Franchising as a Strategy for Small Business Growth

This paper is an investigation into whether franchising is as effective a method of expansion for a small business as it is for larger more established businesses.

To test this theory a case study of two businesses was prepared, Interlink Express and the Cornish Oggy Oggy Pasty Shop. The case studies on the organisations were compiled from the information on their web sites. Both organisations are a member of the British Franchise Association.

These case studies were compared to the literature on the topic. Through researching the topic one factor was revealed as being a major issue in franchising, this was the brand.

Both the organisations that were studied are successful within their markets in the UK, and therefore proved to be good examples of franchising. The organisations had different motives for using this method for growth.

The paper concludes that with the right brand, small business can be just as successful at franchising for expansion as their larger counterparts.

Introduction

This paper will investigate whether franchising is as effective a method of expansion for a small business as it is for larger more established businesses. There are many different methods that organisations can use to expand; some of these involve raising large amounts of capital, which is not always an viable option for the smaller business.

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Businesses whether large or small, must plan what their future needs will be, to move forward. Strategy is the direction and scope of an organisation over the long term: which achieves advantage for the organisation. The strategy answers both the questions “where do you want to go?” and “how do you want to get there?” Incorrect or too few resources is a major factor of failure for an organisation’s strategy (Mullins L 2005).

Once an organisation has developed its strategy, it can then review the methods open to it for growth. Growth can be achieved by direct expansion, mergers with similar firms, franchising or diversification. Some companies choose to grow, not by developing in the conventional way, but by granting a license to others to sell their product or service. There are clear advantages to this, the market is tested, and larger well-established franchise operations will have national advertising campaigns and a solid trading name (Price, S. 1997).

Franchising is basically the permission given by one person, the franchisor, to another person, the franchisee, to use the franchisor’s trade name, trade marks and business system, in return for an initial payment and further regular payments. In relation to any other small business, franchising has proved to be successful, with 96% of units still operating profitable businesses 5 years down the line.

To test the theory on expansion and franchising a case study approach was chosen. Both organisations operate within the UK in different market sectors. The small business that was studied is the Cornish Oggy Oggy Pasty Shop, a local organisation from Cornwall; this organisation is expanding by franchising alone.

The larger organisation chosen is Interlink Express; this organisation is well established and has its roots in other countries, therefore it is only their UK operation that was studied. Within the UK it has utilised franchising to successfully expand their operation.

The backbone of the paper is the literature review. This discusses contemporary theory on organisational strategy, expansion methods and focuses on franchising within the UK. A lot of articles are written for the USA markets, these were not used as they had little relevance towards the UK.

Franchises operations are apparent on every high street in the UK. One of the most important factors is the brand name. This what attracts and retains the customer therefore is it viable for a small business to franchise. The importance of the brand became apparent whilst researching this paper.

Kotler (2000) described a brand as a “name, term, symbol, or design (or a combination of them) which is intended to signify the goods or services of the seller or groups of sellers and to differentiate them from those of the competitors” This brand is a valuable asset to all organisations when franchising. Although, the brand name is often not as strong with a small business as it is with their larger counterparts.

Franchising originated from the USA, with major players such as McDonald entering the UK market. Franchising for the individual as a small business underwent massive growth in the UK until 2000. This growth has slowed down, but there are still plenty of opportunities for businesses to expand.

This paper concludes that given the right small business, expansion is possible though franchising. This franchising must be controlled to uphold the organisation’s ethos, and the brand they trade with.

This chapter discusses the research methods used for the project and the justification for the choice of methods. It discusses methods that were not used, with justification of why they were not included. Included is a critique of methods selected, and with hindsight identifies any changes that would have enhanced the research.

