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THE BORIVLI EDUCATION SOCIETY’S

MATUSHRI PUSHPABEN VINUBHAI VALIA COLLEGE OF COMMERCE

M.K.SCHOOL COMPLEX, FACTORY LANE, BORIVALI (W), MUMBAI-400092.

A PROJECT

ON

FRANCHISING STRATEGIES

In the subject STRATEGIC MANAGEMENT

SUBMITTED TO

UNIVERSITY OF MUMBAI

FOR SEMESTER-II OF

MASTER OF COMMERCE

BY

KISHORE SUSHIL AGARWAL

DIVISION –B, ROLL NO- 201

UNDER THE GUIDANCE OF

Prof.Sumita Shankar

ACADEMIC YEAR 2013-14

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THE BORIVLI EDUCATION SOCIETY’S

MATUSHRI PUSHPABEN VINUBHAI VALIA COLLEGE OF COMMERCE

M.K.SCHOOL COMPLEX, FACTORY LANE, BORIVALI (W), MUMBAI-400092.

DECLARATION BY THE STUDENT

I KISHORE SUSHIL AGARWAL student of M Com Part-1 Roll Number 201 hereby declare that the

project on “FRANCHISING STRATEGIES” in the subject STRATEGIC MANAGEMENT Submitted by me for Semester-II during the Academic year 2013-14, is based on actual work carried out by

me under the guidance and supervision of Prof.Sumita Shankar. I further state that this work is original

and not submitted anywhere else for any examination.

Signature of the Student

EVALUATION CERTIFICATE

This is to certify that the undersigned have assessed and evaluated the project on “FRANCHISING

STRATEGIES” in the subject STRATEGIC MANAGEMENT submitted by Kishore Sushil Agarwal,

student of M Com Part-1.

This project is original to the best of our knowledge and has been accepted for Internal Assessment.

Prof.Sumita Shankar Prof. V. Manikandan

Internal Examiner External Examiner I/C. Principal

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PREFACE

I am pleased to write a Project Book on the subject called „FRANCHISING

STRATEGIES‟. This book is basically written by the students of M.COM-I for their

semester studies under the guidelines of University of Mumbai. As I am well known

about the fact that writing a project book is obviously a challenging task under any

certain circumstances, henceforth I have tried my level best to pull up certain realistic

details with regards to some valuable statistics & also included good number of research

based examples, which is definitely going to be a better scope for them to grab the subject

matter much more easily & efficiently. I hope that the readers will find these useful for

different purposes.

I hereby would like to thank one and all, from the bottom of my heart, those who have

helped me & constantly motivated me for writing this Project Book. I also thank each &

every resources from where I collected all the information & certain numbers of

innovative idea to end up writing this one.

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ACKNOWLEDGEMENT

The satisfaction and euphoria that accompany the successful completion of any task is

incomplete without the mention of people who made it possible.

So I take this as a great opportunity to pen down a few lines about the people to whom

my acknowledgement is due.

It is with the deepest sense of gratitude that I wish to place on record my sincere thanks to

my project guide Ms.Sumita Shankar for providing me inspiration, encouragement,

guidance, help and valuable suggestions throughout the project.

I extend my gratitude towards the Principal V. Manikandan for his timely suggestion and

guidance throughout Semester II of M.Com Part I.

I hereby would like to thank one and all, from the bottom of my heart, those who have helped me & constantly motivated me for writing this Project Book.

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TABLE OF CONTENTS

1 INTRODUCTION.................................................................................................. 6

2 METHODOLOGY OF DATA COLLECTION………………………….….7 3 OBJECTIVES OF THE PROJECT………………………………………….7 4 SCOPE OF STUDY…………………………………………………………8 5 IMPORTANCE OF PROJECT………………………………………......….8 6 LIMITATIONS OF THE STUDY……………………………………...….11

7 BUSINESS GROWTH .........................................................................................12

8 FRANCHISING AS A GROWTH STRATEGY..................................................16

9 HOW TO FRANCHISE YOUR BUSINESS………………………………35 10 STRATEGIES TO COMBAT EMPLOYEE TURNOVER………………..42

11 THE ROLE OF THE FRANCHISOR AND FRANCHISEE…….………………45

12 HOW TO FRANCHISE YOUR BUSINESS…………………………………….47

13 FRANCHISING IN INDIA………………………………………………………50

14 KEY SUCCESS FACTORS IN FRANCHISING………………………………..56

15 RESEARCH PROCESS .....................................................................................60

16 FINDINGS OF THE INTERVIEWS .................................................................64

17 DISCUSSION AND RECOMMENDATIONS .................................................74

18 CONCLUDING REMARKS ..............................................................................80

BIBLIOGRAPHY .......................................................................................................81

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INTRODUCTION

Aku & Ada is a clothing store that sells brand clothes in Leppävirta, a town of a little

over 10 000 inhabitants close by Kuopio. The owners are a mother and a daughter;

both of them having a strong experience of the industry and a business education as

their background. The target group for the company are young and youthful adult

women and men. Aku & Ada provides all encompassing clothing services; they sell

clothes, accessories (bags, belts, and jewellery) and shoes. In addition they give cloth-

ing advice to people with strong experience in fashion, they even organise fashion

nights, help customers to find their personal style etc. The new store opened in March

2010 and so far the business has been operating satisfyingly. Even to the extent that

the future options of growing the operations interest the owners and this thesis will

provide information on one of the possibilities.

Research always has a purpose or a function. The purpose guides the strategies for the

research (Hirsjärvi et al. 2009, 137). The research question was what requirements are

needed for Aku & Ada to become a franchise business. A year ago Riikka Pitkänen,

the chief executive officer of Aku & Ada was writing a business plan for a clothing

store which was also her bachelor thesis. Behind the business operations are Riikka

Pitkänen along with her mother Ulla Pitkänen. The former owned a clothing store in

the same town with the same name during the 1990‟s. After pondering with the idea of

opening the store up again and considering the experience Riikka Pitkänen has

received of the industry and the BBA degree they decided to go for it and start Aku &

Ada again, this time as an ltd. During the process of writing the business plan also

franchising was brought up as a possible strategy in the future. The main focus of this

research is to introduce franchising as a potential growth strategy for the company. As

well as analyse what possibilities franchising offers for Aku & Ada.

This thesis is a qualitative research on what requirements are needed for a company in

a clothing industry to expand its business operations by becoming a franchise

business. First covered are the theoretical aspects of growth of a company and

different options for growing. Then the theory concentrates deeper to franchising

operations; its history, terminology, contract types, advantages and disadvantages,

women and franchising, franchising in Finland and the current state of franchising.

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After the theoretical part there are presented the research methods and findings. The

research is based upon two qualitative interviews, first one of the two owners of the

company and sec- ond one the executive manager of the Finnish Franchising

Association. Finally there are the analysis and conclusions with recommendations for

the company.

In a nutshell franchising is examined from theoretical perspective, from authoritative

perspective and applied to a growing company‟s perspective. As a result from all the

three perspectives are gathered the conclusions and summarised the requirements for

beginning franchise operations.

METHODOLOGY OF DATA COLLECTION

The methodology of data collection I have used for my project is secondary data and it

is collected from various sources like books, journals etc.

Secondary data largely collected from different websites of the Internet.

OBJECTIVES OF THE PROJECT

1. To gain in-depth perception about franchising strategies

2. To study the changing trends of franchising strategies

3. To get the knowledge of new concepts of franchising strategies

4. To study the position of existing units who have undertaken franchising strategies.

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SCOPE OF STUDY

The result of this study is applicable to different firms of business organizations. It can

also apply to the customers, students, financial institutes and to the government.

IMPORTANCE OF PROJECT

Five Franchising Strategies Owning and operating isn't the only way to build a franchise biz. Here are five other strategies to get you in the game. You'll find many routes to owning a small business and several intriguing paths to participating in a franchise business. It's not "one size fits all"--not even close. If you think of franchising in one dimension, you'll limit your opportunities. There are so many ways to get into franchising beyond building and operating a new pizza restaurant. Keep your ears open for opportunity, and prepare to be flexible. With the right approach to franchising, you'll quickly find yourself on the road to career satisfaction and financial success.

Here are the five most common ways you can participate in a franchise program: Go the Classic Route. This is how most people think of franchise opportunities: You buy a new franchise, find the location and build it out yourself. It's all new, and it's all yours. You roll up your sleeves and plunge into your new business as an owner/operator. This is the classic route because it is precisely how so many thousands of franchisees built their multiunit empires, and it describes how much of the franchise world still operates. Newer (and hotter) franchise offerings usually provide the classic route to business ownership.

"We're a young franchise program, and we're opening new markets all over the country. Most of our owners have no experience in publishing a fashion magazine," says Tyler Allen, CEO and franchisor of a new publishing venture, Industry magazine, based in Orlando, Florida. "Opening a new market and starting from scratch is currently the only way someone can own anIndustry magazine franchise."

Among the advantages of this approach is the full new term of the franchise agreement, allowing you the maximum time you need over the term of the agreement to recoup your investment. You also have the opportunity to build your business from scratch. When you open the location, it's brand-new and ready for business; any mistakes made in the establishment of the business will be your own. You don't inherit anyone else's problems or hiring mistakes. You hire your entire team, and your direct involvement will make you the owner, manager, boss and unquestioned captain of the ship. The best upside: The new concept could take off and become a smash success--and you got on the elevator at the lobby level. There is always a downside, of course (business imitating life?). With the classic route, the biggest possible downside is the untried location. It can make or break a retail business, and you may have a substantial sum of money riding on that outcome. Second,

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your team is untried, so the training and opening support had better be solid. The startup phase of the franchise at a new location will drain your cash until the operation's growing revenue begins to carry the payroll, inventory and other expenses; so plan carefully, and never go into a startup franchise undercapitalized.

Buy an Existing Franchise The strongest advantage of buying an existing franchise business is that you have a chance to examine its performance numbers. You know what the sales and expenses were in the past year--and even earlier, assuming the records are accurate (ask the franchisor to provide a royalty payment record so that you can cross-check the key sales numbers). You have an opportunity to discuss the business with the owner, interview key employees and observe the operation. You can research the industry and gain an understanding of objective valuations in that business sector. In an important sense, you also lower your investment's uncertainty . . . and your own risk. Where will you make your money? Maybe you can identify a struggling franchise that needs a new shot of leadership and enthusiasm for the business. If you're successful, you'll build a strong business out of a weak one, and reap the financial benefits.

Buying an existing franchise business means that you're subject to the transfer provisions of the existing franchise agreement, which can be very restrictive. Many franchisors reserve the right of first refusal on all proposed transfers, so it's possible that you can end up putting a big effort into a formal purchase offer only to have the franchisor match it and take you out of the picture. The franchise agreement might also impose a hefty transfer fee, often expressed as a percentage (5 to 15 percent) of the purchase price. This will, of course, fall on your shoulders, so include it in your calculations and your price negotiations. You might also negotiate with the franchisor on the transfer fee, especially if you're buying a troubled franchise. A new, enthusiastic owner may be the answer to the franchisor's prayers; the company may be more than willing to lower or eliminate the transfer fee altogether just to help you take over the ailing franchise. Your major risk: hidden problems of the previous owner's making. No one likes surprises in a new venture, and these hidden problems will cost you money you didn't plan on spending. They range from unhappy supply vendors to dishonest employees to defective equipment--and they simply come with the territory. Add an "unexpected problems" line to your opening budget, and plan for the unexpected.

Some may call the act of selling a house in California, purchasing another in Florida, and buying a franchise--all within a two-month period--a midlife crisis; but for Sonja and Mike de Lugo, it was an opportunity they couldn't pass up. They had been looking for an existing franchise to purchase when a FastSigns franchise went on sale in Gainesville, Florida--an ideal location, since it was close to Mike's family. Taking over a franchise that had been in business for seven years granted the de Lugos, both 41, a comprehensive database of existing customers who were already familiar with the FastSigns franchise--which specializes in signs and graphic solutions. However, they were also left with a negative reputation to correct, due to what Mike calls "lack of managerial enthusiasm." They immediately purchased new equipment to increase their production rate and informed the community of the change in ownership.

Though nervous about buying a failing franchise, the couple was confident in the system since two of their family members were already FastSigns franchisees and could testify to the franchisor's willingness to help. Also, Mike used his previous 20 years of experience as a general manager at hotels in the Hilton chain to his advantage. He knew the business, knew how to talk to people and had contacts, so the couple targeted the hospitality industry as primary customers.

Within eight months, the de Lugos had managed to triple the revenue from the year before; they ended 2004 with estimated sales of $800,000. The de Lugos' success has solidified their opinions about existing franchises. "There may be locations where there's not much competition and it would make sense to put in a new one," says Mike. "But it's just my own personal opinion that I would stick with the resale."

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Buy Master Franchise Rights If you're looking for a more aggressive role in the franchise system, you could check into becoming a master franchisee. The details of the master franchisee concept differ from one system to the next, but the basics are the same: A master franchisee is appointed to serve as a local or regional representative of the franchisor, providing training and field support, and is compensated for those services, often by receiving a percentage of the royalty revenue generated in the assigned territory. The master franchisee may also have recruiting responsibilities, generating commissions on franchise sales made from his or her efforts.

The appointment as a master franchisee is usually extended to existing franchise owners who prove successful in their operations and are interested in expanding their involvement in the system. If you enjoy teaching and want to super-size the return on your franchise investment, inquire about master franchise programs.

It's the involvement in franchise sales that draws many investors to master franchise programs, and it is there that the law imposes the most restrictions. As a third party participating in a franchise sale, the master franchisee will be considered a "franchise broker" and, as such, must be included in the company's Uniform Franchise Offering Circular, disclosing business experience and litigation history. The franchisor must submit a "salesman disclosure" form to most registration states. In a few states, a broker must independently register with state authorities.

A master franchise is often confused with a subfranchising program, but there's one important distinction: A subfranchisor offers and sells franchises directly, for its own account; and, of course, a master franchisee does not sell franchises directly. A master franchisee typically generates leads, meets with and qualifies prospective franchisees, and sends them on to the franchisor for closing. A master franchisee is the utility infielder of franchising. Success is measured by the ability to manage, teach and recruit, while continuing to operate your own franchise business successfully.

When Rich Giannini became involved with Action International, a hands-on business coaching franchise, not only did he lack any previous franchise experience--he barely understood the franchising concept. Nevertheless, in 1999, he confidently assumed the role of master franchisee of the Nevada territory and took on the responsibilities of marketing the business, finding entrepreneurs to purchase franchises, and providing success coaching to franchisees. "As a master franchisee, you have two fundamental roles," says Giannini, 34. "The first is to find suitable franchisees; the second is to help them become successful."

Giannini enjoys the freedom that being a master franchisee grants him. Because he is free to set his own schedule, he can juggle working at Action's head office--helping other master franchisees--with running additional businesses on the side, including a real estate and investment business. "There's a fairly quick educational process," says Giannini. "What's important is that you've got that entrepreneurial attitude--that you'll go out there and get it done, whatever it takes." He points out that his royalty from the sale of each franchise is fixed. In contrast, a regular franchisee chooses the monthly rate to charge clients and is, therefore, more in control of his or her income. Giannini advises potential master franchisees to look ahead 10 years, examine their vision, then speak with different franchisees. Giannini says of becoming a master franchisee, "I [believed] I could help people more by being able to sell multiple franchises and have a lot of people helping business owners rather than just me. My vision better suited the master franchisee side than the individual franchisee side."

Absentee Ownership & Conversion Franchises Be an Absentee Investor. For the right kind of business, with the right employees running that business, it is entirely possible--though rare--to own a franchise business and

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not be directly involved in its management. Rare, I think, because it is hard enough to own and operate a successful small business even when you're on the floor every day. What type of business lends itself to absentee ownership? First, it must be a business that doesn't have valuable inventory. I once had a senior executive of a muffler franchisor tell me his shops couldn't be run by employee managers because too much of the inventory would leave at the end of the workday. Only an owner on the premises is sufficiently motivated to prevent that from happening.

Second, the business must have sufficient margins to be profitable after the expense of having a reliable manager. So many franchise businesses have razor-thin margins that allow for the owner to take out not much more than a modest salary. So the key question then becomes: What drops to the bottom line for the owner?

Service businesses with training programs that can support an employee manager may meet these qualifications. It would be a mistake to assume that any franchise can prosper with an uninvolved owner, but with the right program and a handpicked management team, it can work.

Buy Into a Conversion Franchise. A conversion franchise allows an existing independent business to affiliate with a national brand. The classic conversion program is Century 21 Real Estate Corp., which converts independent real estate brokers and allows them the benefits of a strong brand affiliation while allowing them to continue using their individual identification. Affiliation programs have been launched by a variety of professional service providers, such as handymen, home-repair programs and hotel chains.

Conversion franchise programs offer an attractive balance of brand identification and buying power. If you're operating an independent business and long for the competitive advantages of being tied in to a national reservations system or receiving local leads generated by a national or regional advertising campaign, you may want to consider joining a franchise affiliation program in your business category. Can you use your current business name, or do you have to completely identify with the franchisor's brand? That depends entirely on the system. The real estate affiliation programs often split the identification between the national brand and the name of the broker/franchisee. This is the approach taken by one of the newest real estate franchise systems in the market, Envirian LLC, in Reston, Virginia. Lee Konowe, founder of Envirian, doesn't insist on rigid uniformity with the solitary display of the Envirian name. "We are flexible on how the Envirian name is combined with the broker's name or the town name, or both," says Konowe. "We want our brokers to capture the value they've built in their names, so they can maximize their marketing power as members of the Envirian system."

Often, the fees paid for an affiliation program are considerably lower than those of traditional franchise systems, reflecting the fact that the franchisee is an experienced business owner and needs less training and less support than someone new to the business.

