International Marketing: Franchising and Entrepreneurship

International Marketing: Franchising and Entrepreneurship The past twenty years has seen an unprecedented internationalisation of business and growth of multinational organisations.   Some analysts credit these large multinational firms with more economic impact than many nation states.   This has greatly changed the way marketing is done.   Global markets are extremely difficult to define, and variables significantly more complex and diverse.   The decision to take a company outside the UK involves careful analysis of risk and benefit factors, consideration and selection of potential markets, planned market entry, and development of market penetration over time.   While this can be done through a number of strategies, franchising is a growing means of achieving international presence.   In particular, McDonald’s and The United Colors of Benetton represent two distinct yet successful examples of effective international marketing in globally franchising firms. DECIDING TO FRANCHISE INTERNATIONALLY With the increase in international franchising and its impact on marketing, a number of studies have been conducted on various related aspects.   One first consideration in literature is what leads to the decision to go international, and how this stimulates marketing within the firm.   It is first helpful to consider the relationship between parent companies and their subsidiaries, whether franchises, partnerships, or company-owned outlets.   Structurally, large multinationals such as McDonald’s and Benetton are â€Å"better viewed as inter-organisational networks than monolithic hierarchies,† because each subsidiary can take actions that affect the company as a whole (Birkinshaw 2000, 2).   Corporate structure is determined by interplay between parent and subsidiary, with both responding to and driving needed changes in the business environment (Birkinshaw 2000, 4).   Sometimes it will be the subsidiary that pursues markets, making a â€Å"proactive and del iberate pursuit of a new business opportunity† in order to â€Å"expand its scope of responsibility† (Birkinshaw 2000, 2). Eroglu (1992) studied determinants in firms’ decisions to franchise internationally.   He found two sets of â€Å"perceptual variables – perceived risks and perceived benefits – † determine a company’s decision (19).   When the perceived benefits outweighed the perceived risks, the company would proceed with expansion.   Cost/benefit analysis in one common method for measuring benefits versus risk, but again, is filtered through the perceptual opinions of decision makers.   It is therefore to consider the variables as perceived benefits and perceived risks (Eroglu 1992, 23). Additional research cites factors leading to international franchising as either push factors or pull factors.   Push factors include market saturation, competition, and diminishing domestic profits (Alon and McKee 1999, 76).   For example, after fifty years of franchising in the United States, there are a limited number of good locations for domestic franchises that do not already have a McDonald’s restaurant.   Should McDonald’s continue to build restaurants in a saturated market, they will begin to cannibalise each other, with one McDonald’s competing with another nearby for market share.   This is not a healthy long-term scenario for either the franchisee or the parent company.   In the case of Benetton, more and more fashion retailers start-ups and expansions have greatly increased competition within the sector (Barela 2003, 114). This competition reduces the potential and actual profits of both current and future outlets, causing the firm to explo re other markets where competition is less intense, and market share more easily won.   Pull factors include political changes, such as the opening of Eastern block countries to Western investment, economic changes, such as the growth of a formerly underdeveloped nation to the point it can sustain retail outlets, and the formation of regional trading units that seek out franchise opportunities (Alon and McKee 1999, 76).   Both McDonald’s and Benetton have been swift to move into emerging markets, even when other multinationals have delayed.   For example, franchises in Kazakhstan require complex business licenses, which has deterred foreign investors.   Benetton is one of the few Western companies to move into Kazakhstan, doing so through its typical franchise license method (Anon 2001, 5).   Nigeria was not an initial new market target for McDonald’s, as the average worker there will work over eleven hours to pay for a value meal.   However, the company has entered the country successfully at the initiation of local franchisees, who locate their restaurants in more economically viable areas of the country (Vignali 2001, 97).   Global market initiatives are often â€Å"driven by unmet product or market needs amongst non-local suppliers and customers (Birkinshaw 2000, 23).   In addition to push and pull factors, there are two theories in the study of franchising that explain the decision to move into international locations.   Both address one of the most debated topics in franchising research: why the parent company would want to franchise, when company-owned units provide a higher rate of return (Elango and Fried 1997, 69).   Once a business achieves a certain size, it is more profitable to the parent company if wholly owned.   For example, a typical franchisee may make a forty percent margin, and pay half of that to the parent company.   