Developing franchises into international market

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This chapter studies the concept of developing a franchise in the international market. This chapter shows the literature that has been extracted from different books and journals and aligned according to the understanding of the author towards the subject.

2.1 Introduction

Franchising has become a common term in today's economic life. It is a concept that can be adopted as a terrific way to turn a company into regional, national or international sensation. By issuing a franchise, a franchisee will earn the goodwill for the company, royalties for its product or ideas and can obtain a global reach. On the other hand, the investment made by a franchisor will gain a return in the form of heavy profits. The franchisor gets a profitable product to market with paying minimal royalty, the goodwill of the franchise will automatically attract the consumers and the business get a ground for the exposure (Marinel, 2005).

Although the lure of foreign shores, exotic cultures, and enormous population centres is enough to induce some to begin franchising internationally, the decision is not one to make lightly. A franchise system success in one community, state, region or country is not necessarily an indicator of success elsewhere. International franchising is not the equivalent of expanding the system into adjoining states or even to other region in the franchisors home country. Differences in language, demographics, politics, legal systems, and culture, as well as distance from franchisees often cause extraordinary strains on the human and financial resources of the franchisors organisation. Therefore there is much due diligence and care necessary for making the initial decision whether to commence international franchising as there is any proposed financial or strategic acquisition. The same standard of care should apply to each potential country into which the franchisor consider expanding as each country will present a new set of legal and practical challenges.

With just knowing the successful franchisors and their business, franchising cannot be seen as a premium business opportunity. It has given successful results to just the few we know. There are many options that need to be studied carefully. If a person wants himself to take an entrepreneurial risk then franchising may seem like another gamble. It require enough amount of time, effort and patience (Murphy, 2006). It also requires the time for travel to franchisee location, assist with site selection, training and support.

When a person plans for his own business, he should know that not every business is franchisable. To determine if a business is franchisable he should know the essential factors for franchising. The organisations goodwill and the products image in the market should be evaluated (Tuunanen, 2011).

2.2 Definition of franchising

Franchising is a way or method that has been designed to market different product in the form of goods and services which does not limit itself with any boundaries of business categories; it follows several methods, practices and business transaction (Mendelsohn, 1992)

The ownership relies in the hand of one person for the trade mark, service mark, an idea, a secret process, a patent, the equipment and the goodwill and know-how associated with it.

The grant of permission or a licence of those possessed trade mark, service mark, or products to use for trade on a certain condition and the know- how associated with it.

The method and procedure prescribed by the licensor to hold the business on the rule and regulation of which violation will not be permitted

To receive the payment by the licensee on the agreed royalty in order to carry the business with the trade mark and the brand name of the franchisor (Mendelsohn, p:2, 1992)

2.3 The Initial Decision

In considering whether to commence on international franchising effort the franchisor should create checklist of pros and cons, taking into consideration characteristics unique to its own franchise system and organisational resources, and apply this list to the proposed international effort. The checklist might include the following analysis;


Pre-empts competition

Increases value of trademarks and trade name

Increases revenue, for example royalties from expansion into new international markets

Increases buying leverage


Diverts management from primary focus, such as domestic expansion

Distance decreases direct control over operations and intellectual properties; increases costs of registering trademarks around the world

Diverts use of financial resources from domestic operations

Increase in expenses, such as travel, communication and entertainment.

2.4 The International Expansion of Franchising

International franchising business is a format that involves a relation between the entrant and the host country entity. In this form the former transfer, under contract a business package that is developed and owns to the latter. This host country could be a franchisee or a sub-franchisor.

The franchisors have broadened their vision in terms of expansion in the last decade. The main objective in expanding the franchise globally is to search for an environment that promotes cooperation and reduces conflict. Given the long term nature of franchise business, a franchisor looks for a country's stability as an essential factor.

