Assessing the Obstacles faced in franchising

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The role of franchising in national economies is becoming more important (Kaufmann and Dant 1996) by creating employment opportunities and service prevision (Spinelli et al. 2004). Franchising is the fastest growing from of retailing (Dant et al. 2007) and a major section of this recent growth can be attributed to the emergence of multi-unit franchising (Gruenhagen and Dorsch 2003, Kaufmann 1992). There are many barriers that face franchise allover the world mentioned by Hoffman, R. and Preble. (2004) there are legal economical, technological and cultural. So the objective of this project is to know the barriers of franchising, and the advantages and disadvantages of franchising for both parties (franchisor-franchisee)

Literature Review

Multi-unit franchising (MUF) refers to an organizational arrangement where one franchisee operates two or more franchised outlets in the same franchise system (Kalnins & Mayer 2004). In USA 20% franchisees operate more than half of the franchised outlets (Wardsworth and Morgan 2003). The multi-unit franchising phenomenon can be divided into two categories i.e. sequential multi-unit franchising and area development multi-unit franchising (Kaufmann and Dant 1996). In the first type one of the existing franchisees is granted a right to open additional outlets and each of the outlets is governed by separate franchising contract (Gruenhagen and Mittelstaedt 2005). On the other hand in second type of arrangement, the franchisee is selected as an area developer and he is obliged to open a certain number of outlets in a particular geographical area during a specific time period as stipulated in the franchise contract. The area developers often get exclusivity in that particular area (Kaufmann and Kim 1995).

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Single-unit franchising has been the major focus of franchising research in past. Franchising researcher emphasized that multi-unit franchising and single-unit franchising are two different types of organizational arrangements hence cannot be seen using the same lens. They need to studied separately and most of the previous research on franchising misses this important point. Multi-unit franchising has caught the attention of franchising researchers since 1990s. Although several empirical studies were published on multi-unit franchising in the last decade, the research deficit primarily results from the lack of theoretical foundation of this ownership strategy in franchising networks (Hussain and Windsperger 2010).

The literature review will start with defining the franchise and how it works "Franchising permits the franchisee to sell product or service under highly publicized brand name and a well-proven set of procedures with a carefully developed and controlled marketing strategy" according to (Ball, A., and Mcculloch). Then it will show the reasons behind the choice of franchising.

Franchise has advantage and disadvantage like any other form of business. The advantage and disadvantage will be discussed from both point of view franchisor and franchisee. Each will discuss the advantage and disadvantage from his own perspective.

Aims and Methodology

This project will answer the questions of, why many businesses in Egypt chose to franchise instead of going for any other investment alternative. Benefits of franchising over other investment alternatives.

The aim of this project also, is to explain the barriers of franchising. These include the identification of the four obstacles to franchising allover the world and if these barriers are found in EGYPT. The project also will discuss the advantage and disadvantage of both franchisor and franchisee each from his/her own prospective when using the franchising system.

In order to achieve and realize project aims and objectives, a mixture of both secondary and primary data will be gathered. Primary data, by using data base and books to find the secondary data that need to be mentioned and to satisfy the project objectives (why many businesses in Egypt chose to franchise instead of going for any other investment alternative? Benefits of franchising over other investment alternatives. Advantage and disadvantage for franchising). Qualitative research will be conducted because the main purpose is to gather data from industry expertise from different sectors (food, cloth, cars) that allow to get a wider information's from different prospective.

Exploratory research (What franchising obstacles that are known allover the world are facing the franchisors in Egypt? AND explore the methodology of how to overcome the obstacles and disadvantages of doing franchising business in Egypt? (Based on insights from industry experts)

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Conducting in-depth interview with industry experts who have practice franchise business in Egypt and familiar with business environment in Egypt and have area of expertise of how to deal with franchising obstacles from both sides (franchisor-franchisee)

Conducting the in-depth interview with two from both sides (franchisor-franchisee) in different three sectors.

Dissertation Structure

This section shows how the dissertation is structured and provides an introduction to each chapter. And there are five chapters that included in this dissertation.

(Introduction, literature review, aim and methodology, findings and the conclusion)

Chapter 1- Introduction

The first chapter in the dissertation structure is the introduction that introduces the components of the research. Introduction gives a brief summary of the project, first by defining franchising and discussing the reasons behind the success of franchising as a concept and in Egypt. This chapter introduces the fact of the success of franchising worldwide, the barriers of the franchising system face during the operation.

