Franchising

Introduction

Franchising represents a trend that had grown worldwide because its flexibility offers potential franchisees the choice of the type of business they get into, the type of relationship, as well as the size of their investment.

The purpose of this thesis is to provide general information regarding the franchise system functioning. By means of this paper structuring it was attempted to offer a wider perspective regarding the franchising field. The paper proceeds as follows.

The first chapter, meant to point out some of the basic aspects regarding the franchising concept and its functioning.

The second chapter focuses on the franchising geographical expansion important attention being paid to franchising in the international context.

The third chapter provides an image of the franchising process applied by one of the hospitality industry’s giants that is the Hilton Hotels Corporation.

The fourth and last part of this paper is the conclusions part meant to synthesize the content of the previous chapters.

Primary sources of this thesis include “La Franchise” by Negre P., “Franchising A Practical Guide for Franchisors and Franchisees” by Maitland I., and also several articles of the “Journal of Small Business Management”.

Chapter 1: General franchising overview

1.1. Defining the franchising concept

“The franchise represents a marketing system and a source of capital, a growth possibility without capital dilution.”

For the purposes of casual usage, the concept of franchising can be relatively clearly defined as a simple form of business relationship. An American Marketing Association monograph , for example, defined the franchise as a continuing relationship between two independent parties based on contractual arrangements whereby a franchisor (producer) grants and provides tangible and non-tangible assets as well as managerial guidance, training and expertise to the franchisee for a fee.

The International Franchise Association on the other hand, defines franchising as a continuing relationship in which the franchisor provides a licensed privilege to do business, plus assistance in organizing, training, merchandising, and management in return for a consideration from the franchisee.

Franchising happens when someone develops a business model and sells the right to operate it to another entrepreneur, a franchisee. The company selling the rights is the franchisor. The franchisee usually gets the rights to the business model for a specific time period and in a specific geographic area.

Franchising is also known as an organizational form in which a company grants an individual or another company the right to do business in a prescribed manner over a certain period of time in a specified place in return for royalties or the payment of other fees. The company granting the right is termed the "franchisor," the receiver of the right is the "franchisee," and the right is the "franchise”.

Further, in many definitions, franchising is also characterized as a form of distribution-channel strategy or structure.

1.2. Reasons to franchise

Most investigations into firms' propensity to franchise rely on one of the two theoretical perspectives-resource scarcity or agency theory. Resource scarcity theory asserts that firms offer franchises in their early years because they lack the managerial expertise and capital needed to grow-and franchisees can provide both. In contrast, agency theory asserts that firms franchise when doing so minimizes agency costs via the best available alignment between outlet managers' incentives and firms' objectives.

1.2.1. Resource scarcity

Oxenfeldt and Kelly proposed that firms franchise in order to access scarce resources, particularly capital and managerial resources, in order to expand rapidly. When firms are very young and small, it is difficult to raise capital through traditional financial markets or from existing operations, and likewise it is difficult to develop the requisite managerial talent. Nevertheless, rapid expansion may be essential in order to build the economies of scale in purchasing and advertising necessary to compete effectively against more established firms. In such cases, firms may seek to access those resources quickly through franchising, despite the fact that their preferred avenue for growth is firm ownership where they can expect higher rates of return.