INTERNATIONAL FRANCHISE OPERATIONS AND EXPANSION STRATEGIES.

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INTERNATIONAL FRANCHISE OPERATIONS AND EXPANSION STRATEGIES

1. Global Market Analysis

1.1. Market Research Techniques

Knowledge of basic market research methods is vital for international franchises and

opportunities for development since it allows avoiding poor decisions in expansion into new

countries. Market research entails the collection, analysis and interpretation of information that

focuses on a particular market, including information on probable consumers and rivals within

the market in question (Czinkota & Ronkainen, 2013). Methods such as questionnaires, group

discussions, and, observation studies are among some of the most effective. Some of the

common quantitative research techniques include; Surveys which include online surveys, phone

surveys and face to face surveys which offer quantity data relating to consumers’ preferences,

their buying behaviour and the market trends in general (Acs &Terjesen, 2013). Potential

customers were involved in Focus groups, which referred to a discussion with a small group of

potential customers conducted under the guidance of a researcher: Knight (2000) pointed out that

focus groups provided franchises qualitative results that let the franchises understand consumer

attitudes and perception and thus the franchises were able to refine the best strategy and product

to suit the local market. Other research methodologies include observational research where

businesses study the behavior and preferences of the end users outside the research setting and,

therefore, it captures unique trends that would not be easily discerned when the same consumers

are directly asked (Elango & Fried, 1997). Secondly, secondary research encompassing research

studies conducted from published work including industries reports, research papers, newswires

and other publications offer background information and comparable standards while assessing a

new market (Hoffman & Preble, 2004). Another tool that can be used to map demographic data

includes Geographic Information System (GIS) this is very useful in determining locations of

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franchises depending on the number of people in a particular area, income level and presence of

competitors among others factors highlighted by Kogut & Singh (1988). The other important

strategy that adopts are identified as competitive analysis that involves research on the local and

international rivals with reference to their competitiveness, their market share, and their

strategies (Doherty, 2009). With the analyzed data, franchises are then able to market their

brands well and are in a position to consider certain rival tactics.

1.2. Consumer Behavior Analysis

. The fact that consumer behavior is to some extent influenced by culture means that a society

may have quite distinct values, beliefs, or customs compared to another. For instance, a local

product that sells very well in one country is not likely to sell well in another country due to

cultural differences (H Huang et al. , 2010). Culture also plays a vital role, especially social

culture as it applies to the decision-making process on the purchases; purchaser’s from

collectivist culture involve other individuals including the family or group, on the other hand

purchasers from the individualists cultures act based on their personal preferences (Baena, 2013).

Other more individual characteristics include consumer age, gender, occupation, income, and

lifestyle which go further to influence consumer behaviour. The younger generation is more

drawn towards new products incorporating technology or trendy products while the elder

consumers might prefer quality over innovative technological products (Acs & Terjesen, 2013).

Also, the purchasing capacity and the economical status of the consumer has a direct effect of its

buying behavior and of its allegiance to a brand (Barthelemy, 2011). Issues like motivation,

perception, learning, belief and attitude also portrays a key role. For instance, the way a customer

perceives a brand, with regards to image and reputation, might significantly determine their

shopping behavior (Chiu et al. , 2004). They use different research methods to ensure that they

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gather data on these factors in detail. Quantitative data is collected by means of formal surveys

and questionnaires that measure consumers’ preferences and behaviors, while focus groups and

interviews add more personal-feel information about the consumers’ state of mind (cited in Clark

& Dickson 2003). The primary benefit of observational research is that businesses can conduct

experiments whilst monitoring how they actually use a product and what they actually say about

it; this method can reveal insights that might be hidden when the business directly interviews

consumers (Hoffman & Preble, 2004). Through examination of purchasing data and the feedback

given by customers, it might be possible to get a glimpse into the future of customers and what

they are likely to be doing in future in the way of buying products (Doherty, 2009). However,

any modern company is aware of the importance of digital technology, specifically, the analysis

of social media and tracking behavioral patterns that can be seen using the tools that allow

monitoring consumer attitudes and behavior with high frequency (Sorenson & Sørensen, 2001).

