Essay Example on Franchising: A Global Business Opportunity for Expansion

Introduction

Franchising business is a global marketing concept that can be used by organizations as a strategy for expanding internationally. The concept involves two parties, the franchisor and the franchisee (Mendez, Galindo, & Sastre 2014, p. 843). The franchisee is granted a license to conduct business using the franchisor's brand, knowledge, intellectual properties, business model, trademark, procedures, and rights. An initial start-up and/or regular fee is paid to franchisor. When an organizations (franchisor) target to increase their geographical reach or market share, franchising is one of the low-cost models available. The method is common in highly competitive global industries like gasoline, automotive, bottling/beverages, and fast-food businesses (Lee et al. 2015, p. 28). Some of the most known franchise businesses include McDonald's, Subway, Domino's Pizza, KFC, Hilton Hotels & Resorts, and Hertz. Advantages of franchising business include capital acquisition, motivated management (since franchisee are the business owners), speedy growth, reduced risk, more profits, and simplified supervision (Baresa, Ivanovic & Bogdan 2017, p. 283; Mendez, Galindo, & Sastre 2014, p. 846). On the other hand, the disadvantages include loss of total control, sharing of the benefits, disclosure laws, and lawsuits with difficult franchisees.

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Franchises can be categorized into several types depending on various factors such as level of investment, relationship model, operations, marketing method, and strategy employed by the franchisor, among other aspects. However, the most common five types include business format, product distribution, manufacturing, management, and investment franchises (Aliouche & Schlentrich 2015, p. 348). These types have different characteristics that make them Franchising business.

Business Format Franchise

The business format is referred to by most people as the typical franchise. It is the most common type of franchising business. The business format involves the franchisor licenses the franchisee to use trade names, processes, brand, and the entire business system. The franchisor participates heavily in the establishment, running, and almost all aspects of the new businesses (Aliouche & Schlentrich 2015, p. 350). The franchisee receives support during the initial stages of the business, and guidelines on the daily running of the organization are provided. The franchisor continuously provides services such as advertising, employee training, marketing, quality of products, planning, and business standards. In this setting, the franchisee gets to learn from experienced management, reducing risks of failure. Such businesses are also easy to run since new firms use successful models. In return, the franchisee pays a royalty fee regularly. In most cases, this type of franchising is contractual, as it runs for a set period. Examples of business format franchise include KFC, Starbucks and McDonald's. One can tell how close the franchisee and franchisor work together due to the similarity in price and quality of products sold by the given examples.

Product Distribution FranchiseThe product distribution franchise is also referred to as the single operator. A supplier-distributor business relationship defines product distribution concept. It is one of the earliest models of franchise businesses, where the franchisee has the right to use franchisor's trademark and brand, but cannot manufacture products (Aliouche & Schlentrich 2015, p. 350). The franchisee has to conform to set standards, in terms of equipment and uniform required to store, handle, and represent the brand. The franchisor does not provide guidelines or the entire system of running the business. The franchisee has to pay a regular fee for using the established company's trademark. Product distribution franchise is common among companies dealing with mass production, such as appliances, computers, vending machines, cars, bicycles, and repair parts. Examples include Ford, John Deere, and most automotive companies. In some cases, product distribution licenses include participation in minor processes of the manufacturing process. Such examples include Pepsi and Coca-Cola. Independent contractors who use company names with established reputation also fall under this category.

Manufacturing Franchise

The model allows the franchisee to manufacture and trade using an established franchisor's trademark (Aliouche & Schlentrich 2015, p. 351). The concept is common in the food and beverage industries. Some companies, like in the soft drinks industries, the mother company produces a strong syrup, which they sell to the bottling companies. On receiving the concentrated syrup, the bottling companies mix it with water, bottle the drinks, and distribute using the mother company's branding and trademark. The franchise companies have to maintain specific standards set by the franchisor. The mother company may also offer services such as marketing, advertising, and employee training. Other industries that use this model include cars and toys companies. Most of the businesses under this category can also be classified as product distribution franchise.

Management Franchise

The model involves the franchisee managing and running the business. The mother company is not engaged in the daily running of the business. However, the franchisee uses the franchisor's trademark while conducting business. Such companies are managed from a geographical or regional office (Baresa, Ivanovic & Bogdan 2017, p. 286). Management of the organization includes developing and coordinating a team of operatives offering a particular product or service. Services such as marketing and advertising are done at the regional office, while employees make the provision of the products or services. Managers do not have direct contact with the end-user of the service or product. Examples include service sector products, such as education and training. Van based businesses are an Example of manual services under this category.