â€Å"With the right economies of scale, the franchisor could recoup more of that profit margin by owning the company outright† (Hoar 2003, 78). The first, resource scarcity theory, contends that companies lack the resources such as capital, local market knowledge, and managerial talent to open international outlets on their own (Altinay 2004, 427).   By recruiting local franchisees who supply capital, management, and knowledge of the local market, franchising organisations can achieve internationalisation not otherwise possible (Altinay 2004, 427).   The parent company would not be able to expand, particularly on an international level, without the assets offered by the franchisee.   This theory is more easily applied to small and medium-sized firms which obviously lack the assets for internationalisation than it is to either McDonald’s or Benetton.   Interestingly both organisations do have some company-owned holdings.   For McDonald’s part, Ray Kroc once contended he was in the real estate business, not the restaurant business, citing the large passive income generated from the leasing of McDonaldâ €™s properties to individual franchisees (Vignali 2001, 97).   Agency theory is based on the relationship between the principal party, in this case the parent company, who owns or control a set of economic assets or functions.   They delegate work to the agent, in this case the franchisee, who operate on the principal’s behalf (Doherty and Quinn 1999, 227).   The theory stresses the importance of the process of the transfer of information, the problem of information asymmetry, and monitoring costs associated with both (Doherty and Quinn 1999, 224).   Jensen and Meckling (1975) explain information asymmetry problems occur because the franchisee has detailed information about franchise operations that are not communicated to the parent company, and this causes division between the aims of the parent company and the franchisee.   This is enhanced by the natural tendency for franchisees to operate in their own best interests, even at the expense of the parent company (Altinay 2004, 427).   Applying Agency Theory to a firm’s d ecision to franchise internationally, the company usually does so on the basis of lower costs and decreased risk.   Since salaried managers would be likely to under perform, going with franchisees increases the likelihood of dedicated performance, and therefore reduced monitoring costs (Elango and Fried 1997, 71).   This theory contends that while both McDonald’s and Benetton could open company-owned outlets instead of franchise, the inherent risk and monitoring requirements to the parent company outweigh the economic gains versus franchising.   Internationalisation of a retail entity, such as Benetton, involves the development of operations, sourcing of products, and transfer of expertise.   Doherty and Quinn (1999) cite a number of research studies, which conclude that franchising is a highly effective way to achieve desired results in all three areas in the retail sector (225).   Franchises â€Å"provide the parent company advantages such as economies of scale in marketing and production, while providing or entrepreneurial discretion at the unit level† (Elango and Fried 1997, 68).   In addition, franchises impact the overall marketing strategy and specific marketing activities of the firm as a whole.   Any increase in business activity, such as new outlets or product, should generate additional marketing.   In particular, international franchising usually requires adaptation of marketing products to the local cultures.   In the case of Benetton’s social awareness campaigns, marketing product was intended to be used globally, although some areas and retailers found some of the photos disturbing or inappropriate (Barela 2003, 118).   While the series certainly raised awareness and sales did increase during the time they were in use, there is contention whether the marketing scheme helped or hurt retailers’ bottom line in many locations (Barela 2003, 118).   While McDonald’s has had its own less effective marketing programmes, it has not created the same type of reaction as Benetton.   McDonald’s thoroughly researches each new market to determine the best, most effective, and least offensive marketing practices.   Only then is a marketing mix de veloped.   This often leads to the company adapting its global marketing strategy and components for a specific geographical region or cultural group (Vignali 2001, 97).   MARKET CHOICE Choice of market has also been a subject of much research.   â€Å"Each   concept and country must be considered separately in relation to a multitude of issues about the market, potential franchisees, legal matters, receptivity to franchising in general, and feasibility of the particular concept† (Maynard 1995, 69).   â€Å"In international markets, franchise relations are influenced by the extent to which the overseas franchise system can be transferred into the local market in terms of product acceptance, suitable local presentation and transferable support services† (Connell 1999, 86).   Legal concerns are of particular importance, since they differ so greatly from country to country.   For example, there is currently no legislation in the UK that regulates franchising (Hoar 2003, 77).   The European Union adopted block exemption for franchises, which protects them from antitrust laws.   â€Å"France, Mexico, and Brazil have enacted laws similar to th ose of the United States, requiring franchisors to provide presale disclosure to prospective franchisees, while Australia and Italy have adopted voluntary codes pertaining to presale disclosure and other requirements† (Maynard 1995, 71).   Atlinay (2004), citing a number of research studies, determined that several organisational determinants directly impact market choice.   