1.3. Competitive Landscape Assessment

It is also evident that the evaluation of competition is critical to performing international

franchise activities and expansion plans since it is an important factor in business that helps to

assess the position of the company in a specific country or region. It is generally wise to start

with a definition of current and potential direct and indirect competitors. Direct rivals create or

provide akin products and services, and target the same market, while the indirect rivals

specialize in different products and services that fulfill the same need of the consumers (Hoffman

& Preble, 2004). In examining these competitors, it entails a comparison of the competitor’s

position in terms of the strengths and weaknesses of each competitor, their market share,

business models and how they price and the various marketing techniques they employ

(Barthelemy, 2011). This tool gives an overall picture of the external surroundings that a firm

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has to operate in, allowing franchises to penetrate on what they can parlay into strengths and

opportunities on one side and threats on the other side (Chiou et al. , 2004). Moreover, another

recognised strategy model known as Porter’s Five Forces Analysis also acts as a tool for

measuring the competitive forces of a given market through determining factors such as the

bargaining power of both buyers and suppliers, threat posed by new entrants, threat posed by

substitute products as well as the competitiveness of the industry (Kogut & Singh,

1988). Besides, information concerning economic resources and market shares provide a clue

about the economic strength and market position of competitors while information derived from

customer feedback systems such as dissatisfied and happy customers give an indication of the

extent to which the competitors are meeting the needs and expectation of consumers (Elango &

Fried, 1997). Additionally, through competitors’ brand positioning, franchises get insights into

their rivals’ overall strategies and how well they claim to be different from the others in the

market; it gives the franchise the ability to then construct a proper positioning strategy (Clark &

Dickson, 2003). It is noteworthy that technology has also offered new ways of monitoring

competition through social media and Website analytics tools that help marketers track real-time

activities and consumer responses to competing brands (Sorenson & Sørensen, 2001). Integrated

sourcing systems collect data from multiple sources so that it is easier to have a broad view of

the competition (Hussain & Windsperger, 2010). These tools can enable franchises to note

emerging opportunities in the market, establish sophisticated market segmentation, and adjust

their strategies to meet the market needs to effectively compete (Combs et al. , 2004).

2. Franchise Business Models

2.1. Single-Unit Franchising

The method of single-unit franchising can be regarded as the most basic type of franchise

functioning on the background of the overall spectrum of franchises, with particular importance

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for those companies who perform the franchising activity on the international level. In this

model, the franchisor endows the franchisee rights of the running of a solitary outlet, making this

a comparatively simple entry point method in franchising (Hoffman & Preble, 2003). This type

of franchise is preferred by new franchisees since it poses little risk and costs less as compared to

multi-unit franchising and master franchising (Dant et al. , 2008). Single-unit franchising keeps

franchisers’ outlets centralized, targets mid- to high-volume markets, and provides better

prospects for high-quality establishment than multiple-unit franchising (Bradach, 1997). Thus,

the first advantage of single-unit franchising originates from the fact that this model is not too

large-scale, which would be rather beneficial for those who cannot finance the management of

more big, etc. This model minimizes financial risk and operational issues that are inherent in

Single unit development for the franchisee; it is therefore opportune for the franchisees to learn

the business and develop their skills and capacity (Lafontaine & Shaw, 2005). Additionally,

single-unit franchising results in a better understanding of the relationship between the parties

involved since they spend ample time together interacting, offering support, and monitoring the

operations of the business. This close-knit dynamic can also assist in the reinforcement of brand

standards as shared by the authors in Combs et al. (2004). The recruitment and screening of

single-unit franchisees are less risky for franchisors with the objective of experimenting in new

markets without much capital at stake. Through this approach, they can assess market prospects

and consumers action with little or no dollar risk (Knight, 2000). This can be useful for the

franchisors to get an understanding on the state of the regional markets before expanding to the

areas for which they may seek to switch to the multi-unit or master franchising models if those

areas are proven to bear high potential (Elango, 2007). There are also advantages of single-unit

franchising, due to the fact that, Single-unit franchising is localized in station, The localized

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focus of single-unit franchising also enables franchisees to acquire detailed insight into their

certain territorial market. It is also possible that the growth rate is slower compared to multi-unit

model because each new outlet, is developed with a different franchisee, while the management

of large number of outlets is not as efficient as when managing a large number of units in a

single location (Kaufmann & Eroglu 1998). In the case of multiple individual franchise units,

franchisors are likely to confront communication volumes that are difficult to manage, which for

providing support requires the setting up of strong support frameworks and communication

structures (Sorenson & Sørensen, 2001).

2.2. Multi-Unit Franchising

International franchise operation is not complete without multi-unit franchising since it creates

many opportunities for expansion and operational smoothness for both the franchised and the

franchisees. This was an expansion model whereby a franchisee is endowed with the authority to

undertake several units within a particular region enhancing the developments of the units and

the brand in the market faster (Dant et al. , 2008). This is different from single-unit franchise

where each franchisee owns only one unit this makes the chance of expanding and increasing

market covered to be even faster (Bradach, 1997). Economies of scale are one of the main

benefits of multi-unit franchising due to factors like increased purchasing power. Such layout of

franchise centers allows franchisees to combine their stock, advertising and administrative costs,

and other expenses at different locations, which leads to the overall cost optimization (Hoffman

& Preble, 2003). This model also establishes more consistent branding and enhanced business

execution because multi-unit franchisees can become more familiar with the franchisor’s systems

and guidelines; this contributes to uniformity among various outlets (Lafontaine & Shaw, 2005).

In addition, it should not be forgotten that due to having more experience and capital, multi-unit

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franchisees produce higher sales, and therefore pay more, and possibly have less risk of=default

franchisee failure for the franchisor (Combs et al. , 2004). Since the multi-unit franchising

system a franchise can develop more outlets and cover the market more quickly and efficiently.

They enable Sc, to achieve a large market share of a particular market without being burdened

with many franchisee relationships that would make, it hard for, Sc, to scale, (Elango, 2007).

However, depending on the success of the operational unit, a single failing unit can devastate the

balance of a franchisee’s revenue structure and organization’s financial position, which is riskier

(Doherty, 2009). As for the international context, multi-unit franchising can turn to great

advantage here. It enables franchisors to depend on franchisees with the realization that they

have advanced knowledge of the market situations in the country, customer needs, and other

legal factors as postulated by Knight (2000). This is important as it ensures that the company

harnesses localized knowledge in managing the challenges that are associated with operating in

foreign markets while applying the franchise system that best suits the consumers in the host

country (Welsh et al. , 2006).

2.3. Master Franchising

Master franchising is one of the most essential concepts among the numerous strategies of

international franchise operations, as it is an effective means of achieving impressive market

development. This model sees the franchisor award the master franchise right to a master

franchisee in the operation and further franchising within a particular geographical region, which

most of the time is an entire country or a large area (Doherty, 2009). The master franchisee

therefore takes a role similar to that of being a sub-franchisor, the primary responsibility of

identifying, selecting, training, and supporting sub franchisees means the franchisor is able to

expand rapidly without the need to directly manage each unit (Elango 2007). The two primary

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advantages of master franchising include the lightening of speed and scope of market

penetration. Ultimately, the franchisor has the benefit of the master franchisee offering

comprehensive knowledge of the local markets, connections and assets, such as being able to

adeptly manoeuvre through the legal system of the foreign country or understand consumer

psychology and how consumers conduct themselves in a specific country (Knight, 2000). The

experience is crucial for changing a franchise system according to the local culture and

regulation that makes it much more effective than overseas expansion a fundamental third-party

validated reason (Welsh et al. , 2006, para 7). The master franchisee has enormous money at risk

and a direct interest in the success of the territory, to this end, he will aggressively develop the

market and this makes the market stronger and capable of responding well to any pressure The

master franchising also helps in minimizing the operational risks on the franchisore. This

decentralised delegation involves determination of locations for the franchised outlets, promotion

of the franchise both locally and nationally and providing general support to the sub franchisees

on a daily basis (Combs et al. , 2004). According to Hoffman and Preble (2004), the franchisor

benefits from the concept in that he/she can effectively oversee such strategic initiatives as brand

creation and internationalization without having to worry about minute operational complexities

that the master franchisee would ordinarily deal with. From a financial perspective master

franchising offers various benefits for franchisors – the major one being that the contract is for an

initial fee and then a direct receipt of a proportion of the royalties for a long term period from the

master franchisee without the franchisee having to invest heavily in infrastructure and other fixed

investments at different locations which are usually spanned by the master franchisee agreement

