Franchising

•Chapter 5
•(In book – Chapter 11)
•New Venture Creation
•ENTREPRENEURSHIP FOR THE 21st
CENTURY by Stephen Spinelli
LEARNING
OUTCOMES:
• After reading this chapter,
• you will be able to understand:
• 1 Job creation versus wealth creation
• 2 Franchising history
• 3 The franchising process
• 4 Evaluating a franchise
• 5 Components of a franchise offering
Job Creation versus
Wealth Creation
• As a franchise entrepreneur, we control the growth of our franchise
opportunity.
• This means the ability to own one to dozens of pizza restaurants
using the same systematic process, depending on the goals and
resources of the franchisee.
• For example, a franchise company may decide to limit its number
of stores per geographic territory. Therefore, the expansion market
is limited from the start for potential franchisees.
• Some companies are designed to reward successful franchisees
with the opportunity to buy more stores in a particular market or
region.
• Franchisees who achieve prosperity with single units are rewarded
with additional stores. The entrepreneurial process is encouraged,
and wealth is create
Food Franchises
• https://www.franchisedirect.co.uk/internationalfra
nchises/pakistan/161/?industry_id=186

• Coffee Bike
• Example
Primary Target
Audience (PTA)
• Defining the target customer is
essential because it dictates many
diverse functions of the business.
• Most importantly, it measures
primary demand.
• Once the PTA is defined, secondary
targets may be identified. The
degree of market penetration in the
secondary target is less than that of
the primary target.
 • A demographic profile is a compilation of personal
characteristics that enables the company to define the
“average” customer.
• Most franchisors perform market research as a central
function, developing customer profiles and disseminating this

Demographi information to franchisees.

• Such research may include current user and nonuser profiles.
c Profiles • Typically a demographic analysis includes age, gender, income,
home address (driving or walking distance from the store),
working address (driving or walking distance from the store),
marital status, family status (number and ages of children),
occupation, race and ethnicity, religion, and nationality.
• Demographics must be put into context by looking at concept-
specific data such as average number of automobiles for a
Midas franchise or percentage of disposable income spent on
clothes for a Gap franchise.
Psychographic Profiles
• Psychographic profiles segment potential customers based on social class,
lifestyle, and personality traits.
• Lifestyle addresses such issues as health consciousness, fashion
orientation, or being a “car freak.” Personality variables such as
confidence, conservation, and independence are used to segment
markets.
• Behavioral variables segment potential customers by their knowledge,
attitude, and use of products in order to project usage of the product or
service.
• By articulating detailed understanding of the target market, specifically
why these consumers will buy the product or service, you gain great
insight into the competitive landscape.
• Why will a consumer spend money with us rather than with a
competitor?
Geographic Profiles
• The scope of a franchise concept can be local, regional, national, or
international.
• This helps dynamically shape the vision and therefore the strategic
exploitation of the opportunity. The analysis of system data must
include a link to the vision of the concept and to the vision’s
possibilities.
• For example, if we launched an earring company 10 years ago, we could
have defined the target market as women of ages 21 to 40, and the size
of the market as the number of women within this age group in the
United States. But perhaps looking beyond the existing data and
anticipating the larger market that now exists can shape our vision. The
target market for earrings could be defined as women and men of ages
12 to 32, with an average of three pairs of earrings per individual, not
two. The identification of the target market requires that we combine
demographic data with our own unique vision for the venture.
Franchisor as the High-
Potential Venture
• In a study of publicly traded franchisors, the size and
scope of the firms that achieved public capital are
impressive.
• The capital marketplace has rewarded many franchisors
that have met the criteria for a high-potential franchise
and they, in turn, have performed well in return
to shareholders.
 Key Components of a
Franchise Offering
• If you are looking to be a franchisor to expand your offering,
review the following in terms of how you might construct the
offering
1. Service Delivery System
• The road map for marshaling resources for the franchise
comes from establishing the SDS. In the franchise
entrepreneurial alliance, the franchisor develops a method for
delivering the product or service that fills customer demand
and this SDS is well defined, documented, and proven. The
ability of the organization to develop and transfer the SDS is
the creation of the firm’s competitive advantage.
• Example
• Highly successful and visible examples of business format
innovations are the drive-through in fast-food restaurants and
the bi-level facilities in quick oil change facilities.
2. Training and Operational Support
• Formal franchisor training programs transfer knowledge of the SDS to the franchisee’s
managers and line workers. Continuous knowledge gathering and transfer are important
both before launch and on an ongoing basis. The license agreement defines the specific
manner in which this franchisor responsibility will be performed.
• Training will vary with the specifics of the franchise, but should include organized and
monitored on-the-job experience in the existing system for the new franchisee and as
many of the new staff members as the franchisor will allow.
• Established and stable franchise systems such as Dunkin’ Donuts require such operational
experience in the existing system for as long as a year before the purchase of the
franchise. Once the franchise is operational, the franchisee may be expected to do the
on-site training of new hires.
3. Field Support
• A franchisor’s representative will visit the franchisee’s location
in person, and the franchisor will retain resident experts at
corporate headquarters in each of the essential managerial
disciplines that are available for consultation.
• Ideally the license agreement will provide for scheduled visits
by the franchisor’s agents to the franchisee’s outlet with
prescribed objectives, such as performance review, field
training, facilities inspection, local marketing review, and
operational audits. Unfortunately some franchisors use their
field role as a diplomatic or pejorative exercise rather than for
training and support.
• The greater the substance of the field functions, the easier it is
for the franchisee to justify the royalty cost
 • Marketing activities are certainly some of the most
sensitive areas in the ongoing franchise relationship

4. because they imprint the trade name and trademark

in the mind of the consumer to gain awareness—the
most important commodity of the franchise. If the
Marketing, delivery of the product validates the marketing
message, then the value of the franchise is enhanced;
Advertisin but if it is not congruent, there can be a detrimental
effect at both the local and national levels.
g, and • As the number of outlets grows, marketing budgets
increase and spread across the growing organization.
Promotion Generally marketing programs are funded and
implemented at three different levels: national,
regional, and local. A national advertising budget is
typically controlled by the franchisor, and each
franchisee contributes a percentage of top-line sales
to the advertising fund
5. Supply
• In most franchise systems, major benefits include bulk
purchasing and inventory control. In the license agreement,
there are several ways to account for this economy of scale
advantage. Because of changing markets, competitors and law
make it impossible for the franchisor to be bound to best price
requirements.
• The franchise should employ a standard of best efforts and
good faith to acquire both national and regional supply
contracts.
• Depending on the nature of the product or service, regional
deals might make more sense than national deals. Regional
content may provide greater advantages to the franchisee
because of shipping weight and cost or service requirements.
Franchise Relationship
Model

• The FRM is also a tool that both

franchisors and franchisees can use
to judge the efficiency or success
potential of a franchise opportunity.
• By overlaying the FRM template
onto any given franchise, we can
forecast where bottlenecks will
impede success or where
improvements can be made that
will offer competitive advantage.
Critical Questions
1. We describe franchising as a “pathway to
entrepreneurship” that provides a spectrum of
entrepreneurial opportunities. What does this mean to
you?
2. What are the most important factors in determining
whether franchising is an appropriate method of rapidly
growing a concept?
3. What would be the most attractive aspects of franchising
to you? What is the least attractive part of franchising?