Market Conditions Favoring Master International Franchising
Market Conditions Favoring Master International Franchising
The options available to international franchisors when seeking where to transfer their business operations to are many. These arrangements, both direct and indirect as well as the equity and non-equity exist in plenty. International franchising has been defined as mode of entering a foreign market which involves a kind of relationship between the franchisor who is the entrant and the host country ass the entity in which the franchisor transfers a format or the business package that it owns or developed under a contract to the entity (Jentz, 2007, pp 33-45).
The host country in this case can be a franchisee, or act as a sub-franchisor such that it can transfer the format to another country again. It could also be one of the entities that franchisor has made equity investment in. Five modes of entry into a foreign market by franchisors have been identified. Master franchising, whose popularity is so high and which continues to grow is one of the modes of entry that has been identified particularly for franchisors that deal with services.
Research has confirmed master franchising to be one of the modes of entry to markets that was most prevalent. According to the research survey, most service franchisors (quick service and restaurant franchisors) sought only master franchisees in their international operations (Jentz, 2007, pp 13-45). Master international franchising can be described as a mode of entry which in spite of being unique is shares some of the characteristics of other modes of international entry such as exporting for production firms.
Master international franchising is advantageous in that it a mode of entry into a foreign market that has the lowest risk in terms of finances and very limited control hence low commitment for companies that offer services. It has bee suggested that researchers need to adopt and apply the theories of entry modes used by manufacturers to the service sector. The difference in the entry modes used by manufacturers and those ones chosen by service providers is that in the service sector consumption and production are inseparable while in manufacturing they are different.
The inseparability of the two processes in most service businesses makes it difficult for services to be exported in the literal/traditional sense (Jentz, 2007, pp 55-65). Franchising is associated with services that are considered to be ‘soft’ such as hotels, restaurants and retailing which require continuous production and consumption. Master international franchising for such services can therefore be considered as a mode of entry that is equivalent to exporting.
The uniqueness of master international franchising is because of the parties involved in the chain of operation (Jentz, 2007, pp 55-99). Unlike exporting, it involves the master and the sub-franchisees who are the managing agents transferring valuable assets though intangible that include the brand and the business format of the franchisor who is the owner to the agents, therefore making the master posses the skills and powers of a franchisor (Jentz, 2007, pp 55-99).
Master international franchising can therefore be summarized as a an agreement that is contractual between the franchisor and sub-franchisor that is independently owned to develop a specific number of franchisees in a certain country in exchange for the exclusive right to use the business brand or format for a specified period of time. Because of the contractual nature of the agreement, master international franchising requires very little investment on the part of the franchisor as most of the domestic duties are externalized and delegated to the agent referred to as the ‘master’ operating in the target market.
Because of the mentioned advantages, master international franchising has become very popular. The growth in popularity of master international franchising as a mode of entry to a foreign market is however not just because of these advantages but also due to some market conditions that favour it. The environmental factors that impact master international franchising can be divided into economic, political or legal and social dimensions. According to literature, the economic environment of the target market has a very great impact on the franchisor’s mode of entry.
Economic environment is argued to have three variables that influence mode of entry. These variables include market size, demand variability and the intensity of competition. Market size is argued to be the ultimate determinant of market entry. If market for a particular service or product does not exist in a country, a franchisor can not consider targeting such a country for market expansion (Jentz, 2007, pp 55-99). Evaluation of a country for potential market is however industry specific.
While most restaurant services such as McDonald’s screen for hard currency and social classes where they prefer countries that have most citizens in the middle class bracket, hotel services use the ratio of GDP to that one of foreign direct investment to select potential markets. Franchisors have been urged to evaluate economic environmental factors such as GDP growth and per capita, urbanization level, middle class extent, population growth and participation of women in labour when assessing the economic potential of a country being targeted as a host.
Countries that have high economic potential favour internalization due to their improved environmental attractiveness. The greater the economic market potential of a country, the more likely a franchisor will prefer to internalise their operations hence will not less likely use a master international franchising for market expansion (Jentz, 2007, pp 55-99). The nature of competition affects the mode of entry the franchisor chooses to enter a market into a foreign market. Markets that are highly competitive for example pose as barriers to entry.
Competitive markets imply that the franchisor will use a lot of resources to maintain a competitive advantage over their rivals. In order to avoid such costs that can be viewed as unnecessary, a franchisor will most likely use master international franchising to expand in a market that is characterized by great competitive intensity (Jentz, 2007, pp 67-99). Variability in demand on the other hand makes a country less attractive and consequently makes the franchisor opt fore a method that is characterized by less risks and limited control. A franchisor can never risk investing in a market whose demand is uncertain.
Most emerging markets have high demands for services they are not familiar with especially in the technology sector. A franchisor is therefore more likely to use master international franchising in a country that is characterized great demand variability for expansion. A nation’s acceptance of franchising model is cited as an important prerequisite for franchising. Acceptance as a factor is cited as important factor in ensuring the level of investor’s confidence on this mode of business which greatly affect the potential that it has for generating value (Jentz, 2007, pp 55-103).
The level of development or the stage of development that a country is in is also cited as being important in determining the perception that is developed of franchising. Underdeveloped or developing nations are cited as having a poor perception of franchising compared to developed nations. Generally nations where franchising has been developed for considerable time periods display high levels of acceptance which leads to a condition that is suitable for development of franchising as an approach to value generation (Jentz, 2007, pp 55-103).
Other factors that are oriented in this social realm include cultural difference between home and hosts market and the level of masculinity and individualism that is displayed by a nation. Country risk as a factor is greatly influential on the likelihood of one franchising in any given nation. High levels of risk in a nation that one seeks require expertise and mastery in franchising to be able to generate value. This is a legal or political variable that greatly affect the suitability of a nation for franchising.
Nations whose political environment is supportive of corruption present an environment where franchisors are less likely to use their skills (Jentz, 2007, pp 55-103). Another factor pointed as being influential on franchising is the level of corruption and government commitment to addressing this vice. From the literature, master international franchising is argued to be one of the fastest growing strategies used by international franchisors to expand in foreign countries.
This method has proved to be attractive to the international franchisors because of the fact that the financial risks involved are minimal and that it is a faster way to get to the market. The conditions that favour master franchising have been studied and it has been proposed that they include low levels of corruption within the economy of the country are low, and when the intensity in competition, variability in demand, societal masculinity and individualism, franchise knowledge, geographical distance, level of legal protection, the country’s risk and cultural distance of the country are high.
University/College: University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Date: 30 September 2016
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