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ssignment Of International Business

Topic : Reason for Failure of Franchise in

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What is Franchising ?

A franchise system is a collaboration agreement between two independent business parts, the franchisor and the franchisee, whereby the franchisor allows the franchisee the right to use his brand name, products and services, and specific know-how in exchange for direct or indirect payments to the franchisor by the franchisee. In other words, the franchise system consists of multiple organizations that are legally independent, economically interdependent, and operationally indistinguishable to consumers.

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.

The concept of franchising:

The concept of franchising is a relatively new one in India. But it seems to be catching on really fast. As are many other things, franchising too is a predominantly American import. The United States is a hot bed for franchising activities. However, this concept has evolved over decades there. Unfortunately, what we are seeing in India is simply a cut and paste of the American models. But is this the right way to proceed? The United States market is a very different one from India. In terms of size for one. While India boasts of a healthy growth rate, in terms of the absolute size of its market, it is very small relative to the United States. The scale of activities is another aspect where India pales in comparison. Businesses in the United States are huge and have vast footprints across the country as well as internationally. Uniform development, something that India lacks, is what makes this possible. India boasts of a growing consumption rate as well as an increasing cosmopolitan culture. However, the poor infrastructure and a largely fragmented market is where the problem lies. Furthermore, franchising is a planned activity in the United States. In India however, its simply seen as a quick way to grow. Thats why we rarely see businesses with more than a few franchisees here while the United States has several with hundreds of franchisees across the country. In the United States, franchising is generally taken up after the business has grown to a particular level, which establishes the viability of the business model. In India, its done as soon as it can be done. The short-term goal of quick

profits is generally given preference to growing and nurturing an organization. This damages the brand many a time and hampers further growth as resources have to be diverted to manage the franchisees. But it does not end there. The franchisees suffer as well. Due to a lack of planning and haphazard operations, dissent between the franchisor and the franchisee is common in India. The primary cause of all the problems lies in the lack of proper support from the franchisor. Add to this the high franchise fee and other contributions expected from the franchisee, and you have failure written all over. Hence, the failure rate of franchises in India is significantly high in most sectors. In their quest for growth, franchisors take in franchisees without background checks. This is a sure fire recipe for disaster. Why? There are primarily two reasons. Franchisees may just be out to make a quick buck. But when that doesnt happen, they lose interest. Or franchisees may not have the means to sustain themselves until the business becomes profitable. This again leads to disappointment and failure. While franchising has seen numerous failures in India, it is not to say that there havent been any successes. So what are some of the things you need to do to achieve franchising success? Get your own business model working perfectly Plan for franchise growth Create a proper franchise management process Dont overpromise when it comes to returns Select franchisees carefully Charge reasonable fees

 Provide adequate training Extend all possible support The franchising model should not be viewed as a quick way to make money. It should be nurtured carefully as it impacts the brand. Furthermore, dont simply copy an existing model. A carefully thought out and well executed franchising strategy is the best way to grow your business. The growth may be slow, but you will be creating value in the long run.

Over the years franchising in India has traveled through many industries and segments and companies have tirelessly used this model to expand their businesses in India.What are the learning's? Where have a few of them faltered and why have some succeeded and some failed.What is common amongst the failure and success is the most commonly done mistakes.A few franchisers have learnt quickly and have moved fast to rectify them, the others could not whilst the smarter ones who learnt from the failures of others ensured they did not commit these costly franchise mistakes.They used professional franchise consultants or senior industry veterans who carefully crafted strategies around which they ensured that these mistakes were minimized. So what are these mistakes that franchiser must avoid? Here we go.....

Top 15 Franchise Mistakes While Franchising In India.

Over the years franchising in India has travelled through many industries and segments and companies have tirelessly used this model to expand their businesses in India.What are thelearning's? Where have a few of them faltered and why have some succeeded and some failed.What is common amongst the failure and success is the most commonly done mistakes.A few franchisers have learnt quickly and have moved fast to rectify them, the others could not whilst the smarter ones who learnt from the failures of others ensured they did not commit these costly franchise mistakes.They used professional franchise consultants or senior industry veterans who carefully crafted strategies around which they ensured that these mistakes were minimized.

So what are these mistakes.I would like to list the following, not necessarily in order of magnitude or seriousness, but otherwise. 1. Wrong Franchise Fee and Value Preposition perceptions 2. Incorrect evaluation of local competition and the different kinds of competitors the unit franchisee would have. 3. Franchisee Profiling 4. Accepting the cheque too soon 5. Roles and bearing of Advertisement, Marketing & Publicity on the business at various levels 6. Not understanding that you are a franchise system

7.Preparation of agreement before a lot of other things are clear

8. Wrong commission or ongoing royalty sharing arrangement 9. Training support systems 10. Precedence of concept over systems 11. Geographical demarcations, exclusive territories and adaptations to local market conditions 12. Interconnectivity of the franchise program 13. Importance to Operational Procedures and Manuals. 14. Driving sales. 15. Audit and Regulatory checks

Hence, It is very important to ensure that your franchise strategy covers all of the above points minutely ensuring you franchise your business correctly.

