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Chapter 2 Franchising As A Strategy

The document discusses franchising as a strategy for business growth through market entry, expansion, and investment. It can allow companies to grow quickly while minimizing risks and capital requirements by leveraging an existing business model. Successful franchises like Starbucks, Subway, and McDonald's are examples of using this strategy internationally. Both entrepreneurs and investors can benefit from franchising by gaining expertise, support, and access to proven systems.

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112 views

Chapter 2 Franchising As A Strategy

The document discusses franchising as a strategy for business growth through market entry, expansion, and investment. It can allow companies to grow quickly while minimizing risks and capital requirements by leveraging an existing business model. Successful franchises like Starbucks, Subway, and McDonald's are examples of using this strategy internationally. Both entrepreneurs and investors can benefit from franchising by gaining expertise, support, and access to proven systems.

Uploaded by

alem.lomi94
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Chapter 2

Franchising as a Strategy

At the end of this module, you are expected to:


1. Learn strategic options available to a business
2. Understand franchising as one of the most important strategic options

What is a strategy?
The term strategy comes from the Greek word “strategos” meaning “a general in command of an
army”. Strategy referred in Greek modern word “strategy” would have been “strategike episteme”
means general knowledge. And in the year 1810, it came as an English word “strategy”

Strategy, in business, is an action that managers take to attain one or more of the organization’s
goals. Strategy can also be defined as “A general direction set for the company and its various
components to achieve a desired state in the future. Strategy results from the detailed
strategic planning process”.

Michael Porter defines strategy as competitive position, “deliberately choosing a different set of
activities to deliver a unique mix of value.” In other words, you need to understand your
competitors and the market you’ve chosen to determine how your business should react.

A. Growth Strategies
1. Market Penetration
Market Penetration is a strategy to achieve growth with the help of existing products
in the market. This strategy is followed based on the notion that market is growing /
changing fast and there is a great potential in the market. For retailers, the existing product
means their retail offerings. Products such as food and medicines or the most basic needs
of the consumers usually enjoys a continuous demand. The markets for such products are
not easily saturated. In simple words, market keeps on growing. In this, market penetration
becomes the most strategic growth option for the retailers.
2. Product Development
It is the development of new products to existing markets. It requires some form of
creativity or ingenuity to develop new products. It is also costly. This needs continuous
innovation and patience to adapt the products in existing markets until they achieve market
success.

Product development is a response to environmental changes:


a. Changing buying behavior of consumers.
b. Technological change
c. Competitive pressures
d. Buying most under the one-stop-shop or single roof buying
3. Market Development
This strategy consists of offering the existing products- with or without minor or
cosmetic modifications to customer in related market areas by adding other channels of
distribution. Market development is a logical option available to all the retailers for growth
through geographical expansion. It is viewed as the least costly and least risky of all the
strategic options available to a firm. This can be done also by making improvements
through the product’s packaging and expanding its distribution channel.
4. Diversification
Diversification is the development of new products for new markets. A firm is
diversified when it has two or more lines of business that operate in diverse market
environments. Retailers are said to follow a diversification strategy when it launches a new
offering in a new markets. Firms usually think of diversification under certain specific
situations. When a firms has possibility to expand into industries whose technology or
product complement existing business, it thinks of related diversification.

Types of diversification strategy:

a. Related Diversification —Diversifying into business lines in the same industry.


Volkswagen acquiring Audi is an example.
b. Unrelated Diversification —Diversifying into new industries, such as Amazon
entering the grocery store business with its purchase of Whole Foods.
c. Geographic Diversification — Operating in various geographic markets, which
is the corporate strategy of Starbucks, Target, and KFC.

B. Integration strategies
1. Horizontal Integration
Horizontal integration is the strategy of a company to expand its business into different
products that are similar to current lines. Usually done through mergers, acquisition or
consolidation.
2. Vertical Integration
Is a strategy that allows a company to gain control over distributors and suppliers

Types of Vertical Integration:

1. Backward Integration – is a strategy of seeking ownership or increased


control of a company’s supplier. This is used to reduced dependency to
suppliers.
2. Forward Integration – involves gaining ownership or increased control
over distributors or retailers.
Franchising as a Market Entry Strategy

One of the most significant issues today is the globalization of the economy. It is
characterized by the globalization of business world, which means that an increasing number of
firms are competing with international ones by entering into new markets or launching new
products that are accessible everywhere. As a result, companies are faced with the question of how
to expand and grow their business specifically the entry mode decision to global market.
One promising entry mode for companies is franchising which is used already by a lot of
companies worldwide. The most common advantages of franchising are related to its capitalization
on an already successful strategy. The franchisee generally also has local knowledge, and the
franchisor isn’t directly exposed to risks associated with the foreign market. But, this also means
that the franchisor has limited control on his international operations. Starbucks, Subway,
Mcdonalds (USA), Clarks (UK), and Yves Rocher (France) are just a few examples of
organizations that have been successful using franchising as their foreign market entry mode.

Franchising as a Growth Strategy


Franchising is frequently employed by companies as cost-effective growth strategy. A key
benefit of this strategy is that no capital layout is required for a new franchised store compared to
company-owned stores. Franchised stores are proven to be more successfully than company-
owned stores. This is mainly because company-owned stores are managed by a manager, whereas
franchise owners have a direct financial stake or vested interest in the franchised store.
Franchising the business concept can help streamline the business’s processes and increase
overall market share so the company can offer more services to larger demographics of people.
Two of the most appealing aspects of franchising are that it allows a company the ability to quickly
scale while minimizing risk and that it eliminates the need to raise excessive capital or increase
overhead. (Forbes)
If the local business is capitalized for growth and have systems in place that can be repeated
at scale, franchising is an incredible strategy that can help launch the brand into its next growth
phase. Expansion is a long and complex process, and franchising is not a shortcut to growth. It is,
however, an effective strategy to build upon current footprint, grow market share and reach new
audiences.(Forbes)

Franchising as an Investment Strategy


Why invest in a franchise?
Franchise is both a business opportunity and an investment due to the start-up cost.
Entrepreneurs can build a successful business faster by joining a network of branded franchise
partners who have industry expertise, training, and connections. Some wants to make a long-term
career out of their first franchise and eventually own numerous franchise sites, while some
purchase a franchise with the idea of selling it for a profit once it becomes an established location.
Investing in a franchise often get the advantage of developmental support from the
parent company, which includes quality control, marketing strategy, training, and general business
guidance. It provides access to the franchisor’s proven techniques and network. The franchisor
makes sure that before selling a franchise, extensive research has been conducted to ensure its
profitability this is mainly because of the royalties the franchisor can get from the franchise.

Risk of investing in a franchise:


1. Changes in the economic condition that may affect the profitability of
the franchise.
2. New or changes in government regulations that impact operations
(regulatory risk)
3. Capital risk
4. Reputational Damage
5. Franchise Fad

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