CHAPTER 15

Franchising : is a form of business organization in which a fir that already has a succesful product or service (franchisor) licenses its trademark and method of doing business to other businesses (franchises) in exchange for an initial franchise fee and an ongoing royalty. The word franchise comes from an old dialect of French and means "privilege" or "freedom".

How does franchising work?

It is a form of growth that allows a business to get its products or services to market through the efforts of business partners or "franshisees". A franchise is an agreement between a franchisor and a franchisee. There are 2 distinctly different types of franchise systems :

• A Product and trademark franchise is an arrangemet under which the franchisor grants to the franchisee the right to buy its products and use its trade name.
• The business format franchise, is by far the more popular approach to franchising and is mre commonly used by entrepreneurs an entrepreneurial ventures.

The most common type of franchise arrangement is an individual frandhise agreement. An individual franchise agreemennt involves the sale of a single franchise for a specific location. An area franchise agreement allows a franchisee to own and operate a specific number of outlets in a particular geographic area. Finally, a master franchise agreement is similar to an area franchise agreement, with one major difference. The people who buy franchises from master franchisees are typically called subfranchisees. A person who owns and operated more than one outlet of the same franchisor, twhether through an area or a master franchise agreement, is called a mutiple-unit franchisee.

• Steps to franchising a business

Before deciding to franchise, a firm should consider the following :

• The uniqueness of its product or service
• The consistent profitability of the firm
• The firm's year-round profitability
• The degree of refinement of the firm's business systems
• The clarity of the business proposition

The cost of Franchise

The initial cost of a business format franchise varies, depending on the franchise fee, the capital needed to start the business and the strength off the franchisor. The followin costs are typically associated with buying a business format franchise :

• Initial franchise fee
• Capital requirements
• Continuing royalty payment
• Advertising fees

Advantages and Diadvantages of buying a franchise

Advantage :

• An established marketing network
• Availability of financing
• Potential for busines growth

Disadvantage :

• Cost of franchise
• Restrictions on creativity
• Potential for failure

Steps in purchasing a franchise

Common misconceptios about franchising

• Franchising is a safe investement
• A strong industy ensures franchise success
• A franchise is a "proven" business system
• There is no need to hire a franchis attorney or an accountant
• The best systes growth rapidly, and it is best to be a part of a rapid
• I can operate my franchise outlet for less than franchisor predicts
• The franchisor is a nice person - he'll help me out if i need it.

Legal aspects of the franchise relationship

• Federal rules and regulations : Except for the automobile an petroleum industries, federal laws do not directly address the franchisor-franchisee relationship. Instead, franchise disputes are matters of contract law and are litigated at the state level.
• State rules and regulations : The franchise investement laws require franchisors to provide presale disclosures, known as "offering circulars", to potential franchisees.

More about franchising

• Franchise ethics :
• The et-rich-quick mentality
• The false assumption that buying a franchise is a guarantee of business success
• Conflicts of interest between franchisors and their franchisees
• International franchising. Some of the steps to take before buying a franchise in a foreign country :
• Consider the value of the franchisor's name in the foreign country
• Work with a knowledgeable lawyer
• Determine whether the product or service is salable in a foreign country
• Uncover whether the franchisor has experience in international markets
• Find out how much training and support you will  receive from the franchisor
• Evaluate currency restrictions

CHAPTER 14

Strategies For Firm Growth

Internal Growth strategies involve efforts taken wthin the firm itself, such new product development, other product-related strategies, and international expansion, for the purpose of increasing sales revenue and profitability. Internally generated growth is often called organic growth because it does not rely on outside intervention.

