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Franchising

A franchise is an agreement between two parties which gives one of them the right to information, processes and trademarks to provide a service under the primary business’s name. Generally the franchisee has to pay a certain fee in order to gain these rights. Most franchises are based on a contractual relationship, in which terms and conditions are based on the franchiser’s demands. A franchisee is the person or business to which the franchise is granted. Franchising is a symbiotic relationship between two people or businesses from which both benefit. For the franchiser, it is a far better way to expand his business and gain market dominance than gaining patents and trying to get company-owned outlets to invest in his company. For the franchisee, it is a learning process, through which he gains knowledge of the franchiser’s way of working. The franchisee is given training and learning and development tools through which he can reach the ultimate goal of organizational efficiency. There is a good amount of dependence on both sides for the business relationship to be successful. There are three main categories of franchising. First is the standard business format, under which the trademark is disclosed to the franchisee. A product franchise is one which allows the franchisee to sell products and services under the franchiser’s name. The last category is the manufacturing franchise. This allows the franchisee to manufacture products and services under the franchiser’s guidance. Payments for franchises generally come in the form of royalties, which are paid throughout the contract’s duration. In exchange, assistance from the franchiser in terms of marketing, sales and training is given to the franchisee. Many laymen believe that franchising is common only in the fast food industry. This is not necessarily true. Franchising is a part of many industries from agriculture to hospitality.

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The History of Franchising

It was first Albert Singer who was believed to have founded the concept of franchising. However, research and studies show that franchising is an ancient concept dating back to the olden times. Franchising is a concept which has changed its meaning and definition over time. The term comes from the old French text meaning someone who has a specific privilege or right. In the Middle Ages, franchising was considered as being given the right to partake in certain activities. These could include fairs and transport services and later on even spread to the brewing and building industry. In some cases, people would collaborate for such activities and have their own businesses from which others would benefit. They would in turn try to form relationships with each other and try and eliminate competition from other vendors. This helped to shape the modern concept of what franchising is today. In the 1800s, franchising was popular in Europe and soon spread all over the world. In the United States, chain operations would later form the base of their style of franchising. Since franchising was and still is predominantly a license, general stores and street vendors were considered as franchises. Albert Singer is the first famous franchiser who came into prominence in1851. In order to make franchising more organized, he made contracts defining his terms and conditions. Businesses, who wanted to partake in selling his products, would have to agree with them before being allowed to do so. After the Sewing machine business, franchises began to spread across all industries in the United States including fast food and oil companies.

Types of Franchises

Franchises are separated into different categories with regard to their operating methods. There are five main types of franchises. A business to business franchise is a relationship where the franchisee has no direct access to the customer. The services and products provided are done by the primary business and the franchisee is just a tool to improve market dominance. The franchisee may be responsible for the back office functions such as coordination, printing and manufacturing. The terms are laid down by the franchiser and the franchisee has to abide by these set standards. Negotiation, customer service and other functions are done by the franchiser. A management franchise is similar to a business to business franchise, the difference being that the franchisee is more involved with business planning and operative procedures. This franchise may be for direct products like a food van or indirect services such as learning and development. The management franchise may train workers for the outside world and does not deal with the customer directly. Although some customer interaction is involved, it is not much. Many management franchises deal with the business aspect of a product. The franchisee may be responsible for sales of the product or provision of the services. Such franchises are generally spread over a large are or region. A retail franchise depends on the amount of customers and demand for a product. A good example of such a franchise is a flagship store of a popular brand. The customer is compelled to pay the price of the product through a retailer where he might get it for a cheaper price. More examples can be found in fast food, information technology and the hospitality sector. Most of the franchise investment goes into branding and patenting where logos are a major part of the marketing process. Investment franchises are similar to consulting firms where the franchisee will determine in which market the franchiser’s product will work. They generally assume the role of management consultants. The last type of franchise is the single operator franchise, in which the franchiser and franchisee work side by side in order to provide a service. The franchiser provides the brand name and the franchisee carries out the execution from start to finish under the guidance of the franchiser.

The Advantages of Franchising

The main goal of any organization is market dominance. It wants to be recognized in its field and cut out as much competition as possible. Franchises help do that and therefore enter into franchise agreements. A franchise agreement is an economical alternative to hiring new employees and consulting firms. The employees require a monthly salary and benefits along with it. The franchisee pays a lump sum to the main organization and once the franchise is successful, it continues to pay fees for the duration of the agreement. In return training and learning costs are cut. Most franchise agreements require the franchisee to pay and be paid a monthly income to ensure smooth functioning. Another advantage of franchising is that the daily operations of the business are made easier. The franchisee helps in operative functions. Since the franchise is not an official part of the organization, it does not require detailed training as would be needed for regular employees. No cost is incurred in sales and marketing on the franchise since it is dependent on the parent organization for the same. Along with a saving in cost, the franchise has a better market penetration potential because of its rapport with the customers. Franchisees strive to build a good reputation in the market by trying to exceed their expectations. Discounts and sales offered by the franchise will encourage the consumer to buy products from a particular brand. A large customer base also fosters increased performance on the part of the employee. More advantages of franchising include less recruitment hassles. A franchisee that comes on board has the right to terminate the franchise agreement. However one must also note that if this be the case, the franchisee will lose all his investments and profits to the parent organization. If the franchise and the organization work hand in hand for the agreed period, then international potential and overseas opportunities also open up.