The franchising expansion often develops as a response to perceived local opportunity, as an adaption of the concept of franchising that already exist in the other country. In this case the marketing focus is clearly local to begin with. In addition the local market provides the franchisor with a testing feature and develops the franchising format. Feedback from the market and the franchisees can be obtained easily due to the ease of communication. The required adjustment can be made readily and the variation in the procedures can be done easily due to the local approach and close local contact. All the minor changes can be implemented in the format may be necessary as an impact on training, franchise choice, site selection, promotion, organisation of suppliers, and decoration. The early stage of franchise requires a critical learning process, not only just how to acquire a franchisee but also for learning and tackling the nature of business. When these thorough establishments of franchise are done in the local market the franchise gains goodwill. Hence the franchise is geared to attack the foreign market and is more confident in doing so with a background of domestic success.

Though the franchise has to carry a domestic success with it to get into an international market, it should also possess certain measure to get sustainability in the international market. There are however other important factors that should be studied before entry into the new market.

2.4.1 Partnership Building & Stake holder management:

The collaboration that takes place between two specific stakeholders is termed as partnership. Partnership occurs when two parties responds to a common problem domain, but could not respond individually as they do not possess the required resource for effective results. To be much clear, several people collaborate their working process in an expectation of gaining higher benefits that acting individually (Araujo & Bramwell, 2002).

Mohr and Speckman coined a model in which successful partnership attributes are mentioned. These attributes are based on the factors of commitment, interdependence, coordination and trust. The successful partnership depends on these attributes without which a partnership will fail. The second important factor of successful partnership is communication behaviour which possess three attributes Quality (the information shared needed to be accurate, timeliness and credible), information sharing and participation (the partner jointly agreed on the plans and set goals).

2.4.2 Partnership Management:

The franchising concept involve a exclusive organisational bonding in which the franchisee and the franchisor each gets the essential merits to the business or partnership (Fable & Dandridge, 1992). The franchise system benefits the franchisee with the experience of proven success of the business format offered by the franchisor and the local knowledge of franchisee to join together (Shane, 1996) (Choo, p1, 2003).

2.4.3 Distance Management:

Many franchise depend on the location to provide service, thus this creates a distance from franchisor to create a network of service outlets. A franchisor faces problem when he is supplied by incomplete information regarding the behaviour of its agents and is infuriated by this decentralised service delivery system whose geographic scope extends beyond the nation's local boundary (Norton, 1988). This problem of extended geographical distance and the monitoring agent of franchisee intensify the problems of franchisors' entrepreneurial capability, where the distance factor and time can increase the level of uncertainty and elaborate the informational gap (Norton, 1988). Despite of the advancement in technology which transfers the information, it is evaluated as expensive and difficult task to gather complete and timely knowledge about foreign operations. Further to this, the management of foreign operation could be done through the art and science of experience that is gained as the time passes by (Aharoni, 1966). A franchisor may not possess the ability to manage its franchisee-agents over long distances which requires a complex set of skill that may not be owned by the managers or entrepreneur and this may does not substitute with experience (Huszagh, Huszagh, and McIntyre, 1992). The ability that involves the supervisory skill is considered as a key necessity for international expansion (Shane, 1996) (Choo, p2, 2003).

By careful observation on franchisee behaviour the franchisor can monitor opportunistic behaviour (Norton, 1988). If there is a careful observation made on a person he/she perceive a greater livelihood of being caught and they tend to reduce the opportunism. A reasonable inspection by franchisor on the record of franchisee facilities and a specific verification on the equipment usage or minimum standards will be beneficial. Hence it can be understood that monitoring capability develops in a franchisor

The structure of international franchising contract is another important aspect of distance management, this is a central aspect of franchisee-franchisor relationship (Choo, 2003)

2.4.4 Cultural Adaptability:

The various cultural diversities found in the international market create another complexity in the international franchising concept (Huszagh, Huszagh, McIntyre, 1992). An environment of cultural that may surely differ from the franchisor home country's cultural will significantly affect the process of contract negotiation (Weiss, 1996). Fixed operational routine and procedure are just the assumption about how work should be done. The differences in cultural norms like power distance, Confucian dynamism, and individualism can affect the local implementation (Choo, p2, 2003).

