A Very Brief History of Franchising
Most of the historians consider that the concept of franchising started in the middle ages, at the time when the feudal aristocrats have started to sell the rights of collecting taxes and operating markets to others on their behalf. This is however representing franchising as a political activity instead of the business activity. Moreover, according to some historians the very first example of the franchising indicating a method of conducting business is traced back in the mid nineteenth century in Germany where the contact was made with the tavern/bar owners in order to sell beer entirely in taverns. But, in the United States the earliest use of the franchising was not found in the taverns and breweries rather it started with the product selling by the housewives that are located on U.S. prairie. However, in 1851, a singer named Isaac became the first U.S. franchisor of the product name when he started to sell the rights to the independent salesman in order to sell the sewing machine to the end users (Shane, 2005, p. 52).
Though, Singer Sewing Machine was the first U.S. product name franchisor in America, but it was outpaced rapidly by another significant franchisor i.e., Coca Cola. Early, in 1890, Coca cola has chosen to franchise rights in order to bottle carbonated beverage to various businessmen that were doing business independently and and received limited territories in order to deliver the product in response of paying for and also assuming the distributional risk of the product. There is no doubt that Coca Cola was a significant earlier product franchisor, but it is also the fact that it might not have been the most significant one to start the operations at the 20th century turn. The automobile industry has also adopted this franchising strategy on a wide scale, such as Ford and General Motors have begun dealership in franchising in order to sell their cars under the brand name.
Fast Food franchises also gained popularity and the franchising took as a proper business form in 1950 and also some say that its 1960s when several fast food businesses such as McDonalds, KFC etc, got grip in the market (Zhu, 2005, p. 3). This franchising acceleration is attributed to the increase in advertisement on television and the formation of the national highway system. But, the fact is that TV advertisement has made the national marketing and advertisement a feasible method of building the brand name.
Definition of Franchising
A franchising operation is considered as a relationship on contract between the franchisee and franchisor, where the franchisor is obliged for maintaining a enduring interest in business of franchisee in areas such as training and know-how; in which the franchisee perform operations under a common business or trade name, procedure and format controlled or owned by the franchisor, and the franchisee has made or will make a considerable capital investment in the business from his own capital or resources (Spinelli, Rosenberg & Birley, 2004, p. 2). Franchise is also broadly considered as the practice of including and considering distribution, licensing and other respective arrangements (Mendelsohn, 1982, p. 12). Here, in these definitions franchising is depicted as distributorship, but it is more than just distributorship. Franchising extend to all operations or business methods. It provides greater control, assistance and extended duration.
Contrary to it the distributor just resells goods to the retailer or to the customers. It is also an admitted fact there is not even a single established definition of franchising. The meaning of franchising is interpreted in various ways depending on jurisdiction, discipline, significant structure and application of the arrangements of franchise in any provided context (Spencer, 2013, p. 32). However, it is has said that franchising is the license or right that is granted by the company to a person or group in order to market its goods/products or services in a particular territory for expanding the business in return of the fee payment and royalties etc from the retail outlets (Keup, 2007, p. 4). It can be described in other words as a business clone.
Concept of franchising
A franchise is relationship in business that is governed by the franchise agreement or contract (Meaney, 2004, p. 111). The basic parties that are involved in franchising are franchisor and franchisee and the equipment used is the operating system (Hall & Dixon, 1988, p. 12). The franchisor is the owner of the trademark and operating system of the franchise, whereas the franchisee is allowed and is licensed for using trademark as well as operating system in accordance with the terms and conditions that are set in the franchise agreement (Garner, 2001, p. 18). However, it is obligatory for the franchisee and the franchisor to fulfill their duty and other requirements under the contract. Further, in literature there is vertical integration in the franchising through the resource explanations and agency theory (Carney & Gedajlovic, 1991, p. 607). The franchising provides the benefit of the vertical control over the retail units without any asset investment as required in the full integration (Carney & Gedajlovic, 1991, p. 607).
The resource scarcity thesis emphasized on the brand name, economies of scale and capital in promotion, all these are the functions of the franchising. In order to ease the resource constraints the the chains adopt franchising for pursuing promotions in the economies (Gracia, 2009, p. 47). The agency theory is used to monitor the cost of franchising locally also the risks associated with the free-riding (Bowie & Freeman, 1992, p. 180). Further, Combs, Michael and Castrogiovanni (2004, p. 908) has suggested resource based theory that enhances the competitive advantages, and points out the trade resources and prejudiced distribution, institutional theory that articulates the organizational behavior and importance of the social, environmental, legal and institutional factors. They have also explicitly emphasized on the upper echelons theory in the franchising literature, the upper echelons theory emphasizes on the characteristics of managers, such as their age and past working experiences etc.
PEST of Franchising
Franchises have faced and even still are facing several political, economic, social and technological challenges during their course of expansion. Political factors exert great influence on the business. For example, In order to start franchising arrangements, the companies have to acquire license, for example, for expansion of business in the international market, license of the respective country is required. It is on the wish of the government to award the license to the internationally operating firm or not. Further, it is rightfully mentioned by company has to obey the tax policies, consumer protection laws, trademark laws, government decision, legal issues and employment laws of the country in which they are operating. The company has to first build the goodwill before entering into the market (Lee, 2003, p. 972).