This paper evaluates the growth in franchising in the UK, and whether this method of expansion is viable for small and large organisations. Selection of the topic was stimulated and formed out of awareness of the many franchised outlets. On nearly every high street there are numerous fast food outlets, which are franchised, more and more businesses are using this model to expand. The nature of the research was discussed with colleagues and fellow students this not only added practical ideas and suggestions, it opened new avenues of thought. This was the discussed with lecturers sounding out ideas, gauging opinions and clarifying the question.

The research topic was still wide; therefore other methods were used to form the research question. Focusing in on the question was obtained by employing relevance trees, narrowing the research area. This gave direction to the research, although with reviewing the literature this changed several times (Buzan, J. 1995).

Next, a research proposal was compiled, with the benefit of organising ideas and setting a time-scale for research. Theoretically, the proposal would highlight any difficulties with the research question and access to data. Creating a time-scale would focus on targets and meet deadlines in the completion of the paper.

The literature review, discussing theories and ideas that exist on the topic formed the foundation of the paper. The findings from the research are then tested on theories for validity (Saunders, M. et al 1997). The literature review was challenging, there is very little research in books that focuses on small businesses and franchising. Journals and newspaper articles were the backbone for the review, together with Internet sites and reports.

A lot published articles are written for the American Market, although they can give useful information, they refer to the American market (Saunders, M. et al 1997).

Tertiary data sources, such as library catalogues and indexes were used to scan for secondary data. This produced journals and newspaper articles, and Internet addresses. With the amount of literature, it took time to sort out relevant material to the research. Narrowing down the search Bell’s (1993) six point’s parameters was applied. Applying key words that were identified in the first search produced relevant and up-to-date material (Bell, J.1993).

A limitation on the literature search was the amount of time to read all articles and books on the subject. Whilst reviewing the literature references to other publications were followed and reviewed. Bells checklist on identifying the relevance of literature found was a practical method to reduce the amount of reading (Bell, J. 1993).

To compare two organisations it was decided to do case studies. The organisations chosen both offer franchising in the UK, actively promoting it on their web sites. The case studies of organisations will be reviewed and compared to the literature. The small organisation is expanding though franchising, the larger international organisation uses franchising as part of its overall strategy. These organisations have both applied the franchising business model to their expansion strategy. These organisations were selected from the British Franchise Association web site.

Other methods of data collection were considered and rejected. Interviewing owners of franchises would not have revealed the overall organisational strategy, and the success of their expansion methods. The idea of Focus groups would have offered free flowing information; this could have been facilitated with discussion led by the researcher. This method was rejected due to the limited contacts within the chosen organisations; this also it could have been considered unethical to place pressure on their goodwill. The majority of information on their strategies is readily available on the organisations web sites. This information proved valuable when compiling the case studies.

This section of the paper will discuss current theory on franchising and fundamental management theory. It discusses choices that are open to organisations when deciding on a strategy, for both small and large organisations. This section will focus on franchising in the UK; this information will be then compared to the case studies.

Organisational strategy is the pattern of decisions that determines and reveals to stakeholders the organisations intent; this is achieved through their objectives, purposes, and goals. The organisation identifies where they strategically want to be, and introduces policies and procedures which put in place to achieve these goals. When the strategy is formulated, it will allocate the resources based on its relative internal competencies and shortcomings, and predictable changes in the environment. Strategies are developed at the top level of management, with instructions to the lower levels of management to implement them. Johnson & Scholes (1997) concluded “strategic intent is the desired future state of the organisation…which seeks to focus the energies of the members of the organisation (Johnson J & Scholes K 1997:15).

All organisations require strategic plans to move them forward; some are needed to overcome specific problems within the organisation or the market place. These are long term management decisions that are aimed to place the organisation where the members have decide will be the most strategic place for them. It is the matching of the organisation to the environment; this will lead to “strategic fit” This is the ideal environment for the organisation to operate within (Reader, A 1998).

Managerial decisions are made to identify what is required to implement the new strategy. Are new resources are required? I.e. property, finance or employees, then the risk should be assessed for its long-term value to the organisation. Strategies should not only be considered on how they will affect existing resource capabilities, but also if needed new resources and how they will be controlled. The costs to the organisation should be weighed against the long-term gains, and if needed it can be reviewed, accessed and amended accordingly (G, Johnson & K, Scholes, 1997).