(Sorenson & Sørensen, 2001). However, master franchising is not without its considerations or

flaws in that regard. HKO, this model is predicated on the choice of a proficient and credible

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master franchisee who meets the requisite professional skill, financial strength, and willingness

to adhere and promote the brand image (Kaufmann & Eroglu, 1998). The franchisor has a very

complex task of managing the relationship between it and the master franchisee as well as at the

same time overseeing the franchisee’s operations practices that should not diverge much from

the standardized franchise business model and quality provisions (Lafontaine & Shaw, 2005).

3. Legal and Regulatory Considerations

3.1. International Franchise Laws

Franchise laws in an international context are of critical significance in deciding the nature and

growth of franchising across borders, it sets the legal framework in the relation between the

franchisor and the franchisee across borders (Chiou et al. , 2004). Such laws include extensive

set of rules and legislations in the form of franchise regulations, statutes pertaining to the

disclosure norms of the franchise businesses, laws regarding protection of franchisee’s

confidential information and inventions, and standard operating procedures of prohibiting the

determined courses of actions by both the partners legally (Kaufmann & Eroglu, 1998). Another

essential constituent of international franchise laws is disclosing rules, whereby franchisors are

obliged to make extensive information available to potential franchisees on whether franchising

is a popular method of doing business globally, whether various types of franchises offer

different terms and conditions, whether a franchisor can accurately depict the expected financial

performance of the franchisees under an operating franchised unit and every time there has been

a litigation against a franchisor in a court of law (Barthe This disclosure helps franchisees to be

accompanied by proper knowledge and careful planning before investing in the franchise

relationship since they will be aware of all the risks involved (Clark & Dickson,

2003). International franchise laws tend to contain provisions to safeguard Intellectual Property

rights like trademarks and trade secrets and other proprietary methods of carrying out business

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(Hoffman & Preble , 2004). Brand information and the use of intellectual property are critical to

franchising because the franchisor has to ensure that every franchisee maintains a specific image

and does not infringe the boundaries of the franchising brand (Elango, 2007). Moreover, ant

discretion and international franchise laws would cover issues of territorial rights and protection

against encroachment, which entitles franchisees to some geographic territoryExclusive which

means that the franchisee has a right to that specific area and nobody has the right to open a

similar franchise outlet anywhere in the region without the consent of the franchisee (Hussain &

Windsperger, 2010). Franchise laws in many countries have standard clauses that govern the

process of solving the conflict that may arise between the franchisor and the franchisee due to

noncompliance with the contract, abuse, or failure to honor the contract’s geographical

exclusivity clause or royalty provisions (Sorenson & Sørensen, 2001). These can be negotiations

such as arbitration, mediation or taking legal action before domestic or international courts

depending on the terms of the franchise agreement and the coutry laws(Kaye 2009). In this

regard, international franchise laws are considered useful in controlling the franchising business

across borders since it outlines the coming rights, responsibilities, and safeguards for both

franchisors and franchisees in different countries. They shall include the disclosure requirements

for new or modified products, the protection for patents and other forms of proprietary rights, the

geographical distribution rights, and the legal processes to be followed in case of a dispute.