Franchising doesn't exist in a single investing dimension; it has developed in ways that allow virtually any level of investor in any business situation to participate. The lesson is clear: Keep looking until you find an investment that's well-structured for your interests and needs, and you'll probably find it in the franchise arena.

LIMITATIONS OF STUDY

Since the study is short term project and due to money and time problem it was not

possible to conduct and collect information through primary data for completion of the

project.

The process and topic is very lengthy but few words of procedure are explained in the

project.

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BUSINESS GROWTH

The main theme of this thesis is franchising. Before getting into the theory of

franchising, some other aspects of growing the business and options for growing the

operations are presented.

G r o w t h entrepreneurship

Growth entrepreneurship is usually described as a company that is innovation based

and has internationalisation as a wider goal. Growth is not the purpose for a company

but a result of competitiveness, knowhow and innovativeness, which makes it difficult

to give a specific definition for the concept. In some economies when a company‟s

turnover exceeds 20 per cent on average it can be called a growth enterprise. At the

same time the same economy might only be producing few innovative companies that

might grow their turnover by 100 per cent (MEE Publications Innovation 42/2009 -

The report of the growth and entrepreneurship monitoring group).

The growing companies that have the exact goals of growth and innovativeness, and

invest into the right knowhow will affect the economy around them by increasing em-

ployment, national production and productivity. Fast growth also requires attitude and

knowledge. Therefore humane capital that is ready to adapt to a fast pace of change is

an essential factor in growth, and as a result growth enterprises employ highly edu-

cated labour force more often than other companies (MEE Publications Innovation

42/2009 -The report of the growth and entrepreneurship monitoring group).

Especially in small home markets growth requires a fast internationalisation. There-

fore the ability to operate in the global markets is essential for a growing company.

Another requirement for growth is finance. For high risk projects it can be difficult to

get a loan which is why venture capital finance is popular and essential for growth

enterprises. Growth enterprises also typically have cooperation with universities and

universities of applied sciences as well as research institutes. It is typical for a growth

enterprise that the possible profits of the company are kept for the growth and

development of the company rather than taken out as revenue and salary for the

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entrepreneurs (MEE Publications Innovation 42/2009 -The report of the growth and

entrepreneurship monitoring group).

To compare the magnitude of the growth internationally can be demanding due to the

differences in measuring growth. Growth can be in turnover, revenue or personnel, it

can be fast or long-span, it can be organic or base on buy-outs. Also the definition of

growth enterprises varies which makes it very difficult to compile statistics on the

subject (MEE Publications Innovation 42/2009 -The report of the growth and

entrepreneurship monitoring group).

G r o w t h in smaller scale

Before going international it is typical for the business first to expand the operations in

the home country‟s markets. This can be done in several ways and the same operations

can be executed in a larger scale as well.

Internal growth can mean several improvements and/or operations implemented within

the company in order to increase sales, revenue and profitability of the company.

Product development can mean to come up with a whole new product in order to ex-

tend the product line or improve an already existing product or service. Increasing

market penetration could be achieved by greater marketing efforts or increasing

production capacity and efficiency, which both can lead to increased sales (Barringer,

etal. 2010, 482-486).

Geographic expansion is considered when the company cannot expand in the present location but has reasons to believe that product/ service attracts the consumers in other

location as well. Company owned outlets require large capital and direct managing on

all the aspects of the business, which makes this a slower way to grow in size and the

return on investments are slower compared to franchising. When opening a company

owned unit in another location the manager has to balance between the already exist-

ing and the new unit. This can cause a lack of attention to the original unit and be

harmful for the business operations. On the other hand there are no middle men (fran-

chisees) in between if/when the profits start to flow in (Barringer, et al. 1998, 467,

471; Keup 2007, 65; Barringer, et al. 2010, 521).

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An alternative that does not grow the business but can be considered an option is to

continue the business in the same way as before and avoid the hassle of expanding

production, starting franchising operations or other cooperation with other

entrepreneurs. The costs stay the same and the owner gets all the profit that come in.

The downside is that the companies that do not develop often fail in their businesses

and the business owner also loses out on all the good aspects of growing for

example trough franchising (Keup 2007, 65).

G r o w t h with bigger goals

After the company has grown from the inside and desires to grow even larger, the

company may reach for international markets and seek expansion prospects with other

companies. External growth strategies are based on developing a relationship with

third parties, this can be done for example through mergers, acquisitions, strategic

alliances, joint ventures, licensing, and franchising (Barringer, et al. 2010, 489).

Association alternative consists of dealerships, licenses, incentive programs, partner-

ships and joint ventures. These are often results in negotiations and cooperation of two

parties that have same interests and become to agreement through compromises on

how to settle things. Downsides are the compromises, of which in the case of

franchising the franchisors are safe, they do not have to be so flexible since they are

the one‟s setting down the rules and franchisees simply sign the papers. Some

partnerships and sister corporations may easily seem like franchising which can cause

problems with law at least in the US (Keup 2007, 66-67). One successful company that

has only a few franchised outlets out of the thousands of stores around the world is

Starbucks Coffee Company. They have made agreements with companies such as

United Air- lines, Nordstrom, Barnes & Noble and Wells Fargo Bank. They also

operate side by side with Chapters and Costco (Evancarmichael.com; Starbucks

Coffee Company).

Merges and acquisitions are both ways to grow for entrepreneurial companies. The

first one is more like melting two or more companies that have similar interests

together. In an acquisition one company that wants to benefit from another outrightly

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purchases the other. The latter is more commonly used among entrepreneurial

companies. The company implementing acquisitions can accomplish a number of the

company‟s goals for instance expanding its product lines, gaining access to

distribution channels, achieving economies of scale, and/or spread out the company‟s

geographic area. Acquisitions can also be used to buy out the competitors like when

Google acquired YouTube in 2006 (Barringer, et al. 2010, 491).

Franchising is a way to grow business operations as are the former presented

strategies. It offers a little bit different approach to business ownership, but cannot

create immediate miracles. Franchising allows a business to get its products or

services to wider markets through the endeavours with the business partners (Murphy

2006, 11; Barringer, et al. 2010, 514). This subject will be discussed in detailed in the

following section.

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FRANCHISING AS A GROWTH STRATEGY

Franchising has been conquering the world during the past few decades without the

masses really knowing of its existence. It is a poorly comprehended type of business

ownership and method to grow existing business. Today it is studied by business stu-

dents and also entrepreneurs are aware of the term. In order to completely understand

what franchising is all about one really has to closely study the concept and/or throw

oneself in and experience it first handed (Barringer, et al. 2010, 512). The beauty of

franchising is in the win-win situation that both parties have in the business; franchisor

(owner) who seeks to grow the existing business with little financial input and

franchisees who are ready to spend the money in order to do a business without having

to start from scratch (Bennett, et al. 2008, 11-12).

History

The way franchising works is nothing new to our civilisation. The earliest rights to do

business in other parties names dates back to the Middle Ages (476 A.D. – 1453 A.D.)

when the feudal lord gave rights to the crafts men and other professions to do business

such as operate ferries or hold markets. A more recent and recorded early form of

franchising took place in Germany. In 1845 brewers and tavern owners started

conducting business relations in a way of exclusive distribution rights of beer

(Bennett, et al. 2008, 10).

After beer came sewing machines. The first commercial franchise came from Isaac

Singer after he developed his first sewing machine in 1858. There were two problems

to be solved before Singer Sewing Center could exist. Mr. Singer lacked the capital for

mass production and the customers did not know how to use the machines. He grasped

the idea of selling the rights to other business men to sell the machines and also train

the new users. When he got money from the licensing fees he could finance the

manufacturing and he did not have to figure out the cost or time of hiring. In this way

the business expanded rapidly and is still well known in many parts of the world

(Dugan 1998, 7).

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The next big step in franchising came because of a need for a huge distribution net-

work. As Henry Ford started mass producing his cars in the assembly line in a pace

one had never seen before everything had to adapt to the new culture. There were cars

accessible for the masses; cars need gasoline, parts and services. Now people could

live in a larger area, drive to other towns, they needed accommodation, places to eat

and so on. In the early 1940‟s a lot of business started blooming; automobile dealers,

travel lodges, oil companies made deals with convenience stores etc. This started the

expansion of franchising the way we know it today (Dugan 1998, 8).

The early franchisees in the 1940‟s did not look alike, they had characteristics of their own and the franchise agreements were about 3 pages long, nothing too strict or complicated. About 10 years later Ray Kroc introduced the cloning method to franchising. He is also the founder of the world‟s most well known business and franchise. It all started with milkshake mixing machines and 15-cent hamburgers in San Bernardino.

Back then it was called MacDonald‟s, somewhere along the way they dropped the “A”

from the Mac. Mr. Kroc brought the assembly line method to food industry and

created the concept of fast-food. He believed that controlling every single aspect of

the business, from how to run it to the decor of the store and everything in between

will make the business successful when expanding it to new locations. He was right.

The idea is to make sure the customers gets the same thing every time they walk into a

McDonald‟s. After the finding of cloned franchising business some have tried to

franchise without cloning the business and mostly failed. In the 1960s already existing

franchise businesses started adapting to the cloning method by wearing same uniform

and standardising their businesses. Today the franchise agreements are a lot longer

than 3 pages (Dugan 1998, 9-10).

From the mid 1900‟s franchising has come a long way. The International Franchising

Association (IFA) was founded in 1960, today there are more than 75 industries

operating in the franchising format. Several countries have their own local franchising

associations and even outside of the official associations there are individual

franchisors operating franchised businesses. All in all there are thousands and

thousands of franchisors and franchisees around the world. Franchising is the easiest

way to spread the business around the world, just like McDonald‟s and their golden

arches have proven (International Franchising Association).

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The key concepts

In order to be able to discuss more deeply about the franchising concept it is good to

start with the basic terminology. First there is the introduction of the word franchise

and the origin of it, then different definitions for the concept of franchising from

different points of view and finally presented are the two parties in a franchise

agreement; franchisor and franchisee.

Franchise is actually a loanword from the French language and it translates to freedom, privilege, and exemption (Barringer, et al. 2010, 513). Franchise, spelled as in French, is also a word in English, Finnish, Hungarian and German and has similar spelling styles in other world languages (sanakirja.org).

The term Franchising can be opened up in several ways. Bennett, et al. (2008, 9) quot-

ing Cheryl Babcock, director of the International Institute for Franchise Education as

Nova Southeastern University in Fort Lauderdale gives quite comprehensive definition

and also notes the existence of the two parties in the operation. Tuunanen (2005, 19)

takes more technical point of view in his version whereas Keup (2007, 55) sums the

term in a practical way. The different ways to describe the term franchising are in the

table 1.

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Table 1. Franchising definitions from different perspectives

Franchisor is usually the creator of the business concept, the one that has developed and launched the operations (Tuunanen 2005, 19). Once successful in the business, the business owner lends rights to do business under the same name to another business owner using the original method and/or trademark for a predetermined period of time set in a contract (Barringer, et al. 2010, 513).

Franchisee is the receiver of the right to conduct business invented by the franchisor.

Franchisee can also be called a franchise owner (Tuunanen 2005, 19). Bennett, et al.

(2008, 9) quotes Babcock summarising the roles of the two parties:

“Franchisee pays the franchisor a royalty fee and, often, an initial fee, for the right to

utilize the franchisor‟s brand name, operating system, and ongoing support, and agrees

to conform to quality standards.”

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Dif ferent types of franchising

There are different ways of implementing franchising type business. The main

separation is between product and trade name franchising and business format

franchising.

In Europe only business format franchising is regarded as franchising and the former is

not included in the statistics. In the US both are equally seen as franchising and since

there would not be the latter without the former here are explanations for both. Product

and trade name franchising is franchising as it was in the early days. The franchisor

has a product that is distributed to the end-users by the franchisees. Singer had sewing

machines and GM had cars, this has not changed; newer product and trade name

franchisors are Coca Cola Company and British Petroleum (BP). Coca Cola Company

gives the right to bottle the cola drink in various countries around the world and sell

the drink as Coca Cola. Coca Cola Company does not give rules on how the company

should be run etc. This is a good example of how the franchisor (Coca Cola Company)

gives the licensed Coca Cola trade name and logo to the use of the franchisee (the

bottling factories that also distribute the drink to the retailers) and the franchisees

(factories) run their business the way they please and sell the product to whom they

please. The factories buy the concentrate/syrup from the Coca Cola Company,

add filtered water, bottle it and sell it to the retailers who then sell it to the end-users.

The Coca Cola Company gets their income from selling the concentrate/syrup to the

factories and the factories get their income from selling the drink to the retailers.

(Coca Cola Bottling Franchise; Tuunanen 2005, 18, 141; Barringer, et al. 2010, 514;

Bennett, et al. 2008, 9)

In business format franchising the idea is taken a step further from product and trade name franchising. This time all aspects of the business are determined by the franchsor. As mentioned earlier, McDonalds was the first company to start business format franchising and is a perfect example of this type of franchising. The franchisor pro- vides the entire formula of the business to the franchisee; this comes with a specific plan on how to conduct business, training on how to operate the business, support along the way, and depending on the business even the words that are used in the cus- tomer service might be supplied by the franchisor, so basically everything is covered. Also marketing is done by the franchisor, sometimes the franchisee can market the local business as well but mainly the marketing is nation wide and conducted by the franchisor. In return of a complete (and successful) business model

the franchisee pays royalties and franchising fees for the franchisor. Even though this

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type of franchising might be demanding and inflexible for the franchisee it is more commonly used among the entrepreneurs than the former (Tuunanen 2005, 18; Barringer, et al. 2010, 514-515; Bennett, et al. 2008, 9-10).

Tuunanen (2005, 68) has listed criteria to check in order to find out if the operations

fulfil the qualifications for business format franchising. Criteria 2 to 7 deal with the

legal criteria. Criteria 1 and from 8 to 12 cover the theoretical/practical side. In order

to pass as a franchise in the screening the minimum requisites to fulfil are 1 to 4, and 5

or 6, and 7.

1. There are outlets operated by the franchisee(s) – i.e. not totally company

owned channel of distribution.

2. A written (standard) franchise contract exists between the parties.

3. The franchisee pays an initial franchise fee and/or s/he pays royalty on

continuing basis to the franchisor.

4. The franchisees operate under the same brand/trade name and their outlets

have a uniform outfit.

5. The franchisor provides relevant and classified know-how by training and/or

other significant assistance to the franchisees.

6. The franchisor offers an operational manual(s) to guide franchisees‟ business

operations.

7. The franchisor supplies technical and/or commercial support (i.e. ongoing ser-

vices) to the franchisees.

8. The franchisor does not own (substantial) share of the franchisees‟ companies.

9. The franchisor acknowledges franchising as its operational form and/or

searches for new franchisees.

10. An exclusive right for a territory may be granted to a franchisee in the

franchise contract.

11. The franchisor controls and monitors franchisees‟ business operations on a

continuing basis.

12. The franchisee may not sell, lend, transfer or grant the franchise or any related

rights to a third party without franchisor‟s approval.

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Different types of franchising arrangements

In franchising like in any kind of business, there are different ways to conduct the co-

operation between the parties. Here the three main contract types between the

franchisor and franchisee are introduced; individual franchise agreement, area

franchise agreement and master franchise agreement.

Individual franchise agreement is the most widespread type of contract between

franchisor and franchisee. In this simple cooperation a franchisor sells a single

franchise to a franchisee for one specific location (Barringer, et al. 2010, 515).

Area franchise agreement covers more than one location in one address. This is a

popular type of franchising agreement because it gives exclusive rights (no

competitors from other franchisees of the same franchise) for the area and it gives

challenge for the franchisee by increasing the responsibilities etc. With this kind of

agreement the franchisor sells the franchisee rights to own and operate predetermined

number of units in a specific territory (Barringer, et al. 2010, 515; Bennett, et al.

2008, 282).

Master franchise agreement also known as subfranchising can work in two different

ways. In a nutshell the franchisor sells the franchisee the right to become a franchisor

in a specific geographic area in exchange for royalty payments or a portion of the

franchise fees collected from these additional franchisees. One way of implementing

this is that the franchisee must operate at least one unit themselves and at the same

time act as franchisors for the others in the area. The other way of executing this is that

the franchisee becomes a franchisor and only takes care of the franchisor‟s job in the

area.

This type of arrangement is usually used when expanding to other countries after the

original franchisor has successfully expanded the business through franchising in

smaller area. Another functioning way of utilizing this concept is for example real

estate business, where the people doing the business are professionals in doing it al-

ready and only need to change into a different coat to sell real estate under a bigger

name (Murphy 2006, 164; Barringer, et al. 2010, 515; Bennett, et al. 2008, 283; Keup

2007, 90).

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Multiple-unit franchisee is a term used for an individual who owns and/or operates

multiple units of the same franchise, whether through an area or a master franchise

agreement. Both of these two multiple-unit franchising techniques have their short-

comings to the original franchisor who may lose control of the sales process and will

have his/her hands bounded in terms of expansion in that area for the time set in the

franchising contact. On the other hand, there is reduced total number of franchisees to

manage, also less training and other tasks concerning starting up a new franchise when

every new unit will not need the guidance from the original franchisor (Murphy 2006,

165; Barringer, et al. 2010, 515; Bennett, et al. 2008, 283).

Barringer, et al. (2010, 516) has visualized the different agreement types with

organization charts. First is the individual franchise agreement, in figure 1, which

involves the sale of a single franchise for a specific location. Here are only two parties

and they are directly connected with each other.

Figure 1. Individual franchise agreement (Barringer, et al. 2010, 516)

The second type is area franchise agreement (figure 2) which allows a franchisee

to own and operate a specific number of franchisees in a particular geographic

area. In this chart all the 3 franchisees are operated by the same franchisee

individual in the specific area under the same contract.

