- Jan 14, 2005
- What Is Franchising?
- A Very Brief History of Franchising
- Local Production in Limited Geographic Markets
- Physical Locations Are Helpful
- Industries Involving Local Knowledge
- Industries Demanding Local Discretion
- Standardized, Codified, and Easily Learned
- Brand Names: An Important Competitive Advantage
- Labor-Intensive Industries
- Cost and Risk
- Measuring Performance
Standardized, Codified, and Easily Learned
Although franchising works better in industries in which local discretion in the process of selling to customers is more important, that does not mean it works well in industries in which products or services need to be customized. Rather, franchising works best in industries with standardized products and services. Standardization makes it easier to determine the right policies and procedures for monitoring the actions of independent businesspeople (the franchisees), who are serving customers under the system's brand name and using its operating procedures. By standardizing operations, it is easy to set down in a contract exactly what the franchisee is expected to do. If he or she deviates from this standardized approach, the franchisor can terminate the franchisee's right to operate the outlet and sell it to someone who will follow the rules. Without standardized operations, it is hard to know whether the deviation of the franchisee is inappropriate; this makes it difficult to write contracts specifying franchisee actions and even harder to enforce those contracts after they are written.
This preference for franchising in industries in which products or services are standardized is why we tend to see franchising in services such as tax preparation but not in medical care. The process for filling out tax forms can be standardized, facilitating contracting and monitoring. The process for doing heart surgery cannot be standardized, and the failure to customize when necessary can have very severe adverse results. As a result, contracting how to do heart surgery is difficult, and monitoring the behavior of heart surgeons is too difficult to make franchising of much value.
Franchising also works better in industries in which the operation of the business can be codified. Codification is the process of writing something down. Codifying a business operation means writing down the routines and procedures underlying the operation, from the ordering of supplies to the serving of customers, to the repairing of machinery. For example, Krispy Kreme gives its franchisees specific donut recipes, as well as procedures for how and when to make the donuts. Franchising is more effective in industries in which the routines and procedures can be codified because the mode of business depends on the ability to write contracts to govern the actions and obligations of franchisors and franchisees. To control your franchisees' behavior and ensure that your standards are being upheld, you need to write down those standards in the contract you sign with them. Moreover, when you franchise, one of the things that you lease to your franchisees is an operating manual, or written set of procedures for running the business.
Franchising also requires an industry in which an average person can learn the operation of the business with only the training that you, the franchisor, provide in a few days or weeks. For instance, Subway Restaurants, the world's largest franchisor, provides only two weeks of training to its franchisees before sending them off to run their own businesses. The need for short training periods is one thing that makes franchising more effective in industries such as fast food and tutoring than in industries that require detailed knowledge or long-term training, such as dentistry or higher education.
Moreover, to have a big enough pool of potential franchisees to sell franchises to, you need a business that you can train the majority of the population to run, not just a small group of people with specialized skills. For example, franchising tends to work most effectively in industries in which a general high school education is all that people need to work in the industry, as is the case with ice cream shops. Industries that require a great deal of training and skill development, such as plumbing and electrical contracting, are less amenable to franchising. Because of the time it takes to learn to be a plumber or an electrician, and the relatively small number of people with the skills to perform these trades, these industries are the not the best ones for franchising.