3.2. Compliance Requirements

Legal and Governmental compliance is another significant and fundamental component of

international franchise business where processes and laws are in place to ensure that both the

franchisor and the franchisee abide to the laws of business of all the countries involved in the

international franchises. In the perspective of the act of franchising internationally, compliance

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involves performance of several legal requirements, such as those that touch on the law of

franchise disclosures, properties of intellectual nature as well as legal enforceable contracts. Each

country has franchise laws in place that dictate certain disclosure regulations, which define what

information franchisors must make available to potential franchisees concerning the franchise

agreements’ terms and conditions, the financial performance of the business, and any legal

disputes the franchisor brand has engaged in. The contractual laws prevent franchisors from

being able to coerce franchisees into signing contracts without disclosure of suitable information

to help the franchisee make sound investment decisions (Barthelemy, 2011, p. 55). I can also say

that any compliance requirement also includes protection of patents, trademarks, trade secrets,

and exclusive business practices. Franchisors are required to protect the brand image and

guarantee compliance with the standards of brand image by franchises to ensure the ultimate

resemblance of the franchise operation (Hoffman & Preble, 2004). Further, regulatory

obligations entails the territorial rights and some of the justice mechanisms in case of disputes in

contracts. Franchise contracts present the legal arrangements of the two partners regarding the

rights and duties of the parties and procedures for handling any disputes or deviations from the

agreed terms and conditions also. Alliance to these stipulations aids in sustaining the steadiness

and sustainability of the franchise system (Sorenson & Sørensen, 2001). Franchise obligations

are very important as far as regulation of the partners’ behavior is concerned because they ensure

proper and legal activity on both the national and the international level in franchising.

3.3. Intellectual Property Protection

Protection of intellectual property is critical in to international franchise business as it is the

foundation on which the franchisor protects a franchise’s brand and unique selling proposition

such as business models and strategies (Elango & Fried, 1997). Some of the considerations that

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must come out clearly include; The franchisors must ensure that they have put in place strong

measures that will enhance the protection of trademarks, trade secrets & other related assets

against competitor or even the unwanted franchisees. Logos, slogans, brand names, etc. are

important and legal identities of a product or service that are owned by a franchisor and help to

differentiate them from other companies in the marketplace (Barthelemy, 2011). The franchise

company must ensure that the trade marks it uses are registered in each country the franchise

operates to ensure legal regimes enforces the franchisor’s exclusive rights. It is common for the

franchisor to possess trade secrets in form of a unique formula, production technique or list of

customers, which are legal reserves essential to its operations (Hoffman & Preble, 2004). To

protect franchisors trade secrets, there are several protective measures that franchisors have to

undertake as well as legal provisions that have to be included in the contract between the

franchisor and the franchisee. In addition, by entering into legal contracts whereby franchisors

can prohibit the disclosure of given information and the formation of competing organizations,

franchisors are also able to preserve their rights of intellectual property and the general

authenticity of the franchise business (Elango, 2007). Proper intellectual property protection

helps the franchisor continue with the brand management strategies, retain marketshare, and

prevent brand dilution or imitation or counterfeit products in foreign markets as pointed out by

Sorenson and Sørensen (2001)

4. Financial Planning and Management

4.1. Funding Sources

The sources of funding are other important factors for consideration when it comes to franchising

at the international level since they set the level of the financial strength and feasibility of

franchise business operations (Chiou et al. , 2004). It is essential for both the franchisor as well

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as the franchisee in order to seek for various funding opportunities that are viable in supporting

franchise development, franchise expansion and running of the franchise system. Internal

confidential funding is a typical form of Franchisee funding where franchisors utilizes their

retained earnings or capital reserves to support expansion of the franchise system (Dant et al. ,

2008). Internal financing is considered more effective than external financing because it does not

involve the interference of outside parties and affords the franchisor control in choosing the type

of funding for its franchisees and operations. while internal financing may sometimes not be

adequate to fully support large-scale expansion initiatives, franchisors can consider seeking

external financing options (Combs et al. , 2004). The sources of external funds in cases of

franchisors include the ability to get loans, lines of credit or venture capital which allows the

provision of extra funds to the franchise system (Sorenson & Sørensen, 2001). While on the

other hand, the franchisees embrace personal and external sources of funding to pay the initial

franchise fees, equipment and common expenses, among others sources of funding embrace

loans from financial institutions (Hoffman & Preble, 2004). This is because most franchise

systems have finance or assistance programs that help franchisees to source for finances, thereby

lowering barriers to entry the industry (Lafontaine & Shaw, 2005). Second, organized loan

programs supported by the government, SBA loans and related franchise financing guarantees

exist to some extent, with relatively low interest and reasonable credit conditions (Hussain &

Windsperger, 2010). Furthermore, seeking partners for financial or equity based cooperation or

getting involved with a financial firm, private investor or an equity partner can help franchisees

to source capital and other resources for the purpose of business expansion (Kogut & Singh,

1988). Fexibility in terms of funding and seeking new financing models are the key activities for

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creating the financial stability and profitable franchising systems in the fields of the international

franchising on the condition of success in the concrete and competitive markets.

