Strategic Advantages To Franchising Business Models Business Essay

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Franchising is a form of business in which the franchiser gives the authority to a franchisee to distribute services, products or methods of business to affiliated dealers. In many cases franchisees are given exclusive access to a particular geographical area. The franchiser usually mandates uniform symbols, trademarks and standardization of services.

Currently Burger King has 3 different forms of franchise schemes, which correspond to 3 different types of franchise ownership:

Individual or Owner/ Operator

Entity

Corporate

Individual or owner/ operator ownership was traditionally used for individuals who signed the franchise agreement personally and who were personally responsible for operating the franchise restaurant. Although the individual franchise agreement can be assigned to an operating company under certain conditions, the individual remains personally responsible under the franchise agreement.

Entity ownership allows different forms of ownership and management of, and equity investment in the franchisee. Under the Entity ownership program, a corporation, a limited partnership or a limited liability company can directly execute the Entity franchisee scheme if they satisfy Burger King's guidelines and for approval of franchise ownership distribution plans. Generally, one of the conditions of Entity ownership is that one or more individuals or entities guarantee to be responsible for the franchisee obligations to Burger King out of which one of them has to be designated by Burger King's approval to be the managing owner who shall be responsible to ensure that they comply to the franchise agreement and has to have enough authority to make certain decisions. Additionally the managing owner must have at least 5% ownership of the franchisee.

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Corporate ownership franchise scheme occurs when a company with publicly-traded stock or a subsidiary of a publicly-traded company, that controls locations that are not accessible or have limited access to the general public. Such franchisees are typically food service companies that provide a variety of contract feeding services in a institutional location such as government buildings and facilities, airports, bus and train stations, theme parks and zoos. A qualified director of operations who shall be approved by Burger King needs to be appointed who will have certain responsibilities and authority to ensure that the corporate franchisee is complying with the franchise agreement.

Although these 3 franchise schemes may slightly vary between them as to responsibilities and setup costs, however in substance they follow the traditional franchise setup that Burger King has adopted through the years.

Burger King grants franchises to operate restaurants using Burger King trademarks, trade dress and other intellectual property rights that it owns, from uniform operating procedures, consistent quality of products and services to standard procedures for inventory control and management. For each franchise restaurant, Burger King enters into a franchise agreement covering a standard set of terms and conditions. Recurring fees consist of monthly royalty and advertising payments that range between 3.5% to 5% on gross sales, and a fixed yearly fee that starts at $50,000 depending on the size of franchisee set-up.

 

Burger King offers its franchisees its renowned barbell menu strategy, which gives the franchisees the opportunity to expand on Burger King's high-margin premium products and value products and in order to grow the core drivers of our product offerings. The barbell menu strategy is aimed at driving average check and traffic, since it is believed that by balancing higher margin products with value offerings Burger King's brand equity of flame-broiled taste, we can differentiate Burger King from its competitors.

However the fast food industry is highly competitive and some of Burger King's competitors have significantly greater resources such as Macdonald's. This leads to a disadvantage when it comes to competing with them and most of all to react to changes in pricing, marketing and the quick service restaurant segment in general more quickly and more effectively than Burger King can. This gives the competitors a competitive advantage through higher levels of brand awareness among consumers. In addition, our major competitors are also able to devote greater resources to accelerate their restaurant remodeling and rebuilding efforts, introduce new product and implement advantageous product offerings, which could give them a competitive edge over Burger King.

The market for retail real estate is highly competitive. Based on their size advantage and/or their greater financial resources, Burger King's major competitors may have the ability to negotiate more favorable terms and entrepreneurs may offer priority or grant exclusivity to these competitors for more desirable locations. As a result, this may hinder the ability to obtain new franchisees or renew existing agreements.

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The capital required to grow and maintain Burger King Corporation is primarily funded by franchise agreements, this presents a number of drawbacks in Burger King's strategy, especially when the company currently only holds 10% of the restaurants and it is planning to significantly reduce it over the next 5 years. This may lead to problematic situations whereby Burger King being the franchise will have limited influence over franchisees and reliance on franchisees to implement major initiatives. This may also lead to limited ability to facilitate changes in restaurant ownership, limitations on enforcement of franchise obligations due to bankruptcy or insolvency proceedings and inability or unwillingness of franchisees to participate in our strategic initiatives.

On the other hand Burger King's principal competitors are mainly Macdonald's and Wendy's. These have greater influence over their respective franchisees due to the significantly higher percentage of company restaurants and ownership of franchisee real estate that they hold. This may result, that they may have a greater ability to implement operational initiatives and business strategies, including their marketing and advertising programs.