Therefore strategic decisions will affect the operational level of an organisation, which needs to be in tune with long term goals of the organisation. This factor is important in decision-making; firstly if the operational level is not in line with the strategic level this can cause conflict and jeopardise the strategy, secondly it is at the operational of an organisation that the real strategy is achieved. Procedures and policies should be constantly reviewed, to ensure correct implementation of the strategy (G, Johnson & K, Scholes, 1997).

Strategy is the direction and scope of an organisation over the long term: which achieves advantage for the organisation through its configuration of resources within a changing environment, to meet needs of the markets and fulfil stakeholder expectations. The strategy answers both the questions “where do you want to go?” and “how do you want to get there?” The first question is answered when the goals are set; the second is answered when the strategies are planned. The traditional approach basically focused on the first question although equal importance should be given to both questions. Incorrect or too few resources is a major factor of failure for an organisation’s strategy (Mullins L 2005).

A portfolio analysis will review the current position of the organisations products within the chosen markets. Ansoff (1987) developed a product growth matrix, which reviews current products and their markets; this will also highlight new markets that entry to can be considered. Ansoff considered reviewing the portfolio “as only one part of the equation for a successful strategy” To formulate a successful strategy more than one review of their current position will clearly identify any problematic areas. The greater the information gathered the greater the chance of success of a new strategy (Ansoff (1987) cited in Groucutt, J. et al 2004:212).

Organisations need to continually review their strategic position, and then decide how and when to grow. Robbins (1995) defined growth (expansion) as improvement in operation of an organisation, including in general measurements, such as more revenue, increase staffing and market share. Growth can be achieved by direct expansion, mergers with similar firms, franchising or diversification (Robbins, S 1995).

The traditional growth moves for organisations are acquisitions, mergers, international expansion, or price increases, these it is argued have largely run out of steam. Therefore for most organisations pursuing new growth opportunities should be the number-one priority. Growth moves fall along a spectrum, ranging from traditional product innovation ie. improving features and brand extensions to longer-term strategies such as taking core capabilities to new markets. Managing new growth requires an active feedback loop of constantly monitoring the progress of each initiative, its changing probability of success, and its shifting risk profile (Burnes, B. 2000)

Mergers and acquisitions were an enormous factor of the 1990s growth, as M&A activity grew sevenfold from 1994 to 1999. But acquisitions rarely produce new value and sometimes lead to disaster. International markets, are often viewed as a rich field for growth, in reality they hold little opportunity for future sustained gains in many industries. Markets in Western Europe and Japan are as competitive and mature as in the United States. And emerging markets, are characterized by weak consumer and industrial purchasing power, inefficient distribution channels, and protectionist laws that favour local players (Burnes, B. 2000)

Mergers combine two or more companies into a single corporation. In business, a merger is achieved when a company purchases the property of other firms, thus absorbing them into one corporate structure that retains its original identity. This differs from a consolidation, in which several concerns are dissolved in order to form a completely new company, or a takeover, which is a purchase of a company against its will. In a merger the purchaser may make an outright payment in cash or in company stock, or may decide on some other arrangement such as the exchange of bonds. The purchaser then acquires the assets and liabilities of the other firms. When two companies directly competing with each other merge, it is horizontal integration; when suppliers and customers merge, the process is vertical integration (Johnson, G & Scholes J 2004).

Growth through price increases worked over the past decade in industries such as airlines, chemicals, financial services, and consumer products, as underlying demand was bolstered by the 1990s economic expansion. But in all of these industries, companies have run out of room to push through reflexive price increases as demand has slackened and competition has intensified (Johnson, G & Scholes J 2004).