Chapter 2- Literature Review

The literature review will start with defining the franchise and how it works "Franchising permits the franchisee to sell product or service under highly publicized brand name and a well-proven set of procedures with a carefully developed and controlled marketing strategy" according to (Ball, A., and Mcculloch). Then it will show the reasons behind the choice of franchising.

Franchise has advantage and disadvantage like any other form of business. The advantage and disadvantage will be discussed from both point of view franchisor and franchisee. Each will discuss the advantage and disadvantage from his own perspective.

Chapter 3- Aims and Methodology

The aim of this project also, is to explain the barriers of franchising. These include the identification of the four obstacles to franchising allover the world and if these barriers are found in EGYPT. The project also will discuss the advantage and disadvantage of both franchisor and franchisee each from his/her own prospective when using the franchising system.

In order to achieve and realize project aims and objectives, a mixture of both secondary and primary data will be gathered. Primary data, by using data base and books to find the secondary data that need to be mentioned and to satisfy the project objectives

Chapter 4- Findings

A comparison between secondary and primary findings will be made. This section presents the research data from the case studies and interprets the findings. A comparison is made between the findings of this research and the findings derived from the literature.

Chapter 5- Conclusion

This chapter concludes the aims and findings of the project at hand and it shows the final result of the research. However the research does not end there, directions for further research on the topic will be given in order for other researchers to carry on from where the researcher has left off.

Chapter Two

Literature Review

Franchisor and Franchisee relationship

The significant relationships between multi-unit franchising and franchise system characteristics for example system growth rate, age of the system, and system termination rates have also been evidenced. Bradach (1995) found that franchisors believe that they are exposed to a lower degree of risk when allocating new units to existing franchisee rather than experimenting new and untested franchise partners. The author found after analyzing the responses of the top executives that multi-unit franchising can address certain issues in a more effective way as compared to single-unit franchising, particularly the issues related to unit growth and system wide adaptation. Kaufmann and Dant (1998) argued that franchisor are unwilling to place their business concept in the hands of new and untested franchisees, therefore they look towards existing franchisees to grant new units. It has also been empirically supported that the new units that are allotted to existing franchisees have lower risk of failure (Bates 1998). Franchisors use multi-unit franchising as a measure to mitigate the risk of opportunistic behavior of the franchisee (Bercovitz 2003). The results supported propositions that multi-unit franchising reduces the system terminations and system litigations rate.

Kalnins & Lafontaine (2004) investigated the question about how new units are allocated to franchisees. They found that the franchisors prefer existing franchisors to allocate new units and particularly to the franchisees who presently operate unit close to the proposed location of the new unit. Kalnins & Mayer (2004) mentioned that local knowledge gathered by the franchisee plays an important role for the success of subsequent units opened in the same geographical area. Garg et al. (2005) mentioned the factors that influence the franchisor's choice of adoption of multi-unit franchising and area development agreements. The data indicate that the franchisors planning for expansions are more likely to use multi­unit franchising. The results also suggested that the franchisors those place more emphasis on uniformity, are more likely to use relatively higher proportion of area development agreements rather than sequential multi-unit franchising.

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The multi-unit franchisees have different motivations to enter into the franchise contract compared to those of single-unit franchisees. According to the results of a study by Gruenhagen and Mittlestaedt (2005), the area developer multi-unit franchisees reported that they considered (at the time of taking up franchise agreement) their venture as an investment. On the other hand sequential multi-unit franchisees reported that they were mainly motivated by their entrepreneurial ambitions. Weaven & Frazer (2006) also investigated the motivational factors of single unit and multi-unit franchisees. The findings suggest that single-unit franchisees consider marketing strength of the franchisor brand, potential to employ family members, initial training days, and the level of operational freedom to assess the franchise offer. On the other hand multi-unit franchisees place more emphasis on the importance of business vision and concept, potential for expansion, ongoing training, involvement in decision making process and governance structure. Dant et al (2009) compare the motivations of single unit and multi-unit franchisees and found significant difference among the two groups. They also investigate the change in the motivational factors when single unit franchisees become multi-unit owner.

Weaven and Frazer (2004) empirically verified a positive relationship between multi-unit franchising and system maturity by investigating Australian franchise sector. The authors proposed a negative relationship between multi-unit franchising and level of conflict in franchise system. But the analysis of data revealed that there is significant positive relationship between level of conflict and multi-unit franchising. These results contradict the findings by Bercovitz (2003) mentioned there are negative relationship between multi-unit franchising and litigation and system termination rates. The contradiction of results could be attributed to the fact that both studies were carried out in different markets and different context.