While Burger King can mandate certain strategic initiatives through the enforcement of its franchise agreements, they need the actively seek support from its franchisees for a successful implementation of these initiatives. These efforts to build this alignment with its franchisees may result in a delay in the implementation of the marketing and advertising programs. Although the current relationship with its franchisees is generally good, there is no assurance that it will continue to be so. In fact Burger King has already been sued by the National Franchisee association, this organization represents over 50% of Burger King's franchisees in the United States. This law suit is due to Burger King's decision to dictate to the U.S. franchisees to sell the 1/4 lb. Double Cheeseburger and the Buck Double burger at $1. This is a clear example whereby Burger King's failure to win the franchisees support in its marketing programs and strategic initiatives could lead to negatively affect the ability to implement the business strategy that it would have decided to adopt.

Burger King's operating results substantially depend upon its franchisees sales. However, its franchisees are independent operators and they cannot control many factors that impact the profitability of their restaurants. Pursuant to the franchise agreements and their operational manual, Burger King mandate menu items, signage, equipment, hours of operation and value menu, standardization of procedures and approval of suppliers. However, the quality of franchise restaurant operations may be diminished by any number of factors beyond its control. Consequently, franchisees may not successfully operate restaurants in a consistent manner with the mother company standards and requirements. Due to various factors, Burger King as a franchisor may not be able to identify problems and take action quickly enough; as a result, its image and reputation may suffer.

Most of Burger King's franchisee restaurants are presently located on leased premises. As restaurant leases expire, our franchisees may be unable to renegotiate a new lease, on commercially acceptable terms or nothing at all, which could cause a number of its franchisees to close down.

As already stated, the fast food industry is intensely competitive and Burger King has to compete both in the U.S. and internationally with a number of established companies on the basis of product choice, quality, affordability, service and location. Burger Kings competitors include a variety of independent operators, in addition to well-capitalized national and international chains and franchises. Furthermore, this industry has few barriers to entry, and therefore new competitors may emerge at any time. Burger King's ability to compete will mainly depend on the success to improve existing products, to develop new products, effectively respond to consumer preferences and to manage the complexity of its operations as well as the impact of our competitors' actions.

On the other hand, negative macro consequences of franchising include the propensity of franchising to promote anticompetitive distribution systems (Hunt, 1972), the rationalization of consumer choice (Alon, 2004), and the destruction of local customs (Ram, 2004), leading to what has been called the "McDonaldization of Society" (Ritzer, 1995).

Alon I. 2004. Global franchising and development in emerging and transitioning markets. Journal

of Macromarketing 24: 156-167.

Hunt SD. 1972. The socioeconomic consequences of the franchise system of distribution. Journal

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Marketing 36: 32-38.

Ram U. 2004. Glocommodification: how the global consumes the local: McDonald's in Israel. Current

Sociology 52: 11-31.

Ritzer G. 1995. The McDonaldization of Society: An Investigation into the Changing Character

of Contemporary Social Life. Pine Forge Press: Thousand Oaks, CA.

Using relevant theory and examples to support your answer, critically evaluate the role of leadership in managing cultural and behavioral factors during the execution of a turnaround strategy.  

In the rapidly developing modern world and the age of globalization, the concept of organisational change has become more important than ever before. Although it has always been an important feature of organisational life, the 'place, magnitude and necessity' of organisational change has considerably escalated over the past two decades (Arnold, 2005). As Mullins (2007) states,

"Change is a pervasive influence. It is an inescapable part of both social and organisational life and we are all subject to continual change of one form or another".

There exists a multitude of reasons as to why organisations must constantly make changes, both external and internal. Although internal factors play a role, the main pressures faced by companies to change comes from external forces. This is because in order to survive in the corporate world, organisations must be properly prepared to face and respond to the new challenges and opportunities presented by the ever-changing external environment (Mullins, 2007).

Many organisations appear to be in a continuous state of change as they are forced to increase the speed with which they respond to the unpredictability of external factors, essential for their survival (Hussey, 2000). One of the most influential forces instigating organisational change today is the rapid rate of globalisation and consequent fierce world competition. With the accelerating emergence of economies such as India and China, Mayle (2006) states that

"globalisation is no longer an academic discipline or a fringe movement but a business imperative"

Thus creating the need for constant change and the fact that competition is intensifying, means that organisations cannot simply ignore developments and give advantage to their competitors. Technological change has therefore become extremely significant as the rate of obsolescence increases, a trend that is set to become more significant with the rapid growth of the internet and E-commerce. As Hussey (2000) states, it is unlikely that organisations can introduce new developments without causing changes to skills, jobs, structure and often culture. Another external factor to consider is that the demographic profile of most countries is changing - the proportion of older people is increasing relative to the proportion of younger people. This will create huge pressures for organisations, and corporate issues may involve 'finding ways of dealing with skill shortages, changes in attitudes to the employment of older people and problems of motivation in flat organisational structures which offer little opportunity for promotion' (Hussey, 2000). Other external forces of change relevant to organisations include government intervention, political interests, scarcity of natural resources and the nature of customers. Internal sources of change include innovations, new methods of work, re-locating, training, staff development and the re-allocation of resources and responsibilities (Mullins, 2007). The survival and success of any organisation depends how they choose to adapt to these internal and external demands. It is not about whether to change, but to how and when. Burger King started this process in 1977, by hiring Donald Smith as president and CEO. Smith identified the shortfalls that Burger King was facing at the time. Smith adapted and executed his turnaround strategy, and modelled on the basis of Macdonald's strategy which proofed rather successful.

