Market Entry Options
FRANCHISING is a business system in which a company (or franchisor) sells an individual (or franchisee) the right to operate a business using the franchisor's established system or format.
As part of the franchise agreement the franchisee pays an initial sum of money, a franchise fee or front end fee to the franchisor and agrees to pay a royalty or management service fee for continuing advice and assistance, which is usually calculated as a percentage of annual turnover. The franchisee may also pay an advertising fee to contribute to the franchisor's annual advertising and marketing costs. The franchisee also has to find the capital to open the business. The franchisor provides an operations manual which contains all the information that the franchisee needs to run his or her business. Franchising exist across many different industries, but the most common are in the restaurant and food service industry.
One example for franchising is how the US American company Subway Restaurants entered the German market. Subway is a fast food restaurant, which primarily sells sandwiches called "subs" and salads. The company was founded in 1965 and by now there are 30,246 restaurants in 87 countries. The first store in Germany opened on 13th June 1999 in Berlin. Subway is very successful in Germany because of its Unique selling proposition with fresh and healthy food. Today there are 690 stores. Every 4 days a new one opens. Till 2011 1,500 restaurants are planned.
Franchising has a lot of advantages for both the franchisor and the franchisee. The franchisor is able to expand its business in a relatively short period of time across countries and continents using the capital and resources of their franchisees. Furthermore the franchisor may choose to leverage the franchisee to build a distribution network. Also less investment is needed. One of the major advantages for the franchisee is that the business is based on a pre-established business concept, so he or she can check how successful other franchises are before committing yourself. Furthermore you can use a recognised brand name, trade mark and brand awareness. You benefit from any advertising or promotion by the franchisor. Relationships with suppliers have already been established. You benefit from the franchisor's experience and use its capital investment in the most cost-effective way. Therefore less time and energy is involved in the start-up process. Furthermore financing the business may be easier, because banks are sometimes more likely to lend money to buy a franchise with a good reputation. Another major advantage is that the franchisor supports the franchisee at any time. That includes usually training, help setting up the business, a manual telling you how to run the business and ongoing advice. The area manager is permanent available. The risk is reduced, because it is shared with the franchisor and. Often the franchisee has exclusive rights in his territory, because the franchisor won't sell any other franchises in the same region.
However, the franchisee will have to make periodical payments to the franchisor and will inevitably be subject to a certain extent of restriction and control from the franchisor. Many decisions are made by the franchisor. The franchisee has less control about which employees to hire, what products to sell/services to offer, the layout of the store, etc. Furthermore problems can occur if other franchisees give the brand a bad reputation. The main disadvantage for the franchisor is the loss of control over the day-to-day operation.
A STRATEGIC ALLIANCE is a formal relationship between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations.