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INTERNATIONAL FRANCHISING.
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Examines benefits and risks of franchising in the international marketplace.... More...
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Paper Abstract:
Examines benefits and risks of franchising in the international marketplace. Types of international franchises. Discusses the five strategies used: master franchise, joint ventures, licensing, direct involvement, working with the local government as the franchisee. Cultural factors involved. Trends in international franchising. Success factors. 1 Chart comparing Tradition & Master franchising.

Paper Introduction:
Introduction Franchising has been used by many different types of companies to effectively enter new markets, or to expand their existing market share. In a franchise agreement, the franchisor provides training and the rights to a particular technique or product, and the franchisee assumes the risks (and rewards) associated with the business activity. Fast food restaurants and hotels are examples of successful franchise operations in the international market. Franchising provides participants with the opportunity to enter global markets and rapidly expanding economies, thus diversifying the risks associated with operating in only one geographic market. However, the political and economic situation in the international arena can be volatile, particularly in new economies, and many companies are wary of the risks associated with ente

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The master franchisee assumes the liability, but alsoreaps the benefit from the association. 82). Franchising provides participants with theopportunity to enter global markets and rapidly expanding economies, thusdiversifying the risks associated with operating in only one geographicmarket. International Franchising Association.Internet address: http://www.franchise/org/resourcectr/faq/q1.asp. Trends in International Franchising Some franchising activities, particularly those by American corporategiants such as McDonald's, have garnered a great deal of publicity. The differences between master andtraditional franchising are detailed on page seven. 22). Goods and servicesmay have to be modified before they can be accepted in these markets, orthe marketing approach itself may have to be changed. Licensing agreements permit specific entities to use a product,trademark or other trade asset in return for a royalty fee. 16-18. Master franchisees typicallyestablish one or two stores and ensure their success before expanding theiroperation. Master franchisearrangements are among the most popular form of international franchising("What is Franchising?" 2 1, p. The last common type of international franchise arrangement is that ofinvoking the government as the local franchisee; this is essentially aspecial form of the master franchisee arrangement. Franchise management inEast Asia. InternationalFranchising Association. In addition, the jointventure may involve multiple relationships between the franchising companyand other organizations, whereas master franchisees are granted exclusiverights to a particular country or region (Tomzack, 1995, p. Introduction Franchising has been used by many different types of companies toeffectively enter new markets, or to expand their existing market share.In a franchise agreement, the franchisor provides training and the rightsto a particular technique or product, and the franchisee assumes the risks(and rewards) associated with the business activity. However, the political and economic situation in the internationalarena can be volatile, particularly in new economies, and many companiesare wary of the risks associated with entering this market. Under the joint venture, the franchising company works directly withlocal operators to develop operations. Franchises involve relationshipsbetween the franchisor (who provides the brand recognition and expertise inthe product or service) and the franchisee, who markets the product inaccordance with the franchise agreement ("What is Franchising?" 2 1, p.1). Companies are also developing new strategies for enteringinternational franchising markets, particularly when there are alreadycompetitors in that market. What is "business format" franchising? 18) References Amies, M. Internet address:http://www.franchise/org/resourcectr/faq/q6.asp. In some cases, the companymay want to enter into a master franchise relationship, or perhaps a jointventure where the foreign government is the primary contact. Western companies tend to view negotiation asconfrontations while Chinese participants are more intent on achievingconsensus. Franchising World(33), pp. 17). This arrangement providesthe local government with the greatest amount of control over theactivities of the franchisees, but also provides for the influx of foreigncapital. S. It is critical that companies carefully consider the exact form thatthey want the franchise relationship to take. Franchising World(33), pp. Fenwick, L. Journal of Global Marketing(6), pp. If the master franchisee is working with subfranchisees, thisapproach permits the master franchisee to develop successful procedureswhich can then be passed on; if the master franchisee intends to operateall stores directly, it expedites the expansion process. 1). Franchising through acquisition was used withsome success by Pizza Hut (an American company) in Australia. If these questions and issues can be resolvedahead of time, there is a greater likelihood of success. (1996, July). This research examines the benefits and risksassociated with franchising in the international marketplace. When international franchisees areinvolved, management of both the franchisor and franchisee must putconsiderable effort into maintaining a productive and effective workingrelationship (Welch, 1992, p. In this arrangement,the local government exercises direct control over the operation. Specifically, five strategies are commonlyemployed by international franchising operations: master franchisee, jointventure, licensing, direct investment and working with the local governmentas the franchisee (Chan & Justis, 199 , p. These barriers areerected in order to keep profits from the operation from leaving thecountry, and also to encourage the transfer of business and technicalknowledge from the franchisor to the local economy. 81-96. 