Advantages and Disadvantages of Franchising

Advantages and Disadvantages of Franchising Franchising Franchising is arrangement where one party (the franchiser) grants another party (the franchisee) the right to use trade-name as well as certain business systems and processes, to produce and market good or service according to certain specification. The franchisee usually pays a one-time franchise-fee plus a percentage of sales revenueas royalty, and gains immediate name cognition, tried and tested products, standard building and decor,detailed technique in running and promoting the business, training of employees, and ongoing help in promoting and upgrading of the products. The franchiser gains rapid expansion of business and earningsat minimum capital-outlay. Feature of the franchise is that each buyer undertakes to fulfill the various conditions and requirements of the seller (franchiser), related to the production and sale of goods and the provision of related services to consumers. Thus, in the world market there are groups of companies united in a single system un der the auspices of a major international corporation. Its partners in the contract the franchisor provides advice on corporate location, selects equipment, helps in training, advice on management, and may also provide financial assistance. All this facilitates the standardization and unification of products and services of the companies included in the system of franchising provides unity on market events, style and design, the quality of goods and services sold the centralization of procurement related savings (and the additional benefit to the franchisor). Advantages of franchising mode are following (Kotler, 2002, p. 377): Rapid expansion of sales markets, the increase in sales volume and the territorial expansion of the business Absence of the cost of the vertically-integrated network management (reduction of personnel costs) A lower level of own capital investment Lift the prestige of the company and its trademark, recognition from the customers, increased confidence i n the quality and range of products a single company Income from the sale of the license and renting real estate franchise and equipment Profit from lending opportunities franchisees and reducing the time of turnover. Disadvantages of franchising mode are following (Kotler, 2002, p. 377): The likelihood of a smaller part of the profits from the franchise business than on their own Low reputation of one of the franchises in the absence of proper quality control can affect the reputation of the firm; Difficulty in controlling the reliability of financial reporting franchisee The franchisor is preparing a possible competitor in the face of franchisee company Joint ventures Joint ventures are often created for access to foreign markets, company’s decision to team up with their foreign partner, sharing ownership and control over the activities of the company. In world practice, there are many examples of well-known association of firms and corporations to tap new m arkets and gain competitive advantage. Creation of a joint venture may be the preferred method of access to foreign markets for the following reasons: 1. If the company lacks the financial, technological, managerial and other resources for self-development in foreign markets 2. If the government does not admit to its market foreign companies or subsidiaries without the participation of local capital for some political or economic reasons; 3. When the company, for economic reasons, team up with a foreign company for the joint production, the sale of which will provide the company higher profits due to the low cost of use of local resources (labor, raw materials, etc.)