Reena opened a franchise of a well-known fast food chain. One of the main reasons she entered into this business was that it already had an accepted name. She did not have to spend resources trying to establish the credibility of the business as it already exists.
The franchisor also provided managerial assistance to her. She was offered training on all aspects of operating the franchise including accounting, personnel management, marketing and production.
The franchisor also offered her years of experience in business and knowledge of the market. However, she started facing challenges soon. The franchisor exerted a high degree of control which limited her ability to experiment with new ideas leaving her feeling over-guided or over-influenced. Moreover, apart from the original franchise fee, Reena has to share a percentage of her revenue as ongoing royalty. Additional costs were also charged for services like advertising and training. These expenses made the business model far more expensive than she had anticipated.
Identify and explain three advantages and two disadvantages of the franchise mode of expansion, as discussed above.
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To easily evaluate the franchise business model:
Pros: Instant brand equity, proven operating blueprints, and professional managerial support.
Cons: Lack of operational freedom, high initial fees, and ongoing royalty costs.
Step 1: Identifying the Business Model:
The text describes Reena's experience with a business franchise, a growth strategy where a franchisor grants an independent operator (the franchisee) the rights to use their established brand name and operating systems in exchange for fee payments. Step 2: Identifying and Explaining Three Advantages (Quoting from the Text):
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Accepted Brand Name and Established Credibility:
Quote: *“...it already had an accepted name. She did not have to spend resources trying to establish the credibility of the business...”*
Explanation: The franchisee benefits from an established, highly recognized brand. This eliminates the need to spend significant capital trying to build customer trust from scratch, ensuring steady sales from day one.
Managerial and Technical Assistance:
Quote: *“The franchisor also provided managerial assistance... offered training on all aspects of operating the franchise...”*
Explanation: The franchisor provides professional training on key operational tasks (such as inventory management and accounting) to ensure the local operator can run the business efficiently.
Market Knowledge and Business Experience:
Quote: *“The franchisor also offered her years of experience in business and knowledge of the market.”*
Explanation: The franchisee gains access to the franchisor's proven business practices and market research, helping them avoid the mistakes typically made by new startups.
Step 3: Identifying and Explaining Two Disadvantages (Quoting from the Text):
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High Degree of Operational Control:
Quote: *“The franchisor exerted a high degree of control which limited her ability to experiment... leaving her feeling over-guided...”*
Explanation: Franchisees must strictly adhere to the franchisor's operational guidelines, which limits their creative freedom and prevents them from adapting to unique local market conditions.
High Operational Expenses and Ongoing Royalties:
Quote: *“...apart from the original franchise fee, Reena has to share a percentage of her revenue as ongoing royalty. Additional costs were also charged...”*
Explanation: Operating a franchise requires paying ongoing royalties (calculated as a percentage of gross sales) and additional service fees for marketing and training, which can significantly reduce profitability.