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Figure 2. Area franchise agreement (Barringer, et al. 2010, 516)

Thirdly there is the master franchise agreement (figure 3) in which a franchisee

owns and operates a specific number of franchisees in a particular geographic area

AND provides the franchisee the right to sell to other new franchisees

(=subfranchisees), who find and manage their own franchisees.

Figure 3. Master franchise agreement (Barringer, et al. 2010, 516)

3.5 Advantages and disadvantages

For every type of business and organization there are advantages and disadvantages,

the same goes with franchising. In franchising there are two parties in the contract

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which means that there are good and bad sides from both view points; franchisors and

franchisees. Here the main concern is the franchisor and there for the advantages and

disadvantages are presented from the franchisors point of view (Murray 2004, 16;

Murphy 2006, 183).

Franchising expands the business much faster than growing through company owned

units, this is because there is a greater amount of money and individuals involved in

franchising operations than if company should invest own resources in growing the

operations. On the other hand there might be a loss of control over the network if it

grows so big that the franchisor cannot handle everything anymore. The franchisor

might also create an illusion where he/she would not have to take that much interest in

the daily operations of the business because of the franchisees are doing all of that

kind of work (Francoise 1997, 14-15; Murray 2004, 19-21; Keup 2007, 56-58;

Murphy 2006, 185-193; Barringer, et al. 2010, 522). Figure 4 shows the good and

bad sides of the expansion aspect.

+

-

Figure 4. Advantages and disadvantages from growth perspective

Franchising can also be seen as a method to raise capital, where franchisor does not

invest own money in the same quantity as opening company owned branches, because

every franchisee brings their capital to start their part of the business. This also

guarantees a set income from the fees and royalties for the franchisor. The greater

amount of business units getting their supplies from a same source also cuts down the

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costs in the same way as handling the financials through the same channels etc. Not to

mention the efficiency of marketing that affects every business operating under the

same name; one town/nationwide advertisement that works for all the stores and saves

in costs, time and work effort in marketing. All in all the financial risks are rather

small. The downsides are that the profits that do come are not all for the franchisor, but

the franchisees get their portion of the profits as well, which makes the profits smaller

for the franchisor than if the business would only have company owned units. There

are also costs of operating franchised business such as legal expenses and training etc,

so be- fore getting any profits, the franchisor is required to invest on these aspects.

Similar to other kind of business operations, in franchising, it takes time to start

making a profit,

as most of the franchises take at least half a year to break even (Francoise 1997, 14-15;

Murray 2004, 19-21; Keup 2007, 56-58; Murphy 2006, 185-193; Barringer, et al.

2010, 522). In figure 5 there are the financial aspects gathered from both positives and

negatives.

+

-

Figure 5. Advantages and disadvantages from financial perspective

When growing business to new geographic areas through franchising the franchisees from new locations bring local knowledge from the local markets, this show franchisees importance especially when entering to new countries. Another good aspect of the relationship between franchisor and franchisee are the research and development facilities that come in in form of reports from the franchisees. When the franchisees deal with hiring and other direct managing responsibilities of the business it gives more time for the franchisor to concentrate on the big picture of running the company.

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Peo- ple usually also mean problems; in franchising the franchisor and franchisee look at issues from different points of view and might have different goals in operating their part of the business. The franchisor needs to keep in mind that franchisees are not their employees but independent operators with a franchising contract. The relationship is a leap of faith in a way; franchisor needs to be able to trust to the franchisee and give up part of the business operations to a stranger. Just like in any relationships there will be disagreements on various issues, especially when things do not work the way one ex- pects them to, these are problems that just need to be faced and solved as they come. Lastly, if disputes that cannot be agreed upon when they arise, the franchisee might leave and use the experience in opening own business and become a competitor with knowledge of your business (Francoise 1997, 14-15; Murray 2004, 19-21; Keup 2007,56-58; Murphy 2006, 185-193; Barringer, et al. 2010, 522). Figure 5 sums up the di-

lemmas and the benefits of the relationship between franchisor and franchisee.

+

-

Figure 6. Advantages and disadvantages from relationship perspective

In any relationship both parties come to it with their own history and experience of life. In franchising a good aspect is that every franchisee has knowhow and ideas on management, marketing, fresh motivation etc. But the differences that they bring can be the cause of friction when everyone thinks they know the best (Murray 2004, 19-21; Keup 2007, 56-58; Barringer, et al. 2010, 522). In figure 7 are shown the both sides of the background that the franchisees bring to the business with them.

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+

-

Figure 7. Advantages and disadvantages from experience perspective

In business there are always risks involved, that is what business is about, taking risks.

In franchising a lot of negatives originate from the relationship between the franchisor

and the franchisee. If the relationship works the business will work more smoothly as

well. Franchising really is like marriage; it all comes down to selecting the right

“partner” to grow together. When there is trust and agreement between the parties life

is much easier and everyone is heading to the same direction. In franchising, no matter

how perfect the concept is, if you argue with the franchisee constantly it will be un-

successful in implementation (Murray 2004, 21). An important matter to remember is

that if it is not broken, do not fix it. If you are not ready to expand, and yet you try, you

might end up ruining a good thing, so be prepared. (Murphy 2006, 183)

Reasons for starting franchising

Tuunanen in his research conducted in 1999 looked for reasons why entrepreneurs in

Finland have started franchise operations. The questions were open questions so

Tuunanen has arranged 13 different groups from the results, and they are as follows:

1. Rapid growth, Geographical spreading, Market coverage (14%)

2. Solution to the principal-agent problem (12%)

3. “Copycat Strategy” – method copied from abroad or competitors (7%)

4. Economies of Scale, Benefits from Co-operation (7%)

5. Control and organizational issues (7%)

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6. Cost management and efficiency (6%)

7. Do not know/decline to answer (6%)

8. Access to financial capital (5%)

9. Access to human capital, Local market knowledge (5%)

10. Pilot operations and R & D (3%)

11. “Go with a flow”, no specific reason (3%)

12. Risk sharing (2%)

13. Miscellaneous reasons (1%)

(Tuunanen 2005, 70)

A company‟s growth is followed by two factors. Firstly, their product or service is

successful and becomes well known. Secondly, when the company has been making

profit and has the financial capability to expand. The companies should consider

franchising as an option to grow when they have something that others do not in terms

of trademark and a strong, well designed business model. The willingness to grow

ought not to be underestimated either. One important aspect of the business is that is

should be able to be standardized; this is the core idea in franchising, no matter where

you walk into a store under certain name you expect to receive the same product,

service, atmosphere etc. (Barringer, et al. 2010, 518; Murray 2004, 13).

Franchising suits best for young companies that might lack the financial capital where

the franchising fees and royalties will bring in some of the needed funds. It is also

important to keep in mind that franchisees are looking for a proven product at least to

some extent, so when beginning franchising the business should have been well tested

and the company should have experience of outlets that are company owned and

successful (Barringer, et al. 2010, 518, 523).

Not always is franchising the way to grow. Franchises that are sold need to be affordable for the franchisees and the concept needs to be able to be written open in the con- tract. In huge chains that have large units such as Wal-Mart (comparable to Prisma in Finland) it is not possible to keep the opening costs in reasonable limits for an entrepreneur nor is it achievable to write down all the policies and procedures there are to run such a business. For this kind of cases franchising rules out of options (Barringer, et al. 2010, 518).

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An important aspect of deciding on starting a franchise is whether the entrepreneur is a

business person fit to be a franchisor. It is different to run a business from running a

franchise; franchisor is a business person as well as an educator, trainer, psychologist,

perpetual hand-holder and looking after what/how things are done. A franchisor needs

to remember that he/she is not looking for employees but independent business people

who will be part of the franchising chain as individuals operating the business

according to the instructors given by the franchisor (Keup 2007, 59).

W o m e n and franchising

IFA, The International Franchise Association was founded in 1960, it is a US based

organization and it is a membership organization for all the parties of franchising;

franchisors, franchisees and suppliers. In 1996 they formed a WCF, Women‟s

Franchise Committee to inspire and courage in franchising (International Franchise

Association). Nowadays women in franchising are so common that they are not

considered as a minority. As a matter of fact women are establishing new business

operations twice as fast as men. Before there were more obstacles for women to be part

of business life such as getting finance and recognition (Bennett, et al. 2008, 272-277).

These reasons are still behind the willpower for women to want to be their own bosses

by starting businesses. The attraction to franchising for women is that even though

they are running a business on their own they are not alone but have diverse support

net- work behind them (especially as a franchisee). Women are also better fit for the

role of franchisee due to the general nature of female being able to listen, follow

detailed pat- terns to work and implement business and accept that franchisor has the

experience and knows what is talking about. In addition franchising offers flexibility

for mothers with a family to run (Murray 2004, 111-112; Tuunanen 2005, 106).

Moya Hammond, a managing director of a British wedding bouquet franchise says: “Women have the skills to manage and grow a small business, but some lack the confidence to try...Women do not always recognise their capabilities – particularly if they have taken a career break lasting several years. For such people franchising is ideal. It can provide the support necessary to enable the individual to develop her skills within a safe environment.” (Murray 2004, 113).

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Franchising in Finland

Compared to the history of franchising in US and Europe, Finland is a beginner in

franchising with the first franchising concepts from 1970s (Tuunanen 2005, part II/I

47). In his doctoral thesis Tuunanen, discusses closely the franchising scene in

Finland. According to the statistics from 2003 there were 177 operating franchise

systems with a total of 6 608 outlets in Finland, from the fields of retail, service and

restaurant. Retail being the biggest individual segment with 76 chains, service

following not much behind with 71 chains. The total number of franchise systems in

Finland has grown from 30 chains in 1999 to 177 in 2003. When looking at the

increment of the franchise outlets by business categories from 2002 to 2003 retail

grew the most by

15,2 per cent (871 outlets). The Finnish franchising association was founded in 1988,

so this was just a small example of how fast franchising has been growing in Finland.

Tuunanen also explains how the numbers are only directional because during the years

from 1999 to 2003, 10 franchise systems had been ceased, only one due to bankruptcy.

This also tells how “safe” franchising is; even if the franchising system would end, the

business often still continues. In addition, sometimes the franchise systems might

emerge what happened with the example of the 10 franchise systems mentioned

(Tuunanen 2005, 71-75).

Tuunanen compares the amount of domestic franchises and foreign franchises in

Finland. In 2003 out of 177 franchise systems 133 (75, 1 %) were Finnish origin and 44

(24,9 %) foreign. Tuunanen states that in Europe Finland has an average amount of

foreign franchises in the country compared with the local franchise system and that

most of our 44 foreign franchise systems come from Scandinavia and Western Europe

with only few from North America. These along with the Baltic countries and Russia

were also the countries where Finnish franchises have spread. 21 per cent, one fifth, of

Finnish franchise systems had expanded abroad by 2003. This is a large number even in

an international contrast (Tuunanen 2005, 74-75).

Female entrepreneurship in Finland

Since there is little to no statistics of female franchising in general, and even less of

female franchising in Finland. And since franchisees in Finland are part of the general

entrepreneurial statistics, here are some data of Female entrepreneurs in Finland. By

female entrepreneurship in Finland is simply meant a company that is established by

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woman/women, or where woman/women have over 50 per cent ownership and/or

where woman is a head of the company (MTI Publications 11/2005 Women

Entrepreneurship – Present Situation and Proposals for Measures).

There are only few statistics about female entrepreneurship and they are from different

sources, composed in different styles. This makes it very challenging to compare

different existing statistics (MTI Publications 11/2005 Women Entrepreneurship –

Present Situation and Proposals for Measures). But to show some figures; in Finland

in 2003 out of all the entrepreneurs 33 per cent were women. In comparison with other

countries in Europe in the EuroStat statistics, Finland was in first place in the amount

of female entrepreneurs in 2003(non including agriculture). With agriculture included

Finland was in second place after Portugal (Entrepreneurship Survey 2004, MTI

Publications 18/2004). Out of all the chief executive officers about 16 per cent are

female and nearly half of franchising entrepreneurs female (Uranus.fi; MTI

Publications

11/2005 Women Entrepreneurship – Present Situation and Proposals for Measures).

The former Finnish ministry of trade and industry undertook a research whereby the

companies owned by women in Finland are typically small and financially sound as

well as having the foundation and base of their company base on professionalism

(MTI Publications 11/2005 Women Entrepreneurship – Present Situation and Propos-

als for Measures).

In 2010 a released report of female entrepreneurship by ministry of employment and economy were researched different aspects of entrepreneurship which one of them being strategies and leadership. According to the report a little over half of female entrepreneurs set tangible goals to the company and the time span of the goals was often short, in half of the cases only about a year. Nine out of ten companies were fo- cused on domestic markets. The competitive strategy was invariably the quality of the products and services, nearly as important was the knowhow of the staff (including the entrepreneur). Nearly a third was planning on expanding the operations in the current company; about every tenth company was looking at closure of the business, suspension of the business or selling of the business (MEE Publications. Employment and entrepreneurship 33/2010. - Business practices and profitability of women owner enterprises).

The same research report discloses that over the past three years most of the female

entrepreneurs had offered new or improved products and/or services, often the ideas

came from the customers. The development was usually done by the company and the

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investments had been put into machinery, as well as into marketing and the training of

staff were put effort into. The mentioned problems with development were the overall

economical situation, too small market segments, the high price of development and

lack of proficient staff (MEE Publications. Employment and entrepreneurship

33/2010. - Business practices and profitability of women owner enterprises).

Also the development of business operations was under the female entrepreneurship

research. The factors of success were seen as quality and versatility, expertise and

knowhow, customer satisfaction and established customer relations as well as good

service, flexibility and trust. The needs that were mentioned were especially in

information technology, accounting, marketing and planning of the business

operations. The development of business operations was often associated with

productisation of services, new ideas and marketing. The strategies mentioned were

cooperation with subcontractor, the development of the organizations operations and

expanding the operations (MEE Publications. Employment and entrepreneurship

33/2010. - Business practices and profitability of women owner enterprises).

3.10 The current state of franchising

Lastly here are some future prospects of franchising scene internationally and in Finland. Franchising has been growing constantly since the mid 20

th century and there is no change to be

seen at the moment. Newly graduated business students are drawn to the industries that are governed by franchised businesses. There are new tools to conduct business which are favourable for franchising, in addition franchising affects also other businesses in the economy. Everything seems to be on behalf of franchising and the regulators with franchise associations are to be boosting the prospects for franchising (Barringer, et al. 2010, 539).

Internationally franchising is growing all over the world; this is the biggest trend in

franchising in general at the moment. The reason for global franchising success is

globalization and the effects of it. People want recognition by identifying themselves

with world famous brands as symbols for quality and success. Franchising has also

taught consumers to demand consistent service quality and value (International

Franchising Association).

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Tuunanen in his research has studied franchising and particularly franchising in

Finland very closely from 1996 to 2004 and in his thesis 2005 sums up what the future

of franchising could encase:

Franchising will become more common and important for the economy

There will be more variety in the new franchise systems such as technology

and knowledge

Franchise systems will work together more and multiple unit franchise

agreements will become more common

Awareness, reputation, franchise know-how and interest towards franchising

will grow

Businesses will start franchise operations younger as part of their strategy to

grow

Not only the quantity but also the quality of franchise systems will increase,

there will be more consulting, training, research etc.

(Tuunanen 2005, 103-104)

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How to Franchise Your Business?

Franchising is a complex business model; it‘s not a case of

simply putting together some legal documents.

How to Franchise? The Mind Shift

The objective of franchising is to grow your business. However becoming a franchisor is not about

simply generating a set of legal documentation. Franchising as a business model provides a lot of

advantages and helps solve two fundamental problems of growth, raising funds and finding people

to run your business. Franchising is and will continue to be one of the most complex business

models. You need to have an intimate understanding of your entire business, your value chain and

all the interactions that come into play. Quite simply, to be a successful franchisor, you have to

change the way you view your business. This mind-shift means you go from working in your

business to on your business. In becoming a franchisor, you should start to look at ―How can I

construct a network where every participant is able to benefit from their initial investment?‖

Why? Because a well-structured franchise relies upon healthy profits for the franchisees, as well as

ensuring the same for the franchisor.

How to Franchise? Your Business Model

Growing your business with franchising also means that you are looking at ways in which you

create a valuable business for yourself and your franchisee. Look at your sales figures and levels

of profitability. Ask yourself where are you major sources of revenue coming from? How profitable

are those revenue streams? Do you understand your supply chain and your role in the entire

chain? These are some of the questions you need to answer. This is a critical in formulating a

franchise value proposition or your franchise opportunity. Creating a financial model and then

developing the commercial strategies that underpin a sustainable and profitable business model for

your franchisee and yourself – ensuring you are not dependant on the franchise fees but the

ongoing royalty fees. Doing this means you are able to deliver on your promise of support to

franchisees. A happy franchisee is also your best reference for growing your network and building

your brand.

Legal Documentation

Branding & Marketing

Recruitment Strategies

How to Franchise? Legal Documentation

Basically, your franchise legal agreements need to be founded on the commercial realities and growth

strategies of your business. Often, franchise agreements are developed with “legal only” considerations.

When developing legal documents define the nature of your business model first, plan for contingency and

enable effective compliance measures. The best approach is to have commercial strategies and legal

frameworks developed at the same time. If you combine these two from the start you end up creating a

streamlined business model and that is protected and secured by your legal documentation. This means you

avoid difficult conversion type scenarios. For example imagine having to renegotiate 20 franchise legal

agreements with franchisees that have invested heavily into your business and when you add all the

relationship dynamics and it becomes a mess. It would be tough enough to talk about a change in royalty

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fees, let alone adding supplier conditions and fit out changes, even though this may be critical to the survival

of your franchise network people don‟t like change that will place more pressure on them.

Developing the Franchise Opportunity In franchising terms, the process of finding potential franchisees is referred to as ‗franchise

recruitment‘.

