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Unformatted text preview: TR2201 Entrepreneurial Marketing KWOK Ying Yao [email protected] CHAPTER 6 Franchising and the Entrepreneur The Franchising Boom More than 3,000 franchisors operate more than 909,000 outlets in the United States. Each year, franchises produce goods and services that are worth $881 billion, 4.4% of the U.S. GDP. Franchises employ one in every 12 workers in the U.S. in more than 230 major industries. Ch. 6: Franchising and the Entrepreneur 6-3 The Franchising Boom Economic impact of franchising on the U.S. economy: $2.3 trillion. A new franchise opens somewhere in the world every 8 minutes. http://www.franchising.com/hotfranchises/ http://www.flasingapore.org Ch. 6: Franchising and the Entrepreneur 6-4 Franchising A system in which semi-independent business owners (franchisees) pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark, to sell its products or services, and often to use its business format and system. Ch. 6: Franchising and the Entrepreneur 6-5 The Franchising Relationship Element Site Selection Design Employees Products and Services Prices Purchasing Advertising The Franchiser Oversees and approves; may choose site Provides prototype design Makes general recommendations and training suggestions Determines product or service line Can only recommend prices Establishes quality standards and suppliers Develops and coordinates national ad campaign; may require minimum level of spending on local advertising Sets quality standards and enforces them with inspections; trains franchisees Provides support through an established business system The Franchisee Chooses site with franchiser's approval Pays for and implements design Hires, manages, and fires employees Modifies only with franchiser's approval Sets final prices Must meet quality standards and purchase only from approved suppliers Pays for national ad campaign; complies with local advertising requirements; gets franchisor approval on local ads Maintains quality standards; trains employees to implement quality systems Operates business on a day-to-day basis with franchiser's support Quality Control Support FIGURE 6.1 Source: Adapted from Economic Impact of Franchised Businesses: A Study for the International Franchise Association, National Economic Consulting Practice of PriceWaterhouseCoopers, (IFA Educational Foundation, New York: 2004), pp. 3,5. Ch. 6: Franchising and the Entrepreneur 6-6 Types of Franchising Trade name Product distribution Pure (Business format) Ch. 6: Franchising and the Entrepreneur 6-7 Franchising Basics Franchisee gets the right to use all of the elements of a fully integrated business operation. Essence of what franchisees purchase from the franchisors: Experience. Key Question: "What can a franchise do for me that I cannot do for myself?" 6-8 Ch. 6: Franchising and the Entrepreneur Benefits of Franchising A business system Management training and support Start-up Ongoing Brand name appeal "Cloning" Standardized quality of goods and services 6-9 Ch. 6: Franchising and the Entrepreneur Benefits of Franchising National advertising programs Franchisees contribute 1% to 5% of sales Financial assistance Only 20% of franchisors offer direct financial assistance to franchisees. Proven products and business formats 6 - 10 Ch. 6: Franchising and the Entrepreneur Benefits of Franchising Centralized buying power Site selection and territorial protection Important issue: Territorial encroachment Greater chance for success Ch. 6: Franchising and the Entrepreneur 6 - 11 Drawbacks of Franchising Franchise fees and ongoing royalties Average upfront franchise fee = $25,147 Royalties range from 1% to 11% of franchisees' sales Average royalty = 6.7% of sales Strict adherence to standardized operations Restrictions on purchasing Approved suppliers only Ch. 6: Franchising and the Entrepreneur 6 - 12 Drawbacks of Franchising Limited product line Contract terms and renewal Average term = 10.3 years Unsatisfactory training programs Market saturation Less freedom "No independence" "Happy prisoners" Ch. 6: Franchising and the Entrepreneur 6 - 13 Ten Myths of Franchising 1. Franchising is the safest way to go into business because franchises never fail. 2. I'll be able to open my franchise for less money than the franchiser estimates. 