International Business & Economics Research Journal – August 2009
Volume 8, Number 8
The Franchising Decision: The Perspective Of The Franchisee In The Hospitality Industry
Ramon Diaz-Bernardo, Instituto de Empresa Business School, Spain
ABSTRACT Franchising is a major trend in the hotel industry. Despite the fact that almost two-thirds of branded hotels in the U.S. are franchised, there is a lack of empirical research on franchising in the hospitality industry. In this article, I reviewed one of the most relevant lines of research in franchising literature, usually referred as creating franchising systems, and we have concentrated on analyzing the reasons and motivations to use franchising from franchisee perspective within the
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We will do so by reviewing the relevant literature on the subject and by comparing what the theory says with the opinions of our panel of experts, as well as with the empirical information collected from public sources of information regarding the hotel industry. THE DECISION TO BE A FRANCHISEE: A THEORY OF FRANCHISE DEMAND AND ITS APPLICATION IN THE HOTEL INDUSTRY As described by Fulop and Forward (1997), a lot of theoretical and empirical research has been devoted to explain why firms franchise. However, few studies have aimed to explore the importance and the advantages of the franchise system from the perspective of the franchisee; that is, the entrepreneur choice of franchise vs. independent ownership – a theory of franchise demand. Given the relevance of franchising to the development of businesses, it is interesting to learn why so little attention has been paid to the decision of would-be entrepreneurs to eschew the independent operation and become franchisees. The issue of franchisee motives, though widely recognized and frequently discussed by franchisors, still remains largely unexplored in empirical research terms. From a managerial point of view, a better understanding of the franchisee‟s motivation will provide some interesting insights to franchisors as to how to position their offer in the franchise market. Franchising is not only an organizational system, it is also a market
1. Franchisees gain numerous advantage when they purchase a franchise. First, while a franchisee may be opening a new store, it is part of an already established business and system. This means a franchisee has access to turnkey operations, allowing an increased speed to establishing and growing the business. Franchisees also get support for management and training activities, as well as financial assistance. Going hand in hand with this, a franchise already has an established brand name, quality of goods and service which have been standardized across the franchisor’s larger company, and national advertising programs from franchisors. Franchises also have large-volume, centralized buying power. A franchise has proven products, and
The first choice of business is the franchise. In a franchise, legal binding agreement is entered into between two firms, the franchisor (the product or service owner) and the franchisee (the firm to market the product or service in a particular location). The franchisee pays a certain sum of money for the right to market this product” (Rubin, 1978, p.224). The franchising is more prevalent in the restaurant industry (Hoffman & Preble, 2003). The two distinct features of this business type include; first, in order to notable service components should
Franchising is a business model that allows companies to rapidly expand their market share. According to Franchise.com (2015), there are three types of franchises: distributorships, trademark licensing, and business format franchises. When two organizations enter into a distributorship, the originating company provides the rights another company to sell their products. An example of a distributorship is when an auto manufacturing company grants rights to a dealership to sell their vehicles (Franchise.com, 2015). Trademark licensing is when one company allows another company to use their trademark (Franchise.com, 2015). The business format franchise authorizes franchisees to sell the parent company’s products and/or services as well as utilize their business model. This type of franchising is the most common and is the type needed to obtain to open a new Cold Stone Creamery.
Franchising acquired its popularity by establishing a common method of service which gave customers the comfort that they look for when they look for a meal.When the customers go out
Introduction Opening up a business such as a franchise can carry many risks, both financially and personally but can also be very rewarding and challenging. Some people make a decent living, some end up rich, then again, plenty of people fail. (MSNMoney, 2014) There are many advantages of owning a franchise. Some advantages are that you have association with a well-established brand, reputation and product or service, access to established standard procedures, operating manuals and stock control systems.
Small businesses are essential to the fabric of the American economy. Specifically the franchise model offers an easy way for an entrepreneur to attain success in the increasingly difficult and murky economical landscape. The U.S. Census Bureau estimates that over 13% of the total American workforce is compromised of franchisee employees. That equates to roughly 7.9 million workers. And while many have found unbound success within the realms of franchising, there are risks specific to undertaking such an expenditure.