For a small set of companies new growth is not an immediate concern, as their current growth strategies remain robust. But for most organisations pursuing new growth opportunities is the number-one priority. Today most products, even complex ones such as PCs or airplanes, are largely undifferentiated in terms of performance; so improved product functionality offers little. Fortunately, in most industries a wide range of higher-order customer needs is go unmet. These needs involve the broader economic issues surrounding the product rather than the strictly functional needs met by the product itself (Burnes, B. 2000).

Growth moves fall along a spectrum of categories, ranging from traditional product innovation moves such as improving features and brand extensions to longer-term strategies such as taking core capabilities to new markets. Most companies tend to over-invest in areas they are familiar with and have well-established processes and systems (Johnson, G & Scholes J 2004).

Over the past two decades, the franchising industry has experienced a phase of renewed expansion and continued growth, the advent of new forms of franchising has further added to this growth. Globalisation accounted for much of franchising expansion between the 1960s and the 1980s, new industry segments, such as funeral homes and car repair garages, have been adopting franchising as a means to conduct business based on its standardisation promise. The expansion of older industry segments into non-traditional sites, such as airports, colleges, and hospitals, has allowed for another push in the growth of franchise systems. Through all of these developments, a major portion of the more recent growth can be attributed to the emergence of franchise owners who own more than the traditional single outlet (Grünhagen, M & and Dorsch, M 2003).

Brands

A valuable asset to all organisations, is the brand name of the product, this is then a vital component when franchising. Kotler (2000) described a brand as a “name, term, symbol, or design (or a combination of them) which is intended to signify the goods or services of the seller or groups of sellers and to differentiate them from those of the competitors” (Kotler (2000) cited in Groucutt, J et al 2004:275). The brand is part of the products tangible features, it is the verbal and physical clues that help the consumer identify what they want and to influence choice (Groucutt, J et al 2004).

The actual word “brand” is derived from a Norse word which means to “burn”. It is assumed that this means to imprint ideas or symbols on a product. This then gives the product identification and leaves a lasting mark on the consumer (Groucutt, J et al 2004). Because product features are easily imitated brands have been considered a marketer’s major tool for creating product differentiation. Even when differentiation based on product characteristics is possible, often consumers do not feel motivated or able to analyse them in adequate depth. Therefore the combination of brand name and brand significance has become a core competitive asset in an ever-growing number of contexts. Brands incite beliefs, evoke emotions and prompt behaviours (Aaker, D. (1991) cited in Kotler, P & Gertner, D. 2002:249).

Once a brand is established it requires nurturing, to bring out the full potential and add value to the organisation. Kashani (1999) believes that powerful brands are built over time through a conscious management effort. This is achieved through strategic decision-making and appropriate actions. All brands “need to be based on values and attributes that are permanent and, purposeful and fundamental to its strategy” (Kashani (1999) cited in Groucutt, J et al 2004:285). Therefore by creating such values in an organisation it will provide direction and a future for the brand.

A brand with strong “brand equity” is a valuable asset to an organisation. This asset is difficult to measure; although it has emerged as key strategic asset. A powerful brand enjoys a high level of consumer awareness and loyalty, with the organisation benefiting from lower marketing costs relative to revenues. Consumers expect more outlets to carry strong brands; therefore the organisation has more leverage when bargaining with retailers. This all adds to the “brands equity”, which needs to be managed by the organisation (Kotler, P. et al 2005).

This brand asset management is a concept that is closely related to positioning, since certain brands are central to a company’s current and future performance. They need to be managed, enhanced and protected as assets. This allows brand names like Coca-Cola, Sony, Intel and Disney to extend into new product categories, and produce product variants and services (Kotler, P. 2004).

What is Franchising?

The term ‘franchising’ has been used to describe many different forms of business relationships, including licensing, distributor and agency arrangements. The more popular use of the term has arisen from the development of what is called business format franchising. Business format franchising is the granting of a license by one person (the franchisor) to another (the franchisee), which entitles the franchisee to trade under the trade mark/trade name of the franchisor and to make use of an entire package, comprising all the elements necessary to establish a previously untrained person in the business and to run it with continual assistance on a pre determined basis (Kotler, P, et al 2005).

