What Is Franchising?

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1 Introduction

The purpose of this paper is to shed some light on the concept of franchising from the viewpoint of the franchisor, discuss its different uses taking into account the advantages and disadvantages attached to them, and link these considerations to a firm’s internationalization decision-making process.

1 What is franchising ?

Franchising as it is generally known today is a form of marketing or distribution in which a parent company customarily grants an individual or a relatively small company the right, or privilege, to do business in a described manner over a certain period of time in a specified place. The parent company is termed the franchisor; the receiver of the privilege is called the franchisee; and the right, or privilege itself, is called the franchise.

A simple way to describe franchising is that it is basically a method of cloning success by duplicating a format based on established “best practice” (Stanworth - Smith 1991, 29). A business concept that has proved to be successful is duplicated to the franchisee, who commits himself to a contract to act upon the original business concept. Companies that operate following this original business concept form a franchise network. The franchise concept together with the franchise network form the franchise system that the franchisor is in charge of (Laakso 1995, 6). Franchise systems will be discussed in more detail in chapter 3.

The privilege may be quite varied. It may be the right to sell the parent company’s products, to use its name, to adopt its methods, and to copy its symbols, trademarks, or architecture, or the franchise may include all the rights. The time period and the size of the area of business operations, which are specified, may also vary greatly (Vaughn 1979, 1-2).

Franchising can also be defined as a special type of licensing. Franchising is really incomplete licensing. In licensing, the licensor allows a foreign company to manufacture a complete product whereas in a franchise agreement the franchisor usually supplies an important ingredient (part, material, and so on) for the finished product. Although a franchise frequently does involve a license, but on the subject of licensing there is a broad literature that has no reference whatsoever to franchising. The major literature on licensing arises from the field of patents. Franchise holders are businessmen - not employees or contractors to the franchisor. Meanwhile, licensing is based upon patents and industrial type technology and it relates generally to manufacturing processes and manufactured products. Franchising, on the other hand, involves primarily retail, service, or wholesale operations operated by one or several individuals.

Franchising agreements should also be distinguished from retailing agreements. In a franchising agreement the franchisor usually gives up the right to the whole business concept, and the goal of the agreement is to market the products in question as effectively as possible under the close supervision of the franchisor. Thus, in a franchising-based relationship the franchisor has far more control over the franchisee’s operations than in a retailing-based agreement.

The distinction between a franchising agreement and an agent contract is substantially easier to define. The franchisee operates independently both in the legal and the economic sense, whereas the agent acts under his own name on his client’s behalf in order to obtain purchasing offers for his client, or sometimes also in order to negotiate and close contracts under his client’s name. In other words, the agent acts on his client’s best interests. Additionally, agents rarely possess their own inventory, unlike franchisees do (Lautjärvi - Tommila 1988, 23).

2 History and growth of franchising

Franchising witnessed a dramatic growth during the ten-year period from 1969 to 1978: the number of franchisors increased; the number of franchisees, or...
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