It is common to say that franchisees are in franchised business for themselves but not by themselves. It means that they are heavily affected by each franchisors’ decision. The autocratic franchisor who fails to communicate his/her decisions to franchisees or to consult them on making a decision may suddenly find himself, either in court sued by franchisees, or abandoned by them.
In addition, the franchise model allows a business owner to just focus on execution rather than having to constantly scheme with new ideas. Many small business owners fail because they have to be visionaries at all points. They have to see the bigger trends coming in the industry while also thinking of new and creative ways to connect with the needs of consumers. This is all in addition to
Franchisors are increasingly having to be more and more selective in the adoption of franchisees with factors such as economic climate and the potential difficulty with growth playing key factors in the decision making process. It is not simply an ability to grow which creates a successful Franchise and nor is it the desire of any franchisor to adopt every potential franchisee. Franchisors are becoming more and more scrutinising as the global economy declines. There is a general understanding within any franchised
According to the results of a study by Gruenhagen and Mittlestaedt (2005), the area developer multi-unit franchisees reported that they considered (at the time of taking up franchise agreement) their venture as an investment. On the other hand sequential multi-unit franchisees reported that they were mainly motivated by their entrepreneurial ambitions. Weaven & Frazer (2006) also investigated the motivational factors of single unit and multi-unit franchisees. The findings suggest that single-unit franchisees consider marketing strength of the franchisor brand, potential to employ family members, initial training days, and the level of operational freedom to assess the franchise offer. On the other hand multi-unit franchisees place more emphasis on the importance of business vision and concept, potential for expansion, ongoing training, involvement in decision making process and governance structure. Dant et al (2009) compare the motivations of single unit and multi-unit franchisees and found significant difference among the two groups. They also investigate the change in the motivational factors when single unit franchisees become multi-unit
Not having to answer to a corporate boss is the dream of many and the flexibility that owning a business franchise creates provides this option. Success is not reached by simply creating a business, however. The level of success is measured by the size and efficiency of the business. Business growth is the driving force of the economy. The additional jobs and revenues created when a business expands allow the economy to grow at exponential rates. One of the fastest and most popular ways to increase the size of a business is to turn it into a franchise, which can then be purchased by individuals. Franchising provides opportunities that are beneficial to both the parent company and the purchaser. The company that owns the business can expand
When any company decides to franchise its business, and open up across the United States or the world, they first must consider many things. Will the company be successful in the area they are trying to open? How will they be able to ensure consistency amongst the different locations, to make sure customers experience the same thing no matter what location they visit? What threats and opportunities are there to expanding the business? For companies such as McDonald’s and Kentucky Fried Chicken (KFC), the decision to expand has paid off not only in the United States but also in its expansion throughout the world. Although both companies have become successful and remained, successful for many years it was not always an easy road to success.
Hotel and restaurant firms based in the United States have long used franchising for international expansion, often with master franchise arrangements. Falbe and Dandridge (1992) contended that the rigorous establishment and implementation of franchisee support systems is crucial to maintaining the high quality and service that franchisors offer their customers in their domestic markets. Researchers also claimed that developing a standardized system for products and services is important for international franchisees to replicate their products and services easily
A franchise contract is a form of organization involving two independent firms with the aim of selling goods and services in a specific area ( “How to influence franchise contracts: the Spanish case”Alicia Garci’a- Herrera, Rafael Llorca-Vivero, 2009). Another resource- Business dictionary describes franchise agreement as a contract in which well-established business provide its brand, operational model and required support to another party in order to set up and run similar business. This costs a fee and/or a part of generated income. This distribution technique increases competition between companies producing similar products or services by high efficiency and transaction costs reduction. By this distribution technique the franchisor gains access to more new markets, can raise profits, decrease costs and share risks while still controlling the new franchisee. This collaboration is very important for small and medium businesses. In 2009, a third of retailing networks in US were by franchise contract, in EU impact is smaller but is also growing (Garci’a- Herrera, Llorca-Vivero, 2009).