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Advantages and Disadvantages of Franchising

Paper Type: Free Essay Subject: Economics
Wordcount: 1171 words Published: 18th Jan 2018

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Franchising is arrangement where one party (the franchiser) grants another party (the franchisee) the right to use trade-name as well as certain business systems and processes, to produce and market good or service according to certain specification. The franchisee usually pays a one-time franchise-fee plus a percentage of sales revenueas royalty, and gains immediate name cognition, tried and tested products, standard building and decor,detailed technique in running and promoting the business, training of employees, and ongoing help in promoting and upgrading of the products. The franchiser gains rapid expansion of business and earningsat minimum capital-outlay.

Feature of the franchise is that each buyer undertakes to fulfill the various conditions and requirements of the seller (franchiser), related to the production and sale of goods and the provision of related services to consumers. Thus, in the world market there are groups of companies united in a single system under the auspices of a major international corporation.

Its partners in the contract the franchisor provides advice on corporate location, selects equipment, helps in training, advice on management, and may also provide financial assistance. All this facilitates the standardization and unification of products and services of the companies included in the system of franchising provides unity on market events, style and design, the quality of goods and services sold the centralization of procurement related savings (and the additional benefit to the franchisor).

Advantages of franchising mode are following (Kotler, 2002, p. 377):

  1. Rapid expansion of sales markets, the increase in sales volume and the territorial expansion of the business
  2. Absence of the cost of the vertically-integrated network management (reduction of personnel costs)
  3. A lower level of own capital investment
  4. Lift the prestige of the company and its trademark, recognition from the customers, increased confidence in the quality and range of products a single company
  5. Income from the sale of the license and renting real estate franchise and equipment
  6. Profit from lending opportunities franchisees and reducing the time of turnover.

Disadvantages of franchising mode are following (Kotler, 2002, p. 377):

  1. The likelihood of a smaller part of the profits from the franchise business than on their own
  2. Low reputation of one of the franchises in the absence of proper quality control can affect the reputation of the firm;
  3. Difficulty in controlling the reliability of financial reporting franchisee
  4. The franchisor is preparing a possible competitor in the face of franchisee company

Joint ventures

Joint ventures are often created for access to foreign markets, company’s decision to team up with their foreign partner, sharing ownership and control over the activities of the company. In world practice, there are many examples of well-known association of firms and corporations to tap new markets and gain competitive advantage.

Creation of a joint venture may be the preferred method of access to foreign markets for the following reasons:

1. If the company lacks the financial, technological, managerial and other resources for self-development in foreign markets

2. If the government does not admit to its market foreign companies or subsidiaries without the participation of local capital for some political or economic reasons; 3. When the company, for economic reasons, team up with a foreign company for the joint production, the sale of which will provide the company higher profits due to the low cost of use of local resources (labor, raw materials, etc.)

However, with all advantages of the using joint venture as entry mode for entering and presenting on the international market there are a few problems, the main ones are (Kotler, 2002, p. 377):

1. Contradictions between the partners in the joint venture what may be related to different points of view on the use of the profits of the enterprise, management and implementation of marketing activities, areas of investment, and etc.;

2. The need for a strong partnership in the creation and funding of the joint venture may hamper the implementation of the transnational corporation its own, universal for all countries production and marketing policy.

Foreign direct investment

The most complete form of the involvement of a foreign market is the investment of capital in the creation own overseas assembly and production plants. The meaning of direct foreign investment is defined by the so-called concept of control. The main idea of this mode of entry is that a foreign investor investing in the purchase or construction companies abroad controls further management decisions in this venture. And he does not have to have a 100% ownership interest in it; even a small percentage of shares may be sufficient to establish control over decision-making (Kotler, 2002, p. 378):

On the other side, even all shares do not provide absolute control: if the government dictates whom the company should hire, distribution of revenue, what should company sell and at what price. However, usage of this foreign market entry mode includes several advantages (Kotler, 2002, p. 378):

1. All the profit from investments belongs to the company and it can use it at its own discretion, carrying out their own long-term production and marketing strategies;

2. The firm can increase its profits thought gaining working experience in a large international market with the help of usages local cheap raw materials, labor, saving on transportation costs, etc., as well as expanding sales and conducting effective marketing activities;

3. Paying taxes to the budget of the foreign state and creating jobs, the company can secure a favorable image in government and among the population; 4. Due to establishing close favorable relations with suppliers, distributors, agents and customers the company can better adapt its products, services and marketing programs to the characteristics of the foreign market, thus constantly improving its competitiveness.

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Direct investment capital to the foreign market is carried out in two forms: the export of venture capital and loan capital. Venture capital imported into the international market in the form of direct and portfolio investment. Direct investment involves the purchase or acquisition of the total local company’s controlling stake. Portfolio investment means buying shares of local companies that are insufficient to establish control over them.

Loan capital is loans provided by states, companies, banks, administrative regions, municipalities, etc. Loans divided on two groups: short-term (up to two years) and long term (over two years) (Kotler, 2002, p. 378).


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