78). Companies might find that theconstraints imposed by the government make it difficult to conductbusiness, or that the company is unwilling to cede appropriate control tothe joint venture partner. (2 1). Some of these (masterfranchisee, joint venture and working with the local government) arevariations on a common theme of franchising. However, there are variations on the franchising concept which can beused in the international market, depending on the business environmentwithin a particular region. Foreignexchange, political instability and pressure brought by the internationalcommunity all have an impact on the international business environment,including franchising. Thisdoes not mean that companies should dismiss the risks associated eitherwith international trade in general, franchising in particular, or with thelocal market specifically. By acquiringDino's, Pizza Hut was able to realize the return that it needed to meet itsinternal goals, and did so more rapidly than if the company had used a non-acquisition strategy (Welch, 1992, p. Someanalysts suggest that these well-known franchise activities are merelysymptomatic of a larger movement toward franchising on an internationallevel because franchising provides the franchisors with rapid market access(Welch, 1992, p. 92). Ripe new markets. To some degree, the masterfranchisee arrangement is a special form of joint venture where the masterfranchisee is granted the right to subfranchise any, all or none of theoperation. Pizza Hut entered the market several years after Dino's, and wasunable to gain market share which satisfied the company. E. The benefit tothe franchisee in this arrangement is that there is no research anddevelopment cost, and the franchisee also benefits from the reputation ofthe franchisor. No international venture is without risk, andthe cultural differences between the domestic market and the rest of theglobal market can be significant. From a business perspective, the environment of East Asia in generaland China in particular can be conducive to strong franchise arrangements.This is due in large part to the influence of Confucius on the culture ofthe nation and the strong role of the family. Types of International Franchises At its most fundamental level, franchising is merely "a method fordistributing products or services". Appendix|Traditional Franchising |Master Franchising ||Sells franchises |Sells master franchisee territories ||Qualifies franchisees |Qualifies only master franchisees || |(individual subfranchisees are qualified|| |by master) ||Receives all franchise fees |Receives a portion of franchise fees ||Collects all royalty fees |Collects minority stake of fees ||Trains all franchisees |Trains only master franchisees ||Supports all franchisees |Supports only master franchisee |(Justis & Judd, 1996, p. 73). This shouldnot be done without consulting with companies in similar situations whohave embarked on this type of endeavor. (2 1). This arrangement has been used with considerable successin China, which is not surprising given the political and economic systemsin place in that country (Amies, 2 1, p. International Franchising Success Factors For companies which are already acquainted with the intricacies offranchising, the international market can lend itself to franchising. 85). Marcel Portmann: IFA's eyes oninternational franchising. Chan, P., & Justis, R. Coca-Cola, forexample, experimented with various Chinese characters for its brand inChina before deciding on characters which translate approximately as"permit the mouth to rejoice" (Amies, 2 1, p. Journal of Small Business Management, pp. 54). Since many franchiseoperations remain family-owned and operated, they are well-suited tocultures (such as both China and Japan) where family values continue to bevalued highly by citizens (Chan & Justis, 199 , p. 22-24. (1992, January/February). 73-77. 75-85. Success(42), pp. 76). 16-21. This is not true of joint ventures. As a result,using an intermediary familiar with the business environment of bothcountries can be an effective approach to forming a good franchiserelationship (Fenwick, 2 1, p. 17). Cultural Factors in International Franchising Companies can significantly slow their progress and chance for successif they do not recognize that there can be considerable culturaldifferences between their home country and the target franchise markets.The issue of cultural differences is becoming increasing important asfranchisors are moving from so-called Western nations (such as the UnitedKingdom and the United States) into developing nations. (1995, April). The relationship between franchisors andfranchisees is critical to the success of the franchise endeavor, and canbe difficult in domestic operations. This mayinclude selecting the management and employees, running the operationdirectly, or simply determining which local participants are selected assubfranchisees. The fourth type of common franchise arrangement is that of directinvestment. Fast food restaurantsand hotels are examples of successful franchise operations in theinternational market. 16). 8 ). Tomzack, M. Don't leave home without your flexibilitykit. In the United States, more than 175franchisees sought the removal of Arby's chairman due to dissatisfactionwith the chairman's policies. (2 1, May). However, franchisors should not assume that they are above reproach inthe franchising relationship. (199 , February). What is franchising? There can be significant barriers to direct investment (wherethe franchising company directly owns subsidiaries in the target market),many of which are imposed by the local government. However, the authors also warn that the general approach to businesscan be quite different in China and European nations, and companies arewell-advised to use intermediaries in order to make the process moreeffective and efficient (Fenwick, 2 1, p. Welch, L. The franchisor benefits from having little exposed risk inthe arrangement (risk is transferred to the franchisee or licensee) and thefranchisor is able to enter markets more quickly than if a master franchisearrangement were developed (Chan & Justis, 199 , p. Master franchising: A Newlook. Developments in internationalfranchising. Justis, R. One of the most tryingdifficulties for both participants is the way in which either partyapproaches negotiation. The Chinese participants are also likely to move much moreslowly than franchising companies might desire, which can lead tofrustration if the franchising companies are not prepared. Academy of Management Executive(4), pp. Under a master franchisee agreement, a single coordinating entity isset up which then establishes subfranchisees in addition to any franchisesit owns itself. Pizza Hutcompeted against Dial-A-Dino's, a market leader in the pizza deliverybusiness. By requiring thatforeign companies have only a minority stake in companies, governmentsbelieve that they are able to prevent the outflow of resources (bothtechnical and monetary) and encourage the development of the local economy(Amies, 2 1, p. T., & Judd, R. (2 1, May).

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