Unsuccess Hospital

story

of

Apollo

Franchising

Apollo Hospitals is one of the largest chain of hospitals in India. It has in its network more than 41 hospitals and manages over 8000 beds mostly in the secondary and the tertiary healthcare space. I met Ratan in the year 2001, when he was setting up Apollo Health and Lifestyle, which was to get into franchising of the pollo Clinics, the primary healthcare services chain, which were supposed to complement Apollos large secondary and tertiary care network. These clinics were envisaged as a franchised operations, supported by the Apollo Hospitals group. They were to leverage Apollos excellent brand equity and

knowledge about the healthcare in India and help franchisees run a profitable enterprise. The Apollo Clinics were well conceived. The service mix was essentially OPD consultations, a collection centre for pathology samples, radiology services (X-Ray, Ultrasound) and basic cardiology diagnostics (ECG, TMT and Echo). The clinics also had a 24 hour pharmacy and basic preventive health packages were also offered. We worked hard on the look and feel of the clinic (Ratan had Alfaz Miller design the clinic interiors), Ravi Bajaj was to do the staff uniforms, and the clinics were to hire smart and well-trained youngsters to be the face of the clinics. The consultants were to from the local areas and it was thought that Apollo Hospitals senior consultants will also run their OPDs from these clinics. On the business side of things a franchisee needed to invest close to Rs. 20 MN upfront. The business plan included a fixed percentage payout by the franchisee of the revenue that he made. Apollo was to handhold the franchisee through the setting up of the clinic, purchase of medical equipment, development of the software to run the clinic, recruitment of the employees both medical and non medical, and selection of doctors. Apollo was also to provide an exhaustive set of instructions and guidelines on the management of the clinic to the franchisees and it was responsible for monitoring the quality of the services delivered at these clinics. While on paper the model looks perfect, it has some serious infirmities. A franchised operation by definition has to be a replication of an existing successful model. In Apollos case, they had nothing to show in the area of Primary Healthcare. They used to run a clinic in Mumbai, which they owned. Just about the

time Apollo decided to go the franchise route, their own clinic shut shop. It was losing money hand over fist and the management decided to shut it down. In the franchised model that was now envisaged Apollo had no financial stake. The money was to be put up by the franchisee, he was to bear all the costs including a revenue share with Apollo and it was not clear how Apollo will contribute to bringing in new patients to the clinic. It was expected that Apollos name itself will pull in patients. Thus the franchisee was to fend for himself as far as developing the business was concerned. Apollo could have contributed by investing in the brand pollo Clinics and by forcing some of its leading doctors to run the OPDs from the franchised clinics. Apollo made lofty promises of investing millions in the brand but just didnt. As far as doctors were concerned, some feeble attempts were made to get Apollo doctors to attend these clinics but hardly anything materialised. The problem really was that in Apollo system the senior doctors are not paid firm salaries and they work on a revenue share model. Thus, Apollos control over these doctors is minimal. The senior doctors with a busy practice had no reason to sit in the newly opened Apollo Clinics, which in any case did not have any patients of their own. The selection of the franchisees too threw up issues. The franchisees were largely businessmen with hardly any experience of healthcare. Neither did they have any particular love or passion for the healthcare business. I remember meeting and offering franchises to computer hardware merchants, aluminium dealers, a golf ball manufacturer, a real estate player and the like. All of them were driven purely by a profit motive. Some also saw healthcare as a more respectable business for their children. We sold the franchises indiscriminately, (at least in the

beginning) to anyone willing to put up the money. A network was thus born that had no glue except the brand name that each franchise shared with the other. The biggest casualty in all this was of course the quality of healthcare services that each clinic rendered. There was no uniformity as each franchisee left to fend for himself became increasingly desperate for revenue. He hired doctors on his own many of dubious quality, started offering cuts for referrals, set his own prices and started indulging in all kinds of practices that would help him get the extra money that he needed to stay afloat. As most of these franchises were not businessmen with deep pockets, they were willing to cut corners as their very survival was at stake. In-spite of all this many had to close down operations. Apollo gradually lost control over these franchises. Since, it did not add any value to the franchises life he decided not to pay the monthly royalty. Many refused access to Apollo personnel on their premises and are now pretty much operating as stand-alone entities. They continue to use the Apollo name, as that is the only thing, which adds value to their operations. Creating a franchised healthcare network is fraught with danger. Apollo failed by not first establishing a successful chain of primary healthcare centres of its own. It had no proven learnings in that space and it undertook to make money at its franchisees cost. It lost the trust of not only its franchisees, but also of many of its patients who certainly expected a lot better from Apollo.

Failure is the best teacher

A failed franchise can make the franchisee rich by providing the real-market data and managerial experience that is unavailable in any MBA classroom. You as a franchisee must study and understand what your weak points were that failed your outlet. Ask yourself, What are the areas, where did I go wrong, and how can I improve. Whether there was a weakness in managing the outlet or was it the business concept that did not attract customers, can determine the success of your future ventures. Improving on past business decisions and deciding which tasks you excel at and which you are better in delegating can also help you in the future.

Keep your mistakes in mind: A smart franchisee is one who learns from his mistakes instead of repeating them. While starting anew it is a must not to make similar mistakes. Select the concept, franchisor and the employees with caution as these are most important in the success of any business.

Setting low targets: Failed franchisees must have realised that aiming too high in the initial stages is not a good idea. Always set small achievable targets rather than big targets that can bring in frustration and failure.

Keep daily expenses apart: Agreed that you must have lost money in your previous franchised outlet but investing all your finances in taking up another franchise is not advisable. It is always recommended to keep your business and personal life separate. Similarly, divide your business finances and home investments according to the need of your

family. Risking your family finances in setting up any business tends to be frustrating. More so if the business does not work profitably. Failed or failing franchisees should always strive hard to make their business work. Franchisees instead of blaming themselves and the concept, should utilise time in researching for better business deals when their first venture was unable to bring them profits. Apart from this always remember that the past failures are stepping stones for the future success.