The Disadvantages Of Franchising

Any business process has pros and cons, and it is the same with franchising. The cut in costs, reduction in recruitment hassles, organizational efficiency and market dominance and profits all come at a price. There are certain obstacles which come in the way of franchising. The cost of forming a franchise may be low but the return on investment equally so. One must not have unrealistic expectations about the franchise being able to generate profits as soon as it is established. Forming a franchise demands patience. It may also require the parent organization to carefully monitor the market to decide which investment will benefit both the franchise and the parent organization. It is imperative to look at whether the franchise will be an asset or a liability in terms of cost. The organization should be resigned to losing some amount of control over the franchisee. Although there are guidelines according to which franchisees must work, they also have a certain amount of independence. The parent organization does not have the right to lay off franchisee employees. It must also be careful to ensure that the franchisee does not take away business. Sharing clients is not customary in the business world and it holds true for franchise agreements as well. It is up to the organization to determine which franchise will work for them. This is a process which can take years to execute. One must be sure that the franchisee will not cut into the customer base and use unethical means of business development. Many employees in a franchisee have no growth potential and the organizations are generally overstaffed to accommodate the consumer’s needs. Many employees remain at the same position for a number of years before being promoted or demoted. This leads to unsatisfied employees who may demand salary hikes and even threaten to quit the organization. Conflict management within a franchise is another major disadvantage. Should there be any disagreement between the franchiser and franchisee, it could lead to a legal battle which can result in either organization going bankrupt.

International Franchising

Most businesses follow the Darwinian philosophy. This simply means that the organization with least competitors and maximum market dominance is probably the strongest in its field. The United States has the maximum amount of franchises worldwide. Many franchise agreements happen as a matter of chance. Unless a company has some prominence, it would be difficult to get a franchise. A company needs to employ all marketing strategies possible to acquire a franchise. For this, many factors such as political, cultural, socioeconomic, technological and environmental factors need to be considered. Some countries outside the US having franchise laws are Australia, Mexico, France, Japan and Indonesia. Trade shows and Franchise shows are popular methods of finding good franchise opportunities. One of the most difficult methods of trying to tie up with a franchise is to do it by oneself. It requires knowledge of the market, the competitors, and all the finer points of franchising. Without help it could lead to an inferior quality of franchising or failure altogether. The International Franchise Association helps organizations to search for franchisees relevant to their business. It analyzes the franchisees carefully and then suggest whether a franchise agreement will help them in the long run at all. A popular method of franchising is through a broker. Many brokers work on commission and take a fee in order to help with the market research process.

Mergers and Takeovers

Mergers and takeovers are often confused with one another. However they are two diametrically different processes executed in a similar fashion. When two prominent companies combine their operations, the shareholder value increases and the company becomes much stronger in terms of market share. Many companies state reasons like cooperation, market share, greater profits and market segmentation as reasons for mergers. However there are always ulterior motives for going into mergers. These may not be directly disclosed to the public. Most times, it is due to financial crunches and reasons or a change into the tax system which causes companies to acquire one another or merge together. The new company has significantly different processes and operations. To understand how mergers work, one must first know the definition of it and the difference between a merger and a takeover. A merger is seen as a joint decision between two people or companies at the same level in a bid to combine their business affairs. Not only is it profitable for the company, but also the shareholder. In economical terms, the value of the two companies merged together is more than the revenue generated by each company alone. A merger benefits both companies in some way or another. For example When Chrysler and Dalmier merged, Chrysler gained a greater market share in Europe and Dalmier Benz a better share in North America. A takeover is similar to a franchise where a company may completely buy out a smaller company to gain a better market share. The decision may not be mutual and it is the parent company which benefits more in terms of profit. The operations are considerably tweaked and the company which has been bought out is compelled to stick by the prescribed guidelines.

Conclusion

Franchising is not an easy process to go through. There are legal considerations and repercussions which need to be examined before going into a franchise agreement, merger or a buyout. It is up to the company to decide whether the franchise will be profitable in the long run and whether it is prepared to make the investment and wait for the profit from the agreement. Franchises are advantageous to the company in terms of low costs, less recruitment, no marketing strategy and workforce. However on the flipside, it can mean conflict and a long wait to make profits. A merger and a franchise are very different from one another. A franchise is an agreement but the two companies remain separate and the franchisee simply works under guidelines set by the franchiser. The franchisee depends on the parent company for marketing strategies and the logo and brand design. However in a merger, the two companies collaborate with one another and devise new strategies to increase their market share, shareholder value and profits. In a merger, the two companies are at an equal position. It is a bid improve market dominance. A buyout is a market strategy employed when a company completely takes over a weaker company and sets guidelines according to which it must work. In the case of a franchise, it still has some amount of freedom whereas a bought out company has none whatsoever. With the onset of new regulations and new employees, it is important to train them properly for their job profiles which are not required in a franchised company.

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