3. The bigger the franchise organization, the more successful I'll be. 4. I'll use 80 percent of the franchiser's business system, but I'll improve upon by substituting my experience and know-how. Ch. 6: Franchising and the Entrepreneur 6 - 14 Ten Myths of Franchising 5. All franchises are the same. 6. I don't have to be a hands-on manager. I can be an absentee owner and still be very successful. 7. Anyone can be a satisfied, successful franchise owner. Ch. 6: Franchising and the Entrepreneur 6 - 15 Ten Myths of Franchising 8. Franchising is the cheapest way to get into business for yourself. 9. The franchiser will solve my business problems for me; after all, that's why I pay an ongoing royalty fee. 10. Once I open my franchise, I'll be able to run things the way I want to. Ch. 6: Franchising and the Entrepreneur 6 - 16 Franchising and the Law Franchise Disclosure Document (FDD) Established in 2008 to replace the Uniform Franchise Offering Circular (UFOC) Requires franchisors to disclose to potential franchisees information on 23 important topics Objective: To give franchisees the information they need to protect themselves from dishonest franchisors and to make good investment decisions Ch. 6: Franchising and the Entrepreneur 6 - 17 Franchising and the Law There is no specific Act governing franchises in Singapore. As such, there is no legal definition of a franchise. However, the Franchising and Licensing Authority (Singapore) (FLA) has defined franchising as: Franchising is an arrangement in which a party (the franchisor) has developed a way of running a business successfully, licenses the rights to operate that business format, under its trademark or name, to another party (the franchisee). The business arrangement involves a formal legal contract between the franchisor and franchisee and continual assistance to the franchisee to run the business on a predetermined basis. There are no laws and government agencies that regulate the offer and sale of franchises. The FLA is Singapore's national franchise body and its mission is to nurture and develop Singapore's franchise industry. Companies can choose to become members of the FLA. By being a member of FLA, they are required to comply with the FLA's Code of Ethics. Ch. 6: Franchising and the Entrepreneur 6 - 18 Detecting Dishonest Franchisers In addition to the text Claims that the contract is "standard; no need to read it." Failure to provide a copy of the required disclosure documents. Marginally successful prototype or no prototype. Poorly prepared operations manual. Promises of future earnings with no documentation. High franchisee turnover or termination rate. Unusual amount of litigation by franchisees. 6 - 19 Ch. 6: Franchising and the Entrepreneur Detecting Dishonest Franchiserstext In addition to the Attempts to discourage your attorney from evaluating the contract before signing it. No written documentation. A high pressure sale. Claims to be exempt from federal disclosure laws. "Get rich quick" schemes, promising huge profits with minimal effort. Reluctance to provide a list of existing franchisees. Evasive, vague answers to your questions. 6 - 20 Ch. 6: Franchising and the Entrepreneur The Right Way to Buy a Franchise Evaluate yourself - What do you like and dislike? Research your market. Consider your franchise options. Get a copy of the Franchisor's FDD and read it! Talk to existing franchisees. Ask the franchiser some tough questions. Make your choice. 6 - 21 Ch. 6: Franchising and the Entrepreneur Factors That Make a Franchise Appealing In addition to the text Unique concept or marketing approach Profitability Registered trademark Business system that works Solid training program Affordability Positive relationship with franchisees 6 - 22 Ch. 6: Franchising and the Entrepreneur Trends Shaping Franchising Changing face of franchisees Better educated with more business acumen Multiple-unit franchising 52% of franchisees operate multiple outlets (and growing) International opportunities IFA Survey: 52% of U.S. franchisors have an international presence Master franchising 6 - 23 Ch. 6: Franchising and the Entrepreneur Trends Shaping Franchising Smaller, non-traditional locations Intercept marketing Conversion franchising 72% of North American franchisors use as a growth strategy Piggybacking (or combination or multibranded franchising) Serving dual-career couples and baby boomers 6 - 24 Ch. 6: Franchising and the Entrepreneur Conclusion Franchising: Is a key part of the small business sector Increases the chance of business success for the entrepreneur Growth continues Ch. 6: Franchising and the Entrepreneur 6 - 25 ...
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