Franchising: hybrid organisational arrangement for firm growth and national development

AuthorOlu Ojo Department Of Business Studies Covenant University P. M. B. 1023, OTA Ogun State Nigeria
Pages113-120

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Introduction

A number of strategies are available to the entrepreneur for the expansion of his venture. However, one of these strategies that are mostly ignored by entrepreneurs in new venture expansion is franchising. This paper examines the practice of franchising as a hybrid organizational arrangement by which entrepreneurs can expand their business. This paper is important because proper knowledge and application of franchising business is imperative for firm growth and national development. The author conducted an intensive study of Nigerian business world and discovered that franchising, unlike what obtained in developing countries such as the United States of America where, one out of every three dollars spent by Americans for goods and services is spent in a franchise business. This cannot be said of Nigeria. This is because many entrepreneurs in this part of the world are yet to know the benefits inherent in franchising (Ike-Okoh, 2006).

In this study, we explore what franchising is; we also consider the scope of franchising and examine the criteria for determining a franchise's stature from the perspective of both the franchisee and franchisor. We also look at franchise relationship model. We conclude by examining the current trend of thinking on franchising and how Nigeria business can profit from it.

Literature review Concept of Franchising

Historically, the word franchise is of French origin. It simply means "privilege" or "freedom". Hisrich, Peters and Shepherd (2005) see franchising as a means of new entry that can reduce the risk of downside loss for the franchise. They see franchising as an alternative

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means by which an entrepreneur may expand his business by having others pay for the use of the name, process, product, services and trademark. It can be used as a growth mechanism by the organization (i.e. the franchisor). It is sharing an entrepreneurial vision and working together to make it a reality. According to Otokiti (2004) franchising is a business arrangement in which the franchisor grants the franchisee the right to do business in a prescribed manner over a certain period of time in a specified way. However, franchising can be used to describe business format in which the franchisor offers a complete business package. Thus, Beshel (2001) says a franchise is the agreement or license between two legally independent parties which gives:

- A person or group of people (franchisee) the right to market a product or service using the trademark or trade name of another business (franchisor).

- The franchisee the right to market a product or service using the operating methods of the franchisor.

- The franchisee the obligation to pay the franchisor fees for these rights. - The franchisor the obligation to provide rights and support to franchisees. A simple franchise agreement is illustrated in figure 1 below:

[ VEA LA FIGURA EN EL PDF ADJUNTO ]

It is pellucid from the above figure that both the franchisor and franchisee have rights and obligations to each other.

In order to distinguish it from other forms of agreement, the following important features characterized franchise.

A Contract; a franchise is based on a contract between the franchisor and the franchisee. The contract tells each party what each is supposed to do.

A Purpose; the franchisor and the franchisee agree that their purpose is to provide for efficient distribution of the goods or services.

Resources; the franchisee usually contributes money and agrees to manage the local franchise business to the best of his ability for monetary gain. The franchisor contributes other resources such as business idea, trademark, training, technical know-how, legal framework and advise.

A business entity; there is a separate legal entity. The franchise outlet is set up as a separate business with a distinct identity, different from the franchisee's existing business,

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A common public identity; both parties support a common public identity through the use of a common trade name, trademark, architectural design, advertising, and product brand. A financial arrangement: the franchisee is expected to make a profit from the venture and compensate the franchisor with a franchising fee and royalties as the case may be.

Theoretical Framework of Franchising

The success of the franchisor depends on the success of franchisee. Therefore the franchisor's attempt to select franchisees that will work hard and take the responsibility for their outlets, yet be willing to listen to advise and cooperate (Otokiti, 2004).

Hisrich et al. (2005) argued that not all franchise is right for every entrepreneur. An entrepreneur must evaluate the franchise alternatives to decide which one is most appropriate. Following are the number of factors that should be assessed before making final decision.

- The unproven versus the proven franchise. - Financial stability of franchise.

- Potential markets for the new franchise. - The profit potential for a new franchise.

They also argued that entrepreneurs face certain problems in starting up a new venture in...

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