Sometimes it is difficult for us to understand some concepts. In such situations, analogies are an excellent solution. Today we will talk about franchising, its role, advantages and disadvantages seen from different points of view. And for ease of understanding, we will impose the system on one rule from the school geometry course.
We all studied at school, and even if the years have erased the value of the sine of an angle of 30 ° from our memory, in general terms we still remember what is taught in geometry lessons. Most of us have an understanding of franchising as well, although often very superficial. Today we will look at several slices of this business model, superimposing them on one simple geometric rule.
Why geometry?
If we try to define franchising in the most general terms, then we can say that it is a type of business. Any business - development, movement forward, direction or - vector. In geometry, there is a fairly simple and logical rule - the triangle rule. It says: if we postpone vector B from the end of vector A, then vector A + B connecting the beginning of A and the end of B will be their sum. This principle is also relevant for the economy, at the same time it is understandable to everyone, therefore, it is on this principle that we will see what franchising gives to each of its constituent “vectors”.
Of course, this business model could be compared with an organism consisting of cells, and with the structure of a poem - with any system that depends on its components. But business, like mathematics, loves the accuracy and consistency of actions, moreover, it always has a certain vector of development.
Vector A - Franchiser
The franchisor is a kind of starting point for the business. It has a working system, a model that can be replicated, and a defined consumer market and reputation. How profitable is it to be a franchisor, what are the pros and cons of such a business?
Positive direction
- Rapid development of new markets and strengthening of existing positions. Thanks to the franchise system, the brand becomes known in a new segment, and franchisee contributions allow the business founder to invest more in the development and advertising of the company.
- Possibilities of attracting additional financing for business development. For working with a franchise, each franchisee must pay a certain basic fee, but besides this, there are additional agreements that imply, for example, the acquisition of marketing services, consulting, and employee training by subsidiaries.
- Increased awareness and reduced advertising costs. This advantage is closely related to the previous two: as franchises are launched in different regions, more and more people will become aware of the existence of such a brand. With the growth of popularity, not only does the flow of customers increase, and as a result - and money, but also due to deductions from the franchisee to the general marketing fund, the total costs of advertising are reduced while maintaining its quality.
- Continuity of subsidiaries in terms of positive experience. The franchisor usually tests new technologies and systems of work at the parent organization, and in case of a positive outcome, transfers the experience to all its franchisees. This multiplies the positive effect.
- Separation of responsibilities and competencies. The franchisee is a separate business entity, therefore, it bears some responsibility for its business. He independently hires personnel, builds internal management, and is responsible for his financial results. Thus, the franchisor is deprived of the lion's share of worries about the development of his brainchild.
Negative direction
In addition to advantages, the role of a franchisor also has certain risks, dangers, and disadvantages.
- The likelihood of losing control over part of the business. Often, successful and ambitious franchisees, having achieved high results, want to separate from the parent company and become independent. He can start competing with the franchisor, which is not just unpleasant, but also quite dangerous, franchise knows the market and the business from the inside, imagines the strengths and weaknesses of the franchisor. To prevent the development of such a situation, in the contract concluded upon entry of the franchisee into the business, there must be a clause prohibiting him from conducting his activities, which will be competitive with respect to the franchisor. But, of course, this condition cannot make this prohibition permanent.
- Competition from former franchisees and the likelihood of information leaks. This risk follows from the previous one. One day a successful franchisee may decide that he is cramped within the framework of the franchise, wants to start his own business in the same area. For the reasons stated above, it can be a strong competitor, which is not at all in the hands of the franchisor. Thus, in the "estate" of the franchisor, "two birds with one stone are shot at once": he loses an experienced and competent manager and at the same time acquires an equally sophisticated competitor. In addition, the more people have access to information constituting a trade secret, the higher the likelihood of its leakage.
- The “shadow economy” of a subsidiary. No one likes to share their profits, even in the case of franchising, when without the parent company, the franchisee would never have become a franchisee. Therefore, if the amount of franchise deductions under the agreement depends on the volume of sales, there is a risk that the subsidiary will hide its real turnover in order to reduce payments.
- Quality control difficulties. This risk lies in two dimensions at once: legislative and purely human. First, from a legal point of view, the franchisee is an independent entrepreneur, so he cannot be issued orders typical for ordinary employees. Secondly, the human factor plays an important role. If the franchisee is, as they say, a person with character and he cannot or does not want to fulfill any requirements of the franchisor, it will be very difficult to oblige him to do this. And this reduces the quality of control and can affect the reputation of the entire franchise, because for consumers all businesses are part of one whole.
- The complexity of the development of documentation. A package of franchise documents requires taking into account many smallest details, a lot of time, effort and money. At the same time, there is always a risk that there are no buyers of the franchise who fit all the requirements, which means that the costs will not pay off.
Of course, as in any business, there are pluses and minuses here. The task of an entrepreneur is, before deciding to launch a franchise, to carefully analyze all the nuances, to look at various sections of the business, perhaps, with the help of experts, first try to develop the parent company and, only if it is successful, expand according to the current model. But let's say that everything worked out for the franchisor, he opened a business, set him a certain direction of development, and reached a certain point. And here comes the second vector - the franchisee.