In ensuring efficient and well-developed franchise recruitment, all franchisors will face the concept

of value proposition. But what is value proposition? By definition, value proposition is simply the

franchisor saying to the potential franchisee ―if you invest in my franchise network, you will receive

a return of ____ ―. However, in considering value proposition, franchisors should ask themselves:

What can I offer franchisees? As a franchisor, you are trying to find the most valuable franchisees

for your network. At the same time, as investors, franchisees are trying to find the most valuable

investment. Once again, franchisors must ask themselves: Why would potential franchisees buy

my brand? How does my network compare to other franchise opportunities in the market?

Kitchen table economics – Franchise Opportunities

The most valuable franchisees will weigh up their potential investments on the simplest of terms, a

concept known as ‗kitchen table economics‘. Prospective franchisees want to know:

How much they will need to invest in a specific franchise opportunity? (establishment costs)

When will they receive the funds they invest back again? (payback period and return on

investment)

Whether they will receive a fair return for their labour in the business? (salary)

What they might receive when they exit the business? (business asset value)

Essentially, you want franchisees who ask themselves: Will this decision ensure a comfortable

standard of living for me and my family? These are the franchisees that will last.

Established Costs – Franchise Opportunities

Franchisors need to ensure that establishment costs are within a reasonable boundaries for their

particular franchise opportunity. This is because many franchisees fund their investment through

leveraging some kind of personal equity. This can mean taking out a mortgage on the family home,

utilising a severance package or even simply drawing from savings or family inheritance.

When establishment costs begin to rise, the number of potential franchisees declines, meaning it is

essential to create value propositions most suitable to your pool of prospective franchisees.

Fees, Levies and the support offer – Franchise Opportunities

The biggest reason franchisees pay ongoing franchise fees and levies to the franchisor is because

they are using their brand, business practices and so forth. However in any franchise network,

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franchisors have a certain obligation (because of these fees and levies) to support their

franchisees. With this in mind, franchisors need to articulate a ‗support offer‘ in great detail to

franchisees in the early stages of the franchise agreement.

In developing the support offer, franchisors must consider the roles and responsibilities of the

franchisee and the skills and capabilities required of them. For example: if providing strong levels

of customer service are required of the franchisee, the support offer should contain training on this

issue. On top of this, the franchisor must provide support in terms of sales, product

management/innovation, employee management, financial management and so on.

Branding & Marketing – Franchise Opportunities

The nature of the franchise system means that franchisees naturally have a huge incentive to

market the franchise brand. However, franchisees also want to know where marketing funds are

being spent and that they are being spent effectively. For this reason, having a fair, well-

documented system of pooling and later utilising marketing funds is crucial.

Branding and Building Brand Equity

Branding is not only about a logo, its also about the offer

and experience.

How We Work

Our consultants will work with you to define your brand. We help create a meaningful value

proposition, unique product and service experience, and appealing visual style. Throughout the

branding process, we integrate our team‘s diverse experience, across the legal, marketing and

finance disciplines to engineer a brand that represents value. A brand that has a compelling value

proposition, considers the customer journey, its touch points and has a design look and feel to

match.

What Is Branding?

The word brand is thrown around loosely and often only refers to its cosmetic attribute – the logo,

design and or communicational style. However, and more importantly, brands are much more than

that. Branding should create an emotional connection. Brands need to build their promise on a

clear and differentiated value proposition, a well-crafted product and service experience, and a

visual and communicational strategy. Companies that only focus on one of these three areas are

either beautiful but shallow or deliver incredible value but never really capitalise on the benefits

they offer.

Great Brands Are Like Great Leaders

Great branding emanates great leaders. They each have a vision, know how to communicate that

vision and deliver on that vision. These brands lead by example and are consistent. The emotional

connection they create with people gives them purpose. The challenge however, is to remember

that like any relationship, you have to keep up the effort. If you lose your way, people will lose trust

in you and that‘s hard to rebuild.

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Our Process

Above all, branding needs to deliver value. Providing value is not a case of slapping together a

fancy website or logo. Each component needs to deliver a return… We package your objectives

around a unique design and visual aesthetics – giving you purpose and style all in one. In short we

build great brands.

Value Proposition

Product Experience

Design

Trademarks

We Start By Defining The Why? – Your Value Proposition

A brand is not just about choosing a logo and name then presto, you are the next Louis Vuitton, Apple or

Virgin. Branding is, and most importantly begins with, an understanding of your mission and vision. Why

should a customer consider you over someone else? What value are you bringing across the value chain?

What is the market pain or opportunity are you looking to solve or address? What do your customers look

like? Without purpose your brand is shallow. You need to figure out your purpose first.

Franchise Digital Strategy

It’s not only about your Website, it’s about your Brand and

how you sales.

Drive Franchise Growth with your Digital Strategy

Your website needs to deliver tangible results; drive sales, and/or generate leads. It needs to

impact the bottom line. Reaching these goals is not easy. Often, the process leads to a host of

questions about your digital strategy and leaves many small business owners and growing

franchisors confused. And the lack of a thoroughly thought through online marketing plan,

inevitably leads to lack of results and disappointment about your website‘s and social media‘s

apparent waste of precious time and money.

1. Why it fails? – The Biggest Issue When Developing a

Digital Strategy

There tends to be a mismatch between the needs of the business and the ability of the web

developer / designer to actually meet those needs.

A lack of understanding around the technology needs within your company, your brand message,

and your customer/client base further complicates matters.

If you add the management component that you may have to deal with – a brand strategist from

one firm, a creative copy writer from another, a web developer, a social media strategist, a

technology consultant and an internal marketing assistant, all these add up and increase

complexity. The budget balloons out of scope and your site goes live 3 months later, if you are

lucky!

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If you want to avoid these common headaches you need to consider a full-service firm that

understands franchise growth, one that initially focuses on your business‘ strategy, sets priorities

and follows through to execution and campaign management.

2. Start with the Why – Define the Purpose of Your Digital

Strategy

Before creating a website, you need to understand your market, think of the relationship you want

and who you want to attract.

Have a look at your customer behaviours: What does their decision process look like? What

devices do they use? Where do they live?

It is just as important to look at how you drive your marketing efforts offline as well as online.

Everything you do is inter-connected and should compliment your overall marketing strategy.

3. Be Memorable and Have Presence – Communication

and Branding Strategy

This is where your brand and communication strategy makes all the difference. When someone

with presence comes into a room, people notice them. There is a small silence and a change in

energy. The same principle should apply to your presence online. A carefully crafted website does

the same thing. As with a charismatic individual, the details are key. In this context, it‘s about the

communication style, the design and consistency across all online mediums and how user friendly

the website is. It‘s about having a holistic approach. If you are memorable, your clients/customers

will start a relationship with you and ultimately this will lead to sales.

4. Next Steps – Validate Your Digital Strategy

Once you have defined the relationship you want and understood what makes your brand unique,

the next step is to set your business objectives and determine a way to measure them. Are you

establishing an e-commerce site, or are you looking to generate leads and build awareness? Be

realistic. There are tools like Google Keyword Estimator and Google Trends that allow you to

validate some of your ideas objectively.

Additionally, some financial modelling can help the decision and planning process. Using business

tools and mapping your process, the way your business works, will really allow you to understand

the dynamics you need generate, so that you can turn your online strategy into results. It also helps

you keep things simple and keep you focused.

Summary – A Final Note

In franchising, having an online presence is the way you set yourself apart from other franchise and

non-franchised brands. It is fundamental to the franchise growth of your customer base and your

franchise network. You can drive sales for your franchisees, increase productivity, cut operational

overheads and even identify prospective franchisees. Look at the whole picture, while staying

focused on your objectives.

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Franchisor Exit Strategy

Selling your Network?

Franchisors, Selling your Network?

What is your business worth? Who will buy it? and How can you maximise the value of your

Franchise network? Buyers look for franchise networks that can operate without their constant

involvement. By putting in the time and money to construct a well-functioning and relatively

autonomous franchise network, you maximise the number of would-be buyers, as well as the

potential sale price.

Franchising and Revenue

Many franchisors particularly in the past, saw the up-front franchise fee as one of the principal

attractions of franchising, looking to grant as many franchises as quickly as possible to maximise

that revenue. And as a result they didn‘t understand that the real business value is achieved in

nurturing in their networks to develop significant ongoing revenue.

Recurring Revenue

Upfront franchise fees occur only once. Trying to mark them up as far as possible in the beginning

jeopardises the ongoing revenue streams. To earn a continuing stream of money into your

franchise network, your have to look beyond the initial franchise fees for each store. With a

reasonable franchise fee and ongoing royalties that continue for many years, the risk for the buyer

goes down, there‘s a monthly income stream for you and in the meantime, the value of the

business goes up.

Franchising and Group Buying Rebates

Rebates that are part of a group buying benefit can be a tricky subject between franchisors and

franchisees. Franchisees may feel that as the suppliers are specified by the franchisor, the benefit

should be shared with them. However, a franchise network as a whole gets a buying group benefit

because of the franchisor‘s skill, effort and intellectual property in first developing and then growing

the brand. So why shouldn‘t the franchisor capture as much value as they can from the extent of

the network they have built? Of course, the deal for the franchisees needs to be fair, profitable and

provide incentive as well. The franchisor is then able to generate additional revenue streams

through product rebates, add significantly to the value of the franchise and keep franchisees

happy!

Franchising and Buyer Risk

The recruitment of good franchisees is not only essential to the success and profitability of your

network operationally, it is also an important factor potential buyers will assess. They want to be in

―good company‖. Just one bad egg can spoil it for everyone else and give the franchise brand a

bad name!

To safeguard against dispute and litigation and the destabilising effects this can have on your

franchise network, franchisors must ensure that all their legal agreements relating to the granting of

franchises and the franchisee recruitment processes are well developed, fully documented and

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consistent. Maintaining this strategy as well as compliance with the Franchising Code of Conduct

increases the business value and decreases risk for potential buyers.

Franchising and Reliance on the Proprietor

In most franchise systems, one of the franchisor‘s main roles is running the business. Buyers

consider how much of the business‘ success is directly linked to the current owner‘s involvement

and how that business will continue to operate independent of the proprietor.

You increase the value of your business and alleviate potential buyers‘ risk by ensuring that

franchisees are well supported, trained and managed with clear standards to uphold, and that your

business personnel, systems and manuals are also well supported and up to date

Dcstrategy.com

Entrepreneur.com

Franchising as a Growth Strategy More and more businesses are discovering the franchise model as a method for increasing

sales and brand visibility through independent business owners. Over the past two

decades, franchising has been one of the largest growth industries in our nation‟s

economy, with a net annual economic impact close to one trillion dollars. Franchising is

no longer just for roadside motels and quick service restaurants; today, companies are

franchising their businesses in industries as diverse as mortgage brokerage firms, medical

spa treatment centers, auto repair shops and veterinary clinics.

If you are thinking about growing your business, either within Las Vegas or on a broader

(state or national) scope, you may want to consider franchising as a way to reach your

goals. While most people have general knowledge about franchising from their

experience as consumers, not many understand how it works. Simply put, a franchise is a

license granted to an individual or business entity (the franchisee) to market a company‟s

(the franchisor) goods or services in a particular territory using the franchisor‟s business

systems, trademarks and methods of operation.

There are many reasons that businesses decide to franchise. Franchising offers the

potential for rapid growth with a relatively low capital investment.

Moreover, franchise companies retain a significant level of control over the use of their

brand and system, while at the same time having the comfort of knowing that each

location is being operated by an independent business owner that is highly motivated to

maximize the sales and profits of the business. A business is a good candidate for

franchising when the company has a method of doing business or system of operations

that is easily reproduced and can easily be adopted by others through training. It should

have a proven track record of economic success with a unique trademark with a distinct

identity – the “brand.” Indeed, many business owners begin to consider franchising when

customers begin to ask about other locations and business opportunities with the brand.

Importantly, there are many legal considerations that go along with a business‟s decision

to franchise its concept. Franchise relationships are regulated under a variety of state and

federal laws and under the Federal Trade Commission‟s Franchise Rule.

Aside from having a well-written franchise contract, a franchise company is required to provide

each of its franchisees with information regarding the franchise in the form of a “Franchise

Disclosure Document.” As a result, it‟s a good idea to contact an attorney who understands

franchising before taking your business to that next level.

Franchising is a powerful model that has a proven history of helping business owners and

individuals to realize their dreams, but it‟s not for everyone. As a result, it is important to have

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a good understanding of how franchising works and what it will mean to your business

operations before you take that leap.

Strategies to Combat Employee Turnover

Despite the difficult economy, think of how many of your employees left in the last year or two. For all franchise owners, employee turnover is a major issue that affects quality of service, staff morale and brand reputation. But for multi-unit owners hoping for future growth within the parent organization, the bottom line implications of each employee departure make it even more of a priority concern. Many franchisees only calculate turnover as a cost derived from time spent interviewing, finding a new employee and training them, but in practice the costs are far greater. In fact, one of the largest expenses can be incurred when customer service slips because of mistakes from a new employee, mistakes which wouldn‘t have been made by a veteran employee. When all factors are added together, did you know that each departing employee that walks out your door has likely cost you between $700-$1,000?

Finding new ways to keep employees happy, engaged, motivated and committed to working for the company can be a full-time job on its own and some proposed solutions can often cost as much as the challenge to be solved. For franchise owners who own several franchise locations and operate in multiple industries, the greater challenge is that what might work in one industry may not work in another, so your investment is limited. This only succeeds in fueling the frustration.

With a rebounding economy, no one can afford to ignore or put off the search for a solution. For some industries, like quick-service restaurants whose average turnover for hourly workers hovers around 130 percent, the latest surveys paint a staggering picture. Job-hunting firm Manpower found that 84 percent of all employees plan to look for a new position in 2011 regardless of industry. These findings combined with the naturally high rates of departure in most franchise organizations could mean the economic rebound is poised to pose a significant drain on potential profits, not to mention creating a significant risk to the customer experience.

Each departing employee that walks out your door has likely cost you between $700-$1,000.

To be sure, turnover is a complex problem with no single magic bullet solution. But, when building a strategic plan to streamline training, adopt new motivational tactics and refresh the hiring process, owners should consider the role that individual employee personality can play. Easy to use, industry-agnostic, and cost-effective, a behavioral assessment program can provide new insights and tangible data that will lend new perspectives on employees and ultimately create a workplace environment that far fewer are willing to leave.

The Person Behind the Position

Retaining employees begins with hiring the right people. Simple enough, but reference checks and a basic interview are often the only ways employers determine who should be hired. During the interview process, an owner or manager might explain the role to be filled and its primary responsibilities, but how can they be sure the person will be a natural fit for the demands of the role? In a typical retail franchise, for example, almost every employee is in front of the customer in some capacity. The tasks and expectations when it comes to customer service are dramatically different from the sales associate to the stock room assistant. Armed with a more specific set of behavioral requirements for each position, franchise owners can develop a more defined sense of characteristics needed for success in each role and use that knowledge to seek similar traits in reviewing prospective employees.

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Assessments aren‘t an elimination tool. Instead, they provide valuable information that quite simply cannot be obtained through the interview process. How often have you hired the ideal candidate for a front-of-store position, only to have them leave a month later saying, ―I don‘t like being in front of people.‖ Instead, armed with insight into their natural tendencies, interviews can address potential discrepancies up front, or identify other open positions that the prospective employee may not have considered, but might be better suited to fulfill.

Insights into individual employee behavioral drivers are not limited to just new hires. Across a seven-unit SUBWAY franchise organization, turnover was regularly averaging 70 percent. After conducting a round of employee behavioral assessments using an assessment tool developed by an IFA Supplier Forum member, one immediate observation was that many current employees were working in the wrong positions. For example, an employee stationed in the first position, a key customer-facing role charged with greeting customers and taking detailed orders, had a profile that suggested he would be more successful in a behind-the-scenes role. Given the mismatch, the team shifted the employee to a food preparation and kitchen management role, and the change was immediately embraced by the employee. Not only did the change begin positively impacting the overall workflow, the individual became noticeably more productive.

Sure the employee was happier, but did the investment in the assessment program really help overall? In this multi-unit SUBWAY franchise, the application of a behavioral assessment program reduced turnover from 70 percent in any given location, to an average of 42 percent across all locations. In fact, four locations reached all-time turnover lows of 32 percent, incredible results for an organization where the industry average is at 130 percent. Additionally, the more positive customer service experience created by having the right people in the right place has been attributed to the stronger sales growth at each location and an uptick in customer return visits. And what are the bottom line results? The fewer employees walking out the door saved an estimated $15,000 or more a year in training costs alone.

Making the Most of Behavioral Insights

In just five to 10 minutes, assessments can provide all kinds of valuable insights into a candidate, from natural behavioral characteristics to the different factors that can help motivate them as an employee. The advantage of adding a behavioral assessment tool to a strategic set of employee management tactics is easy to see, but the long-term value is in the versatility of the investment. Even if only used initially to realign current employees and help select better new hires, once the data is gathered, plenty of additional cost savings and opportunities for growth will emerge from the findings.

Training. Companies and brands are more cognizant than ever of how each employee is a direct representation of their reputation and brand to customers, which makes the amount and complexity of training for each new employee even greater. Everything–from the proper way to greet customers to advanced guidance on job performance–is now the training standard within most franchise operations. Behavioral insights into the traits most commonly associated with key jobs can identify areas where training programs may not be resonating as effectively. For instance, a pre-recorded DVD training program would not be the most effective way for the more socially oriented employees who are naturally best suited for customer-facing positions to retain all the critical information they will need for the job. It is also a missed opportunity when considering that this training is often an employee‘s first exposure to the organization. Just like with customers, the more you create an appealing, motivating first impression, the more likely they are to stay.