The principle is simple; some companies choose to grow, not by developing in the conventional way, but by granting a license to others to sell their product or service. There are clear advantages to this, the market is tested, and larger well-established franchise operations will have national advertising campaigns and a solid trading name Some franchisors can also help secure funding and discounted bulk buy supplies for outlets when you are in operation (Price, S. 1997).

Each business outlet is owned and operated by the franchisee; however, the franchisor retains control over the way in which products and services that are marketed and sold, and controls the quality and standards of the business. The franchisor will receive an initial fee from the franchisee, payable at the outset, together with on-going management service fees, usually based on a percentage of annual turnover or mark-ups on supplies. In return, the franchisor has an obligation to support the franchise network, notably with training, product development, advertising, promotional activities and with a specialist range of management services (Kotler, P, et al 2005).

Franchising is essentially the permission given by one person, the franchisor, to another person, the franchisee, to use the franchisor’s trade name, trade marks and business system, in return for an initial payment and further regular payments. In a UK franchise industry currently worth £9.1 billion and comprising 718 franchised units (Nat West UK British Franchise Association Annual Survey of Franchising 2004). In relation to any other small business, franchising has proved to be successful, with 96% of units still operating profitable businesses 5 years down the line. Only 66% of small firms survive the first 3 years (Small Business Service Report 2005). There is (some) evidence to suggest that franchises are less likely to fail than other types of small business organisations (Small Business Service Report 2005).

A franchise is defined as a long-term, continuing business relationship in which for a consideration, the franchisor grants to the franchisee a licensed right, subject to agreed requirements and restrictions, to conduct business utilising the trade and/or service marks of the franchisor and also provides to the franchisee advice and assistance in organising, merchandising, and managing the business conducted to the licensee (Price, S. 1997).

The franchisor develops a special product, service, or system and gains national recognition. The franchisor then grants a right or license to small, independent businessmen throughout the country to merchandise this service or product under the national trademark and in accordance with a proven, successful format. This increases the franchisor’s exposure for more national business and gives the franchisee a greater chance for success in a given field with a smaller amount of capital investment (Price, S. 1997)

Code of Ethics for Franchising

The UK Code of Ethical Conduct in franchising takes as its foundation the Code developed by the European Franchise Federation. In adopting the Code, the Federation recognised that national requirements may necessitate certain other clauses or provisions and delegated responsibility for the presentation and implementation of the Code in their own country to individual member National Franchise Associations. The Extension and Interpretation, which follows the European Code, has been adopted by the British Franchise Association, and agreed by the European Franchise Federation, for the application of the European Code of Ethics for Franchising by the British Franchise Association within the United Kingdom of Great Britain and Northern Ireland (www.thebfa.org).

The European Franchise Federation, EFF, was constituted on 23rd September 1972. Its members are national franchise associations or federations established in Europe. The EFF also accepts affiliates, i.e. non-European franchise associations or federations, and other professional persons, interested in or concerned with franchising. Affiliates have no voting rights and cannot be appointed officers of the EFF (www.thebfa.org).

The EFF also comprises a Legal Committee, composed of two lawyers from each national member association or federation and highly qualified in franchise matters. The EFF has, furthermore, installed a Franchise Arbitration Committee, which is at the disposal of parties preferring to submit their disputes to the latter’s determination. The evolution and the ever-growing importance of franchising in the EC economy as well as the EC Block Exemption Regulation for franchise agreements, entered into force on 1^st February 1989, prompted the EFF to revise its existing Code of Ethics (www.thebfa.org).

