Franchising refers to a situation under which a business relationship involves an individual or a company owning a system, a franchisor, granting a business license to an individual or a company mandated to operate a franchise system or store on a casual basis. This person or company granted the license is usually referred to as a franchisee to the granting company or an individual involved on the business relationship. This would involve authenticating the use of the franchisor’s trademarks, operating systems and brand at a previously agreed fee. This is normally done under a series of specified agreements and obligations between the two parties involved; the franchisor and the franchisee. The obligations and agreements must have set policies and procedures that would ascertain the company's brand and constancy regardless of the location failure to which it is subjected to termination legal action and monetary reimbursement. Corporate stores, on the other hand, refer to the business relationship where stores and companies are run and owned by a single mother company. The parent company unleashes and manages the resources that are needed for new business ventures which involve setting up of stores, monitoring the daily operations of the stores and accounts for all the losses and profits that are would be incurred in the entire process.
Doug Burgoyne, a president and co-founder of FROGBOX Company, in his bid, to expand FROGBOX Company operations across to one hundred and more cities in the United States formulated a way that he considered would be of ultimate success to the company. He made deliberate considerations between Franchise stores and corporate stores evaluating the merits and demerits of both at various levels. In doing so, he noted the financial repercussions of corporate stores in comparison to franchising. The returns for corporate stores turned out to be higher at approximately 20% than that of franchising with revenue returns of about 7% per location. The president also considered the managerial aspect and operation of both corporate and franchise; this was mainly because when FROGBOX considered pursuing expansion in the United States, the basis not only depended on profit making but also to the later.
Advantages of Franchise Stores
Franchising influences the Company’s competencies through proficient skills that are expressed by its entrepreneurial minded franchisees. The company franchise stores and systems, therefore, would supersede those owned by company possessed-store managers. Secondly, franchising varies risks as they draw entrepreneurs who are better able to manage and bear risk. This further ensures the risks are properly distributed to the local franchise stores who have the ability to adjust and operate under the immediate prevailing conditions. The franchise system also can alter the fee for the franchise so as to meet prudent risk sharing alongside the franchisees' readiness to take up the risks and offer incentives that lower the shrinking behavior of franchisees’. Franchising system imposes undiversified risks on the franchise store director. It also offers substantial remedy to the control challenges faced by stores with high dispersion of the market type.
Franchising system organization structure also ensures incentives provisions and delegation of decisions are achieved. This is contributed to by the fact that more decentralization of decision making is tied to accounting parameters of performance than in a company-owned. Franchising reinforces the organization’s brand name and trademark. During us the company's brand and name, the franchisee ensures it maintains high quality of products and services in doing so, the company trademark and brand are reinforced across the various franchise system in the various locations. Bridging the agreement and policy statement by the franchisee that may tarnish the company reputation would result in termination of the franchise agreement.
Franchising system influences the franchisees to focus on the relevant effort required to manage the local needs and ensure the provision of high quality services. The franchisees, on the other hand, hold the residual returns from their units. It also acts as a technique for coordination as it gives the chain an opportunity to maintain the least decision rights that govern the consistency and quality of the trademark and brand through imposition of set regulations on operating the brand. This system was considered an investment that would ensure direct accountability on its finances and thus would optimize on quality service delivery and satisfactory customer services. This is what contributed greatly to operating franchise system in Canada.
Disadvantages of Franchise Stores
Withdrawing of comparative proficiency of headquarters by the local management is a limitation that the FROGBOX Company has faced. This has been contributed to adversely by the information unevenness due to the multiple sub companies and markets that serve different number of clients in various parts. The headquarters is normally tasked with the role of running client relationship, inventory levels, purchasing, advertising and selection of product mix and services. Retaining these roles at the headquarter level when there is a diverse market mix is quite challenging. This is because the conditions under which each marketing mix and the franchise system operates differs and the difficulty in appealing to customers due to the diverse customer bases.
Recruitment of reliable and competent franchisees for FROGBOX Company has been a challenge despite the upward trend in growth on the levels in the franchise system of the company. This has constituted to a decrease in the number of enquiries from prospective franchisees which averagely ranges between 40- 30 within a period of three years, 2009-2012. This aspect has not only affected the volume of the franchisee, it also affects the standards of franchisee enquiry. This has posed a great challenge to the franchise system or store as the threshold criteria expected by the franchisor is beyond the reach of the franchisee. To curb this challenge and limitation, the FROGBOX Company opted to using offerings to fund the franchisee and spotter fee to lure more candidates.