Team Dynamics. How a team interacts and works together has a profound effect on productivity, speed of service, customer experience and employee morale. Introducing employees to the idea that each of them might have a distinct approach to communication or task management will help create a more positive work environment and stronger team dynamic. By creating ways for employees to share their own behavioral profile pattern, on nametags or lockers, fellow team members are instantly equipped with insights into the best way to approach, correct or support their fellow teammates.

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This is an especially important factor at the management level, as the traditional role of a manager cannot be taken as a one-size-fits-all title. Instead, the job requirements of a franchise manager should be a direct function of the behavioral characteristics of the people who work there. Because of this, owners need to give special attention to the store dynamic when they are hiring or promoting a given manager–not just the manager‘s personality or style.

Leadership Development. Any franchise owner knows that their success and growth are heavily reliant on the people helping them run the day-to-day operations in each location. Not only will a more data-supported understanding of individual behaviors provide current insights, but the information can also be used to help uncover new leaders for existing or future locations. After conducting the assessment initiative to help mitigate employee turnover in the multi-unit SUBWAY franchise, two manager profiles emerged, The Problem Solver and The Maintainer.

The Problem Solver manager is excellent operationally, but also has a higher dominance drive where he will naturally assume ownership of, and directly address, any issues that arise. This quality also includes a much stronger emphasis on the need to do things by the book. Knowing this, the franchise owner gained a better understanding of which managers, and prospective managers, would be more effective managers at struggling locations.

A more data-supported understanding of individual behaviors can also be used to help uncover new leaders for existing or future locations.

The Maintainer manager is also operationally strong, but has a much more team-oriented approach in the work environment. This management style excels in locations that have a more established, close-knit team that is at its best when working closely together. The stronger drive of the maintainer to seek a collective, more open approach to a challenge–rather than to just take complete control–allows the manager to more easily integrate himself into the functioning team dynamic where he is better able to motivate and drive overall success.

Motivation. Every contact a manager or franchise owner has with an employee is an opportunity to motivate or not to motivate. Not everyone responds in the same manner or is looking for the same reward. While some employees are motivated by praise, others need a challenge to meet. Imagine the motivational power managers would have if they knew which employees needed more public recognition for their work and which employees would rather quit than have their photo posted to the wall praising their efforts or success. Often all it takes is something small, like a low-cost gift card or early paid leave, so long as it has meaningful value for the employee.

More Food for Thought

Creating a culture of employee and job satisfaction combined with a scientific-based approach to hiring and job role definition can have dramatic, positive effects on employee turnover and customer service. Assessments are one important piece to consider adding to the arsenal of tools for combating the revolving door inherent in a growing job market and creating a consistent, increasingly positive customer experience.

To sustain a culture of employee excellence and low turnover, however, franchise owners need to truly be committed to employee satisfaction and happiness in their daily roles. Many times slogans, pep talks or fancy marketing materials take the place of genuinely caring for an employee‘s well-being and success. If reducing turnover is the ultimate goal, a more comprehensive, positive approach is needed and is achievable. All it takes is the ability to show that each individual employee matters. Simply put, employees that care about their jobs and know their managers or owners care about them as individuals will come to work wanting to contribute to an organization‘s success day in and day out. As famous

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football coach and successful businessman Joe Gibbs once said, ―People who enjoy what they are doing invariably do it well.‖

THE ROLE OF THE FRANCHISOR It is important to understand that not every business should be franchised. It is equally important

that when you decide to become a franchisor that you do so in a way that maximizes the unique

character of your business. Successful franchisors are rarely the product of a packaged approach

as each element of your franchise system should be developed in a way that supports your

franchisees so that they can deliver consistently to your brand's customer your Brand Promise.

MSA's methodology in developing emerging franchisors is what has made us the leading and most

respected franchise consulting firm in the world.

Successful franchisors share some common attributes. They are motivated to share their

experience and know-how with their franchisees. They provide their franchisees with the tools

needed to operate their businesses to brand standards and, are focused on ensuring that each

franchisee operates to system standards. Great franchisors have all made their share of mistakes

and have survived them. It is their hands-on knowledge of the business they are franchising that is

of the greatest value to franchisees as franchisees benefit from the franchisor's proven experience

which hopefully allows franchisees to avoid some of the minefields that plague many start-up

businesses.

Franchisor vs. Franchisee

The franchisor owns the brand and the operating system that they license to their franchisees. The

terms of the franchisee's license is contained in the franchise agreement they sign and it is

important that the franchise agreement be based on a highly structured strategic plan designed for

the uniqueness of the franchisor's offering. Only after developing the franchise strategy should a

franchisor begin the development of their Franchise Disclosure Document and Franchise

Agreement. Working with qualified franchise lawyers is essential to ensure that your legal

agreements provide you and your system with the protection and brand controls required and

equally important, are marketable to prospective franchisees.

The franchisee invests in the right to use the franchisor's expertise, brand name, operating

methods, and initial and ongoing support. The franchisor grants the franchisee the right to operate

business under the franchise system's trademarks and service marks and enforces the brand

standards of the system.

Great franchisors provide training to new franchisees and their management and provide support in

the training of the franchisee's staff. Franchise systems will provide their franchisees with a library

of operations manuals, field consulting, consumer marketing and other support and provide each

franchisee with the tools needed to operate their businesses to system standards.

MSA works with our emerging franchisor clients to first assist them in evaluating whether or not

franchising is an appropriate expansion strategy for their company. Only then do we begin the

process of designing the franchise strategy, developing the tactical elements required to manage

and support the franchise system and provide our clients with the guidance in marketing to

prospective franchisees and closing the franchise sale. It is our experience as franchise

management and also our experience in consulting with some of the world's leading franchisors

and non-franchisors that makes MSA the most respected franchise consulting firm in the world.

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THE ROLE OF THE FRANCHISEE Joining an established and well-managed franchise system can be rewarding, profitable and provide a level of safety that may not be available to non-franchisees staring their own independent businesses. As a franchisee, you are responsible for the day-to-day management of your business to the brand standards of your franchisor. Not all franchise opportunities are equally sound investments. When you are making your decision to become a franchisee you should look closely and determine whether the franchisor can provide you with:

A tested and proven method of doing business

A clearly defined Brand Promise and a recognized brand name that you can capitalize on in

your local market

An extensive library of operations manuals and training programs for you and your

management team and support for the training of your other personnel

A headquarters and field support team that is focused on improving your bottom line

performance as well as enforcing its brand standards at each of its company owned and

franchised locations

An active research and development program geared to developing new products and

services to keep you ahead of the competition

A local and national advertising and marketing program that supports your business

The opportunity to invest in additional locations

A return on investment that meets your expectations

Franchisee vs. Franchisor

A franchisee doesn't actually buy a franchise although they own the underlying assets of the

business which may include the land, building and equipment. As the owner of their business the

franchisee enters into a license agreement with the franchisor and obtains the right to do business

using the franchisor's operating methods, brand name, trademark and servicemarks in offering the

system‘s products and services.

Before you make the decision to become a franchisee, do your homework. Engage the services of

a recognized franchisee lawyer as your advisor. We have included on this web site a publication

called Making the Franchise Decision which you should download and use as your guide in

conducting your due diligence on the franchise opportunity. You should also spend some time

educating yourself on franchising. A good tool to use is Michael Seid‘s book Franchising for

Dummies now in its second edition. Above all, take your time in evaluating a franchise opportunity

and do not rush into any investment without first getting professional guidance and making certain

that the franchise system is right for you.

THE POWER OF THE FRANCHISOR'S BRAND Franchisors invest a lot of time, energy, and financial resources in developing and supporting their

brands. They do this so that consumers understand exactly what to expect before they even walk

through the door of any of their locations. Great franchisors want to ensure that their customers are

satisfied each and every time they shop at a franchised location. In the consumer's mind, a

franchisor's brand equals the company's reputation. It is the experience they perceive they will

have—and expect to have - that is essential to protecting the value of the company's marks. This is

true regardless of whether the location is company owned or franchisee owned. Consistent

execution to brand standards is expected in each locationthey visit regardless of where the

business is located.

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The brand is the franchisor's most valuable asset. Customers decide which business to shop at

and how often to frequent that business based on what they know, or think that they know, about

the brand. Consumers really do not care who owns the assets of the business. Great franchisors

provide the tools needed by the system's local operators and enforce system standards simply

because they understand that in the customer's mind, they're shopping or eating at a branch of

trusted chain.

To illustrate further... When one sees an advertisement for a Wendy's hamburger, they

immediately associate it with the experience of ordering and eating a franchised Wendy's

hamburger. The experience of visiting a franchised Wendy's, supported by the message in its

advertising, communicates and reinforces to the public just what Wendy's is. The same goes for

other franchising companies, such as Meineke. When you see an ad for brake services, one can

almost feel their car stopping more safely at the light.

WIDER ADOPTION SPURS FRANCHISE GROWTH The number of industries bringing goods and services to customers through franchising is growing.

In fact, franchise growth is becoming a significant force in the U.S. economy thanks to its wider

adoption as a successful business expansion model.

Franchised businesses operated more than 828,000 establishments in the United States in 2007,

according to the International Franchise Association's Economic Impact Study. These businesses,

run by both franchisees and franchisors, provided franchise growth in the form of more than 9.1

million jobs, $802 billion of product output, and contributed more than $468 billion of gross

domestic product for the benefit of franchise growth.

Moreover, franchise growth supplied about the same number of jobs in 2007, as all manufacturers

of durable goods, such as computers, cars, trucks, planes, communications equipment, primary

metals, wood products, and instruments

The economic impact of this considerable franchise growth goes beyond activities inside

franchised businesses when one considers franchises purchase products and services from non-

franchise suppliers and their owners and workers spend income earned from franchising on

personal purchases.

HOW TO FRANCHISE YOUR BUSINESS

MSA has been fortunate to work with both start-ups and mature businesses in a variety of market

segments. Some businesses seek our advice regarding ‘when’ is the best time to franchise your

business while others inquire ‘how’ to franchise your business successfully once the timing is

good. Here‘s the franchising advice we offer:

For start-ups and smaller businesses...we recommend that a company have an operating

business before franchising their business. In order to franchise your business, a prospective

franchisor must show that the business is profitable and scalable. They need to establish an

estimated investment that is competitive for expansion and will remain profitable once franchise

fees and royalty payments are added. Lastly, understanding the ebb and flow of one‘s business for

at least one-year is also a benefit toward planning to franchise your business.

For mature businesses…we work with mature organizations to create a franchising system that

not only helps business owners reach their goals, but is sustainable and profitable for the

franchisee. We counsel business owners on the value of a comprehensive strategy that properly

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documents the franchising relationship—and helps both parties avoid costly legal and professional

issues later.

EACH BUSINESS NEEDS ITS OWN FRANCHISE STRATEGY The development and implementation of any franchise strategy today can be complex. The legal

documents—Franchise Disclosure Document (FDD) and the franchise agreement—are fairly

straightforward, but the business decisions that support what's stated in these legal documents

need to be well-thought through. Getting guidance from a professional franchise consultant can be

extremely beneficial.

Why a Solid Franchise Strategy is Important

The good news for potential franchisors is that the market readily accepts great products, services,

and concepts that provide consumers with what they want—in the way they want it.

The challenge is to know what is working in franchising today and what is not then designing a

franchise strategy that is both attainable and adaptable. For instance, a business franchise

strategy needs to beattainable in its financial assumptions and short- and long-term projections,

which can be accomplished by doing a Gap Analysis. A franchise strategy must also

be adaptable in how it reaches a local market, evolves its product and service offerings, motivates

its franchisees and enforces its brand standards.

Some franchisors try to save money by ordering franchise strategy self-help kits with fill-in-the-

blank forms for franchise agreements and FDDs from companies who are unqualified to serve as

professional franchise consulting firms. Others take someone else's franchise strategy and simply

copy or modify it for their use, which carries a high risk for both the franchisor and the franchisees.

Each business is unique and therefore each franchising strategy should be also.

BEWARE OF PACKAGERS: WORK WITH A QUALIFIED FRANCHISE CONSULTANT

Franchise packagers do not provide the same level of service as qualified franchise consultants.

Instead of helping a prospective franchisor evaluate, design, and develop a franchise strategy,

packagers deliver franchise disclosure documents based on a boilerplate template.

While an inexperienced prospective franchisor may think they have found a simple way to become

a franchisor and fulfill their dreams, they quickly learn otherwise. The franchise disclosure

documents do allow a new franchisor to legally sell franchises, but the documents don‘t address

other important areas, such as the relationships and growth strategy that will help them avoid

litigation issues later.

Benefits of Qualified Franchise Consultant

Engaging a qualified franchise consultant can make the difference between a franchise system

succeeding and failing. MSA ensures that one‘s franchise offering, its structure and its brand

promise is all in alignment with a franchisor‘s business goals and objectives.

Working with a professional franchise consultant not only provides higher-quality guidance,

expertise and services, but offers these services for a comparable cost of a packager.

So steer clear of packagers and work with recognized franchise consultants, like MSA.

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VERIFY EXPECTATIONS WITH FRANCHISE CONSULTING A significant benefit of working with MSA‘s franchise consulting firm is our breadth of franchise

experience; our strategic planning expertise; and our tactical implementation service and support

that our clients have come to depend on.

MSA conducts a GAP analysis as part of their engagement process. The franchise consulting

analysis helps business owners in multiple ways:

Identifies differences (or gaps) in potential opportunity with actual performance benchmarks

based on real industry franchising metrics

Reveals planning, direction, or other shortcomings, so that strategy and expectations can

be adjusted early in the franchise consulting phase

Identifies tactical planning goals and objectives to maximize opportunities

Offers a reality test or confirms one‘s franchisability before further investments (financial,

people and other resources) are made

Be More Prepared

Additionally, a franchise consulting GAP analysis spotlights what areas—from operations and marketing support to technology and real-estate investments—that need to be addressed in the development of a franchisor‘s business infrastructure while the legal documents are being developed.

Becoming a franchisor requires a sizable financial investment for a sustainable and scalable

infrastructure. Working with a franchise consultant upfront, avoids the guesswork and better

prepares the franchisor for what‘s ahead.

EXPAND THROUGH INCREASED FRANCHISE SALES Once a franchise is operating well, many franchisors choose to increase their franchise sales efforts for increased growth and expansion. Whether they are considering domestic or international franchisingexpansion, we emphasize the importance of having a focused, well-thought out franchise sales strategy in place.

Are you looking for more domestic franchise sales?

If you‘re a franchisor who is considering ramping up your domestic franchise sales program, we

recommend you carefully select the best target market for expansion based on: competition,

demographics, plus its proximity to your headquarters and regional support staff.

Are you considering international franchising expansion?

If your company is considering international franchising, you must first have a stable and

profitable domestic operation in place and an organization that can support an international

franchising presence. Once you have this, there are other scenarios and issues that will need to

be addressed, such as:

Potential product changes, system modifications and edits to training materials that support

culture and local tastes

The availability and cost of qualified local labor

Government stability or instability, local laws and legal systems

Compliance with the Patriot Act for international franchising

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Tariffs, currency-exchange and transfer restrictions

Franchising In India

Franchising - The fastest Growing and ever changing Industry in India

Though at a nascent stage the industry has witnessed 30 to 35 per cent growth in the last 4-5 years

Home to over a billion people, including a flourishing class of urban consumers possessing considerable amounts of

disposable income together with the continued growth of the economy have strengthened India‟s claim to be a

viable and beneficial destination for a foreign franchisor. In the USA, almost a third of the retail sales come from

franchised outlets, with sales of trillion of dollars while in India, the industry is few million.

An important aspect which determines the feasibility of any franchising business in a country relates to the class of

consumers it caters to. India is a multi ethnic country with the second largest population in the world. Indian

consumers have experienced the standard of services offered overseas and have sufficient exposure through

media, which has further fuelled their expectations.

There are approximately 1150 national and international business format franchise systems in India in 2007.

Around 8 to 10 per cent Indian franchise systems have entered international markets.

There are an estimated 70, 000 units operating in business format franchises.

The growth rate in franchised units from 2005-06 to 2006-07 was 30 to 35 per cent for the last 4-5 years.

Some 500000 persons are employed in business format franchise organizations.

Franchising contributed less than 4 per cent to India‟s Gross Domestic Product (GDP) in 2007.

Annual turnover is approximately us$ 4 billion.

Almost every product or service has a market in India but sometimes, innovative strategies like “Indianisation” of

its products and marketing techniques must be employed by a foreign franchisor to further access the sizable

market of India. In a franchised business, over 90 per cent succeed. This success rate usually lures entrepreneurs

with no experience but with a surplus capital and a will to succeed towards franchising. The franchisee benefits

from a tried tested and proven business concept, which can dramatically reduce the chances of failure.

Franchising potential in India:

Though the Franchising in India is at a very nascent stage, but this industry has clocked the growth rate of 25-30

per cent, the second fastest growing industry. Organized retailing though only at 6 per cent of the retailing, will

take off in a very big way. The Indian middle class is slowly expanding and now buys consumer appliances with

more disposable income. India offers lot of potential for the franchising community. Apart from Indians being very

entrepreneurial, franchising as a way of doing business has been well accepted.

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U.S.

Isaac Singer, in the 1850s, who made improvements to an existing model of a sewing machine,

was among the first franchising efforts in the United States, followed later by Coca-Cola, Western

Union, etc. and agreements between automobile manufacturers and dealers. Modern franchising

came to prominence with the rise of franchise-based food service establishments. In 1932, Howard

Deering Johnson established the first modern restaurant franchise based on his successful Quincy,

Massachusetts Howard Johnson's restaurant founded in the late 1920s. The idea was to let

independent operators use the same name, food, supplies, logo and even building design in

exchange for a fee.

