From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company

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9780131494213: From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company

In this book, Dr. Scott A. Shane systematically helps businesses assess the pros and cons of the decision to franchise.  This book focuses squarely on the issues and challenges faced by franchisors. Shane answers key questions such as: What do successful franchisors do differently from unsuccessful franchisors? Why do some companies in an industry choose to franchise while their competitors don't? How does the decision to franchise affect your ability to compete with firms that don't? For businesses that choose to move forward, Shane presents proven principles for every aspect of building a successful franchising system, including: recruiting, selecting, managing and supporting franchisees; establishing territories and pricing; managing expansion; and navigating the unique legal and institutional challenges of franchising.

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About the Author:

About the Author

Dr. Scott A. Shane is Professor of Economics and Entrepreneurship at the Weatherhead School of Management at Case Western Reserve University. The author of numerous scholarly articles on franchising, Dr. Shane has consulted with many current and potential franchisors on the topics outlined in this book. Dr. Shane has also written or edited seven other business books including: Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Academic Entrepreneurship: University Spinoffs and Wealth Creation; A General Theory of Entrepreneurship: The Individual-Opportunity Nexus; Entrepreneurship: A Process Perspective; and Foundations of Entrepreneurship. Dr. Shane holds a Ph.D. from The Wharton School, University of Pennsylvania.


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Excerpt. © Reprinted by permission. All rights reserved.:

INTRODUCTION

INTRODUCTION

Franchising has become the dominant mode of retail entrepreneurship in the United States. The number of businesses involved in franchising in some way is astounding. At most recent count, almost 2,300 companies manage franchise chains in more than 80 industries. These companies work with 767,000 franchisees that employ 10 million people—as many as all manufacturers of durable goods combined.1 Moreover, franchise systems generate $1 trillion in sales annually, accounting for approximately 40 percent of all U.S. retail sales.2

Franchising is also becoming a more common business model. The number of franchised outlets in the United States increased by 146 percent from 1980 to 2003, an average of 6 percent per year, as franchises have replaced independent businesses in industries as diverse as fast food, banking, Internet services, automotive repair, and eye care. In fact, in the United States today, a new franchised outlet opens approximately every 8 minutes.

This pace of growth has been on an accelerating trajectory in recent years. The number of franchised outlets in the U.S. economy grew by only 28 percent in the 11 years between 1980 and 1991, but it grew 92 percent in the 11 years between 1991 and 2002.3

Franchising is growing even faster internationally, leading the House Committee on Small Business to define franchising as one of America's most rapidly growing exports. Currently, approximately 500 American companies operate more than 50,000 franchised outlets overseas. Ninety percent of all franchisors in this country are planning to expand internationally in the next decade, and roughly half of all franchised outlets established in the past decade were set up outside the United States.

The industry distribution of franchising is also quite broad. Franchise systems are currently found in more than 80 different industries, with more industries being added every year. Recent industry additions to franchising include advertising for on-hold telephone calls and outlets offering three-dimensional ultrasound, allowing people to see their soon-to-be-born children.

Despite the common perception that it is all about small business, franchising is a strategy adopted by a surprisingly large number of big businesses. Several Fortune 500 companies, including Ashland Oil, First Interstate Bancorp, McDonald's®, Medicine Shoppes International, Merrill Lynch, Ponderosa®, Postal Instant Press, Prudential Insurance, S.C. Johnson, Shoney's®, Snelling and Snelling, TCBY Enterprises, Union Carbide, and Wendy's International, have used or currently use franchising as a business model.4 Five percent of all franchisors are public companies, including Ben Franklin® stores, Big O Tires®, Doubletree® Hotels, Gymboree®, Microage Computer Centers, Staff Builders® International, and Swisher International.5 Ironically, franchising is also an avenue for private equity firms interested in taking public companies private again, as well as financing management buyouts and making acquisitions. Recent private equity deals involving franchising include The Dwyer Group, Cottman® Transmission Systems, Carvel® Ice Cream, Sylvan Learning Centers®, El Pollo Loco®, Chem-Dry®, Meineke® Car Care, Ruth's Chris® Steakhouse, Nutri Magic®, and Money Mailer® Systems.6

The Purpose of This Book

Obviously, franchising is an important business model chosen by some firms in some industries. What makes franchising particularly interesting, however, is that the adoption of it appears to be a strategic choice made by some businesses and not others. For example, although at least 12 coffee companies franchise, Starbucks® steadfastly resists the use of this strategy. As a result, many franchised coffee companies, such as Seattle's Best Coffee®, compete head to head with a giant chain of company-owned coffee houses. Similarly, although most large restaurant firms franchise their operations—in the restaurant industry, only 13 of the 100 largest chains chose not to franchise—General Mills operates its Olive Garden® and Red Lobster® chains directly.7 This leads General Mills to compete as a company-owned chain with many other firms that use a very different approach to operate their businesses.

