GLOBAL ECONOMIC DEVELOPMENT THROUGH THE UTILIZATION OF THE FRANCHISE SYSTEM
By: Carl Kosnar
(Part I of III)
PREFACE
International franchising has fascinated me for many years. I still get excited seeing a familiar trademark when driving down a street in New Delhi, Cairo, or Paris. While traveling outside the United States, my wife and I will frequently play a game seeing who can point to a recognized sign first such as McDonald’s or Gold’s Gym with the same exuberance of children playing car-trip games.
Much has been written in recent years extolling the virtues of franchising as it exists in the United States. However, there has been a dearth of information and analysis of the economic impact and potential of franchising, or similar economic expansion systems, in developing countries. Most of what has been written about international franchising has dealt with the legalities pertaining to franchise law, licensing, and trademark and patent law, and their disparities from country to country. In spite of the scarcity of academic and research analysis, the period between the 1980s and the early-2000s witnessed a dramatic increase in international franchising and similar commercial expansion activity. This has occurred not only in Western Europe but also in Asia, South and Central America, Eastern Europe and, to a more modest extent, Africa and the Middle East. In this article, I attempt to point out some of the benefits and consequences of importing Western (essentially American) franchises and franchising techniques into developing economies.
PURPOSE
The success of the American franchise business model is well documented through volumes of books and articles, including those I have written, over the last twenty years. It is not my intent to add to the prolific amount of text that already exists, but rather to put forth the challenges that I perceive in attempting to transfer the American franchise business model to developing economies in other parts of the world. In order to be successful in many countries outside of the United States, it is my contention that the American version of franchising requires modification in order to be accepted and flourish.
One such modification is a related expansion technique that I have implemented in the United States and Canada with good results which I call the “Franship” system of growth, a composite of elements taken from franchising and joint venture commercial arrangements. I believe the term Franship has a connotation that is more acceptable in regions of the world that are reluctant to accept American-style franchising; it proposes a business relationship based on parity.
DEFINITION OF FRANCHISING
If one analyzes franchising systems worldwide, the structures tend to be hybrid forms of economic organizations that create various hierarchical relationships for the purpose of distributing goods and services. Part of the debate over the precise definition of franchising has revolved around the different business activities which franchising encompasses. The term franchise, in its generic usage, has been used to label business relationships as diverse as the right to broadcast television programs or operate professional sports teams within certain geographic territories to utilizing a complete business-format franchise package such as McDonalds.
However, a franchise is probably best defined as comprising a contractual relationship between a franchisee (usually taking the form of a small business) and a franchisor (usually a larger business) in which the former agrees to produce or market a product or service in accordance with an overall “business system” devised by the franchisor. The relationship is a continuing one with the franchisor providing ongoing support and advice, research and development, and help with marketing and advertising. In return, the franchisee usually pays an initial franchise fee and also an ongoing royalty or management service fee normally based on gross sales or a mark-up on supplies purchased from the franchisor. The franchisee provides the capital for the business and is a legally separate entity from the franchisor.
Although the franchisor is usually a larger business than the franchisee, most franchise companies do not meet the description of a large, national company. Most franchisors in America and Europe remain small to medium-sized enterprises (SMEs) and are regional in structure and size. Eighty percent of all franchise companies in the United States have less than 100 franchised units (source: International Franchise Association). The large franchise companies are almost invariably American in origin, and usually qualify as a Fortune 1000 Company, e.g., McDonald's Corporation, Coca-Cola, Pepsi, Holiday Inn, Burger King, KFC, Pizza Hut, Budget Rent-a-Car and Avis.
It has been argued that in the early stages of franchising in the United States, the franchisee was simply a managed outlet of the franchisor. Examples of this theory are the Singer Sewing Machine Company, which started franchising in the 1860’s, and the automobile dealerships and gasoline station franchises started at the beginning of the 20th Century. In these early franchise models, the franchisor exercised enormous control over the franchisee. At the other end of the pendulum are those that argue that the franchised small business may be viewed as an emerging form of independent small business whose distinguishing characteristic is its independence to operate, and profit, under the guidelines of the usually larger franchisor. As such, franchising, or in some cases modified versions, can be viewed as a means of nurturing and developing entrepreneurial talent in developing countries, and it is in this context, that I believe the Franship program can accelerate economic growth.