Sources of funding to invest on franchise store of FROGBOX Company in the various cities are another challenge that has limited the pursuance of a major expansion in the United States. The reduced tolerance risk by the banks has consistently hindered franchisees from acquiring funds for their franchise stores. The solution to this limitation is to have the franchisee’s system endorsed by one or more banks. This would in turn increase the franchisees financing prospect and they're ability to source adequate funds for investing in the franchise stores in over 100 cities of the United States.
Franchising stores usually indicate limitations in the use of units owned by the company according to their particular networks are a third challenge faced by the FROGBOX Company. This calls for integration of multi-channel dispersion advances which would include the company owned units, franchise stores, electronic channels (web, mobile) and upstream diversification into the supply chain. The franchisee selected by Burgoyne on the basis of their success in business and career on different industries never focused on growing of FROGBOX Company operations to absolute accomplishment in the various cities and locations as their priority. The company's operation, as a result, never reached their optimum level as performance gaps existed between some locations, as at times, it proved tricky for some franchisee to hub supplementary time and labor. Finally, investing in franchising stores is very costly and onerous to the FROGBOX Company as it would involve compliance with the franchise laws of the United States which is more elaborate as compared to the laws stipulated by other governments.
Advantages of Corporate Stores
Corporate stores are more lucrative as compared to the franchising systems. This is mainly because the yield higher profit margins as revealed by the statements of and analysis done by Burgoyne the President of FROGBOX Company. The revenue returns for corporate stores is approximately 20% which is much higher than that of the franchise stores which only stands at 7%. This is contributed to by the fact that the corporate stores have large and faster sales and reduced operation costs. Their goods are also not sold on credit, and all the company advertisement in most occasions is done unanimously and not separately. Corporate stores ensure division of risks in its multiple shops. In the case where one store has encountered losses, the profits earned from the alternative stores would subsidize the loss percentage to a negligible value.
In supplying of goods and services to the corporate stores, the central office is involved in the purchase of a very large range of products and services to the respective multiple stores. In so doing, they acquire the goods at a relatively low price and hence the company would enjoy an economic buying scheme which would in turn maximize on the profits and company income. An increased daily sale due to the decentralization manner created by corporate stores builds the customer confidence levels and consistency in purchasing. The customers express absolute satisfaction from the corporate stores since the goods and services provided are highly durable, and the prices are relative.
Corporate stores have reduced costs in the distribution of services since they sell the goods directly to the customer without the influence of the middle person. Middlepersons normally raises the prices of goods so as to earn commission on the gross sale. In the case of corporate stores, their services are not needed, and hence market mix created by the corporate store is a stable one without fluctuations in the customers' turn out and demands. The customers of the FROGBOX Company would, therefore, have a direct link to the producers hence ensuring a maintained quality of the goods and services that are offered in the various corporate stores. Finally, corporate stores usually get access to facilities of conducting a survey, research and study on the techniques on methods of operation, situation in the market, control and customers’ interest and needs.
Disadvantages of Corporate Stores
The Corporate stores system, when integrated into the operation of the company in most cases, is unable to cope with door to door delivery of goods and services and credit facility, unlike the franchise system. This gives the Company a poor rapport in the market and, therefore, it, therefore, does not optimize on the company's profit margins as the current customers commonly prefer increased services delivery and subsidized prices to quality. Secondly, corporate stores employ a large number of the working staff and personnel who upon promotion or services put the business at various organization risks and ineffectiveness in the normal operations. FROGBOX president, however, believed this aspect can easily be manned because any of the managers that underperforms can be dismissed and a more competent personnel be hired to replace the person.
Corporate stores have low prices of goods and delivery of services because they handle only a limited amount of goods and services. Price comparison is, therefore, a challenge in operating these stores. The aspect of product variation is also another disadvantage of operating corporate stores in the United States and a hindrance to the pursuance of the major expansion of FROGBOX in the United States. The company focuses on high quality of its products with less attention in product variance as each subunit is operating only under the authorities of the head office. A huge capital requirement is also a limitation of operating corporate stores in the various cities in the United States that the FROGBOX Company faces. The company organization is, therefore, limited in exploiting market, in different places as they cannot handle the financial implications alongside running the existing store.
Unfavorable working environment for the employees and managers operating different corporation stores since they don’t operate under any policy that take into consideration the local circumstances and sales increase. This is because the only powerhouse that drafts these policies to be adopted by the stores is the central office which has no direct link to the customers' demands and he working conditions for all its employees. A company venturing into corporate stores must, therefore, consider the employees working conditions and policies that serve their interests.
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