The processes involved in organisational change may differ widely depending on the corporation in question and the current situation that it is facing. However, it is important for all organisations in today's globalised economy to understand the importance of continual change - constantly transforming in order to keep up with the changing environment and hence survive in the competitive modern world. The actual changes to an organisation can either be implemented in a planned and systematic fashion, often designed and implemented by consultants, or in a more informal and reactive way, where managers react to situations on a daily basis and implement change accordingly (Tosi, Rizzo & Carroll, 1994). The notion of organizational development - change that focuses on the whole organization - is concerned with anticipated, planned and consciously designed change that will serve to increase an organizations effectiveness (Cummings & Worley). Lewin's change model provides a fundamental model of planned change, which perceives change as a 'modification of those forces keeping a system's behavior stable'. In this model, Lewin believes that the change process consists of three steps: Unfreezing, Moving and Refreezing. Unfreezing involves diminishing the forces that uphold an organizations current behavior - often done by showing employees the discrepancies between behavior desired by the organization and behavior that is currently displayed. Through a process of 'psychological disconfirmation' members can thereby be motivated to change. The second step, 'Moving' aims to shift the current behavior of the organization by developing new behaviors, values and attitudes in the system through changes in organizational structures and processes. Thirdly, 'Refreezing' involves the stabilization of the organization at its new state, often through supporting mechanisms such as organizational culture, norms, policies and structures' (Cummings & Worley, 2001). Lewin's model serves to provide a general structure that allows one to understand organizational change and the processes involved.

The need for managers to restructure organisations and become more flexible is unavoidable, and due to continuing trends in technology and manufacturing development, organisations must operate as 'masters of change' (Tosi, Rizzo & Carroll, 1994). Studies have shown that the planned approach to organisational change, using techniques such as training programmes and goal setting programmes, have had more positive effects on productivity than other approaches, as they have been more effective in changing satisfaction and attitudes (Tosi, Rizzo & Carroll, 1994).

Change can create a feeling of deep resistance amongst the people of an organisation, thus making it difficult, sometimes impossible, to successfully implement organisational improvements. Strong resistance to change can occur even when employees are fully aware of the failings and limitations of the current system employed (Tosi, Rizzo & Carroll, 1994), and such resistance can stem from a number of sources.

Resistance to change can occur due to the fear of the unknown as employees worry that the new system may be more difficult to use than the present one or that they will be forced to face new problems and decisions for which they lack experience (Tosi, Rizzo & Carroll, 1994). De Jager (2001) argues, 'Most people are reluctant to leave the familiar behind. We are all suspicious about the unfamiliar; we are naturally concerned about how we will get from the old to the new, especially if it involves learning something new and risking failure" (p. 24). As Bolognese (2002) suggests, resistance can also be considered an inevitable response to any significant change as 'individuals naturally rush to defend the status quo if their security or status is threatened'. The existence of a strong organisation culture and power structure, which naturally serves to maintain stable behaviour patters, can also act as a barrier to change, as the very nature of change will put them in jeopardy (Tosi, Rizzo & Carroll, 1994).

Although such reasons exist, the managers of any organisation should be responsible to turn such negative views around and neutralise them into something positive. Much resistance is caused due to the lack of communication in the implementation process, which leads to misunderstanding on the employees behalf and consequently the lack of trust in top tier management. It is important, therefore, for organisations to establish a strong climate of trust in order to make any changes possible. The involvement of employees in the change process, especially the need to communicate, is also key to the effectiveness of any management change, and managers should actively encourage participation and lend support to their people. Between 1980 and 2004, Burger King hadn't managed to keep up with the pace. Throughout these 24 years Burger King had seen 11 CEO's, whereby its market share slid down to 15.6%. Following the take-over by the private equity TPG group in 2002 and the appointment of Greg Brenneman as CEO in 2004, Burger King had set its strategy to recovery. Brenneman having held board appointments in different industries, which presumably follow different strategic practices, were more likely to initiate strategic change at their own firm (Geletkanycz and Hambrick 1997). Brenneman launched his 'go forward plan' whereby he focused on 4 key strategic objectives;

Increase profitability

Fire up the customer

Fund the future

Work together

Brenneman tackled the main problematic issues by deconstructing the problem and tackling the issue at its source. This strategic initiative and change did not come without any resistance, however he had managed to communicate and take on the responsibility of helping the management team to overcome such resistance by effective communication and clear vision which in return managed to implement the required changes effectively.

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