Investment Franchise

The investment franchise involves big projects requiring huge financial capital. Examples include large restaurants and hotels. In this model, the franchisee works in an advisory or managerial position, which is delegated to an executive team (Baresa, Ivanovic & Bogdan 2017, p. 286). In most cases, the franchisee is a cooperate investor. The franchisor is involved in the running of the business, where they coordinate with the franchisee team to maintain set standards.

Critical Analysis of a Franchise Business

The chosen franchise business is McDonald's. It is a fast-food company that was founded in the year 1940. The PESTLE and Porter five forces macro-environmental analysis of the franchise will be used to help discuss the strategic competitive advantage of the company.

PESTLE Analysis

Political factors

Political factors discuss how the government can influence the economy (Perera 2017). They include matters regarding the law, tax policies, political stability, trade restrictions, and tariffs. McDonald's company is profoundly affected by several political factors. Taxation on food products and the hotel industry can increase the cost of production, which in turn raises the price of fast foods. In countries with extreme levels of corruption, the cost of opening and running a McDonald's branch is high. Labour laws influence factors such as working hours and wages, which also influence expenditure. Other political factors that can affect the company include political stability, travel, trade, and pricing regulations.

Economic factors

Factors under this category include economic growth, employment rates, inflation rates, interest rates, and cost of production (Perera 2017). The rise in unemployment due to the economic downturn in many countries results in reduced spending. Also, the high price of living influences people to buy less, or turn to local hotels that sell cheaper foods. The rising cost of energy in most countries increases the value of running a business, thus reducing the profit margins.

Social factors

Cultural aspects contribute the most to the social factors that can affect McDonald's. Culture influences food consumed by different communities (Perera 2017). For example, some people do not consume meat or animal products such as milk. There are also traditions, taboos, and restrictions of consuming certain foods in different regions of the world. Trends in food consumption can also influence the success of the company. Currently, there have been campaigns against fast foods in the media to support healthy living and fight against obesity.

Technological factors

The rise of internet use has influenced lifestyle changes, as it contributes significantly to decision making (Perera 2017). Currently, almost all youths have social media accounts. Social media accounts such as Facebook, Twitter, and Instagram, influence social and community trends, especially among the young generation. Negative reviews posted on these platforms can have grave effects on the business. A post against Macdonald's can take a few minutes to spread all over the world. Also, the internet provides an opportunity for the company to reach a broader community.

Legal factors

Laws and regulations factors fall under this category (Perera 2017). Several laws affect the running of a business, demands for its products, and the cost of production. In some countries, international companies, like McDonald's, can face discriminatory laws, which could raise the cost of running a business. Health and safety laws, consumer laws, and labor laws are some of the other legal factors that can affect McDonald's.

Environmental factors

Ecological factors such as climate change, weather, and that can influence the company's chances of success (Perera 2017). Situations such as drought and famine affect farmers, who are the source of food sold by the company. Hotels and fast food joints sell lowest during heavy rains days. Other environmental factors include the use of energy-effective lighting, and the use of biodegradable materials and recycling waste to protect the environment.

Porter Five Forces

Competitive rivalry looks at the strength and number of competitors (Dobbs 2012, p. 22). In locations with many fast food joints, offering high-quality products, customers and suppliers can go elsewhere. In such cases, companies can result in price cuts, reducing the profit index of the company.

Supplier power analysis the capability of McDonald's suppliers to increase prices. When suppliers are many, all offering quality products, the company can easily switch to cheap alternatives. However, when their number is small, they have more substantial power and can increase prices at will.

The number of customers defines buyer power, and their capability to switch to other fast food alternatives (Dobbs 2012, p. 22). In the presence of many cheaper options, buyers can choose to buy from the competitors, especially when quality is guaranteed. The value of each customer and the cost of finding new consumers/markets also determines their power.

Threats of substitute products are the availability of alternative products, which can serve the same products like McDonald's (Dobbs 2012, p. 22). In this case, these are other types of food offered by different hotels. In most cases, the threat is high, since the hotel industry is vast. Cheaper food substitutes weaken McDonald's power.

The threat of new entrants is the ability of new fast-food companies to join the industry. The capability is determined by barriers to starting a new fast food joint. Fast food businesses do not require either highly trained p...