Franchising is a contractual form of a strategic alliance. Franchising is a strategic alliance in which a franchisor licenses its company trademarks and methods of doing business in return for a recurring royalty fee to the company. More simply, the franchisor sells the rights to use its business name and to sell its product or service to a franchisee. Both of these parties then enter a franchise agreement that outlines the terms of the franchising relationship (Nickels, McHugh, & McHugh, 2004).
There are several advantages and disadvantages to franchising. It offers franchisees the opportunity to start a new business with less of a capital expenditure than traditional businesses. Starting a franchise business is often more successful than starting a new business from scratch because the brand is already build and has proven itself to be competitive in its industry. In addition, franchisees are purchasing a proven method of doing business. Advantages to franchisors include the ability to build a distribution network at little cost and the ability to rapidly expand throughout many countries or continents. One of the major disadvantages of this strategic alliance for franchisees is the loss of control over the business. The franchisee must follow certain guidelines and systems, with any changes having to be made by the franchisor in advance. This type of alliance also often leads to litigation due to incompetence on either party. An incompetent franchisee can damage the reputation of the franchisor by providing goods and services that are damaged or are inferior to those provided by competitors (Nickels, McHugh, & McHugh, 2004).
One of the most famous examples of this type of strategic alliance is McDonald's. For an application fee and recurring royalties, franchisees are able to purchase the rights to the McDonald's name as well as the proven business model for running a successful McDonald's restaurant. Along with this model comes training, operating manuals, and other support from corporate headquarters. This strategic alliance allows McDonald's to maintain its competitive strategy and strategic activities while growing and expanding.
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One major advantage of this strategic alliance with its franchisees is the ability for McDonald's to create a distribution network with relatively little cost. While McDonald's must provide operations manuals, training programs, and other support to franchisees, many of these items cost relatively little to reproduce. The application fees and recurring royalties generated from each franchise location make these costs more than reasonable when compared with their benefits. Another major advantage of the franchising system is the ability of McDonald's to create brand awareness and availability in other countries and continents. For example, McDonald's is now considering expanding to China and other Asian countries. McDonald's is also very popular in European countries such as Germany and Spain. Without franchisees to operate these businesses and turn royalties over to the McDonald's Corporation, it would have been much more expensive and difficult for McDonald's to expand internationally (Nickels, McHugh, ; McHugh, 2004).
Brand awareness and marketing are also more easily accomplished with the franchising form of a strategic alliance. Throughout the world, most people see the Golden Arches of a McDonald's restaurant and immediately associate that image with the McDonald's brand. Responding to market trends is also better accomplished with the franchising system. Due to new legislation about trans fats, as well as an epidemic of obesity throughout America, McDonald's now needs to adjust its strategic activities and competitive strategy to reflect awareness and concern for these trends. By using the franchising system, McDonald's is better able to make healthier choices and more health information available to consumers at a lower cost than if the franchising system were not in place (Nickels, McHugh, ; McHugh, 2004).
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