Market Entry through Franchising Networks

Franchising introduction The different commercial vehicles

available Factors that influence the choices

of a franchisor CASE: Franchising in Slovenia

Franchising introduction

Franchising more common when expanding international

What is Franchising? A kind of licensing which means that a

company gives another company the right to use their brand name, their full line of products etc.

Franchising introduction

Some factors to consider when franchising internationally

Experienced management personnel Sufficient financial resources Differences between countries

Some reasons for failure when franchising internationally

Choice of inappropriate commercial vehicle Lack of adequate game plan Choice of wrong person

The different commercial vehicles available

Direct Franchising Master Franchising Joint venture

Direct Franchising

Directly into the foreign country The establishing of a foreign

subsidiary or branch office Entering into a development

agreement

Directly into the foreign country

The franchisor grants a franchise for an individual franchise outlet directly from his country in the same way as he would grant a franchise in his own country, even though the franchisee and the outlet are situated in a foreign country.

Situations where this form is most appropriate:

When opening up a minimum number of franchise

outlets When two countries are geographically close to each

other For tax reasons

Directly into the foreign country

Advantages Control of his franchise system The most profitable method Full use of in-house personnel

Disadvantages Difficult to provide service and training Termination of a franchise agreement Difficult to control due to lack of supervision

The establishing of a foreign subsidiary or

branch office

The franchisor establishes a branch office or subsidiary in the foreign country, and the subsidiary acts as the franchisor for the purpose of granting franchises in the foreign country, much as the franchisor would do in his own country. Here, the franchisor’s foreign subsidiary or branch office enters into a unit franchise agreement directly with the franchise to establish a franchise outlet in the foreign country.

Situations where this form is most appropriate:

Generally, in the same situations where the franchisor would choose to franchise directly

Where the franchisor has the financial resources and availability of management personnel

The establishing of a foreign subsidiary or

branch office

Advantages Termination of the franchisee agreement Greater use of foreign personnel Indicates the seriousness of the franchisor’s intention

Disadvantages Costs Risks The senior management unfamiliar with the laws, etc.

Entering into a development agreement The franchisor enters into a development agreement directly with a developer, who is usually a foreign national. Under the terms of such an agreement, the developer agrees to himself develop and own all of the franchise outlets in the foreign country. Again, the franchisor himself or a subsidiary of the franchisor enters into a unit franchise agreement directly with the developer/franchisee for each franchise outlet to be established in the foreign country.

Situations where this form is most appropriate:

Depends on the number of development agreements that the franchisor intends to enter into in order to saturate the foreign country.

Where the franchisor wishes to limit the number of franchisees in the foreign country

Entering into a development agreement

Advantages More sophisticated franchisees More cost-effective Development fee

Disadvantages Failure of a developer/franchisee could be catastrophic It may result in slower growth Difficult for the franchisor to find a suitable developer

Master Franchise Agreement

The franchisor enters into a master franchise agreement directly with a sub-franchisor, usually a foreign national, pursuant to which the sub-franchisor himself develops and owns franchise outlets in addition to sub-franchising outlets to sub-franchisees in the foreign country. Thus, the entering into a master franchise agreement involves sub-franchising directly from the sub-franchisor who enters into a unit franchise agreement with a sub-franchisee for each franchise outlet to be established in the foreign country.

Situations where this form is most appropriate:

When the franchisor does not have the financial resources to directly franchise

Differences in cultures

Master Franchise Agreement

Advantages Minimizes the financial resources Financial risk lower It involves a sub-franchisor who is familiar with the laws

etc.

Disadvantages Control If the sub-franchisor fails Less profitable

Joint Venture The franchisor enters into a joint venture agreement with a joint venture partner, who is usually a national of the foreign country, pursuant to which the parties agree to establish what usually is a joint venture company but which may sometimes be a form of partnership or trust in the foreign country. The Joint Venture Company, partnership or trust then enters either a development agreement or a master franchise agreement with the franchisor.

Situations where this form is most appropriate:

When the franchisor wants to retain some equity in the franchised business.

When the franchisor needs the expertise and resources of the joint venture partner

Joint Venture

Advantages Risks More control compared to the master franchising

agreement. If there are differences in cultures

Disadvantages There might be difficulty in agreeing on buy/selling

provisions Difficulties in finding the right joint venture partner

Factors that influence the choices of a franchisor

Four different theories might affect the choice of foreign establishment.

Internationalization Theory Marketing Theory Transaction Cost Theory Capitalization Theory

InternationalizationInternationalization TheoryTheory

A company is most likely to enter a country with a simular culture

As the company gains experience, they increase their investments in the country

InternationalizationInternationalization TheoryTheory

The study showed:

That US companies prefered to first enter culturally simular countries

That they do not increase equity investment as they gain experience

Marketing TheoryMarketing Theory

A company prefer to establish a wholesaler instread of having contact with many retailers in countries with a great physical distance

A company prefer to sign a contract with a franchisee instead of opening an own affiliate in a country with great physical distance

Marketing TheoryMarketing Theory

The study showed:

That US companies prefer to establish a wholesaler in a country with a great physical distance

That there is now correlation with physical distance and the chosen distribution method

Transaction cost theoryTransaction cost theory

Companies prefer contracts when cultural distance is great

Companies prefer contract when the environmental uncertainty (currency- and political risk) is great

Transaction cost theoryTransaction cost theory

The study showed:

that US franchisor use contract more frequently in areas

with a great culturally distance.

Capitalization theoryCapitalization theory

A franchisees ability to acquire capital affects the franchisors choice whether to sign a contract or to make an equity investment

There are risks both for the franchisor as well as for the franchisee

Capitalization theoryCapitalization theory

The study showed:

that franchisor would more frequently sign contracts in rich capital countries, while making equity investments in poor countries

CASE: Franchising in Slovenia

1998: 25 000 restaurants all over the world

60% were franchised

1991: McDonalds began to show interest for Slovenia

First restaurant in Ljubljana

Where and how to open a new restaurant

Investigate the surrounding Company owned or franchised?

Franchised restaurants are more profitable

Family business Contract for 20 years

The process to find a suitably franchisee

Few manage the selection process Loyal and devoted to the work Selectionphase last 3 months Interview and evaluation Starts as a crewmember, end as a

manager

How to managing a McDonalds restaurant

as a franchisee Advise from the corporation Advertise local (1%) and donate to

common marketing (4%) Cannot participate in another food

business Allowed to resign

The franchise situation in Slovenia during the 90s

1991: socialist regim fell Democracy, liberalization and

integration 1995: 22 000 smaller companies Franchising not well known Afraid of losing control No laws on franchising

The situation in eastern Europe

Yugoslavia 1988 Poland 1992 Romania 1995 Croatia 1996 Czech Republic 1992 Hungry ?

Slovenia todaySlovenia today

17 McDonalds

600 Employees

60% Franchised

The Franchise situation in Slovenia today

McDonalds WorlwideMcDonalds Worlwide

70% Franchisees 30 000 McDonalds restaurants 46 million customers in more than

100 countries Plan to open 850 traditional

restaurants in 2003

McDonaldsCase questions

What constitutes McDonald’s advantages when opening a franchising outlet in comparison with an own affiliate

How does McDonald implement the strategic policy “think globally, work locally”?

Many franchisors run many outlets so called multi unit franchising. What are the advantages from the franchisors and the franchisees point of view

What decides the variable fees (the operational and the marketing fees)?

On what basis does McDonald lease the restaurant and the property to the franchisee? What kinds of problems can occur when the franchisee is the owner of the property?