The Egyptian Franchising Development Association Commerce Essay

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By definition, according to the Egyptian Franchising Development Association; Franchising is a method of distributing products and services, at least two levels of people are involved in the franchise system; the franchisor, who lends his trademark or trade name and a business system and the franchisee, which pays a royalty and often an initial fee for the right to do business under the franchisor's name and system. The franchisor grants the independent operator the right to distribute its products, techniques, and trademarks for a percentage of gross monthly sales and a royalty fee. Furthermore, the Franchisor facilitates factors such as national or international advertising, training, and other support services for the franchisee in order to make sure that the franchisee lives up to the brand name its holding. Agreements, typically last five to thirty years, with premature cancellations or terminations of most contracts bearing serious consequences for franchisees.

The issue of Franchising itself is considered to be complicated because it involves two parties from different countries, which means that a lot of agreements have to be agreed upon and stated down in a clear contract that binds both parties. The Franchisor and the Franchisee both obviously seek their own benefit which makes the advantages and the disadvantages for each party differ. In other words the franchisor has a set of advantages and disadvantages and the franchisee has a completely different set of advantages and disadvantages as well.

2.1 The reasons behind Franchising

As mentioned earlier, the issue of franchising is by no means considered to be an easy task; it is extremely complicated and risky, since it involves two parties from different countries, bound to each other through a binding contract that they both have to respect and follow. The general wondering that comes to mind after knowing these facts about franchising is about the reasons franchisors and franchisees still do it. There are a lot of alternatives to franchising such as real estate or securities; however franchising is quiet frequently chosen over its alternatives, which means that the franchisors or the franchisees are not seeking just profits through franchising, they are obviously seeking more.

The researcher has discovered that explanations for the existence of franchising from the franchisor's perspective have been discussed since the 1960's, and are mainly divided into two competing views. The first view talks about franchising being a cheap source of capital when it comes to retailing expansion (Oxenfeldt and Kelly, 1968/69). This view however was proven to be flawed since cheaper alternatives such as stock issuing (Rubin, 1978) do exist. On the other hand, studies have shown that franchising supports the idea of rapid expansion and that franchisors believe in that idea based on their desire to have control with foreigners. (Kaufmann and Dant, 1996).

The second view discusses the attraction that franchisors get when deciding to franchise. The view simply states that the franchisees get extremely motivated when they grasp a franchising opportunity, since they are considered to be semi-independent owners of the franchise; not just a hired manager. The ownership factor is the reason behind the franchisees excitement and motivation, this factor gets the franchisee to do its best, in order to make as much profit as possible. This is where the franchisor benefits. The franchisor does not invest a lot of capital in order to get its brand name into a new market; on the contrary the franchisee pays the franchisor a royalty fee in return of simply using its brand name. (Dahlstrom and Nygaard, 1994)

After discussing the views that franchisors have as to why they franchise, the researcher now moves on to discuss the reasons behind the franchising choice made by the franchisees. Research on the issue has shown that franchisees choose franchising over its alternatives, because they simply become part of an already established, larger system that they partially depend on. Franchisees view franchising as an opportunity to make lots of profit without exerting remarkable effort, since they become part of an international, well known brand name, which gives them a competitive advantage within the boundaries of the country they operate in. Franchisees believe that franchising gives them a competitive advantage; since they get some degree of independence, while receiving training, expert support and financial assistance. (Kaufmann and Dant, 1996; Kaufmann and Stanworth, 1995; Peterson and Dant, 1990; Stanworth and Kaufmann, 1996)

2.2 Balancing the powers

The traditional view of franchising pictures the franchisor as the party that has all the power over the second party which is the franchisee. That view is the result of a logical way of thinking, since the franchisor is the party that owns the brand name, provides training, expert support as well as financial assistance to the franchisee. (Kaufmann and Dant, 1996; Kaufmann and Stanworth, 1995; Peterson and Dant, 1990; Stanworth and Kaufmann, 1996)

These facts obviously are more than enough to give the franchisor the upper hand over the franchisee when it comes to matters like investing capital and decision making. However, despite of that superiority that the franchisor has over the franchisee, some franchisees have tried to balance that power structure, often through founding or becoming members of increasingly powerful franchisee associations. Harris and France (1997) report that membership in the American Association of Franchisees and Dealers has increased from 20 founding members in 1992 to over 6,000 today. The American Franchisee Association has raised membership from 4,000 in 1992 to 7,500 in 1997 (Harris and France, 1997). The statistic shows the overwhelming number of franchisees who have found the power balancing matter to be of great importance and have tried to take action regarding it. In other cases franchisors themselves have found that the level of trust between them and the franchisees is declining and the level of resentment is rising. As a result they have take action in order to attempt and resolve the problem. Morrison (1997, p. 56) notes that franchisors have initiated steps in the recent past to secure "more equitable cooperative agreements" with franchisees. Franchisors took immediate action and formed "a franchisee advisory council to get their input on key issues, including new products and pricing." Touby (1993, p. 70). That move implemented by the franchisor somewhat satisfied the franchisees and was enough to reinforce their trust in the franchisor's perspective.