By: Carl Kosnar
(Part I of III)
PREFACE
International franchising has fascinated me for many years. I still get excited seeing a familiar trademark when driving down a street in New Delhi, Cairo, or Paris. While traveling outside the United States, my wife and I will frequently play a game seeing who can point to a recognized sign first such as McDonald’s or Gold’s Gym with the same exuberance of children playing car-trip games.
Much has been written in recent years extolling the virtues of franchising as it exists in the United States. However, there has been a dearth of information and analysis of the economic impact and potential of franchising, or similar economic expansion systems, in developing countries. Most of what has been written about international franchising has dealt with the legalities pertaining to franchise law, licensing, and trademark and patent law, and their disparities from country to country. In spite of the scarcity of academic and research analysis, the period between the 1980s and the early-2000s witnessed a dramatic increase in international franchising and similar commercial expansion activity. This has occurred not only in Western Europe but also in Asia, South and Central America, Eastern Europe and, to a more modest extent, Africa and the Middle East. In this article, I attempt to point out some of the benefits and consequences of importing Western (essentially American) franchises and franchising techniques into developing economies.
PURPOSE
The success of the American franchise business model is well documented through volumes of books and articles, including those I have written, over the last twenty years. It is not my intent to add to the prolific amount of text that already exists, but rather to put forth the challenges that I perceive in attempting to transfer the American franchise business model to developing economies in other parts of the world. In order to be successful in many countries outside of the United States, it is my contention that the American version of franchising requires modification in order to be accepted and flourish.
One such modification is a related expansion technique that I have implemented in the United States and Canada with good results which I call the “Franship” system of growth, a composite of elements taken from franchising and joint venture commercial arrangements. I believe the term Franship has a connotation that is more acceptable in regions of the world that are reluctant to accept American-style franchising; it proposes a business relationship based on parity.
DEFINITION OF FRANCHISING
If one analyzes franchising systems worldwide, the structures tend to be hybrid forms of economic organizations that create various hierarchical relationships for the purpose of distributing goods and services. Part of the debate over the precise definition of franchising has revolved around the different business activities which franchising encompasses. The term franchise, in its generic usage, has been used to label business relationships as diverse as the right to broadcast television programs or operate professional sports teams within certain geographic territories to utilizing a complete business-format franchise package such as McDonalds.
However, a franchise is probably best defined as comprising a contractual relationship between a franchisee (usually taking the form of a small business) and a franchisor (usually a larger business) in which the former agrees to produce or market a product or service in accordance with an overall “business system” devised by the franchisor. The relationship is a continuing one with the franchisor providing ongoing support and advice, research and development, and help with marketing and advertising. In return, the franchisee usually pays an initial franchise fee and also an ongoing royalty or management service fee normally based on gross sales or a mark-up on supplies purchased from the franchisor. The franchisee provides the capital for the business and is a legally separate entity from the franchisor.
Although the franchisor is usually a larger business than the franchisee, most franchise companies do not meet the description of a large, national company. Most franchisors in America and Europe remain small to medium-sized enterprises (SMEs) and are regional in structure and size. Eighty percent of all franchise companies in the United States have less than 100 franchised units (source: International Franchise Association). The large franchise companies are almost invariably American in origin, and usually qualify as a Fortune 1000 Company, e.g., McDonald's Corporation, Coca-Cola, Pepsi, Holiday Inn, Burger King, KFC, Pizza Hut, Budget Rent-a-Car and Avis.
It has been argued that in the early stages of franchising in the United States, the franchisee was simply a managed outlet of the franchisor. Examples of this theory are the Singer Sewing Machine Company, which started franchising in the 1860’s, and the automobile dealerships and gasoline station franchises started at the beginning of the 20th Century. In these early franchise models, the franchisor exercised enormous control over the franchisee. At the other end of the pendulum are those that argue that the franchised small business may be viewed as an emerging form of independent small business whose distinguishing characteristic is its independence to operate, and profit, under the guidelines of the usually larger franchisor. As such, franchising, or in some cases modified versions, can be viewed as a means of nurturing and developing entrepreneurial talent in developing countries, and it is in this context, that I believe the Franship program can accelerate economic growth.
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