Internal growth strategies :

• New product development  : involves designing, producing, and selling new products (or services) as a means of increasing firm revenues and profitability. In many fast-paced industries, new product development is a competitive necessity. 
• The keys to effective new product and service development :
• Find a need and fill it
• Develop products that add value
• Get quality and pricing right
• Focus on a specific target market
• Conduct ongoing feasibility analysis
• The Top 5 reasons new products fail
• The potential market was overestimated
• Cutomers saw the product as t expensive
• The product was poorly designed
• The product was no different than the competition's
• The costs of developing the product line were too high
• Additional internal product-growth strategies:
• Improving an exiting product/service : enhancing qulity, making it larger or smaller, making it more convenient to use, improving its durability, or making it more up-to-date.
• Increasing the market penetration of an existing product or service : involves actions taken to increase the sales of a product or service through greater marketing efforts or through increased production capacity and efficiency.
• Extending product lines : involves making additional versions of a product so that it will appeal to different clientele or makinng related products to sell to the same clientele.
• Geographic expansion : is another internal growth strategy by simply expanding from their original location to additional geographic sites. The keys to succesful geographic expansion follow :
• Perform succesfully in the initial location
• Establish the legitimacy of the business concept in the expansion
• Don't isolate the expansion location

External growth strategies

Rely on establishing relationships with thirs parties.

• Mergers and acquisitions : A merger is the pooling of interests to combine two or more firms into one. an acquisition is the outright purchase of one firm by another. In an acquisition, the surviving firm is calleds the acquirer, and that is acquired is called the target.

Steps involved in an acquisition 

• Licensing is the granting of permission by one company to another company to use a specific form of its intellectual property under clearly defined conditions. There are  principal types of licensing :
• Technology licensing : is the licensing of proprietary technology that the licensor typically controls by virtue of a utility patent.
• Merchandis and character licensin : is the licensing of a recognized trademark or brand that the licensor typically controls through a registered trademark or copyright.
• Strategic alliance and Joint ventures
• Stategic alliance is a partnership between two or more firms that is developed to achieve a specific goal.
• Joint venture is an entity created when two or more firms pool a portion of their resources to create a separate, jointly owned organization.

CHAPTER 13

Preparing for and Evaluating The Challanges of Growth

Most entrepreneurial firms wat to grow. Especially in the short term, growth in sales revenue is an important indicator of an entrepreneurial venture’s potential to survive today and be succesful tomorrow. This section focuses on three important things a business can do to prepare for growth.

      1. Appreciating thenature of business growth

Growing a business succesfully requires peparation, good management, and an appreciation of the issues involved. The following are issues about business growth that entrepreneurs should appreciate. For example : Not all business have the potential to be aggressive growth firms, a business can grow too fast, and business success doesn’t always scale.

2. Staying ommitted to a core strategy

Is to stay commited to a core strategy, which defines how it completes realtive to its rivals. A firm’s core strategy i largely determined by its core competencies, or what it does particularly well.

3. Planning ofor growth

Is to establish growth-related plans. This task involves a firm thinking ahead and annticipating the type and amount of growth it wants to achieve.

·         Reasons for Growth

A firm’s pace of growth is the rate at which it is growing on an annual basis. The six primary reasons firm try to grow to increase their profitibality an valuation :

1.       Economic of scale are generated when increasin production lowers the average cost of each unit produced. Economies of scale can be created in service firms as well as traditional manufacturing companies. Variable costs are the cost a company incurs as it generates sales. Fixed costs are costs that a company incurs whether it sells something or not.

2.       With Economic of scope, the advantage a firm accrues comes through the scope (or range) of a firm’s operations rather than from its scale of production.

3.       Market leadership occurs when a firm holds the number one ot the number two poition in an industry or niche market in terms of sales volume.

4.       Influence, power, and survivability. Larger business usually have more influence and power than smaller firms in regard to setting standards for an industry, getting a “foot in the door” with major customers and suppliers, and garnering prestige.

5.       Need to accommodate the growth of key customers. Sometimes firms are compelled to grow to accommodate the growth of a key customer.

6.       Ability to attrat and retain talented employees is to attract and retain high-quality personel.

·         Knowing and managing the stages of growth

1.       Introduction stage              : start up phase

2.       Early growth stage              : is generally characterized by increasing sales and heightened complexity.

3.       Continuous growth stage : the need for structure and more formal relationships.

4.       Maturity stage                     : when it growth slows.

5.       Decline stage                        : it i not inevitable that a business enter the decline stage and either deteriorate or die.

•  Basic model of firm growth

The impact of managerial capacity