Weaven and Frazer (2007a) found that the franchisor who recognize higher agency costs in future tend to use higher quantity of multi-unit franchising. The relationship between adoption of multi-unit franchising and (1) system uniformity and (2) higher brand value was also found significant. Furthermore, Weaven & Frazer (2007b) found a positive relationship between multi-unit franchising and age and size of franchise system, system corporatisation and use of plural forms of distribution. A negative relationship between level of conflict and multi-unit franchising was also evidenced empirically. A study of Spanish franchise sector showed that multi-unit franchising is positively related to franchise system density (Sanchez et al. 2006). Moreover the results revealed that larger franchise system and franchise systems operating in service sectors make relatively extensive use of multi-unit franchising. The findings by Weaven & Herington (2007) suggest that less mature and relatively small franchise systems are more likely to use single-unit franchising and less sophisticated HRM policies and, on the other hand, large and mature franchise systems generally use multi-unit motivation of the franchisees at the local outlets results in lower shirking and free-riding under multi-unit franchising compared to single-unit franchising.

Franchising in Egypt

Mentioned by (Yin 1989). Franchising is generally described as the granting or licensing of certain intellectual property rights by one agent, the franchisor, to another, the franchisee and the access for the franchisee to certain tangible and intangible benefits and privileges.

In Egypt, Franchising is growing larger every day, "Recent figures show that there are currently more than 310 franchising concepts operating in Egypt across the board in the food business, retail stores, sports and hospitality, among others. They represent some $4 million in cumulative investment and employ more than 4,000 people." (Madany, 2005)

Franchising alternatives mentioned by (Ball and Mcculloch) are contract manufacturing "the firm contacts with a local manufacture to produce products for it according to specifications" also mentioned licensing and strategic alliance .but in Egypt the success of any business that you may start and to be survive for long time is 10%., beside you should have the well known of the business and have the talent to start it. Which is nothing comparing to franchising. As franchising allow 90% chance for success. (Madany 2007) that proves why Egypt needs franchising systems. This is a reason of why choose franchising instead of the other alternatives.

Since the 1970's (Yin 1989) Egypt has gone a long way in dealing with the franchising concept. For example, local fast food chains have dramatically developed up to an extent where they were able to compete with international franchises in terms of management, service and product quality. This situation led them to expand outlets by local franchises throughout different governorates as well as going international in some few cases. An example of these fast food outlets is: Mo'emon, Cilantro, and Coffee Roastry etc

The franchising market in Egypt has tremendous potential, mainly in the fast food sub-sector. The market has shown remarkable expansion since it began in 1970, and the market is expected to continue growth at an annual rate of 10 to 20 %.

Fast food franchises are the most common franchises in Egypt, where most of them are US- based such as Hardees, KFC, MacDonald's…etc. The introduction of these new brand names changed and development the tastes of the average Egyptian. Going out and eating became a more regular custom than in the past. This concept has encouraged many new comers to enter the market and reflects the growing trend in this industry in Egypt.

Garment franchising is another new and growing industry in Egypt such as Timberland, Mango, Addidas, and Nike…etc.

As seen from these two industries there is a lot of potential and growth in the Egyptian market. Franchising has extended well beyond food and or FMCG products as both legal and accounting firms have franchised their name quite extensively well beyond the famous few world known Multinationals present in any and every country.

Effect of Franchising on the Egyptian Economy

Statistics obtained from the Egyptian Franchise Development Association 2004:

Total annual turnover generated by all franchised systems in Egypt is estimated at EGP 5.2 Billion. (U.S 860 Million Equivalent)

Total investments in the franchise sector of the economy are estimated at EGP 22 Billion. ( U.S. $ 3.7 Billion Equivalent)

Employment in this sector is estimated at 36,300 employees.

As seen from the above, franchising played and plays a vital role in the economic and social development in Egypt.

Positive Contributions of Franchising:

Helps local brands by increasing competition and raising the standard of product quality and services.

Generating new incomes and additional jobs.

Boosting the host economy and raising the standard of living of its population.

It limits risk, as the franchisee is supported by the experience of the franchisor with proven methods, training and on-going advice.