It is claimed that the franchising is least favored by the governments of the developing countries. But, the fact is that the developing country’s government is adopting franchising and considering it a tool for the rapid development of the economy and as a creator of new employment opportunities and greater income and create self employment opportunities for people (Abizadeh, 2010, p.10). Further, the franchising network has to face the economic issues that also exert their influence on the business. Economic factors exert their influence nationally, internationally as well as globally. They affect the purchasing capability or power of the customers capital cost of the firm. Moreover, Preble, Kincaid and Hoffman (2004) have also declared that franchising is emerging in Middle East, East Europe, and Asia.
The franchising is also affected by the social factors, for example the demographic changes. Various factors exist in the society that affects lifestyles of people. The main factors that exert their influence are religion, family, culture, locality and education. Considering an example that McDonalds is not welcomed warmly in India, especially because the Indians consider cow as sacred and it is claimed that McDonalds is using beef in the burgers and also the cow fat in the oil that they use for cooking, which is against their cultural values (Kulkarni & Lassar, 2009). Similarly, in Pakistan there is a concept of halal and haram. So, the company has to be conscious of the fact that they deliver halal food in Pakistan. Technological changes have also affected and are affecting the franchising concept of the companies.
The companies have to be conscious of the research and development activities and they have to use legally allowed technology of the respective country. Further, they have to consider expectations of the stakeholders and automation in order to remain in the business. Once, successfully franchised the business facilitates the political, economical, social and technological progress in the respective economy (Acemoglu & Robinson, 2000, p. 1169).
Advantages and Disadvantages of franchising
There are several advantages as well as disadvantages of franchising. Franchising provides certain independence level to the franchisee so that they can carry out their business. It helps in the provision of the established good or service that has already enjoyed fame of the brand name, brand awareness and recognition and minimum operational cost (Welsch, Alon & Falbe, 2006, p. 135). This provide benefits to the franchisee in that it gives already sold base of the customers that would generally take several years for establishment. It increases the success chances as the business with which one is associated is already proven for delivering products and services (Peterson & Rajiv, 1990, p. 56).
Franchises also attract the consumers by offering certain consistency level and quality as it is mandated by agreement of franchise. It also offers vital support of construction and design, site selection, training, financing, ongoing and continuous support and grand opening ceremonies, region and national advertising, operational support and assistance, operating methods and procedures, access to purchase in bulks and enhancement of the spending power.
There are also many disadvantages associated with franchising which include the franchisee is not independent in the true sense as they are required to conduct business in accordance with the restrictions and procedures that are set forth by franchisor in franchisee agreement.
The restrictions consist of products and services that are offered, the pricing arrangements and the geographic territory. The franchisee has to pay the initial fee of franchise as well as royalties and the advertising fee. The franchisees have to be careful in balancing the support and restrictions as given by the franchisor but they have to do this with their own managing skills and abilities. a destructive image can however result if the franchisees are not performing well or if the franchisor is operating with the unforeseen events and problems (Tikko, 2005, p. 332).
Franchising in the Hospitality Industry
The hospitality business is now becoming increasingly specialized with Several hotel chains that are filling various niches. Franchising in the hospitality industry has also attracted much attention in this rapidly growing era. The Asians, African American and Native Americans are widely adopting and supporting the franchising in the hospitality. This is due to the fact that the growth is now demanding diversity and this franchising is a best method of diversifying, for adopting new and innovative ideas and looking ahead and beyond traditions. The companies are now also trying to reach to diverse entrepreneur’s pool by demonstrating the franchising benefits within hospitality industry (Sturman, Corgel & Verma, 2011, p. 240). The franchising in the hospitality started in 1960, when the big giants of hotel industry i.e., Holiday Inn and Marriot has gained remarkable market share (Lashley & Morrison, 2000, p. 59). Holiday Inn is still considered as the largest hotel in the franchising industry.
The corporations that think ahead for the future have also realized that the work forces are required to reflect the potential customer bases in order to know the tools and tactics for appealing the base in a better manner. So, in hospitality industry it is strived to ensure that the associated customer base is inclusive and diverse. It is inclusive of all backgrounds, perspectives, cultures that are why franchising is widely adopted in hospitality. Several hospitality companies are however claimed to promote just the non-traditional franchisees. But, Estelami (2009, p. 119) has rightfully mentioned that they the hospitality businesses have left those teams whose main focus is to promote the non-traditions franchisee in hotel industry and has helped the economy in its downturn. Even during the economic downturn that has occurred recently, hospitality franchisees have placed increased focus on the major inclusion steps and diversity of the emerging markets, development of franchise, diverse business to business alliances and multicultural strategies for marketing (Chon, Pine, Lam & Zhang, 2013, p. 285).
But considering the present scenario, now the franchisors associated with hospitality have adopted a holistic approach towards diversity as they are now integrating diversity across the business functions. It is however the responsibility of the franchisors in the hospitality industry and overall franchising industry to share business case and create awareness of imperative for reaching to more diverse group of the prospective franchisees. For this they need to concentrate on the diversity through the customer focusing efforts by looking and searching beyond the cultural and traditional aspects in order to find next owner or franchisee.
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