The growth in franchises picked up steam in the 1930s when such chains as Howard Johnson's

started franchising motels. The 1950s saw a boom of franchise chains in conjunction with the

development of the U.S. Interstate Highway System.

In the U.S. the (FTC) Federal Trade Commission requires that the franchisee be furnished with a

Franchise Disclosure Agreement by the Franchisor at least ten days before money changes hands.

The final agreement is always a negotiated document setting forth fees and other terms. Whereas

elements of the disclosure may be available from third parties only that provided by the franchisor

can be depended upon. The U.S. Franchise Disclosure Document (FDD) is very lengthy (300-700

pp +) and detailed (see Uniform Franchise Offering Circular (UFOC) for elements of disclosure),

and generally provides audited financial statements of the franchisor in a particular format,

although audited financial statements may not be required under some circumstances, such as

where a franchisor is new. It will include data on the names, addresses and telephone numbers of

the franchisees in the licensed territory (who may be contacted and consulted before

negotiations), estimate of total franchise revenues and franchisor profitability. The States may

require the FDD to contain specific requirements but the requirements in the State disclosure

documents must be in compliance with the Federal Rule that governs federal regulatory policy.

There is no private right of action of action under the FTC Rule for franchisor violation of the rule

but fifteen or more of the States have passed statutes that provide this right of action to

franchisees when fraud can be proven under these special statutes. The majority of franchisors

have inserted mandatory arbitration clauses into their agreements with their franchisees, in some

of which the U.S. Supreme Court has dealt with.

There is no federal registry of franchises or any federal filing requirements for information. States

are the primary collectors of data on franchising companies, and enforce laws and regulations

regarding their presence and their spread in their jurisdictions.

Where the franchisor has many partners, the agreement may take the shape of a business format

franchise - an agreement that is identical for all franchisees.

The UK

In the United Kingdom, there are no franchise-specific laws; franchises are subject to the same

laws that govern other businesses. For example, franchise agreements are produced under regular

contract law and do not have to conform to any further legislation or guidelines. There is some

self-regulation through the British Franchise Association (BFA).

However there are many franchise businesses which do not become members, and many

businesses that refer to themselves as franchisors do not conform to these rules. There are several

people and organizations in the industry calling for the creation of a framework to help reduce the

number of "cowboy" franchises and help the industry clean up its image.

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On 22 May 2007, hearings were held in the UK Parliament concerning citizen initiated petitions for

special regulation of franchising by the government of the UK due to losses of citizens who had

invested in franchises. The Minister of Industry, Margaret Hodge, conducted hearings but resisted

any government regulation of franchising with the advice that government regulation of franchising

might lull the public into a false sense of security. The Minister of Industry indicated that if due

diligence were performed by the investors and the banks, the current laws governing business

contracts in the UK offered sufficient protection for the public and the banks.

Europe

Franchising has grown rapidly in Europe in recent years, but the industry is largely unregulated.

Unlike the United States, the European Union has not adopted a uniform franchise disclosure

policy. Only five countries in Europe have adopted pre-sale disclosure obligations. They are France

(1989), Spain (1996), Romania (1997), Italy (2004) and Belgium (2005).

The Code of Ethics of the European Franchising Federation is self-enforced in seventeen European

states where their national franchise associations are members of EFF members, and UNIDROIT.

All formal disclosure countries are required to give „‟Contract Summaries‟‟ to be furnished,

highlighting:

• the object of the contract

• the rights and obligations of the parties

• the financial conditions

• the term of the contract

Legal consultation is a must to enter and finalize the agreement(s) as it in all regions. Most often

one of the principal tasks in Europe is to find retail space, not so significant a factor in the US. This

is where the franchise broker, or the master franchisor, plays a significant role. Cultural factors are

also significant as the populations tend to be homogeneous.

France

France is one of Europe‟s largest market. Similar to the United States, it has a long history of

franchising, dating back to 1930s. Growth came in the 70s. The market is considered tough for

outside franchisors because of its cultural angularities; yet, McDonald‟s and Century 21 are found

everywhere. There are some 30 US Firms involved in franchising.

There are no government agencies regulating franchises. The Loi Doubin of 1989 was the first

European Franchise Disclosure law. Combined with Decree No. 91-337, they regulate disclosure,

although the decree also applies to any person who provides to another person a corporate name,

trademark or trade name other business arrangements. The law applies to „‟exclusive or quasi-

exclusive territory‟‟.

In brief, the disclosure document must be delivered at least 20 days before the execution of the

agreement or any payments are made.

The specific and important disclosures to be made are:

• the date of the founding of the franchisor's enterprise and a summary of its business history

and all information necessary to assess the business experience of the franchisor including

bankers,

• a description of the local market for the goods or services,

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• franchisor's financial statements for the previous two years,

• a list of all other franchisees currently in the network,

• all franchisees who have left the network during the preceding year, whether by termination

or non-renewal, and

• the conditions for renewal, assignment, termination and the scope of exclusivity.

Initially, there was some uncertainty whether any breach of the provisions of the Doubin law would

enable the Franchisee to walk away from the contract. However, the Supreme Court (Cour de

cassation) eventually ruled that agreements should only be annulled where missing or incorrect

information affected the decision of the franchisee to enter into the Agreement. The burden of

proof is on the franchisee.

Dispute Settlement features are only incorporated in some European countries. By not being

rigorous, franchising is encouraged.

Italy

Under the Italian law franchise is defined as an arrangement between two financially independent

parties where a franchisee is granted, in exchange for consideration, the right to market goods and

services under trademarks. In addition, articles which dictate the form and content of the

franchise agreement and define the documents that must be made available 30 days prior to

execution. The franchisor must disclose:

• a summary of the franchise activities and operations,

• a list of franchisees currently operating in the franchise system in Italy,

• year-by-year details of the changes in the number of franchisees for the previous three

years in Italy,

• a summary of any court or arbitral proceedings in Italy related to the franchise system, and

• if requested by the franchisee, copies of franchisor's balance sheets for the previous three

years, or, since start-up if period is shorter.

China

China has the most franchises in the world but the scale of their operations is relatively small. Each

system in China has an average of 43 outlets, compared to more than 540 in the United States.

Together, there are 2600 brands in some 200,000 retail markets. KFC was the most significant

foreign entry in 1987 and is widespread. Many franchises are in fact joint-ventures, as at their

forming the franchise law was not explicit. For example, McDonalds is a joint venture. Pizza Hut,

TGIF, Wal-mart, Starbucks followed a little later. But total franchising is only 3% of retail trade

which is hungry for foreign franchise growth. The year 2005 saw the birth of an updated franchise

law, "Measures for the Administration of Commercial Franchise". Previous legislation (1997) made

no specific inclusion of foreign investors. Today the Franchise Law is much clearer by virtue of the

2007 law, a revision of the 2005 Law. The laws are applicable if there are transactions involving a

trademark combined with payments with many obligations on the franchiser. The Law comprises

42 Articles and 8 chapters. Among the franchisor obligations are:

• the FIE (foreign-invested enterprise) franchisor must obtain registration by the regulator

• The franchisor (or its subsidiary) must have operated at least operated two company-owned

franchises in China (revised to anywhere)for more than 12 months ("the two-store, one-year” rule)

• the franchisor must disclosure any information requested by the franchisee.

• cross-border franchising, with some caveats, is possible (2007 law).sments for rich ar

• the standard franchise agreement, working Manual and working capital requirements,

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• track-record of operations, and ample ability to supply materials, and

• the ability to train the Chinese personnel and provide them

• long-term operational guidance.

• he franchise agreement must have a minimum three-year term

Among other provisions is:

• the franchisor will be liable for certain actions of its suppliers

• monetary and other penalties apply for infractions of the regulations.

The Disclosure has to take place 20 days in advance. It has to contain:-

• Details of the franchisor‟s experience in the franchised business with scope of business

• identification of the franchisor‟s principal officers

• litigation of the franchisor during the past five years

• full details about all franchise fees

• the amount of a franchisee‟s initial investment

• a list of the goods or services the franchisor can supply, and the terms of supply

• the training franchisees will receive

• information about the trademarks, including registration, usage, and litigation

• demonstration of the franchisor‟s capabilities to provide training and guidance

• statistics about existing units, including number, locations, and operational results, and the

percentage of franchises that have been terminated; and

• an audited financial report and tax information (for an unspecified period of time)

Other elements of this legislation are:

• the franchisee‟s confidentiality obligations continue indefinitely after termination or

expiration of the franchise agreement.

Australia

In Australia, franchising is regulated by the "Franchising Code of Conduct", a mandatory code of

conduct made under the Trade Practices Act 1974.

The Code requires franchisors to produce a disclosure document which must be given to a

prospective franchisee at least 14 days before the franchise agreement is entered into.

The Code also regulates the content of franchise agreements, for example in relation to marketing

funds, a cooling-off period, termination and the resolution of disputes by mediation.

The federal government is currently considering recommended changes to the Code of Conduct

contained in the report, "Opportunity not Opportunism: Improving conduct in Australian

Franchising" tabled by a Parliamentary inquiry into franchising on 4 December 2008.

Some experts have warned that any push to increase regulation of the franchising sector, could

make it a less attractive means of doing business.

New Zealand

New Zealand is served by over 350 franchise systems giving it the highest proportion of franchises

per capita in the world. There is no separate law covering franchises, so franchises are covered by

normal commercial law. However, the self-regulatory Code of Practice introduced in 1996 by the

Franchise Association of New Zealand contains many provisions similar to those of the Australian

Franchising Code of Practice legislation.

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Russia

In Russia, under chapter 54 of the Civil Code (passed 1996), franchise agreements are invalid

unless written and registered, and franchisors cannot set standards or limits on the prices of the

franchisee‟s goods. Enforcement of laws and resolution of contractual disputes is a problem:

Dunkin' Donuts chose to terminate its contract with Russian franchisees that were selling vodka

and meat patties contrary to their contracts, rather than pursue legal remedies.

Brazil

In 2008, there were about 1,013 franchises with more than 62,500 outlets, making it one of the

largest countries in the world in terms of number of units. Around 11 percent of this total is

foreign-based franchisors.

The Brazilian Franchise Law (Law No. 8955 of December 15, 1994) defines the franchise as a

system in which the franchisor licenses the franchisee, for a payment, the right to use a

trademark/ patent along with the right to distribute products or services on an exclusive or semi-

exclusive basis. The "Franchise Offer Circular" or disclosure document is mandatory before

execution of agreement and is valid for all of Brazilian territory. Failure to disclose voids the

agreement with refunds and serious damages.The Franchise Law does not distinguish between

Brazilian and foreign franchisors. The National Institute of Industrial Property (INPI) is the

registering authority. Indispensable documents are the Statement of Delivery (of disclosure

documentation) and Certification of Recording (INPI). The latter is necessary for payments. All

sums amounts may not be convertible into foreign currency. Certification may also mean

compliance with Brazil's antitrust legislation.

Parties to international franchising may decide to adopt the English language for the document, as

long as the Brazilian party knows English fluently and expressly acknowledges that fact, to avoid

translation (but it follows). The Registration accomplishes three things:

• It make the agreement effective against third parties

• Permits the remittance of payments

• Qualifies the franchisee for tax deductions

India

Franchising of goods and services, foreign to India, is in its infancy. The first International

Exhibition was only held in 2009. India is, however, one of the biggest franchising markets

because of its large middle-class of 300 million who are not reticent on spending and because the

population is entrepreneurial in character. In a highly diversified society, (McDonalds is a success

story despite its fare differing from the rest of the world. So far, franchise agreements are covered

under two standard commercial laws: the Contract Act 1872 and the Specific Relief Act 1963,

which provide for both specific enforcement of covenants in a contract and remedies in the form of

damages for breach of contract.

Kazakhstan

In Kazakhstan franchise turnover for 2010 is 1 billion US$ dollars per year. Kazakhstan is the

leader in Central Asia in the franchising market. There is a special law on the franchising of 2002,

there are about 300 franchise systems and franchises near the 2000 outlets. Kazakhstan franchise

began with the emergence of a factory "Coca-Cola", opened to sublicense Turkish licensor of the

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same brand. The plant was built in 1994. Other brands that are also present in Kazakhstan through

the franchise system include Pepsi, Hilton, Marriott, Intercontinental, Pizza Hut etc.

Social franchises

In recent years, the idea of franchising has been picked up by the social enterprise sector, which

hopes to simplify and expedite the process of setting up new businesses. A number of business

ideas, such as soap making, whole food retailing, aquarium maintenance, and hotel operation,

have been identified as suitable for adoption by social firms employing disabled and disadvantaged

people. The most successful example is probably the CAP Markets, a steadily growing chain of

some 50 neighborhood supermarkets in Germany. Other examples are the St. Mary's Place Hotel in

Edinburgh and the Hotel Tritone in Trieste.

Social franchising also refers to a technique used by governments and aid donors to provide

essential clinical health services in the developing world.

Event franchising

Event franchising is the duplication of public events in other geographical areas, while retaining the

original brand (logo), mission, concept and format of the event. As in classic franchising, event

franchising is built on precisely copying successful events. Good example of event franchising is the

World Economic Forum, or just Davos forum which has regional event franchisees in China, Latin

America etc. Likewise, the alter-globalist World Social Forum has launched many national events.

When The Music Stops is an example of an events franchise in the UK, in this case, running speed

dating and singles events

Key Success Factors in Franchising Key Success Factors in Franchising Pre-Tested Model Franchising earns good results if done by

organizations after creating a brand and testing. Retail organizations ought to look at establishing

a Company-Owned and Company-Operated (COCO) model successfully before seeking expansion

by taking the franchise route.

Transfer of Knowledge The franchisers, who provide their valuable inputs gained by their rich

experience in retailing which includes training, store design and advertising and promotion, will

produce good results.

Single Face to Customers The franchisee has to carry on his operations by playing the role of

the principal brand. The store's image elements and product portfolio have to be carefully

maintained. This also includes the upkeep of various standards in the areas of customer service,

store presentation, operating processes and store personnel skills which will enable the transfer of

the total brand experience to the customer. This seamless integration of the franchiser and the

franchisee to present one single 'face' to the customer will ensure successful store operations.

Win-Win Situation The franchiser gets a partner in the franchise to establish his business and

shares with the franchisee such tested technologies, product offerings and processes. Sharing

investments and returns through mutually agreed means will enable the growth of both the

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franchiser and the franchisee, covering the risks at the same time

Ownership and Responsibility Franchisees fail when the franchise retail business is not owned

by the franchisee. They often feel that the franchiser has the responsibility of ensuring success. So

there must be clearly defined responsibilities for both franchiser and franchisee.

Review Regular reviews of performance and planning actions for implementation by both parties

will ensure successful franchise operations. Besides, such periodical reviews will bring to light gaps

in any area of deliverables on the part of either the franchisee or the franchiser that have to be

dealt with urgently.

Understanding the nature of franchisor-franchisee relationship

“I present myself to you in a form suitable to the relationship I wish to achieve with you.”

—Luigi Pirandello

Franchisors have selected franchising as a distribution method to gain market share for their

brands. The relationship between a Franchisor and Franchisee , on the surface, is a legal

relationship based on a franchise agreement. The basis for creating this relationship is the business

of the franchisor that the franchisor wants to grow and the franchisee wants to participate in.

However, the moment you interject people, you are confounded with the complexity of the

relationship, a combination of legal, business and people.

A Franchisor, in order to achieve its objective of increased market share through franchisees, has

no choice but to make this relationship, regardless of the complexity, be effective by ensuring that

results are obtained harmoniously.

A Franchisor cannot approach this important topic of EFFECTIVE FRANCHISE RELATIONSHIP from

the vantage point of „what will I (the Franchisor) only gain from the relationship‟. Instead, the

Franchisor must approach the relationship from “What must I (the Franchisor) do to make this

relationship both harmonious as well as effective in achieving the intended results.‟

At Franchise Mind™ we define Effective Franchise Relationships in the following manner:

“When the Franchisor and Franchisee work harmoniously together, respecting each other,

appreciating and accepting the efforts and roles each has to play in their respective success,

recognizing their dependency on each other, operating their businesses with integrity and the

highest standards and putting forth their best effort to preserve and nurture their special

relationship in order for both of them to achieve more than their intended objectives.”—Harish

Babla, Franchise Mind™

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A good number of problems in the Franchisor-Franchisee relationship emanate from incorrectly

labeling the relationship:

Franchisor says

Franchisee thinks ??

„My Partner‟ „You are responsible for my success‟ ?

„My customer‟ “I cannot be refused because the customer is always right‟

?

„My friend‟ “Friends get special treatment‟ ?

„My franchisee‟

The importance of the inter-dependent relationship with roles, responsibilities and obligations for both parties

?

In essence this business relationship should be kept business. There is nothing wrong in being

friendly, gracious, warm and even to get to know franchisees and their families at a personal level.

In fact there is nothing wrong in having a spirit of partnership, customer or family however

labeling the relationship as such makes it difficult for a Franchisor to deal with the business aspects

of this complex relationship.

Importance of Effective Relationships

When the Franchisor-Franchisee relationship is effective and harmonious there are many benefits

that emerge for the Franchisor as Franchisees will likely:

1. Expand market share into other territories

2. Open additional units

3. Validate the company to prospective franchisees

4. Participate enthusiastically in company programs

5. Contribute ideas for overall system growth

6. Take a leadership role in helping other franchisees

Culture of control

The company culture helps define the level of control a Franchisor wants to exercise. The two

extremes would be: 1. Independent (loose) control

2. Dependent (tight) control

The Independent culture says to the franchisee „we will teach you our system, follow it to the best

of your ability. If you need help, call us, we are available.‟ A Franchisee has a lot of „freedom‟ in

this franchise system.

A Dependency culture on the other hand, says to a franchisee „You will do exactly everything we

teach you and in the manner we show you.‟ A Franchisee in this culture has very little „freedom‟ in

this franchise system.

