Entrepreneurs should make informed decisions before selecting the most appropriate entry strategy when they plan to invest in a given industry or sector. Since there are several options to choose from, companies need to identify the best model that has the potential to maximise profits and succeed without incurring numerous costs. The franchise business model is advantageous over a new independent enterprise since it requires a short period to launch, benefits from an established investment and can deliver positive results due to the presence of an existing brand name. This critical analysis paper analyses the franchise business model against the establishment of an independent enterprise.
A Brief Background
Companies and firms follow the principles and attributes of entrepreneurship to achieve their business aims. Individuals who want to invest and increase their income levels should examine the opportunities, challenges, obstacles and resources that can impact performance. The identified business type can either deliver the intended objectives or disorient the level of profitability. Baena and Cerviño (2015) identify franchise as one of the best choices whereby an upcoming investor considers the importance of acquiring a license from an established or existing business to provide services or goods under its model and name. The person who pursues this strategy will become the franchisee while the established corporation will be the franchisor (Oleksandr et al., 2017). Those who decide to follow this business type will have to consider the regulations, guidelines and expectations of the targeted organisation.
On the other hand, some individuals will decide to acquire adequate financial resources and assets to start a new independent business or enterprise that never existed before. This model remains practical for small-sized entities since they make it possible for investors to make their own decisions with external influence or requirements. Although this approach remains common, it presents both disadvantages and benefits that investors need to take into consideration (Oleksandr et al., 2017). For instance, the owner makes the decisions regarding branding, business model and messages available to the customers. However, the time taken to break even increases depending on the entrepreneur’s agility and strategy.
Franchise vs. New Independent Enterprise
The franchise business model has remained common since it has the potential to meet the demands of both the entrepreneur and the existing company. These gains explain why many business organisations are currently allowing emerging firms or investors to utilise their established models. This mutual benefit has made it easier for many start-ups to record positive gains within the same period (Baena and Cerviño, 2015). When compared to independent enterprises, this model appears more beneficial since the latter requires additional marketing strategies and establishment of a superior brand name before the owner can start to make profits. When individuals consider these two approaches, chances are high that they will settle for the franchise model.
Many people would expect their business ventures to become sustainable within the shortest time possible without the need to increase operational costs or expenses. The franchise model appears to perform excellently in this area since the owner will capitalise on an existing shop design and brand name to take his or her business to the next level. The advertisement programs and branding initiatives the identified parent company undertakes ensures that additional sales are recorded immediately. A new venture will lack such benefits due to the absence of an existing brand. Instead, businesspeople who pursue direct investment enterprises should launch their advertising campaigns depending on the nature of the product and the expectations of the identified customers.
The chances of success for each of the two options tend to vary significantly due to a number of aspects. First, a franchisee will succeed much faster due to the presence of existing partners or franchisees who can share business strategies and secrets to improve performance. The people behind an independent venture need to brainstorm and monitor the most appropriate procedures for delivering the intended results (Oleksandr et al., 2017). Second, franchisees receive additional support from the existing websites and social media FunPages. For a new venture, new advertising processes and the consideration of online presence might affect the time taken to deliver the intended profits or sales.
The presence of a security fund is an outstanding benefit that remains available to many franchisees in different parts of the world. Some organisations consider the idea to ensure that struggling startups are able to attract more customers and meet their demands (Oleksandr et al., 2017). A positive growth means that the original company will maximise its profits and become more successful. A synergistic approach becomes a reality that favors both the franchisor and the franchisee. A new business will not have a model to follow or security fund to utilise when negative outcomes are recorded. Those who take this issue seriously will eventually invest wisely and record increased profits.
Any entrepreneur planning to start a new venture needs to consider the best model that is guided by the existing situations in the market. Individuals who decide to start a wholly-owned business will have to look for a physical location, write a detailed business plan, consider a contingency plan and acquire adequate resources to open it successfully. The entire process might be time consuming since every activity will require more time and support systems (Oleksandr et al., 2017). An investor who selects the franchisee model will complete most of such duties in no time. This achievement is attributable to the presence of a superior or established strategy that has worked effectively before. The parent company will provide additional inputs that will reduce the required implementation period. This unique benefit explains why many people consider the importance of this approach for launching a new business venture.
The unique advantages associated with franchising explain why it has become a favorable approach for many people who intend to achieve greater entrepreneurial goals. For instance, Kristandy and Aldianto (2015) believe that “a franchise business is perceived as an appropriate stepping stone for building sustainable business environment” (p. 318). The strategy is capable of reducing some of uncertainties and limitations that many independent ventures encounter, such as the unfamiliarity of the brand, lack of existing customer base and the complexity of launching marketing procedures successfully (Calderon-Monge, Pastor-Sanz and Huerta-Zavala, 2017). In the developing world, the franchisee model remains outstanding since it reduces the risks associated with the population’s income level, absence of a developed infrastructure and the existence of established business entities. A franchisee investment will overcome all these possible hurdles and ensure that meaningful sales or profits are recorded within the first year of investment.
Many investors expect their businesses to grow and continue to record additional benefits or gains. When a poor model is identified and pursues, the entrepreneur will take long before realising such gains. For the franchisee, the actions and initiatives of the parent company will influence performance directly (Kristandy and Aldianto, 2015). Emerging advertising strategies, research and development (R&D) activities and customer satisfaction practices will make it easier for the venture to achieve the outlined goals. These benefits are usually unavailable to any new independent start-up, thereby reducing the time taken to achieve positive results or outcomes.
With these discussions, it is appropriate to understand that a franchisee will have to provide some commission or royalties to the parent company for using its business model. While this might emerge as a striking disadvantage, enterprises should conduct a detailed analysis to compare these two approaches and make informed decisions. Such a strategy is critical since the ultimate aim of the investment is to maximise profits or gains (Calderon-Monge, Pastor-Sanz and Huerta-Zavala, 2017). An entrepreneur who will ignore such attributes might make a crucial mistake and select a model that does not resonate with the anticipated business goals or the nature of the existing environment. Individuals who consider such issues will formulate and develop the best strategy is capable of delivering positive results in a timely manner.
The above discussion has presented a critical analysis for the franchise business model against the establishment of a new enterprise. The franchise model stands out since it presents additional support systems and resources that can deliver the intended investment successfully. It also has the potential to level the playing ground, reduce obstacles and attract more customers. Entrepreneurs should, therefore, analyse the potential benefits and drawbacks of the above two outlined approaches and make informed choices since the ultimate goal is to have a sustainable business venture.
- Baena, V. and Cerviño, J. (2015) ‘New criteria to select foreign entry mode choice of global franchise chains into emerging markets’, Procedia – Social and Behavioral Sciences, 175(1), pp. 260-267. doi: 10.1016/j.sbspro.2015.01.1199
- Calderon-Monge, E., Pastor-Sanz, I. and Huerta-Zavala, P. (2017) ‘Economic sustainability in franchising: a model to predict franchisor success or failure’, Sustainability, 9(8), pp. 1419-1434. doi: 10.3390/su9081419
- Kristandy, S. and Aldianto, L. (2015) ‘Factors that influence student’s decision in starting-up service franchise business in Bandung’, Procedia – Social and Behavioral Sciences, 169(1), pp. 318-328. doi: 10.1016/j.sbspro.2015.01.316
- Oleksandr, P. et al. (2017) ‘Franchising model for expansion of the international travel business’, Problems and Perspectives in Management, 15(4), pp. 230-242. doi: 10.21511/ppm.15(4-1).2017.07