2.4.5 Control:

The control over the ability to influence system, decision and methods has a crucial impact on the foreign enterprise future. The lack of control does not provide the franchisor with a support over coordinating actions, behead strategies, revise strategies and solve the dispute that may rise when two parties of a contract may execute their own interest (Davidson, 1982). Moreover an entrant can utilise its control to acquire large share of foreign enterprise profit. Thus control can be seen as factor to gain higher returns (Choo, p3, 2003). Understanding the legal and cultural landscape of international franchising is essential for success. Failure to concentrating on this fact may lead the franchise into the wrath of heavy losses.

2.5 The cost of franchise:

Generally the amount for the initial cost depends on two factors. Whether the franchising fee is only for the business concept or whether it includes all the necessary equipment to trade. Most of the cases the upfront are decided to be the 10% of the total start up cost. This means that the total start cost varies from one franchise to another depending on its location. In some complex cases the franchisor may acquire and equip property for the franchisee. However, there may still be a difference in the total cost of the franchise relating to the cost of the property (Kastenbaum & Genn, 2008).

A franchisor may ask for a small amount of initial fee but a huge ongoing royalty. Conversely there can be a large upfront fee and less ongoing royalty. This may depend on how the franchisor may opt for recouping its cost. Some may reduce their initial upfront fee and take a handsome ongoing royalty for the cost and profit to be recouped. Or few may opt for handsome upfront fee for their cost and low royalty as their profit. This depends on how the terms of the deal are coined. But the main thing to be acknowledged is that the terms are carefully understood and agreed by both the parties (Marinel, 2005).

2.6 The Franchisor's Resource

To launch and sustain as the franchise on the international platform is a challenging job. It needs good financial and human resource to succeed over the long term. The commitment to the franchise for these resources has been made when it first thought of going international and extends through sales and development process into the operational period and continues throughout the life cycle of each international franchise relationship.

2.6.a Primary Factors:

2.6a.1 Resources

International franchising is not for the faint of heart or people with little financial resources. Although the rewards from the successful international franchise can be significantly large but an equal significantly large financial resource is also essential. Coming to the organisational structure, a franchisor must decide on the format of the franchise structure to fit in the international market or the format should be altered accordingly to the international style. In general, the greater the desired interaction at the individual unit level, the greater the resources that the franchisor must commit to the market.

In addition to the organisational structure a franchisor should realise that the issue of the franchise is located and established outside the boundaries of the home country. This is to gain the international presence. A franchisor must determine that the establish offices, or retain personnel's are outside its home country. Careful considerations of these resources are required before deciding on going international.

2.6a.2 Control:

Apart from the resource the franchisor needs a considerate look on hiring and retaining the international franchise professional. The level of control is necessary to implement a successful system and stands as a primary factor in understanding the type of contractual relationship to establish in a targeted international market. If the franchising business is highly technical substantial control may be needed to ensure system quality and performance. In such business a franchisor may prefer a direct franchising system in which the franchisor can oversee the performance of individual franchisee. If a franchisor has ability and resources, joint ventures with local businesses also allow substantial control. If resources are limited, or if expansion or growth are higher priorities than strict quality control, master franchising may more attractive alternative.

2.6b. Secondary Factors:

The resources available to a franchisor and the control necessary for the franchising system to be effective are the primary factor that a franchisor must consider when understanding the type of system to implement in a particular market. However although the resource availability and control requirement are likely to determining the ultimate structure chosen by a franchisor upon entering a new market, each of the following factors must be accounted for to determine how resources will be deployed and control will be exercised.

2.6b.1 Marketing specific Concerns:

Each market that a franchisor targets for expansion of the franchising system will have a wide range of issue specific to that market that will affect, and may dictate, the ultimate structure of the franchise system in the target market. For instance, Cultural or language barrier may require a franchisor to use local assistance. A franchisor with substantial resources available to dedicate to the target market may be able to establish a local office and hire local managers to administer the system, resolving cultural and language barriers while allowing the franchisor to maintain a substantial degree of control over the system. Franchisor with more limited resources may partner with a local master franchisee to bridge the cultural and language gap, and thereby relinquish some control over the system.

