San Francisco, CA (PRWEB) July 17, 2013
Franchising as a business model is an increasingly important part of the American business landscape. This model already comprises about 5% of businesses in America and generates about 8% of all private sector jobs. Intriguing new franchise businesses are popping up everywhere. LED Source®, a new franchisor of LED Lighting, offers an opportunity for franchisees to profit from the “green” trend. InXpress USA, a fast, growing franchise organization, specializes in international shipping for small to medium-sized businesses.
These and other innovative franchises offer grass roots entrepreneurs a chance to get into business for themselves. The franchising model combines a potent mix of capital, brand and initiative. It also has a lot to teach non-franchised companies.
How Franchising Works
A firm with an established product or service (the franchisor) enters into a contractual relationship with other businesses (the franchisees). Franchisees operate under the franchisor's trade name and guidance--in exchange for a fee.
The contract defines franchisor and franchisee responsibilities. The franchisor provides a business model and marketing strategy that specifies segments, products/services and brand positioning. The franchisor also provides advertising, marketing, training and support. The franchisee is responsible for the local facility and management of daily operations.
In recent years the franchise model has expanded from being product-oriented (for example, fast food) to include service-dependent businesses like auto maintenance and hotels. The newer model requires the franchisor to rationalize complex businesses into repeatable processes that franchisees can execute.
Franchisors get continuous feedback from current and prospective franchisees. A franchisor feels pressure to grow by attracting more franchisees. The market holds the franchisor accountable for its marketing strategy—and for the financial performance of its franchisees.
In traditional businesses, by contrast, development and execution of strategy is the exclusive responsibility of management at the top. Execution of sales and other operations are the responsibility of the “front line.” Lack of alignment with management about what to do and how to do it makes employees feel that they don’t have a stake in the business. Problems are “someone else’s fault.”
When the franchise model is executed well, it yields a high degree of alignment between franchisor and franchisees. Not only do franchisees have “skin in the game” because they have invested and own a share of the upside. Royalty payments to the franchisor raise the franchisee’s break-even point, focusing them on cash flow and driving them to higher levels of effort. Traditional companies often struggle to motivate their employees to minimize expenses for the good of the business.
Emulating Successful Franchises
How can traditional companies emulate the best parts of the franchise model?
1. Treat employees as if they have a real stake in the business—instead of being disposable “resources.”
While corporate employees are not independent business people who have invested in the company’s business system, management would do well to try to act as if they were. Employees who are committed to the company should have the opportunity to critique its strategy and plans.
2. Build scale centrally. Too many companies grow haphazardly, failing to find the right balance between centralizing key functions while giving rein to local initiative. They might emulate how franchisors drive marketing and product development centrally, leaving leeway for franchisees to adapt the strategy to local markets.
3. Define your business model—then replicate it. The franchise model reinforces a meticulously defined business system. Many traditional companies have trouble getting employees to really understand how the business is supposed to work. Define your business model to employees as rigorously as if you were contracting with franchisees to implement it.
4. Sustain marketing and advertising effort despite fluctuations in the business. In tougher market conditions, traditional companies often reduce marketing and advertising to maintain quarterly bottom line performance. Most franchise contracts require spending either a flat dollar amount of marketing/advertising or at least a fixed percentage of revenues. Traditional companies might benefit by holding spending on marketing, advertising and training relatively constant, through good times and bad.
5. Keep the culture flat. A franchisor has strong incentives to create multiple channels of communication with its franchisees. A CEO and top executive team who worry about what employees think and are open to well-informed feedback will be able to count on a better motivated work force.
Other companies would do well to heed and apply the core practices that continue to make the franchise model successful.
Mark Street is a partner in the Charlotte, NC office of the Newport Board Group. Mark can be reached at (980) 721-7293.
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