Neither positions is „right‟ or „wrong‟. It is an issue of company culture and keeping sight of the

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objectives of the business. Where in the control spectrum is the Franchisor comfortable in ensuring

the success of the franchise system, the consistency of the customer experience from one outlet to

the next and the achievement of somewhat similar operating results from one Franchisee to

another.

A Franchisor oriented towards tight control has the responsibility to ensure that every aspect of the

business is addressed without gaps.

A Franchisor oriented towards loose control has to be comfortable that from time to time, a

Franchisee may take actions that cause the franchisor angst.

Changing nature of the relationship

As in any relationship, the Franchisor-Franchisee relationship goes through changes in thinking, in

attitude and feelings towards each other.

Franchise Mind™ identifies four major stages in the relationship: 1. Pre-franchisee stage

2. Pre-opening stage

3. Launch stage

4. Operating stage

Since the Operating stage is the longest, Franchise Mind™ breaks this stage into 4 phases: 1. Confident phase: „I can do this‟

2. Ego-driven phase: „I am great and the system is okay‟

3. Resentment phase: „Its me and not the franchise‟

4. Inter-dependent phase: „Together we can accomplish more‟

Each of the stages and phases can be recognized by several criteria as perceived by the

Franchisee:

1. Overall satisfaction with the business

2. Sense of loyalty towards the franchise system

3. Confidence in the ability to meet their various goals and objectives

4. Confidence in themselves

5. Confidence in the business

6. Confidence in the Franchisor

Final thoughts

The Franchisor is the „senior‟ in the Franchisor-Franchisee relationship and must take responsibility

to make this relationship effective. This means that the relationship achieves the intended results

and is harmonious.

When the relationship is effective the franchise system will derive many benefits and grow.

As in any relationship, this relationship too will go through different stages and phases.

Recognizing those „highs‟ and „ebbs‟ will allow a Franchisor to deal effectively with the changing

attitudes and feeling emerging from Franchisees.

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RESEARCH PROCESS

Research is a process that people start when they need to find out about a certain issue in a systematic way and in this way increase their knowledge of the issue. The collection of data alone does not compose a research; it has to be collected systematically and with a clear purpose. Also an assembly of data from different sources in one document with bibliography is not enough to make it a research; this is a part of the research that is concluded with interpretation of what the data tells (Saunders, et al.2009, 320).

Research methods

The main separation of different kinds of research is the division between quantitative

and qualitative methods. With quantitative research methods the research generates

and/or uses numerical data in the process and with qualitative research methods the

research generates and/or uses non-numerical data in the process (Saunders, et al.

2009, 151). For this research process the natural choice was qualitative methods since

the research question concerned the requirements for franchise operations. Require-

ments are best disclosed by using non-numerical data.

A starting point in qualitative research is a description of realistic life. This includes a

thought that life is diversified. In a research one must take into consideration that

reality cannot be dismembered arbitrarily into pieces. Occurrences shape each other

simultaneously and it is possible to find numerous connections. A qualitative research

aims to study the subject as comprehensive as possible. In a qualitative research the

goal is to find out or reveal facts rather than verify already existing facts or claims

(Hirsjärvi et al. 2009, 161).

An interview is a unique way to collect information due to the direct linguistic

interaction with the source of information. The biggest advantage is the flexibility that

it brings to the data collection. In qualitative researches an interview is usually a main

method of data collection. The reliability of interview undermines the fact that

interviewees tend to give socially acceptable answers (Hirsjärvi et al. 2009, 204-206).

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Interview is one type of conversation. In a normal conversation the parties are (or think that they are) in equal position in asking questions and giving answers. Inter- views for research purposes are to be understood as systematical form of data collection. This type of interview has goals and it aims to gain as reliable and valid information as possible (Hirsjärvi et al. 2009, 207-208). Interview can also be an easier way to receive data from managers. It has been argued that managers are more willing to take part of a research when they are interviewed than to complete questionnaires. An interview offers them an opportunity to go through the topics without having to write anything down (Saunders, et al. 2009, 324).

There are different ways to implement interviews. Main separation is structured; using

standardizes questions in highly formalised way, unstructured; informal more like

conversations, and semi-structured from between the two previous ones. (Hirsjärvi et

al. 2009, 208-209; Saunders, et al. 2009, 320-321). In this research the most suitable

and therefore the used interview style is a semi-structured interview. The reasons for

this come clear next. It is typical for a semi-structured interview that the themes of the

interview are set beforehand but the exact questions and order of questions is not

known. Also the themes and questions can vary from interview to interview and do not

have to be repeated (Hirsjärvi et al. 2009, 208; Saunders, et al. 2009, 320). In this

research the interviewees got to see the questions (see appendices 1-2) beforehand,

some of the questions were skipped along the way, but the main idea with the themes

were dealt with in both cases. The themes were different in each interview due to the

differ- ent aspect that was being looked for from the different interviewees.

An interview can be implemented as individual interview, couple interview or group

interview. Individual interview is used most often, there present are the interviewer

and the interviewee. A couple interview is a sub-form of a group interview. Grönfors

(1982, 109) has stated that interviewees are a lot more emancipated and liberated

when there are more people present (Hirsjärvi et al. 2009, 210). In this research one of

the interviews implemented was a couple interview and one was an individual inter-

view. The couple interview because there were two owners of the company and it was

natural to interview both of them at the same time. The individual interview because

there was only one executive director/representative to interview from Finnish

Franchise Association.

Sometimes it may not be possible to have a face-to-face interview. In order to

disregard issues with time, distance and costs it may be more efficient to conduct

inter- views by telephone. When the parties are not physically in the same space it may

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be more difficult to establish trust and therefore the reliability may become an issue if

the participants are not as engaged to the interview as in face-to-face situation or

might not want to participate at all. In addition when talking on the phone the

interviewer cannot witness the non-verbal behavior of the interviewee. Furthermore

the time used in the interview may be shorter than in face-to-face interview and the

questions might become less complex (Saunders, et al. 2009, 349). In this research one

interview was implemented as a phone interview due to issues with time and distance.

Data collection and analysis

In this research there were three interviews planned. In the end only two actualised.

Both of the interviews were implemented in Finnish since all the participants speak

Finnish as their first language. The interview of Ulla and Riikka Pitkänen, the owners

of Aku & Ada took place in Leppävirta, in the store on October 25th

2010. As the main

research problem is to find out if franchising is possible for the company‟s future it is

only expected to have the owner‟s interview as the base. The second interview was

implemented as a phone interview on October 27th

2010; the interviewee was Juha

Vastamäki, the executive manager of Finnish Franchising Association‟s. Finnish

Franchising Association being the official operator for franchising in Finland is a

natural continuance to find out more about franchising and the operations in Finland.

Both interviews would probably have been face-to-face interviews if timing would

have worked out more smoothly. With the second interview, scheduling was a

problem, thus a phone interview was carried out in order to overcome the timing

issue. Unfortunately the third point of view of a company that has succeeded in

implementation of franchising their business operations was left out due to the

reluctance of the interviewee. The two interviews that did take place went smoothly.

All the interviewees talked a lot and did not need to be pushed to answer. They even

gave some of their own comments outside of the actual questions. The fact that all

three interviewees have their hands full of work all the time did not show in their

attitudes at all, everyone gave full answers and provided me with a lot of data to work

with.

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As a result of these two interviews there are about eight pages of material which will be analyzed comparing the data to the theory. The material is divided according to the themes in the interview questions (see appendices 1-2). The interviews are not com- parable with each other due to the difference in the nature of the interview, first one being more to find out of the company‟s situation and the second focusing more to the format of the business strategy. Both interviews are based on the theory and conse- quently all the three (theory and two interviews) are linked to each other.

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FINDINGS OF THE INTERVIEWS

Here is the data from the two interviews; first the interview of the owners of Aku &

Ada and second the executive manager of Finnish Franchising Association‟s. All the

questions were divided under different themes. Here the questions are opened under

each theme on the same order as in the interview (see the questions from appendices

1-2).

5.1 Results concerning Aku & Ada

The responses of the first interview with RiikkaPitkänen, the chief executive officer of

Aku & Ada and UllaPitkänen, the chairman of the board of Aku & Ada are as follows.

The themes start with background of the entrepreneurs and the company, going

through the present operation of the company, the possibly future growth of the com-

pany and finally their relation to franchising.

Background of the entrepreneurs

The chairman of the board (COB) has a vocational qualification in business and ad-

ministration from a commercial institute. After the basic education she has been taking

courses on her own time to deepen her knowledge on the field of textile business;

purchasing, styles, marketing, colour training, stylist etc. She considers that the extra

training has given her energy and enthusiasm to continue and move forward into new

challenges. The chief executive officer (CEO) is a newly graduated bachelor of

business administration specialised in entrepreneurship.

The COB has a long experience in the field. The first clothing store she worked in

Leppävirta was called Katri asuste, the COB was involved with Katri asuste from1982

to 1989. From 1989 to 2001 she started and ran her first own clothing store in

Leppävirta, first edition of Aku & Ada. In 2001 she was involved with opening and

setting up a larger clothing store in Kuopio called Nina and worked there until 2004 as

the store manager. Between 2004 and 2005 the COB had a small internet enterprise

called Up style; she worked as a stylist and went shopping with her customers and

helped them to find their style and clothes. During this project she got to know the Vero

Moda shop closely in Varkaus since she went there often with her customers.

She received a phone call from The Varkaus Vero Moda store and they asked her to

host some customer nights which led to her becoming the store manager for the shop

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between years 2006 and 2009. During that period of time she arranged the whole store

and started everything from the scratch there.

The CEO is a daughter of the COB so she has less experience in years, nevertheless

impressive amount of experience of the industry behind her. She started as a teenager

helping out her mother in the first edition of Aku & Ada and was also working in Nina

in Kuopio where her mother was involved. After this she has been working in inter

alia: Dinsko, Dress Man, Vero Moda, H & M, Sportland, Only. She has worked as a

sales person, visualiser, responsible sales person and in Vero Moda she was

responsible for the same tasks as a store manager.

The COB wanted to become an entrepreneur because she wanted to do things in her

own way in order to make things work instead of just watching from the side. She

wanted to do something that was her own, her character is strongly entrepreneurial and

she does not stay working for someone else for a long period of time. The CEO has

grown in very entrepreneurial atmosphere, having both of her parents being

entrepreneurs. She is also excited to see what she is able to do on her own and finds it

interesting to be able to make decisions herself and being in charge of things.

To sum this part; both the COB and the CEO have extensive experience of the field

considering their ages. Both have business education and both have been working in

some sort of managerial tasks. In addition both are also entrepreneurial as nature and

have the attitude to run a company.

Background of the company

The idea of opening Aku & Ada by the CEO and COB has been alive for couple of

years. Everything took concrete shape during summer/fall 2009 when the CEO was

working on her thesis with a subject that did not interest her. In addition to that she

was thinking about opening Aku & Ada with her mother again. After a conversation

with her supervising teacher she decided to write a business plan as her thesis and

from there onwards everything started to quickly unfold. Already in October 2009

they had premises for the company in another location in Leppävirta but due to

situations beyond their control they lost the premises and had a little set back in their

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enthusiasm as well. The COB kept on searching for a suitable place for store and

found the present location which was not in a condition fit for opening a business

and needed major renovations. These premises were also smaller than the original

place and therefore they decreased the merchandise categories from the original

plans of also having children‟s clothing, house decoration etc. in their selection. The

renovations began on January 2010 and the final step was to furnish and stock the

shelves for the grand opening on March 25th

2010.

This is the first Ltd for both parties of the company and they received assistance with

the establishing of the company from entrepreneur center Wäläkky. Most of the

finance was provided by Finnvera, a specialized financing company owned by the

State of Finland, as entrepreneur loans and female entrepreneur loans. In addition they

also took a small bank loan. At the moment Aku & Ada employs the CEO and the

COB.

To make a long story short, the idea of the company had been alive for a while al-

ready. At the time of the CEOs graduation from university of applied sciences every-

thing else just fell into the right places and as a result the mother and the daughter

opened Aku & Ada again, this time together as an Ltd.

Operation of the company After about half a year from opening the store it can be said that the company‟s operations has started off successfully. The first month when company was making profit was July. In September there was a little downturn in the profits due to the buy-ins. The owners agree that this would not be possible without strong experience from the field. The COB has brought a lot of knowledge that has been vital to the success, the profit margins have been set to correct level to bring incomes, the buy-ins were successful even though they were made late in the circulation of the industry. In addition Leppävirta had no other clothing store which means a huge demand for the company right from the beginning. The previous Aku & Ada was still in the memories of the locals and they waited for months for the opening of the new store. Customers come from further away as well, some even from the big Kuopio city 50km away. Also the young CEO is a point of interest for the locals and she brings a fresh breeze to the town, she has learned a lot during this year and is still learning new things all the time. Both the CEO and the COB are seeking for their own place in the company. The COB cannot do everything even if she would like to make sure and check that everything is correct. She needs to give space to the CEO and both need to focus on what it is that they do best.

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The biggest challenges have been the buy-ins, also the marketing needs to be focused

in a correct way and the CEO is learning what kind of clothing is saleable and match

each customer with the correct products. The easiest things for the COB has been

selling and serving the customer as well as buy-ins, for the CEO the painless things

have been visual things, to draft the advertisements, using the computer and take care

of the office work. The pleasant aspects of entrepreneurship have been the freedom of

making own decisions and the flexibility to adapt for example if there is a quiet day

the other one can have a day off etc. From the other point of view, the irritating issues

include dealing with difficult customers, however, after being able to find clothes and

make them happy also these customers bring feelings of success. The other issue

mentioned was the unevenly distributed labor when the COB is handing all of the

accounting and much of business at the store as well. The COB confessed that she is

still in the excitement of the beginning and wants to be involved with everything.

A regular working day is from 9am to 6pm; in the morning they clean up the store and

during the day they serve the customers and unload the deliveries. A couple times they

have had customer nights outside of the regular opening hours of the store and on

Sundays the COB keeps the accounting up to date. The unique thing for Aku & Ada is

the easygoing atmosphere, taking customers as they are, serving them till the end and

the strong and long experience of the COB.

As a summary of the operation of the company, so far everything has started off well and the roles and tasks of COB and CEO are still in progress. At the moment the COB wants to have a look at everything and keep everything under her control in some ways. The CEO is learning new things all the time and is making her part of the business with the skills she possesses.

The original Aku & Ada had a branch store in Kuopio in the 1990‟s but it was not

successful and did not last for long. The biggest issues are the restrictions set by the

brands; in one city/town there can only be limited number of stores that can sell

certain brand‟s products. This means that if all the brands Aku & Ada is selling in

their present store would be in the supply of the possible new stores, the location of

these stores should be in smaller towns that do not have stores already selling the

same brands. As Aku & Ada is at the moment, it is not possible to transfer the store in

Kuo- pio, which is the largest city close by.

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The reasons behind the willingness to grow are firstly about the profit that it would

bring. The second rationale is that when there is more than one store it would make it

possible to divide the big buy-in deliveries between the stores and have more

variations in products. The idea of franchising came about already in the process of the

CEO‟s thesis which was the business plan for Aku & Ada; an already existing

franchise chain that specializes in youth clothing had approached her and offered their

chain and business opportunity which was turned down. Another growing strategy that

has been thought over is a possible ecommerce store of Aku & Ada; this would then

possibly require a third person to work for the company. Also importing some new

brands to the Finnish markets would be inspiring option for the CEO and the COB to

expand their business operations. No major expansions are of current interest. First

they want to pay out their debts and then when the time is right and the company‟s

stage is more stable, cautiously take a step at a time, and always know what lies ahead.

Provided that Aku & Ada will open stores in new geographical locations it would be

somewhere in eastern Finland, with the ecommerce store the possibilities for

expansion are theoretically unlimited.

The biggest obstacle in growing the business is the restrictions by the brands in each geographical area. Therefore, if other stores are opened narrowing down the brands should probably be the first thing to do. Money and practicality are reasons mentioned for the desire to grow business operations. For now there is no need to start expanding. At first the business needs to grow strong as it is and become financially stable.

The CEO and COB agree that their business concept should be modified in case

franchising would become their strategy to grow. The brands should be defined and de-

creased and the segmentation should be more focused. Also more knowledge about

franchise operations should be acquired, at the time of the interview the CEO or the

COB knew only a little of the basics of franchising. When it comes to actually giving a

part of the responsibility of the business operations to someone else, they should care-

fully select a skilled textile field‟s expert whom they can trust. The COB trusts to new

people easily but once the trust has been broken, there will be no change for that.

Results concerning Finnish Franchising Association

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Here are the responses from the interview with the Finnish Franchising Association‟s

executive manager, Juha Vastamäki. The themes start from beginning of franchise

operations, followed by franchising in Finland, women and franchising, advantages

and disadvantages of franchising, Finnish franchising association and lastly the future

of franchising.

To begin franchising operations

There are no official statistics on how long companies have been operating before

starting with franchise operations. As an example the executive manager (EM) of the

Finnish Franchising Association gave an approximate figure of five years after

operating on its own and then choosing franchising as a growth strategy. The main

concern is that the company should be able to prove that the business works and

should able to sell the idea to the franchisees. Everything starts from defining the

profile of the company as well as defining what kind of entrepreneur the company is

looking for. Only after all the basic things are dealt with can the focus turn to search

process of the possible franchisees; they can be found via newspapers, internet,

recruitment services etc.

A rear situation would be if the franchisor and the franchisee knew each other from before; though that would only be an advantage but not many entrepreneurs have such a large network to choose from.