The choice of some companies to compete by franchising and other companies to compete by owning all of their own outlets leads to the first goal of this book: to explain when franchising is a good strategy for a firm to adopt and when it is not. Franchising has advantages and disadvantages that influence the ways in which firms compete successfully with each other. As the entrepreneur who founded a company or a manager who runs one, you need to decide how to best compete with firms that franchise when you do not, and vice versa.

In addition, you probably want to figure out whether you are better off using franchising in your business. The chapters that follow will help you to answer this question: Should I franchise my business or not? This book examines the feasibility of franchising in your industry, the pros and cons of franchising, the legal and institutional requirements to franchise, and the management challenges of doing so, to help you to understand whether your company is better off on balance being a franchisor.

Of course, you might have already decided that you should franchise your business (or reading the first few chapters has led you to decide to adopt this business model). As you certainly realize, being successful at franchising requires you to design an effective franchise system. This book will also help you to do that, identifying the policies and strategies that are necessary to create a winning franchise operation.

This is important because, despite the widespread reach of franchising, surprisingly few companies succeed at franchising. In fact, of the more than 200 new franchise systems established in the United States each year, 25 percent don't even make it to their first anniversary, approximately three quarters fail within a decade, and only 15 percent make it to 17 years. The poor performance of most firms that franchise raises several questions that you need to answer: Why do so many new franchisors fail? What do successful franchisors do differently from unsuccessful franchisors? This book examines the policies and strategies that successful franchisors adopt and how they differ from those of unsuccessful franchisors, to provide a framework for entrepreneurs and managers to understand how to establish a winning franchise system. This book also serves as a guide for entrepreneurs and managers with ineffective systems to redesign their systems for success.

How Is This Book Different from Other Books?

Other people have written books about franchising, so it is important for you to know how this book is different from other books on franchising. Perhaps most important, this book takes the perspective of the franchisor, not the franchisee, which is the perspective taken by the vast majority of books on franchising. The franchisee-focused approach is not very useful to managers and entrepreneurs trying to figure out how to make their companies successful at franchising. Books that take this focus concentrate on what an individual should do to get started as a franchisee and seek to answer questions like "How do I select the right franchise outlet to buy?" or "What are the hot properties in franchising today?" They offer little guidance to managers and entrepreneurs about how to grow their companies through franchising or how to use franchising as a strategy to make their companies more profitable. In contrast, this book provides a guide for entrepreneurs and managers to use in evaluating franchising as a business strategy.

This book is also different from most books on franchising, which focus on the operational details of how to franchise. While "how to" books are important and are fine for answering many questions that are important to franchisors, such as "How do I advertise my franchise at a trade show?" or "How do I fill out a Uniform Franchise Offering Circular (UFOC)?", they do very little to help entrepreneurs and managers succeed. Unfortunately, there is no answer to a "how to" question that is a secret to success. Insight into success tends to come from answers to "why" questions. So there is no way to follow the recommendations of "how-to" books to increase the chances of being successful with franchising.

To be successful in franchising, you need to master the basic principles of business and economics that underlie franchising. What you need is a book that tells you what those principles are and how to apply them to design an effective franchise system. This book provides those principles and helps you use them to design an effective franchise operation.

Moreover, this book takes the idea of identifying these principles—and explaining how to apply them—seriously by developing a framework of rules for success that are based on rigorous academic research. This framework explains why certain actions should lead to success and offers persuasive evidence to support those explanations. The book uses this framework of research to identify decision rules for whether franchising is appropriate for your industry, whether the benefits of franchising outweigh the costs, whether you have a business concept that is appropriate for franchising, and which policies and strategies to adopt to make franchising successful. The decision rules presented in the chapters that follow will help you to choose such things as the right royalty rate and franchise fee for your franchise system; whether to use master franchising, area development agreements, or sub-franchising...

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Shane, Scott A.
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