 Franchising
Best Practices
Franchise
Entrepreneurs
The World is their Oyster
By
Dianne H.B. Welsh
Published: August 2007
Thomas Friedman, the
award-winning New York Times columnist, in his best
selling book, The World is Flat, explains how the
flattening of the world happened at the dawn of the 21st
century; and what it means to countries, businesses,
communities, and individuals; and how governments and
societies can, and must, adapt. In a word, the book is
about globalization and how it affects the daily life of
every person in this room.
However, globalization is not new, as we well know. In
1964 when my father created soft-sided luggage that
revolutionized the luggage industry, his main concern
was how to produce his luggage in Iowa Falls, Iowa and
be competitive with the manufacturers that would soon
spring up in Korea and Taiwan. That was 42 years ago. By
today’s market indicators, my Dad had good reason for
concern. Industrial production expanded 10.9% in South
Korea, 6.1% in Thailand, and 2.3% in Chile in the first
half of 2006 (The Economist, August 3, 2006). Meanwhile,
Europe’s economies are improving: Germany’s industrial
production surged 7.6%, Sweden’s output increased by
6.8%, and France’s production is 2.6% higher in February
2007 than it was in the same period in 2006 (The
Economist, April 12, 2007).
Franchising is a business model that has benefited from
globalization (and Thomas Friedman would agree that it
has contributed to the world that we live in being
flatter). It has been one of the fastest growing methods
of doing business in the U.S. and abroad for the last
half century. And franchising continues to expand its
reach around the world. Approximately one out of every
12 businesses internationally is franchised. Although
statistics vary, it is estimated that about 35 percent
of all retail sales are in franchising, amounting to
over a trillion US dollars annually. Indeed, the future
of franchising is international, as the US market is
highly saturated. Canada and parts of Western Europe are
also saturated. Sixty percent of US franchisors
currently have at least one outlet outside the United
States. Because of these opportunities in international
franchising, Ilan Alon and I edited the first
comprehensive volumes on international franchising to be
published. We devoted two volumes to emerging markets,
what we considered the future of franchising, and two
volumes to industrialized markets.
The most opportunities for franchising are in emerging
markets. According to Czinkota and Ronkainen (1997),
only 15 percent of the world’s population resides in
developed market economy countries. Emerging markets
contain 80 percent of the world’s population, 60 percent
of the world’s natural resources, and the most dynamic
potential for long-term growth to businesses and
franchisors.
What is an emerging market? There are three
characteristics associated with an emerging economy:
economic growth, market governance, and the level of
economic development. The level of economic growth is
among the most important considerations for
international franchising expansion.
Market governance influences a wide range of country
risk elements such as: government regulation and red
tape, political stability, kick-backs, ownership
restrictions, controls of capital flows, and import
restrictions. All of these factors are important to
international franchisors’ evaluations of foreign market
potential. Characteristics of emerging markets include a
low GNP per capita, but a high potential for growth,
unequal distribution of income, but a growing middle
class, technological and regional dualism with pockets
of development along urban centers, agricultural (less
developed) and industrial (developing) economies, and
high population concentrations and growth.
Challenges include lack of managerial and
entrepreneurial talent, lack of capital for
international franchising expansion, political
instability and risk, regulatory uncertainty, and
corruption, underdeveloped infrastructure, and lack of
transportation and communication networks.
Highlighting the opportunities for franchising in one
developing economy, China, (Langsha, 2005) reported that
there are presently 1,900 franchise systems in the
country, providing employment for 2 million Chinese
workers. Opportunities in China are expected to expand
dramatically, as the government recently cancelled
restrictive prescriptions for foreign-funded franchises.
What triggers a franchisor to expand internationally?
External factors, such as inquiries from prospective
franchisees, are the reason most often cited, then
opportunities for growth overseas. More recently, a
closer examination that differentiated between market
maturation and opportunity recognition found no support
for the view that North American franchisors expanded
into overseas markets because of domestic market
maturation. I just served as guest editor for a special
issue on International Franchising in the International
Journal of Entrepreneurship and Innovation Management
that will appear in a few months. In that issue, a study
by John Clarkin found that the presence of area
developers and master franchisees in a franchise firm is
likely to influence monitoring and marketing
capabilities. Previous studies have shown that the
presence of master franchisees has been associated with
higher system growth rates. In franchising, size and
experience matter.
Franchising is a less expensive, less risky form of
doing business than developing a start up company. The
franchisor, or founder, of the unique business format
system fits clearly into the definitions of
entrepreneurship found in the literature as reviewed by
Low and MacMillan (1988). That is, the creation of new
ventures, carrying out new combinations, and being
driven by the perception of opportunity. Franchising
encompasses entrepreneurial characteristics such as the
introduction of new products and services, innovative
marketing, openness to change, outrunning the
competition, and fast growth.
What about franchisees, those that operate the locations
that we frequent? While franchisees differ from the
traditional entrepreneurs in that they are buying a
license from an organization that has a market tested
concept and a structured set of operating procedures,
usually decreasing their risk substantially relative to
a traditional start-up business, they are still business
owners, which classify them as a particular type of
entrepreneur. Entrepreneurship entails being innovative,
proactive, and willing to take risks. Despite the
control of the franchisor, a franchisee still must
commit to a certain amount of risk taking and
proactiveness in running his business successfully.
Furthering international research has long been a goal
of many international academic organizations and
journals. In fact, in the June 2005 issue of the Academy
of Management Journal, the editors examine international
management articles that have been published from 1970
to 2004 to find out if they truly have increased the
international scope of the journal. They concluded that,
while there has been a dramatic increase in
international management research in their journal,
especially in the first half-decade of the 21st century,
there is still more that needs to be done. (In the area
of entrepreneurship, a study by Ireland, Reutzel, and
Webb in the August 2005 issue found that 50 articles had
been published between 1963 to the present, and the
number of authors per published entrepreneurship paper
is increasing, due to collaboration among scholars from
multiple countries that have been formed to examine
international entrepreneurship research questions.
In my opinion, there are many overlooked opportunities.
International entrepreneurship will continue to be one
of the cornerstones of business development in the Tampa
Bay area and around the globe.
DIANNE H.B. WELSH is the
James W. Walter Distinguished Chair of Entrepreneurship,
Professor of Management, and Director of the Florida
Entrepreneur & Family Business Center at the Sykes
College of Business at the University of Tampa. A
recognized scholar in international entrepreneurship and
franchising, she is co-editor of the first comprehensive
volumes on global franchising in emerging and
industrialized markets. Dianne is the author of over 100
published manuscripts that have appeared in the Academy
of Management Journal, Journal of International Business
Studies, Entrepreneurship Theory & Practice, Journal of
Business Venturing, Journal of Small Business
Management, and others.
Published August 2007,
Volume 1, Number 5,
Bay
Area Business Magazine
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