1. Market Entry through Franchising Networks
Franchising introduction
The different commercial vehicles available
Factors that influence the choices of a franchisor
CASE: Franchising in Slovenia

2. Franchising introduction
Franchising more common when expanding international
What is Franchising?
A kind of licensing which means that a company gives another company the right to use their brand name, their full line of products etc.

3. Franchising introduction
Some factors to consider when franchising internationally
Experienced management personnel
Sufficient financial resources
Differences between countries
Some reasons for failure when franchising internationally
Choice of inappropriate commercial vehicle
Lack of adequate game plan
Choice of wrong person

4. The different commercial vehicles available
Direct Franchising
Master Franchising
Joint venture

5. Direct Franchising Directly into the foreign country
The establishing of a foreign subsidiary or branch office
Entering into a development agreement

6. Directly into the foreign country
The franchisor grants a franchise for an individual franchise outlet directly from his country in the same way as he would grant a franchise in his own country, even though the franchisee and the outlet are situated in a foreign country.
Situations where this form is most appropriate:
When opening up a minimum number of franchise outlets
When two countries are geographically close to each other
For tax reasons

7. Directly into the foreign country
Advantages
Control of his franchise system
The most profitable method
Full use of in-house personnel
Disadvantages
Difficult to provide service and training
Termination of a franchise agreement
Difficult to control due to lack of supervision

8. The establishing of a foreign subsidiary or branch office
The franchisor establishes a branch office or subsidiary in the foreign country, and the subsidiary acts as the franchisor for the purpose of granting franchises in the foreign country, much as the franchisor would do in his own country. Here, the franchisor’s foreign subsidiary or branch office enters into a unit franchise agreement directly with the franchise to establish a franchise outlet in the foreign country.
Situations where this form is most appropriate:
Generally, in the same situations where the franchisor would choose to franchise directly
Where the franchisor has the financial resources and availability of management personnel

9. The establishing of a foreign subsidiary or branch office
Advantages
Termination of the franchisee agreement
Greater use of foreign personnel
Indicates the seriousness of the franchisor’s intention
Disadvantages
Costs
Risks
The senior management unfamiliar with the laws, etc.

10. Entering into a development agreement
The franchisor enters into a development agreement directly with a developer, who is usually a foreign national. Under the terms of such an agreement, the developer agrees to himself develop and own all of the franchise outlets in the foreign country. Again, the franchisor himself or a subsidiary of the franchisor enters into a unit franchise agreement directly with the developer/franchisee for each franchise outlet to be established in the foreign country.
Situations where this form is most appropriate:
Depends on the number of development agreements that the franchisor intends to enter into in order to saturate the foreign country.
Where the franchisor wishes to limit the number of franchisees in the foreign country

11. Entering into a development agreement
Advantages
More sophisticated franchisees
More cost-effective
Development fee
Disadvantages
Failure of a developer/franchisee could be catastrophic
It may result in slower growth
Difficult for the franchisor to find a suitable developer

12. Master Franchise Agreement
The franchisor enters into a master franchise agreement directly with a sub-franchisor, usually a foreign national, pursuant to which the sub-franchisor himself develops and owns franchise outlets in addition to sub-franchising outlets to sub-franchisees in the foreign country. Thus, the entering into a master franchise agreement involves sub-franchising directly from the sub-franchisor who enters into a unit franchise agreement with a sub-franchisee for each franchise outlet to be established in the foreign country.
Situations where this form is most appropriate:
When the franchisor does not have the financial resources to directly franchise
Differences in cultures

13. Master Franchise Agreement
Advantages
Minimizes the financial resources
Financial risk lower
It involves a sub-franchisor who is familiar with the laws etc.
Disadvantages
Control
If the sub-franchisor fails
Less profitable

14. Joint Venture Situations where this form is most appropriate:
The franchisor enters into a joint venture agreement with a joint venture partner, who is usually a national of the foreign country, pursuant to which the parties agree to establish what usually is a joint venture company but which may sometimes be a form of partnership or trust in the foreign country. The Joint Venture Company, partnership or trust then enters either a development agreement or a master franchise agreement with the franchisor.
Situations where this form is most appropriate:
When the franchisor wants to retain some equity in the franchised business.
When the franchisor needs the expertise and resources of the joint venture partner

15. Joint Venture Advantages Disadvantages Risks
More control compared to the master franchising agreement.
If there are differences in cultures
Disadvantages
There might be difficulty in agreeing on buy/selling provisions
Difficulties in finding the right joint venture partner

16. Factors that influence the choices of a franchisor
Four different theories might affect the choice of foreign establishment.
Internationalization Theory
Marketing Theory
Transaction Cost Theory
Capitalization Theory

17. Internationalization Theory
A company is most likely to enter a country with a simular culture
As the company gains experience, they increase their investments in the country

18. Internationalization Theory
The study showed:
That US companies prefered to first enter culturally simular countries
That they do not increase equity investment as they gain experience

19. Marketing Theory
A company prefer to establish a wholesaler instread of having contact with many retailers in countries with a great physical distance
A company prefer to sign a contract with a franchisee instead of opening an own affiliate in a country with great physical distance

20. Marketing Theory The study showed:
That US companies prefer to establish a wholesaler in a country with a great physical distance
That there is now correlation with physical distance and the chosen distribution method

21. Transaction cost theory
Companies prefer contracts when cultural distance is great
Companies prefer contract when the environmental uncertainty (currency- and political risk) is great

22. Transaction cost theory
The study showed:
that US franchisor use contract more frequently in areas with a great culturally distance.

23. Capitalization theory
A franchisees ability to acquire capital affects the franchisors choice whether to sign a contract or to make an equity investment
There are risks both for the franchisor as well as for the franchisee

24. Capitalization theory
The study showed:
that franchisor would more frequently sign contracts in rich capital countries, while making equity investments in poor countries

25. CASE: Franchising in Slovenia
1998: restaurants all over the world
60% were franchised
1991: McDonalds began to show interest for Slovenia
First restaurant in Ljubljana

26. Where and how to open a new restaurant
Investigate the surrounding
Company owned or franchised?
Franchised restaurants are more profitable
Family business
Contract for 20 years

27. The process to find a suitably franchisee
Few manage the selection process
Loyal and devoted to the work
Selectionphase last 3 months
Interview and evaluation
Starts as a crewmember, end as a manager

28. How to managing a McDonalds restaurant as a franchisee
Advise from the corporation
Advertise local (1%) and donate to common marketing (4%)
Cannot participate in another food business
Allowed to resign

29. The franchise situation in Slovenia during the 90s
1991: socialist regim fell
Democracy, liberalization and integration
1995: smaller companies
Franchising not well known
Afraid of losing control
No laws on franchising

30. The situation in eastern Europe
Yugoslavia 1988
Poland 1992
Romania 1995
Croatia 1996
Czech Republic 1992
Hungry ?

31. Slovenia today
17 McDonalds
600 Employees
60% Franchised

32. The Franchise situation in Slovenia today

33. McDonalds Worlwide 70% Franchisees 30 000 McDonalds restaurants
46 million customers in more than 100 countries
Plan to open 850 traditional restaurants in 2003

34. McDonalds Case questions
What constitutes McDonald’s advantages when opening a franchising outlet in comparison with an own affiliate
How does McDonald implement the strategic policy “think globally, work locally”?
Many franchisors run many outlets so called multi unit franchising. What are the advantages from the franchisors and the franchisees point of view
What decides the variable fees (the operational and the marketing fees)?
On what basis does McDonald lease the restaurant and the property to the franchisee? What kinds of problems can occur when the franchisee is the owner of the property?