There are no set financial figures that the company should fulfill in order to start with

franchising operations. Everything depends on the business plan and varies from case

to case. The company does not have to be free from debt as long as the situation is

under control and there is a plan. Franchising is not the only growth strategy. Some-

times company owned units can be a better option. A professional in franchising

should analyze whether franchising suits for the company or not. Franchising is also a

strategic question for the company including the finance and management of the chain

etc. Franchising is also ruled out if the operations do not fulfill the model of business

format franchising but is based on one specific product or is some sort of joint market-

ing cooperation. Another important aspect is that in franchising the franchisor pro-

vides the support for the franchisees, thus if the entrepreneur does not want to be sup-

porting others but work in the front line, franchising might not be the best solution for

the growth.

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To summarise the requirement for getting into franchising the company should have a

working and successful business model that is able to be copied. There should be a

clear profile of the company and a business plan. The finance of the company should

be controlled and planned ahead. Finally the owner should be ready to step into a role

of franchisor and be able to support and manage the franchisees, the whole chain and

the operations.

Franchising in Finland Product and trade name franchising is not a franchising type in Europe or Finland. This is a general interpretation of franchising in Europe and therefore Finland follows the European style. Compared to the US Europe has focused more on business activities. From the Finnish perspective it also makes things simpler since franchising as a word can be confusing. When it comes to legislation issues, there are no specific laws controlling franchising operations. Franchising is covered by general business laws. Vastamäki does point out that this is a topic of current interest and conversation. Sweden already does have some legislation concerning franchise agreements in particular. The issues that are under legislation in Sweden are covered by the ethical rules of franchising in Finland.

There are no general figures on how much the starting up costs for franchise

operations are in Finland or abroad for that matter. Only the sky is the limit and there

is no minimum capital required either. The costs naturally vary from industry to

industry and can be whatsoever. As an example the fastest grown franchising chain

in the world, Curves, female fitness center, started with one fitness gym in Harlingen,

Texas, US in 1992. At the moment there are over 10 000 Curves fitness centers

around the world in over 80 countries. Behind all of this is a marriage couple who

started with franchising three years after the beginning of business with an initial

capital of USD 10 000 (Curves -health club and fitness centers).

It is typical for a franchising chain to have at least one own unit that they can try out

and invent new business ideas for the chain. Only a small portion of chains does not

have own units, in Finland an example is kiinteistömaailma, real-estate business. The

most important thing in starting up franchise operations from new franchisors point of

view is the business idea/concept. If the concept is not successful and entrepreneurs

are not ready to pay for the concept and start up running business under the same name

it is not fit for franchising. In all kinds of business the core foundation is always the

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business plan, same goes for franchising. After the basics are taken care of there are

multiple steps to take in starting with franchise operations such as; writing manuals,

looking for business locations, finding entrepreneurs to become franchisees etc.

To conclude, Finland follows the style Europe has set for franchising to consider only business format franchising as an official type of franchising. At the moment there are no specific laws considering franchising in Finland but all the franchise chains that belong to Finnish franchise association must follow ethical guidelines in their operations. The costs to start franchising operations are not set, but vary from industry to industry and business to business. In most franchising chains the franchisor runs at least one unit him/herself to try out new ideas etc. The most important issue is to start with is a business plan, after the basics are clear and the concept able to be copied the process of starting up a franchise can begin.

Women and franchising

Once again, there are no statistics on how many female franchisors there are in Finland

or anywhere in the world. Out of the franchisees internationally female represents

about one third and in Finland more than one third. Compared to entrepreneurship

there are more than double the amount of women involved with franchising. The

franchising concept attracts women for it is seen as a safer option and women

appreciate the network and support they get from franchising, whereas men want to do

everything on their own and make decision themselves. Furthermore, as women do not

generate many business ideas, or they do not have the courage to implement their own

ideas in the same way as men do, franchising provides an option to avoid taking risks.

There

are also a lot of industries that are dominated by women within franchising chains

such as the cleaning industry, restaurant and café etc. service industries. If a woman

wants to earn more money than as being an employee for someone else but not start a

business on her own franchising is a convenient option for that. Or if a cleaning lady

wants to advance on her career becoming a franchisee can offer that advancement for

her.

When it comes to financial supporting female entrepreneurs starting franchise

operations the rules are same as starting any business operations. When the franchise

chain is already well known for example R-kioski in Finland, it is easier for the

franchisees to get finance when opening up a franchise unit compared with a private

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convenience store. Therefore it is important for the franchisor to build contacts and

make oneself well known, this will make it easier for the new franchisees to get

finance and join the chain.

To sum the topic up there are not much statistics on women in positions of franchisors but from the point of view of franchisees there are one third of female franchisees globally and a bit more in Finland‟s scale. A lot of the industries that franchising has been successful in are dominated by women and therefore a lot of women have seen it as a good option and possibly a career advancement to buy a franchise. In Finland women get the same financial aid as when starting up any business operations, in that light franchising is seen as a business operation like any other business. It might be easier to get finance as a franchisee when joining to a large, well known chain than when beginning business operations as an individual. This is because the finance companies know the risks of the franchised chain better than of an entirely new business.

Advantages and disadvantages of franchising

The advantages of franchising compared to accustomed entrepreneurship are the fast

pace of growth, the input franchisees bring with them; finance, entrepreneurial

attitude, motivation, they bare their share of the risks and perform better than hired

labor. On the contrary the franchisor will share the profits with the franchisees, to find

the perfect franchisees might take time and franchising only really works when the

goals to grow are voluminous. For a franchisor the tasks are different from only

running a company when there is a whole chain of companies to run. The franchisor

develops, guides, supports the franchisees and the operations, also things like

customer feed- back, quality standards, sales figures etc. are responsibilities of the

franchisor.

Finnish Franchising Association

The base members of Finnish Franchise Association are the franchising chains, in

addition there are associate members that offer services for the franchising chains.

Furthermore the Finland‟s franchise association is also a member of Federation of

Finnish Enterprises, in this way they want to be part of the entire sector. There are

about 100 members in the association at the moment. Every franchising chain in

Finland is not automatically a member of the association. Only after the application

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period the chains that operate according to the ethical guidelines are accepted as new

members. This is a policy that all the franchising associations around the world work

according to. As a member of Finnish franchising association a chain will receive

membership services such as seminars, assistant with recruitment, networking,

coverage in a yearbook and online, revision of franchising contracts and a wide

international network if/when expanding franchise operations abroad. About one third

of Finnish franchising chains operate also abroad and another third of the franchising

chains are on their way abroad. There are very minor downsides of belonging to the

Finnish franchising association except for the membership fees.

The future of franchising

For the past 20 years the franchising business has been building success stories in

Finland and the positive growth is only continuing. The changes in the economy

makes people think about the career choices they have made. If a person is

inexperienced in entrepreneurship but is interested in owning a business they often

seek for a franchise to start with.

The future development in the field of franchising will come from the growth of

service and care sectors. Also new concepts will appear especially from the care

sector when the population will age and need more services. There are no visible

signs for a downturn in the trend of franchising. Franchising does not fit for every

business, this will not change. Also, Finland being a big in size and sparsely

populated limits the possibilities for the operations to grow or in some cases even to

begin the operations.

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DISCUSSION AND RECOMMENDATIONS

The following chapters present the findings and conclusions of the research as well as

recommendations of what kind of actions the company could take next, subjects for

possible further studies and also an outlook of the reliability of this research.

Summary and conclusions

In this part the main findings are discussed based on the two interviews and the theory.

The research question was what requirements are needed for Aku & Ada to become a

franchise business. This is the starting point where to look at the results. Table 2 sums

up the main findings concerning the requirements; what the situation is now, what is

required of a company from Finnish Franchising Associations Executive Managers

point of view and what does the literature states.

Aku & Ada was opened on 25

th of March 2010. It employs the two owners of the company and

financially is still getting started and is establishing the foundations. The two owners have both worked in the industry major part of their lives and both have business related education and experience from managerial tasks from before. The business idea of the store is to sell a mixture of quality clothes from different brands and help the customer to find what is right for her/him. The entrepreneurs enjoy the freedom and flexibility of being able to make their own decisions and run the operations their way. They find it challenging to face customers with a poor attitude towards themselves but get feelings of success when every customer is being helped and satisfied. Also the tasks are not divided equally between the two owners; this has been discussed and there should be a change coming.

According to Juha Vastamäki, the EM of Finnish Franchising Association a company

that is looking into franchising as means to grow the operations should be able to

prove that the business works and is able to sell their business idea to the franchisees.

The tasks of franchisor are to develop, guide and support the franchisees, as well as

mange the entire chain as a whole. The business idea should be clear, written down

and duplicable. The advantages of franchising operations are the rapid growth, the

contribution of franchisees; they bring capital, entrepreneurial attitude, they have

strong motivation to make their investment grow and thereby share the risks of the

operations. In contrast a franchisor does share the profits with the franchisees and it

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might take a lot of effort and time to find the right franchisees to trust part of the

business to.

From theoretical perspective franchising suits best for young companies that might

lack the financial capital where the franchising fees and royalties will bring in some of

the needed funds. Franchisees are looking for a “proven” product, so when beginning

franchising the business should have been well tested and the company should have

experience of outlets that are company owned and successful (Barringer, et al. 2010,

518, 523). An entrepreneur who is considering becoming a franchisor should posses

qualities that fit for a descriptions of an educator, trainer, psychologists, perpetual

hand-holder and a manger, for franchisors need to be able to provide assistance to

franchisees in every aspect concerning the business (Keup 2007, 59). As the benefits

of franchising Barringer (2010, 522) has mentioned rapid, low-cost market expansion

and income from franchise fees and royalties, Murphy (2006, 186) brings up the lower

risk for franchisor and business talent in form of franchisees and Francoise (1997,

1415) mentions the knowledge of local markets by the local franchisees. As the

hindrance of franchising brought up are things like profit sharing and lost of control

(Barringer 2010, 522), the relationship with the franchisee requires trust and it might

become fraught (Murray 2004, 20-21), Francoise (1997, 17) also points out the

possible loss of control over the network.

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Present situation

Aku & Ada

Requirements

Juha Vastamäki

Theory

Operations of

the company

A young (8months), small company,

operating in a small

town

Able to prove that the business works and to

be able to sell the

idea to the franchi-

sees

Tested and experience of outlets that are

company owned and

successful

Entrepreneur Entrepreneurial,

business education,

strong experience of

the field of the in-

dustry

The franchisor devel-

ops, guides, supports

the franchisees and

the operations, also

things like customer

feedback, quality

standards, sales fig-

ures etc. are responsi-

bilities of the franchi-

sor.

Franchisor is a busi-

ness person as well as

an educator, trainer,

psychologist, perpet-

ual hand-holder and

looking after

what/how things are

done. Franchisees are

not employees, but

entrepreneurs working

under the same name.

Business idea Selling brand clothes to young and

youthful women and

men. Providing per-

sonal customer ser-

vice.

Clear, written down business idea, able to

be cloned

Successful and proven to work, concept able

to be standardized;

this is the core idea in

franchising

Advantages Freedom and flex-

ibility of entrepre-

neurship

Fast pace of growth,

the input franchisees

bring with them;

finance, entrepre-

neurial attitude, moti-

vation, they bare their

share of the risks and

perform better than

hired labor

Fast expansion, me-

thod to raise capital,

shared costs, efficient

marketing, local

knowledge from fran-

chisees, business

knowledge and fresh

ideas from franchisees

Inequality between

division of tasks

Shared profits, find-

ing of the perfect

franchisee

Shared profits, loss of

control over the net-

work, troublesome

relationship with fran-

chisees, difference in

the business skills,

underperformance

Table 2. Abstract of the key findings

Themes Disadvantages

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77

In conclusion, Aku & Ada is not in a state where a business should be in order to begin

franchising operations according to the theory and the EM of Finnish Franchise

Association. Their business concept is not yet proven to be successful in a wider scale;

in addition they have only one store which is still in a phase of settling down. The

owners are entrepreneurial and hard working, but they need to think carefully if they

have what it takes to be on top of a franchise chain; manage the operations and the

franchisees. Also, it is recommended to evaluate the business idea and recognize if it

is duplicable, if not, identify what should be changed or modified. As a revision most

central requirement to start with for a company getting into franchising operations is a

clear and successful business concept that is able to be copied and that franchisees are

willing to buy.

6.2 Recommendations and propositions

Theoretically once the business is strong financially and surmounted the first year or

two there is no reason why franchising could not be an option. Companies grow

followed by two things. Firstly, their product or service is successful and becomes

well known. Secondly, when the company has been making profit and has the

financial capability to expand. The companies should consider franchising as an

option to grow when they have something that others do not in terms of trademark and

a strong, well designed business model (Barringer, et al. 2010, 518; Murray 2004, 13).

Aku & Ada has already proven that at least in Leppävirta they have a service that is

successful and their operations are already well known even outside of Leppävirta. For

the qualifications to grow they still need the financial stability. When it comes to

franchising and having something that others do not have and a strong business model,

their concept at least in a small town of Leppävirta is working and therefore this

criteria is also fulfilled to some extent. If they are expanding to larger cities the key

problem will be with the limitations of the brands in each city and town. This is a

strategy which needs to be carefully planned. Perhaps as the owners stated in the

interview they should narrow the brands down and the segmentation should be more

focused. This will probably lie ahead of them whether they choose franchising as a

growing strategy or choose to expand in some other way. The owners are well aware

of their present situation and for now the main focus is establishing good foundation

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for their business. After the financials are stable the time to consider different options

for growth is more current. Franchising is one option if they figure out how to make

their concept duplicable. Other option that were thrown in the air during the interview

were importing new brands to Finland that are not available for the consumers yet,

ecommerce of Aku & Ada and even a company owned unit in some other city/town.

The last one mentioned could also be a step towards franchising operations depending

how the other store thrives in another location.

Reliability of the research

Any research aims at avoiding mistakes and yet the reliability and the validity of re-

searches can fluctuate. By the reliability of a research is meant the consistency of the

findings (Hirsjärvi et al. 2009, 231; Saunders, et al. 2009, 156). It can be assessed by

reviewing the following questions (Easterby-Smith et al. 2008, 109):

1. Will the measures yield the same results on other occasions?

2. Will similar observations be reached by other observers?

3. Is there transparency in how sense was made from the raw data?

To answer to these question concerning this research, the first one is naturally no. If

the company had been running for longer and was financially more stable and possibly

would have expanded already to another location the results could easily be different.

The question number two can be a little controversial since everyone observes

situations by using their own background and knowledge mixed with the occurrences.

In this case I think that the interviewees made their point clear enough for another ob-

server to come to similar conclusions and therefore the answer to the question number

two would be yes. For the third question concerning the transparency I would also

answer yes. The used research methods are discussed, it has been made clear when,

how and who have been interviewed, the findings are disclosed in detail and the sum-

mary is based on straight to the interviews and the theory. Also the interview questions

can be found from the appendices, for the interviewee they were naturally presented in

Finnish.

Another measurement of research is the validity. This concern whether the research methods

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are measuring what was supposed to be measured (Hirsjärvi et al. 2009, 231; Saunders, et al. 2009, 157). The validity of a qualitative research can be achieved through an accurate description of the implementation of the research (Hirsjärvi et al.2009, 232). This has been carried out in this research and therefore an endeavor for the validity of the research has been undertaken. A further point of view is a generalisability, or external validity, and it refers to how well the results of a research are generalisable. By this is meant how applicable the research results are to other organizations. When conducting a research for a specific company one should never claim the results could be generalised (Saunders, et al. 2009, 158). In the conclusions of this study there is no mentioning of the results being applicable to other situations.

Subjects for further studies

In general this research has proven that there is a big lack of research of franchising

from franchisors point of view, especially from of female franchisors. In Finland

Tuunanen has basically been the only one publishing research of this form of business

operations. When there are only a few studies from a subject they tend not to be

focusing on specific theme but cover the subject more comprehensively. Tuunanen

(2005,103-104) and Vastamäki agree that franchising will grow and conquer new

industries etc., taking this into consideration franchising ought to be receiving more

attention from the researchers as well as businesses and other officials.

From Aku & Ada‟s standpoint further studies could be exploring of other growth

strategies, such as importing of new brands, product/service development or

geographic expansion by company owned outlets. If franchising is chosen to be a

potential growth strategy then a closer study on the next steps should be made that

includes for example what should be altered in the business concept and which

location the business could be taken etc.

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CONCLUDING REMARKS

This thesis was assignment from a clothing store called Aku & Ada. It is still a young company in a textile industry but growth will possibly be ahead of them sooner or later. It is good to explore the possibilities before making decisions and this thesis presents the owners one possibility for the future which includes growing through franchising operations.

From my own point of view this research gave thorough basic knowledge of

franchising for the owners of Aku & Ada. Based on the information they receive they

can form better judgments and opinions towards franchising. No matter what the final

results of the research are, what really matters is the opinion of the entrepreneurs

towards franchising with the information they can gain from the theory and the

interview of the EM of the Finnish Franchising Association.

This was an interesting process for myself as well, since I did not know very much of the subject beforehand and it is a current topic in business life and touches the lives of every consumer in some way. The process was carried out in a quite short period of a time, and therefore it was a bit stressful, but this was a decision I made and do not regret the time frame set for the process. If something could be done differently I would have decided of the third interview from the very beginning of the process and then have had more time to look for an alternative when the original interviewee did not cooperate. Now the results are only from two perspectives and the third point of view would have been very complementary for the big picture. Personally I also find the theoretical part a bit ponderous to read; same it was to write, not as a whole, but partially. This is an academic research and therefore it must be as it is and the readers can make their own decisions what parts are of their interest and find useful to read. All in all in my opinion I have succeeded in the process and hope that this will be useful for the owners of Aku & Ada in some way now or in the future.

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Pitkänen, Ulla; Pitkänen Riikka 2010. Owners of Aku & Ada Oy. Interview 25.10.

Vastamäki, Juha 2010. Executive Manager of Finnish Franchising Association. Phone interview 27.10.


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