BUSINESS STUDIES (CLASS 11) WORKSHEET 14 -FRANCHISING

EMERGING MODES OF BUSINESS IN INDIA 

What is Franchising?

Isaac Merritt Singer was an American inventor, actor, and businessman. He made important improvements in the design of the sewing machine and was the founder of what became one of the first American multi-national businesses, the Singer Sewing Machine Company

Franchising is a form of marketing and distribution in which the owner of a business system (the franchisor) grants to an individual or group of individuals (the franchisee) the right to run a business selling a product or providing a service using the franchisor's business system.

Franchisees are also given permission to use the franchisor's branding, trademarks, and identifying marks under specified guidelines. It is important for anyone deciding to start a business by becoming a franchisee to remember that in franchising the franchisee is bound to a partnership agreement with the franchisor for a defined period of time (some exceptions do exist).

Franchising as we know it today is widely believed to have originated with Isaac Singer in the 1850s. After Singer invented his sewing machine he encountered two main problems when introducing it to the marketplace. The first was that customers needed to be taught how to use the new invention before they would buy it. The second was that Singer did not have enough capital to manufacture his machine in large numbers.

In response, Singer, along with business partners, came up with the idea of selling the rights to sell the sewing machines as well as train those who bought one to local business people across the country (and eventually internationally).

Once he employed this system, Singer’s enterprise expanded rapidly. The royalties earned from the license rights helped offset manufacturing costs and, because each franchise was self-financed, Singer Manufacturing Company was able to tap into the entrepreneurial attributes and local market knowledge of the franchisees to help Singer become more successful than he could have by himself.

There are four major types of franchises:

a. Business Format Franchises, 

b. Product Franchises, 

c. Manufacturing Franchises, and 

d. Business Opportunity Ventures.

A franchisee is a small-business owner who operates a franchise. The franchisee pays a fee to the franchisor for the right to use the business's already-established success, trademarks, and proprietary knowledge

Advantages of Franchising

Rapid expansion: Today scalability is important to quickly capture market share and establish market dominance. In traditional business models, the promoters would require large amounts of capital or bank loan to expand their business. However, in a franchise model, the franchisee provides the capital and the franchisor provide the brand and technical know-how to quickly expand with the minimum capital requirement.

Local business knowledge: India is a diverse country having different cultures, languages and market. Therefore, most businesses do not have enough business, legal, or real estate knowledge and experience to invest across States and cities in India. However, in franchising, the franchisors have the ability to work with the franchisees to become aware of the knowledge about local market conditions.

Lower operating cost: In some franchising models, the franchisor would negotiate volume pricing and group buying on behalf of the franchisees. This will help lower the operating cost of a franchisee business. Further, since the franchisee is aware of the local market conditions, the franchisor can save on doing expensive research on local markets, business procedures, etc.,

Branding: One of the primary responsibility of the franchisor is to use best efforts in advertising and promoting its brand name. Therefore, the franchise business is typically better advertised and branded when compared to traditional business. Also, in the case of a franchise business, since advertising or branding cost is shared by all the franchisees, the overall cost of branding is lower in a franchise model.

Minimal risk for franchisee: Since the franchisor puts all the effort in promoting the brand, the franchisee is exposed to minimal risk. Further, in a franchise model, since the business model is also proved, the business risk for a franchisee is minimized.

Easy access to capital: Since most franchise business models are well established and having a proven reputation, it is easier for the franchisee to obtain a bank loan for starting a franchisee business.

Training and technical know-how: In a franchising business, the franchisor provides the franchisee with training and technical know-how by the franchisor. Therefore, it prevents the chances of costly mistakes due to lack of training on the part of the franchisee.

Disadvantages of Franchising

Independence of franchisee: In a franchise model, though the franchisee is an owner of a business, the franchisee cannot act independently. The franchisor regulates the franchisees and it is necessary to submit various reports to the franchisor.

Commitment or lock-in period: Typically franchisee’s are made to commit to the franchisor a lock-in period until which they would be mandatorily expected to operate the business irrespective of profits or loss. During the lock-in period, the franchisee will not be allowed to change the business model or change franchisor.

Negative publicity: In case the franchising business gets negative publicity due to the actions of the franchisor or another franchisee, the entire brand would suffer. This could lead to loss of sales or customers for a franchisee that was not involved in that act as well.

Franchise Examples

You can see several food chains around your location. Not all of them are directly operated by the main company branch, in fact, most of them are operated by a franchise. Some of the best Franchise examples of food companies are listed below:-

Domino's

KFC

McDonald's

Subway

Pizza Hut

Fun Facts

Over 750,000 franchises currently operate in the United States, which employ a vast number of people every year.