MODULE 3_FRANCHISING.pdf

MODULE 3: PREPARING FOR FRANCHISING 1 MODULE 3 Preparing for Franchising Learning Objectives: At the end of this module, you are expected to:...

MODULE 3: PREPARING FOR FRANCHISING 1 MODULE 3 Preparing for Franchising Learning Objectives: At the end of this module, you are expected to: 1. Analyze the concept of franchisability; 2. Break down the steps involved in preparing for franchising; and 3. Assess the criteria to be developed by a franchisor to evaluate a franchisee. Introduction In this module, it discusses the development of a franchise system from the perspective of a franchisor who wants to pursue growth through the franchising route. It introduces the concept of franchisability, the most important for a potential franchisor. An attempt has been made to provide the potential franchisor a detailed guideline to develop an appropriate franchise system. The essential qualities of potential franchisees have been discussed to guide the franchisor to make an appropriate choice of a franchisee. Essential Knowledge FRANCHISABILITY Essentially, it is very difficult to determine the franchisability of a business concept. It is however, possible to identify several criteria to judge whether the business is franchisable. 1. Profitability. The firm willing to franchise its business must assure the potential franchisees that the business being offered for franchising is a proven business model. It should not be in the concept stage. It should be profitable at unit level. 2. Flexibility. The willingness of a franchisor to adapt to the needs of local market is an important factor in incorporating the element of flexibility in the franchise system. This flexibility of a franchise system should allow the franchisors to tailor all their marketing efforts to meet not only the legal requirements of the local market but also the cultural and behavioral aspects of the local market. 3. Transferability of Business Model. It depends on the degree of complexity of a system. Relatively, simpler systems take less time to transfer the knowledge to the franchisees. 4. Standardization. The standardization of the product/service offerings and other related areas help the franchisors maintain uniformity of operation across the system and consistency in the quality of services being provided by the franchisees. 5. Prototype. The firm willing to franchise out its business must develop a successful prototype in order to train the potential franchisees the way of carrying out its business. 6. Trustworthiness. The firm must, in order to sell franchises, establish its creditworthiness in the eyes of its prospective franchisees.  MODULE 3: PREPARING FOR FRANCHISING 2 7. Management Competency. In order to grow through the franchise route, it is essential that the management should be competent enough to identify the right entrepreneurial talents at various places. FRANCHISE FEASIBILITY STUDY Once the franchisability of the business is thoroughly determined, the next step is to conduct a feasibility examination. Some of the factors that need consideration in carrying out franchise feasibility include the following: 1. The Underlying Business. The firm willing to franchise needs an operating business with a proven business model. It is better if the firm set up its business at more than two other locations. Opening up business at several locations can serve as testing ground for franchise success. 2. Products & Services. It is very important for the potential franchisor to ascertain whether the product or service that are offered have a sustainable growth potential. Preferably, they should be differentiated from those offered by the competitors. 3. The Systematization of the Business. Customers visiting a franchise store have high prior expectations about the quality and consistency of experience. Therefore, it is important that the business operate consistently from location to location. 4. The Support System and Fees. The franchisor offers the business know-how that includes project feasibility report including demand and income projections, site selection, location planning, interior development, display arrangement, recruitment and selection, staff training, supply of raw materials, and other goods from authorized suppliers, operation manual and also provides supports in operation, management and marketing of the business. 5. The Potential for the Expansions. It is very important for the potential franchisors to make sure that a market potential has been clearly identified and a schedule of entering different geographic location has been worked out. DESIGNING THE FRANCHISE SYSTEM The process of developing a franchise system varies from industry to industry and also varies from company to company. Moreover, a list of general elements has been identified. The following are: 1. Management Competency. A franchisor should ensure whether the existing management has adequate capabilities and staff to manage the growth of the franchise system. 