It reduces the rate of default on loans to franchise outlets, by providing a transfer of technology which results in superior standards of goods and services.

In conclusion, franchising is a very attractive tool in the coming era towards economic development in Egypt as well as MENA region through:

Contribution to the GDP directly through their own contribution and indirectly through developing supply chains into international level (local and export).

Excellent tool to develop professional management skills in Egypt.

Helps to solve the unemployment problem as in many cases it can be a labor intensive industry.

Barriers of franchising:

There are many barriers to franchising that may face both franchisor and franchisee. This part will discuss the barriers of franchising starting with defining the major barriers that are found allover the world.

Authorized Barriers: Hoffman, R. and Preble. (2004) stated that:

"Overall, the trade associations report the existence of royalty taxes, contract law, and the lack of specific franchise legislation as the major legal issues potential franchisors and franchisees needed to be aware of." The legal (Authorized) barrier of franchising is that there are not a fixed legal and specific legislation to control the franchising process. It differs from one to another it mainly based on the contract and the agreement of the two parties. So it may affect both the franchisor and franchisee due to the lack of legislation of franchising.

Political Barriers: "Challenges facing franchisors in the future include concerns about economic stability and energy, changes in legal/political environments, and the need to find qualified franchisees." Hoffman, R. and Preble. (2004). These shows that political risks ( like wars) are challenges for the franchising system and needed to over come these risks and found ways to solve it like found a qualified franchisees, study well the countries and the stability of these countries. And if suitable to start the operation in or not.

Socio-Economical Barriers: Franchises could found many barriers when opening in a country where there are economy problems like (Limited income, weak currency, inflation rate…etc) these can affect the success of the operation

Technological Barriers: Nowadays, technologies are very important elements in our daily life. Especially in business life, as it reduce time and more efficient in the work process. Technology could be barrier that faces franchising operation as; it will affect the whole operation in a negative way. In countries that face a lack of technology may have negative impact on the franchising system cause, it makes shortage in the communication process between franchisor and franchisee. Also it affects the way of managing staff, product assembly and more. So one important element for the success of franchising system is the technological use in the operation.

Trade Barriers:

"Technical barriers to trade may take the form of standards, technical regulations, conformity assessment procedures, sanitary or phytosanitary measures, etc." Sierra.E (1999) technical regulations, rules, agreements confirmty, taxes all these factors may affect the franchising operation, as it may makes limits for the franchising system to work properly and affect the process to work smoothly.

Advantage of franchising:

Advantages of franchising according to (British government) for the franchisor and franchisee makes them have a greater chance to grow up the business these due to, of franchising system allow using the same brand name and trade mark that leads to have better opportunity as many benefits used well, like using the same advertisements or promotions. Also the franchisor gives the needed training and support to the franchisee that help in success of the business. Moreover help in setting up the business and gives all the information needed to run the business and start the franchising operation smoothly and efficiently.

Furthermore one of the advantages that franchising system provides, having the exclusive rights in your territory, which makes the franchisor have not the ability to sell franchise in the same region or area of any other franchisee that can be one way of the success of the business. Moreover the financing the business is more easily as for example bands would like to lent money or gives loan to franchise that have a good reputation.

Further more, one of the barriers that face franchising is the balance of power, (Elizabeth C. Spencer) mentioned that "redress imbalance of power and ensuring certainty among the parties are among the stated goals of the regulation of the franchise". That insure one of the main factors of franchising success is the balance of power. So if the there are no balance of power it will have negative effect on franchising. Moreover the balance of power is considered as on the most important factors of franchising success.

Last but not least the relationship with supplier is already available and easier to get the material with the same quality without any difference from the others.

Disadvantage of franchising

The disadvantages of franchising are that, the costs of being franchisor may be very high than expected, include the initial costs of buying the franchisor. Also franchisees have to pay management service fee that needed to pay that is cost a lot. Further more, franchisee may not be able to make any change about the standers of the franchising, because there are agreements include restrictions that are guideline for running business. That leads to appearance of the problems. This happens when there are changes needed that fit your local market franchisee will not able to makes any changes. Other disadvantage is that franchisor can give the brand a bad reputation that will affect the business operations that affect the brand in different areas. Further more, franchisor may find difficulty in selling the franchisee for many different reasons

The revenue and profits are shared by the two parties (franchisor-franchisee) that will lead to affect the relation between both parties into negative way that will lead to end up the business .Mentioned by (British government)