Through further research, the researcher has discovered that conflicts between the franchisors and the franchisees mostly take place if the franchisee is a single unit one. That conclusion was withdrawn after the researcher had come through the following quote: According to Grünhagen, M. and Mittelstaedt, R. (2002)

"Question: Was one of your expectations that if you had more stores, you would have more say with [the franchisor]? Franchisee: That is very true. That used to occur in the system. The [franchisee] association has tempered that a little bit. I mean, the president of the association today, he had fifteen restaurants, and they still listen to big guys, there's no denying that. But the association has added a lot of credibility. [ … ] But, it was not an issue [for me] - that if I get more stores, the company will talk to me. Even when there was no association, that wasn't an issue at all. Partly, because I was so small at the time, I didn't even think about getting to that size that would make any difference. After a few years then, the association came up and the issue was mute (emphases added)."

The example or the quote shown above proves that the franchisors often get into conflicts with single- unit franchisees rather than multi-unit franchisees, since multi-unit franchisees have a lot of power within the boundaries of the country they operate in, which forces the franchisor to listen to their needs and requests and let them participate in the decision making process.

2.3 Advantages of Franchising (For Franchisor)

Expansion: Franchising is considered to be an Advantage for the Franchisor since it allows it to expand rapidly through countries and continents without having to invest capital; they rather depend on the capital of the franchisee. Moreover the franchisor does not give up control of the franchise since the brand name obviously stays the same and the franchisee is only considered to be a mediator or a representative.

Legal Considerations: Through Franchising, the franchisor is totally relieved of the legal duties of opening a new outlet within the borders of the country, for instance they do not have to go through the trouble of obtaining the required licenses or permits, they simply depend on the franchisee to get this legal work done since it is considered to be a local issue and it would be easier for the franchisee to take care of it.

Operational Considerations: Franchisors obviously are also relieved of many of the operational considerations, since the franchisees will have a lot of incentive to run the business successfully because they have a direct stake in the operation. However the franchisee has to get back to the franchisor before taking any important decisions regarding the products for instance, which means that the franchisor has the upper hand.

2.3.1 Disadvantages of Franchising (For Franchisor):

Limited pool of viable Franchisees: The Organizations or the Individuals who have the resources and the required qualifications to open and successfully run a franchise are extremely limited, which could have a negative impact on the expansion of the franchise.

Control: The Franchisors face a huge control issue if they decide to franchise. Their brand name is at stake, which means that an incompetent franchisee could easily damage the goodwill that the public have towards the brand through providing inferior goods and services. Moreover Replacing an incompetent franchisee is not as easy as replacing an incompetent manager, since there is a contract, which could be a problem. If that franchisee does not live up to the franchisor's brand name it could do some serious damage.

2.3.2 Advantages of Franchising (For Franchisees):

Quick Start: The franchisor offers the franchisee a quick start for a business with an already established brand name as opposed to having to build a business let alone a brand name from scratch. All that the franchisee needs to accomplish is to simply manage and run the franchise successfully in order to be able to live up to its brand name.

Expansion: With the help of the expertise provided by the franchisors, the franchisees are able to take their franchise business to a level that they would not have been able to without the expert guidance of their franchisors.

Training: The Franchisor often offers the franchisee significant training that is not offered to new starting businesses. This training could help the franchisees to manage the franchise successfully with a minimal amount of mistakes as opposed to any new starting business.

2.3.3 Disadvantages of Franchising (For Franchisees):

Control: The United States Office of Advocacy of the SBA indicates that a franchisee "is merely a temporary business investment where it may be one of several investors during the lifetime of the franchise. In other words, it is "renting or leasing" the opportunity, not "buying a business for the purpose of true ownership." This simply means that the truth of the matter is that a franchisee has no control what so ever over the franchise, since they do not actually own it, this means that they do not have the authority to change anything in the franchise without consulting the franchisor first. (Clark, D. 1997)

Price: Living up to a franchisor's brand name is by no means considered to be an easy task. It requires huge sums of money in order to accomplish. Additionally, the franchisor sets certain standards that the franchisee has to abide by without having the luxury of resorting to less expensive alternatives.

