway is a quick manipulating food giving technique which was established in render

sandwiches to the availing customers in that they can select any type of bread also the

manufacturing procedure. Currently, Subway services are recognized worldwide as the

marketing leader in terms of revenue. Subway storing facility costs less in opening than any

other open franchisees. The franchising technique is generally based on the strong brand which

greatly boosts attraction on the new franchisees and also their vices.

Besides following better know-how amongst domestic investors the storage costs of the

Subway speeds the development of the franchising system. A major positive view of the

marketing entering mode enhanced a more rapid growth. Subway opened several locations

amongst most non-traditional locations which include showrooms in Michigan. Subway emerged

in the Chinese Market during the Mid-1990s by opening the very first market restaurant First

Years Subway was accompanied by most challenges as a result of the environment as a fact of

local eating techniques from different countries on how Subway company used to serve (Rosado-

Serrano et al., 2018). Subway emerged as a result of their Franchisees leading to globalization

which developed during the late 1980s which shows that any company acts on any global section
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while coping up with local requirements of any potential customers. Subway Limited company

acquired Franchising for the need of growing. During the mid-1980s till late 19990s Subway

was the quickest also rapidly growing Franchise System Worldwide showing that this kind of

entry mode is the best way towards successful also universal market into various countries.

Conclusion

Franchising allows an individual the right to operate under the same brand name and deal

with the same goods and services as they do in the local market. At the end of the franchise

period, the franchisee can choose to renew the agreement or not. Franchising is associated with

several advantages and disadvantages, including that it allows an organization to enter a foreign

market by approaching entrepreneurs in that country. The need for control drive organizations to

approach entrepreneurs in foreign countries with major business gaps to distribute their goods

and services under their terms. Franchisors use these entrepreneurs as their franchisees who are

initially motivated to make large profits. Entrepreneurs pay initial franchising fee followed by

regular payments which partially meet the influence costs. Subway services are recognized

worldwide as the marketing leader in terms of revenue due to Franchising

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References

Cumberland, D. M., & Litalien, B. C. (2018). Social franchising: A systematic review. Journal

of Marketing Channels, 25(3), 137–156. https://doi.org/10.1080/1046669x.2019.1657757

Gitman, L. J., McDaniel, C., Amit Shah, Reece, M., Koffel, L., Talsma, B., & Hyatt, J. C. (2018,

September 18). Franchising: A Popular Trend. Opentextbc.ca; OpenStax Introduction to

Business. https://opentextbc.ca/businessopenstax/chapter/franchising-a-popular-trend/

Hill, C. W. L., Hult, G. T. M., & McKaig, T. (2018). Global Business Today (Fifth Canadian

Edition) [Review of Global Business Today]. McGraw-Hill Education. (Original work

published 1998)

Hool, C. (2019). Are you franchise wise? Journal of Aesthetic Nursing, 8(2), 90–91.

https://doi.org/10.12968/joan.2019.8.2.90

Rosado-Serrano, A., Paul, J., & Dikova, D. (2018). International franchising: A literature review

and research agenda. Journal of Business Research, 85, 238–257.

https://doi.org/10.1016/j.jbusres.2017.12.049

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