The motives differ between small and large organisations when they are using franchising for growth. Franchising is fast becoming one of the most popular entry mode strategies for international retail companies when moving into international markets. Though initially slow to respond to this practical phenomenon occurring in the international retailing domain, the academic community has also been gradually turning its attention to the nature of international franchising, in the context of retailer internationalisation (Quinn, B & Alexander N 2002).

Despite this increase in the practical use of franchising, academic attention has only recently been afforded to the nature of international franchising in the context of retailer internationalisation. Control is an issue of serious concern for international franchise companies. It is becoming a particularly important issue for international organisations as they continue to employ franchising as a mode of expansion in internationally diverse economies, and in locations geographically distant from the home market (Quinn, D & Doherty A 2000).

In terms of market entry mode strategies available to international retail companies, franchising has proved an increasingly popular mode of operation in recent times (Burt, 1993 cited in Quinn, D & Doherty A 2000) Franchising has historically been a favoured mode of expansion among service sector companies, particularly the fast food restaurant business.

However, a diverse range of retail companies has become aware of the advantages for international expansion, which the franchise strategy may bring. Therefore, the strategy has been adopted not only by niche retailers, for example, Benetton, Body Shop and Yves Rocher, but also other retailers such as Casino (France), GIB (Belgium) and UK variety stores Marks & Spencer and BhS, where it has been employed as only one of a range of entry strategies (Quinn, D & Doherty A 2000).

Studies have identified how complex the expansion practiced in small busines is and how it can strategically gain a competitive advantage over a competitor. Although these studies have also conluded that expansion is often seen as peripheral to some small firm’s requirements. Research has found some small businesses use sophisticated marketing strategies and others use no form marketing (Klemz, B and Boshoff, C 2001)

The small firm has always been viewed as the budding large firm, and Alfred Marshall’s analogy of the young plant in the nursery seedbed is applicable today as it was in the nineteenth century, of course most of these tender young shoots are destined not to survive. Marketing of products and service can develop the business, increasing turnover and profit (Alfred Marshall cited in Day J 2000).

Smaller firms share a number of characteristics differentiating them from larger organisations, that lead to marketing problems. These include, limited customer base, limited activity, fewere resourcrs, owner/managers marketing competency, no formalised planning and evolutionary marketing, and, innovation, niches and gaps. The relationship and affinity that many SME owners/managers have with their customer base has frequently been cited as an advantage. It is considered that the best strategy a small business can adopt is to fully appreciate and exploit any existing customer base, prior to attempting an expansion of this base (Klemz, B and Boshoff, C 2001)

One argument with marketing in SME,s is that it differs from the larger organisation, it requires more intuitiveness, creativeness, networking is of higher importance and more about operating under extreme time pressure. Day J (2000) stated, “Encouraging small firms to act both intuitively and flexibly is not tantamount to condoning sloppy and careless thinking, nor equally, is it an excuse to impose rigid and conservative business school models on them” Therefore the smaller businesses require their own models to be based on (Day. J. 2000:1036)

For these SME’s to reach international achievement, they not only have the appropriate product and strategy, but the decision makers must have the appropriate attitudes as well (Calof, 1994). It is these attitudes that determine how decision makers perceive the benefits, costs and risks of internationalisation (Calof (1994) cited in Chetty, S and Campbell-hunt.C 2003). These attitudes that will shape international decisions are based on the decision-makers’ past experiences (Chetty, S & Campbell-hunt. C. 2003)

Resources or the allocation of resources are a key factor to the success of any marketing strategy. There are a number of different theorisations of processes of development in a firm’s international operations. Cavusgil and Nevin, (1981) considered “internationalisation to be a gradual, sequential process through different stages, with the firm increasing its commitment to international operations as it proceeded through each stage” The most often used model is the Uppsala process model. It emphasises learning by focusing on market knowledge and commitment. To minimise risk and overcome uncertainty, it says that firms internationalise in a step-by-step process. As firms gain market knowledge they commit more resources to the market (Cavusgil and Nevin, (1981) cited in Chetty, S and Campbell-hunt,