From Ice Cream to the Internet: Using Franchising to Drive by Scott A. Shane

By Scott A. Shane

During this booklet, Dr. Scott A. Shane systematically is helping companies examine the professionals and cons of the choice to franchise.  This booklet focuses squarely at the concerns and demanding situations confronted by way of franchisors. Shane solutions key questions resembling: What do profitable franchisors do otherwise from unsuccessful franchisors? Why perform a little businesses in an decide to franchise whereas their opponents do not? How does the choice to franchise impact your skill to compete with organizations that do not? For companies that decide to circulate ahead, Shane offers confirmed ideas for each point of creating a profitable franchising method, together with: recruiting, settling on, dealing with and aiding franchisees; setting up territories and pricing; coping with growth; and navigating the original criminal and institutional demanding situations of franchising.

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Don’t franchise unless customers in your industry are served from fixed locations; otherwise your franchisees will end up fighting with each other over customers and you won’t be able to stop them. 2. Don’t own outlets in industries in which you need to give outlet operators an incentive to adapt products to local markets; franchising provides them with an incentive to do that. 3. Don’t own outlets in industries in which outlet operators need discretion to negotiate with customers; salaried managers won’t have the right incentive to do that well.

When outlets are all company-owned, chains earn their profits from the operation of their outlets. In contrast, when outlets are completely franchised, chains earn royalties on gross sales at outlets. The risk of a business is very much affected by the variance in performance. For two businesses with the same average performance, the risk is much higher in the one with more varied performance than in the one with more constant performance. Because variation in sales tends to be smaller than variation in CHAPTER 2 • THE ADVANTAGES OF FRANCHISING 37 profits, compensation through royalties is less risky than compensation through profits from operating a chain.

Because of the time it takes to learn to be a plumber or an electrician, and the relatively small number of people with the skills to perform these trades, these industries are the not the best ones for franchising. Brand Names: An Important Competitive Advantage Franchising is most effective in industries in which brand name development is important. This is the case in fragmented industries, such as restaurants. 13 Franchising is valuable in industries in which brand names are important because it increases the scale of operations of a business very quickly—much more quickly, in fact, than through company ownership of outlets.

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