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Brand Names: An Important Competitive Advantage

Franchising is most effective in industries in which brand name development is important. This is the case in fragmented industries, such as restaurants. In fragmented industries, the development of a brand name is often an important competitive advantage to firms that lack other ways to differentiate themselves from their competition.

Franchising is valuable in industries in which brand names are important because it increases the scale of operations of a business very quickly—much more quickly, in fact, than through company ownership of outlets. Because building a brand name relies heavily on advertising, which is influenced by scale economies, franchising provides a mechanism for lowering the costs of building a company's brand name.

In addition, brand names provide a way for customers who have little information about providers in particular markets—such as tourists looking for a meal—to ensure quality. By providing a common brand umbrella for businesses operating in unfamiliar areas, you can ensure that your customers will know what they will experience before they pay for that experience. That, of course, makes them more willing to commit to purchasing your product or service. In short, franchising provides a much greater advantage to firms in industries in which brand names are an important competitive advantage. This leads franchising to be concentrated in these industries.

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