2. Competitors’ Analysis. A franchisor should be aware of the competition both at the franchise level and also at the consumer level. 3. Conflict Management. A franchisor should anticipate probable source of conflicts between the franchisor and the franchisees and devise strategies to resolve them. 4. Economic Impact. A franchisor should consider the impact of investments, cash flows and profits will have on franchisor and the franchisees. 5. Financing Requirements. A franchisor should determine whether the kind of investment the franchise system requires shall be fulfilled by a potential franchisee.  MODULE 3: PREPARING FOR FRANCHISING 3 6. Exit Strategies. While working out a franchise agreement, a franchisor should provide for an exit clause. In case, a franchise at a particular location turns out to be unviable, the exit routes available to the franchisees must be spelled out clearly. 7. Marketing Strategy. A franchisor should have a well-defined marketing strategy that includes market segmentation approach, targeting strategies, positioning approach, qualifications of a franchisee, franchisee profile, franchisee selection criteria, franchisee relation management approach, sales procedures, etc. 8. Management Information System. Information generated and maintained systematically offers the franchisor an upper hand in managing the franchise better. 9. Business Policy. A franchise system should have a well-defined policy pertaining to acquisition of relevant matters related to franchising. 10. Training Programme Calendar. A franchise system should have well-defined training programs and manuals. 11. Monitoring Mechanisms. A franchisor should take care of devising monitoring mechanism pertaining to site selection and development, operating standards, financial management, sales and marketing, usage of trademark, and etc. 12. Support Mechanism. A franchise system should have clearly documented procedures for providing support to the franchisees. A franchisor should carefully study the system and develop a franchise system that nay provide an answer to most of the questions that may arise during the implementation of franchising strategy. ASSESSING A POTENTIAL FRANCHISEE: QUALITIES OF A FRANCHISEE Generally, a potential franchisee may be evaluated on the basis of certain qualities. The following qualities are: 1. Ability to Perform without Supervision. A franchisee has nobody to supervise in day-to-day running of business. 2. Being Self-disciplined. A franchisee should be self-disciplined with regard to time management and should be able to allocate time for paperwork, meetings, an moving in the market. 3. Ability to Work under Pressure. No franchise guarantees income and profit without putting any efforts. A franchisee should be able to work under such pressures. 4. Attitude to Learn from Failures. A franchisee should be able to learn from failures and apply them to improve the business. 5. Ability to Meet Standards. A franchisee should be able to create benchmarks/standards and continuously strive to achieve them. 6. Ability to Take Difficult Decisions. A franchisee is required to take difficult decisions for a smooth functioning of the franchise. 7. Ability to Take a Balanced View. A franchisee should be able to take a holistic perspective of any business issues that may emerge during the currency of the franchise. 8. Tolerance of Ambiguity. Business is a very complex system and clarity may not prevail at all aspects of business.  MODULE 3: PREPARING FOR FRANCHISING 4 9. Receptiveness. A franchisee should be receptive and have an open mind in interaction with the franchisor. 10. Growth Orientation. A franchisee should have a long-term growth orientation rather than a short-term profit orientation. 11. Ability to Delegate. A franchisee should be able to delegate tasks to others and get many things done rather doing things oneself. 12. Internal Locus of Control. A franchisee should be able to put in adequate efforts to be successful. A franchisor should be able to assess these qualities through an appropriate mechanism. Moreover, these qualities would help franchisee run the franchise successfully. REFERENCE: M. Sidhpuria (2012), “Retail Franchising”. Published by McGraw Hill International Edition ASSESSMENT TASKS Answer the following: 1. Is it possible to franchise all the business? Yes or No? How does a potential franchisor determine whether the business is ready to grow through the franchise route? 2. Why is it necessary to carry out a franchise feasibility study? What are the factors that need considerations in carrying out a feasibility study for franchise business? Explain each one of these criteria with the help of real life examples. 3. How does a potential franchisor establish trustworthiness in order to be more acceptable among the franchisee fraternity?