4.2. Cost Analysis

This factors can be broken down and analyzed as cost in the course of the international franchise

operations; this therefore helps the franchisors as well as the franchisees in the establishment of

expenses, in the provision of necessary resources, as well as ensuring that there leans are

optimized in profit making (Chiou et al. , 2004). Expense evaluation can be defined as a process

of categorization and estimation of all costs which may be incurred in relation to franchise

business inititives. Current and prospective franchisees are both able to finance their franchised

operations through cost and pricing strategizing whereby; franchisors identify an initial fee to

charge to franchisees on entry into the franchise relationship, regular royalties that the

franchisees are supposed to pay and any other fees that the franchisor may deem necessary from

the franchisee (Combs et al. , 2004). Further, the costs regarding training and development of

franchisees, marketing and advertising across franchisees, and overhead have to be evaluated so

that proper funding and resource provisions can be made for system expansion and overall

support (Sorenson & Sørensen, 2001). While franchisors remunerate their franchisees in

exchange for the products and services which the franchisees provide, franchisees analyze costs,

assessing the financial advisability of franchising as an ownership form and feasibility of

franchising business taking into consideration initial investment costs, lease or real estate costs,

inventory and supply costs, wages for the employees, and other operation costs (Hoffman &

Preble, 2004). Through cost estimates one is able, with reasonable reasonable accuracy,

determine the actual amount of money necessary to establish the franchise unit and run it, as well

as the probable profits, as well as the rate of return on the investment (ROI) carried out by the

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franchisee (Elango, 2007). Cost analysis help franchisees to embrace overall cost reduction

measures and negotiate favorable costs with suppliers and vendors, ways and means on how to

make improvement and enhance cost reduction in carrying out the operations. These tools

include break-even analysis, cost volume profit (CVP) analysis and the variance analysis; both

the franchisors and franchisees use them for cost controlling to identify value chain of

improvements and provisions of valid financial decisions (Hussain & Windsperger, 2010). Cost

analysis is vital since it helps to identify trends, track expenses, and make recommendations on

the right financial strategy to adopt when implementing international franchises in competitive

and changing markets.

4.3. Profitability Metrics

Various measures of profitability are significant in Internal franchise operations to determine the

feasibility of business operations (Chiou et al. , 2004). Franchisors and franchisees rely on

quantitative tools to benchmark performance and assess profits, financial health, and viability of

their businesses. The Rate of Return on Investment is just one of the most basic profitability

measures that assess capital intensity, basic possible returns on franchise investments (Combs et

al. , 2004). ROI is calculated by a formula in which net profit is divided by total investment and

is used in measuring the profitability of specific stores or the franchising system on the whole.

Also important is the gross profit margin which measures the actual income generated from sales

less the cost of good sold and reflects the operational efficiency and the pricinig strategies put in

place (Sorean and Sorensen, 2001). Average unit volume or AUV is another statistical

measurement that describe the average income that a single franchised outlet is making within a

certain period of time; it is used to compare the performances in the industry (Elango, 2007).

Additionally, the franchisors focus on some scalar parameters like same-store sales growth,

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System-Wide Revenues, franchise turnover rate, etc so as to analyze other performances and

system health for future scopes and developments (Hoffman & Preble, 2004). Moreover,

operating cash flow, free cash flow, and cash conversion cycle as other liquidity ratios give

information about the solvency and financial viability of franchise operations sighted by

Lafontaine & Shaw (2005). The provincial franchisors and franchisees can examine profitability

measures including profitability ratios and cross-check the results with those of competing food

franchises in order to locate areas of inefficiency and ineffective resource-use and then devise

and apply methods of improving profitability and sustainability in future.

5. Cultural Adaptation Strategies

5.1. Localization Techniques