2.6b.2 Training

Franchisor offering systems with complex of technical underlying business often must provide substantial training to its franchisees to ensure their individual success as well as the success of the system. Because training not only assists franchisees in establishing successful business, but also serves as a point of control for franchisors, decisions regarding the type of training system to implement can be critical to the success of the system in a given market. one fundamental issue in far ranging international system is that it may not be feasible for a franchisee abroad to travel to the franchisors head quarters for training. If strict system control and training guidelines are essential for the success of each franchisee, a franchisor may have to opt out of competing in a given market rather than implement substandard training or allow third party to train franchisee. On the other hand, if control is less essential, it may be feasible to allow a master franchise to perform system training for the franchisor to provide a dedicated or periodic on-site trainer to particular market.

2.6b.3 Distribution

In certain franchise system, one of the franchisor's primary functions is to establish the system's distribution network, particularly in systems that require franchisees to purchase goods directly from franchisor or goods proprietary to the system. In such system or in other cases in which franchisee cannot obtain inventory or supplies on a cost effective basis, the franchisor must bear the burden of either establishing a local distribution network itself or establishing a relationship with a third party to service franchisees in the target market. For instance a franchisor may opt to establish a master franchise in market, rather than engaging in direct franchise sales to single-unit franchisees, if the master franchisee is capable of establishing a distribution network for its substances.

2.7 Considering the Factors for International Franchising

A franchisor need to consider the factors that are essential when decided to enter in the international market. These certain factor needed to be considered when a certain franchisor wants to enter in the new market. When considering the launch of international franchising effort, the franchisor is wise to budget for the efforts discussed below;

Legal due Diligence: the franchisor should restrain competent counsel in each country in which franchisor intends to offer franchisee. In house counsel of the franchisors home country must coordinate the efforts of local counsel to ensure that all local laws and customs applicable to the franchisor's proposed franchising are carefully researched and applicable government fillings are processed. The franchisor may decide to engage counsel in its home country with sufficient knowledge and experience of the laws and customs related to franchising in the host country.

Registration and Property rights: Obtaining local country registration of the franchisors principal trademarks and protection of other essential elements of the franchise system's intellectual property is essential before the franchisor begins offering franchises in the host country and is often very costly. In many instances the franchisor should retain separate local intellectual property counsel, as competence in this area varies from country to country.

Import/export Matters: the franchisors may need to research local source for generic or proprietary products necessary to operate the franchise system in the target country. This often takes time and great deal of financial resource, such travelling to host country and testing those products. In the event local products are not feasible and/or desirable, the franchisor must identify cost effective means of shipping essential inventory to the host country, possibly storing it there, and a means of distributing the products to the franchise units. In addition to the logistical issue, other costs may exist on both ends of the supply line relating to official governmental regulations concerning the exportation and importation of the essential supplies.

Foreign Exchanges/Withholding Taxes: For each country in which it intends to sell franchises, the franchisor must establish, the method of payment, such as whether to use local currency or the currency of the franchisor's home country, and determine the allocation of risk between the franchisor and franchisee with respect to local currency fluctuation. The franchisor must also research whether there are any restriction on converting its fees earned in the host country into the currency of its home country or upon the removal of currency from the country.

Becoming a Franchisee

The idea for establishing own business needs a lot of hard work. The person who desires for his own business has to possess a unique or impressive idea that has to be easily indulged in the market. If such an idea or product has evolved in person's mind then franchising is the best option. Franchising is not like the independent business where decisions are made by experience industry professionals (Windsperger, 2004).

The decision to acquire a franchise must be made after a thorough research on the proposed franchise. The details about the new and unique idea should be understood. The market research should be conducted in order to get the potential response of product from the market. The advantages and disadvantages of the product should be carefully considered.. Before the decision is made for the franchisee the motivational factor has to be considered from the parent firm.