Conflicts: The relationship between the franchisor and the franchisee could possibly face conflict. If that was to happen, then the franchisee could possibly face huge problems, since they obviously do not have the upper hand in that operation. This means that the franchisee could simply lose everything if they get on the franchisor's bad side, and quiet shamefully the international law takes an extremely long time in order to resolve a franchise conflict, by then the franchisee would have already lost its business and will not be able to do anything about it.

2.4 Types of Franchising

There are four main types of Franchising used by all franchises across the globe (Daud, N.) Those four types are:

1-The Product Franchise: This type of franchise grants the retailer the right to use the brand name of the franchisor but has to pay a fee in return for using these rights or at least purchase a minimum inventory of stock. Some tire shops could be a good example for that type of franchise.

2-Manufacturing Franchise: "The franchisee is permitted to manufacture the products under license and sell them using the originator's trademark and name. They also get the benefit of the national advertising of the product they manufacture. The company owning the product gets the franchise fee and sometimes a fee for every unit sold. Examples include the food and beverage industry."

3-Business Franchise Venture: These ventures typically require that a business owner purchase and distribute the products for one specific company. The company must provide customers or accounts to the business owner, and, in return, the business owner pays a fee or other consideration as compensation. Examples include vending machine routes and distributorships.

4-Business Format Franchise: This type of franchising is the most popular one out of all four. In this type the franchisor grants the franchisee the rights to manufacture and sell its products, it also offers significant training to the franchisee; however the franchisee has to pay a fee for using these rights.

2.5 Barriers to Franchising

Starting up a franchise is by no means an easy task. After extensive research the researcher found that there are a lot of barriers to franchising. Those barriers are:

Legal 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."

There are wide differences among countries in terms of the extent of legislation available to regulate franchising as well as the extent to which such legislation is enforced. Legal barriers to franchising could be caused by either the home country or the host country.

Cultural Barriers: Different cultures have different demands, which are considered to be a barrier to franchising, since it is extremely difficult for franchisors to adapt to each and every culture they enter. Furthermore, communication could also be a form of a culture barrier, since it may not be very clear because of many differences, such as language.

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

"In general, international franchisors need to familiarize themselves with the local culture and methods of conducting business to know how to best adapt their business formats to any given host country".

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

"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."

According to Hoffman and Preble, political barriers are considered challenges for franchisors in other words, the existence of political instability within the country (wars, revolutions…etc).

Socio-Economical Barriers: Franchises could face a problem when opening in a country where the economy suffers. (Limited income, weak currency…etc)

Technological Barriers: the technological barriers could become an issue if the franchisor operates in a country where technology is not adequate. This inadequacy could easily affect the managerial technology, which is considered to be of great importance to both the franchisor and the franchisee, in terms of communication, managing the staff, product assembly and more. Basically, franchisors depend on the existence of managerial technology at the franchisee's quarters in order for all trading operations to run smoothly.

Trade Barriers: Rules and regulations set by the government that limits increases of taxes, tariffs and customs. Sierra.E (1999) stated that:

"Technical barriers to trade may take the form of standards, technical regulations, conformity assessment procedures, sanitary or phytosanitary measures, etc."

2.6 Conclusion

The literature review of this dissertation paper is discussing franchising and all its different aspects. The paper starts off by giving a detailed definition of franchising and how it works. Then the dissertation discusses the reasons behind the popularity of franchising across the global market from the franchisor's point of view as well as the franchisee's point of view. Moreover the researcher then starts to tackle the power struggle between the franchisors and the franchisees. It was found that franchisors and franchisees get into conflicts and struggle over the decision making power, due to the superiority factor. The research then discusses the relevant solutions implemented by the franchisor and the franchisee in order to end these power conflicts.

Furthermore the research goes in depth of franchising and discusses the advantages and disadvantages of franchising from both the perspective of the franchisor as well as the perspective of the franchisee. Then the research goes on to discuss the four different types of franchising acknowledged across the globe. At least one of these four types has to be used if the organization decides to franchise. The four types are well-known by all franchisors around the world.

The last point discussed in the literature review of the dissertation is considered to be one of the most important points of the research. That last point tackles the issue of barriers to franchising around the world. Barriers to franchising are considered to be crucial, since it could prevent franchising from spreading put widely on an international level. There are a lot of barriers to franchising; however the researcher chose to tackle only six of those barriers in order for the researcher to be able to talk about each and every one of those barriers thoroughly. In conclusion, the literature review of this dissertation covered all the crucial points and arguments needed in order for the researcher to be able to conduct the rest of the research study.