Advantages and Disadvantages of Franchising - Paper Example

Introduction

Franchising is a market entry strategy where the franchisor grants right to the franchisee to use its trade name and business model to offer goods and services to the market (Tuunanen & Hoy, 2007). It has created an perfect opportunity for the entrepreneurs to enter the international market for expansion. The franchisee is required to pay royalties as a portion of the revenue generated plus a one-time franchise fee based on the contract. It is characterized by various conditions set by the seller/franchisor where the buyer/franchisee must fulfill. Most of the Canadian multinational companies have succeeded globally through franchising. For instance, this case study will assess some of the advantages and disadvantages of franchising to Tim Hortons Inc. The company is a well-known fast food restaurant with its significant brands being coffee and donuts. It is one of the largest Canadian quick-service restaurant chains with over 4,500 outlets in nine countries. Tim Hortons Inc. was founded in Hamilton, Ontario in the year 1964 by Jim Charade and Tim Horton ("Tim Hortons," 2018). The various advantages and disadvantages that the restaurant has faced in its franchising strategies are discussed below.

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Firstly, the primary advantage of venturing into the franchising realm of opportunity for growth and expansion. Every entrepreneur has a goal of growth of their business. Spreading the name of the company far and wide has been a challenge to most firms, but this is made more comfortable with the franchise strategies. Tim Hortons Inc. has managed to penetrate the international market through franchising and hence boosting their revenue sales. The company has successfully opened branches across the country and world. Franchisor plays a significant role in prospering in the new market as they have a better understanding of the local market which grants the franchisor a competitive advantage over the rivals (Czinkota & Ronkainen, 2013).

The other advantage associated with franchising is the capital leverage. Some entrepreneurs in the small and medium enterprises lack access to adequate capital to fund the business operations. Kotler (2016) argued that franchising allows expansion in a new market without the entrepreneur incurring the high cost of equity or debt risk. The franchisee provides the necessary capital needed to operate the unit and offer various resources to allow the business to grow. Tim Horton provides the business model, designs, promotions and employees' training and development to its staff across the board which creates strength in business expansion at the lowest capital outlay. Franchising strategy reduces the risk for capital limitation due to the brand reputation of the franchisor.

Also, competent and motivated management, acquiring and retaining good managers are a significant challenge facing many entrepreneurs in today's business environment. They spend much of their time and financial resources looking for new managers and training them for better productivity. It is also tricky for such entrepreneurs to supervise the management from a distance. However, franchising creates an avenue for overcoming these issues by substituting the owners for the managers. The franchisee is the owner, and he/she is strongly motivated by the investment they make in the business operation and the profit compensation. The level of innovation is also high due to the need for profit maximization.

On the other hand, franchising is associated with some disadvantages just like any other form of business. Tim Hortons and any other companies need to address some of these drawbacks before deciding on entering into a franchising contract. Firstly, the strategy involves a piecemeal revenue from per unit contribution (Tuunanen & Hoy, 2007). The franchisor does not earn every dollar generated from the company's bottom line. The revenue spawned is only a fraction which may be lower than what could be made if the branch is wholly-owned. Tim Hortons' income mainly arises from the combination of royalties and revenue share from various units under the model. Thus, it might be difficult for the franchise to maximize profitability.

Through franchising, Tim Hortons Inc. has lost control of day-to-day operations compared to a fully-owned company facility. Bugayan & Filimonenko (2013) Connoted that the final decision of hiring and firing is transferred to the franchisee. This reduces the controlling power of the franchisor who has invested heavily in the business model. Franchisee also determines the branch location and which contractor to do the build out. The franchise can only be revoked in case of violation of the agreement but not like in a wholly-owned branch where the entrepreneur can fire employees with short notice.

Conclusion

In conclusion, the above analysis reveals that franchising is one of the most common marketing strategy used by various business to support their growth and expansion in the global market. External organizational environment varies from one country to another and firms must create rapports to venture in all this market by use of local distributors who have got a better understanding of the market. Tim Hortons has prospered in the international market through the franchise. However, it is essential to put into account the various advantages and disadvantages associated with franchising and develop appropriate strategies for addressing the identified problems. Entrepreneurs will also be required to optimize the available merits of the franchise in creating a competitive advantage.

References

Bugayan, S., & Filimonenko, I. (2013). Advantages and disadvantages of franchise business opportunities in Rostov-on-don. The Russian Academic Journal, 25(3). doi: 10.15535/44

Czinkota, M., & Ronkainen, I. (2013). International Marketing. Australia; Mason, OH: South-Western Cengage Learning.

Kotler, P. (2016). Introduction to Marketing Management (Custom Edition). Melbourne: P.Ed Custom Books.

Tim Hortons. (2018). Retrieved from http://www.timhortons.com/ca/en/index.php

Tuunanen, M., & Hoy, F. (2007). Franchising a multifaceted form of entrepreneurship. International Journal of Entrepreneurship and Small Business, 4(1), 52. doi: 10.1504/ijesb.2007.011431