Vector B - Franchisee
A franchisee can be roughly compared to an athlete taking over a relay baton, with the only difference that the first athlete continues to run alongside. Still, the main role now remains with the franchisee, because the franchisor has brought his business to success, occupied a certain niche, but further development and expansion is the task of his “successor”.
Positive direction
- Support. Since the franchisee does not start his business from scratch, behind his back is the parent company with a ready-made business model, successful experience, valuable knowledge, then he is not left alone with his difficulties. The franchisor conducts ongoing training, shares information, advises on emerging issues and warns against making wrong decisions. Although the franchisee is an independent owner of the business, the franchisor is interested in its success, since the results of a particular business entity leave an imprint on the entire network of enterprises, both from a financial and reputational point of view.
- Fast start. Since the franchisor provides a ready-made business scheme, the franchisee is required to provide a material component: find and equip premises, select personnel. At the same time, recommendations on choosing a location specifically for this business are provided, as well as advice on the design and quality control of employees' work. This also includes the savings of several years, which would be spent on learning the basics of doing business, as well as nerves over the mistakes made.
- A “ready-made” reputation and a recognizable brand. As a rule, only a successful business that has achieved certain success becomes a franchise. Accordingly, he has already established himself in the market and consumers know him. If the reputation is good, then for the franchisee it is a great help in the development of their business.
- Lack of competition from “insiders”. In the terms of the franchise agreement, the region and specific territorial boundaries are spelled out, within which this franchisee has the right to conduct business. As a result, there is no possibility of competition between representatives of the same franchise.
Negative direction
- Control and a clear set of rules. According to the agreement, along with a huge base of useful knowledge, experience and support, the franchisee also receives a list of requirements that must be adhered to. They can relate to absolutely all areas of business, and with some of them the head of a subsidiary company may not always agree, but nevertheless, he is obliged to comply with them. Plus, the parent organization controls all activities, which is also not always pleasant to the franchisee.
- Constant payments. Everyone knows that an entry fee is required to qualify for a franchise. But the payments do not end there. The franchisee is obliged to make payments to the general marketing fund and pay for business training. As practice shows, the more successful the franchise is, the larger the amounts payable by the franchisee. This is a kind of payment for minimizing risks and gaining knowledge.
- Error inheritance. Franchisors are people too and can make mistakes. And if the innovations introduced by them do not justify themselves, then this will happen immediately in the entire network of companies. Thus, both losses and damaged business reputation will be divided among all franchisees. If the franchisor goes bankrupt, the franchise agreements will be canceled.
As you can see, this side has its pros and cons. What do we end up with? There is vector A - the franchisor, there is vector B - the franchisee, which can move in exactly the same direction, or maybe deviate somewhat from the path traveled by its predecessor. But, one way or another, the network of companies gets the result, consisting of the totality of the actions of the franchisor and the franchisee. Roughly the same thing is happening at the macroeconomic level.
Vector A + B - Franchising
In geometry, according to the triangle rule, the vector connecting the beginning A and the end B is their sum. And in the economy, everything is the same - the sum of the efforts of the parent and subsidiary companies forms a single system of franchising. At the same time, if we take into account not one specific franchise, but the totality of all businesses of this kind in the country, then we can analyze their impact on the economy as a whole, also highlighting the advantages and disadvantages of franchising for the state.
Positive direction
Today franchising is widespread almost all over the world. In Russia, this type of business is less widely represented than, say, in the United States, due to its youth in our country and the predominance of conservatism in the mentality of the people. It is important to understand that the essence of franchising is the acquisition by an entrepreneur of ready-made technologies, business methods, goods and a brand name. The main thing here is precisely the schemes, practical developments and experience, and not the right to use the brand, as many mistakenly believe.
Franchising contributes to the development of small and medium-sized businesses, and this, in turn, gives us the following:
- Allows you to create new jobs.
- Simplifies the process of introducing innovations.
- Attracts investments to the country's economy.
- Promotes the development of fair competition.
- Forms a system of practical training in entrepreneurship without creating specialized training places.
- Increases business transparency and tax collection.
- Allows you to involve broader masses of the population and a younger audience in economic relations.
- Develops the economy, social sphere and infrastructure of the regions.
- Promotes the development of the service sector.
- Allows to increase the standard of living of the population, as well as the demand for products.
- Minimizes the gap in the difference in economic development between the center and the periphery.
Negative direction
- If there are weak competitors and a competent franchise strategy, this business can become a monopoly in the region.
- There may be other negative aspects, but they, as a rule, are associated with violations by the parties of the working conditions, with the formation of the so-called "shadow" franchising. These are exceptions, not a rule, so we will not consider them.
Thus, we see that franchising is a fairly convenient system for scaling large and developing small businesses, which has a lot of advantages for the country's economy. But for the success of the franchise, it is necessary that each of its subjects invest their energy, efforts, and be interested in the result. Then the direction of movement of these "vectors" will be extremely positive, and their sum will be quite significant.