Organisation size greatly determines the number of franchises that can be supported, as each must be supplied with product and support (Altinay 2004, 429).   Operating and international experience have both been shown to positively effect the decision to franchise.   In general, the greater the experience of decision-makers, particularly if they have lived or worked abroad successfully, the greater likelihood they will pursue markets beyond current operations.   (Altinay 2004, 429).   Company leaders may also recognise that competitive pressures in current markets make growth and expansion there unlikely or prohibitively expensive.   Similarly, the external environment of the markets under consideration may make them more or less attractive to potential investors (Altinay 2004, 429).   For example, some governments have highly restric tive business laws, while others provide little or no protection for franchisers.   The former makes both starting and doing business difficult, while the latter puts the franchiser at risk.   A supposed franchisee could simply take the business model or proprietary systems and go out on their own, cutting the franchiser out of their rightful position in the relationship. Other researchers have concluded geographical and cultural proximity are major determinants of market choice (Alon and McKee 1999, 76-77).   Specifically, organisations will choose markets based on their physical closeness or cultural similarities to the head office.   For example, the areas most likely to begin franchises of UK businesses are Ireland and France, while US franchisers first target Canada and Mexico (Alexander and Doherty 2003, 15).   The logistical issues of transporting people and product are greatly reduced when franchises expand into nearby countries, rather than ones far removed.   After geographically immediate countries, the next areas targeted for franchise are those with similar cultures to the organisation’s host country (Alexander and Doherty 2003, 15).   For example, UK retailers franchising in the US, Canada, or Australia can expect relatively similar customer groups, requiring little adaptation of product or marketing materials.   Train ing, advertising, and other organisation material can remain in English, with no need for translation or significant cultural variations (Alexander and Doherty 2003, 16).   In practice, some franchisers leave market choice almost entirely up to the initiation of franchisees, while others are more proactive.   In a best-case scenario, both the subsidiary and parent company evaluate the local market, the internal market, and the global market when considering possible markets (Birkinshaw 2000, 9).   For example, McDonald’s both requires market justification from franchisees and carefully evaluates each new market opportunity before allowing franchisees to proceed (Vignali 2001, 97).   Market approval is heavily dependent on resource allocation, that is, there must be sufficient resources available and available at that location for the market choice to go forward (Birkinshaw 2000, 45).   MARKET ENTRY Various factors have been found to contribute to the method, location, and timing of market entry.   First, there are a number of different methods used in international expansion and franchising.   Direct franchising, joint ventures, and master franchising are all common.   In direct franchising, the parent company seeks out potential franchisees in market areas it has selected for development (Maynard 1995, 66).   While it requires greater involvement by the parent company, it also allows the organisation to be more selective in franchisee choice and therefore have more control over the foreign operation (Maynard 1995, 68).   Franchisees may be solicited through newspapers or similar media outlets, but are more commonly sought through recommendations of other successful franchisees (Noren 2001, 62).   This method is similar to the licensing franchise arrangement typical of Benetton retailers worldwide; in some areas Benetton relies on a master franchiser, described belo w (Barela 2003, 116).   McDonald’s develops most of its franchises through a hybrid form of direct franchising, although individual franchisees initiate the franchising opportunity with McDonald’s, rather than the organisation needing to seek them out (Noren 2001, 63). Sometimes the parent company actually joins with a local firm to move into a foreign market.   This can be through acquisition or merger, but is more commonly accomplished through a joint venture.   This is when the companies join forces to create a distinct third company owned by both partner firms† (Maynard 1995, 66).   â€Å"Joint ventures create more-cumber-some tax and financial issues than the other two approaches, but they have other advantages, which vary depending on the partnership arrangement† (Maynard 1995, 68).  Ã‚   The created company then sometimes initiates or supervises franchise relations within its country or geographical region, and sometimes oversees company-owned units (Maynard 1995, 68). The most common approach to international franchising, and one used in part by Benetton, is the master franchisee.   This person is typically a well-capitalized local businessperson, with good understanding of local laws and culture, established relationships, and knowledge of the marketplace (Maynard 1995, 67).   They are recruited through local media such as newspapers, industry sources such as trade magazines, and international brokers.   Some governments also assist in the process; for example, the United States Department of commerce â€Å"seeks out foreign partners for US companies through its Gold Key program† (Maynard 1995, 69).   In this model, the master franchisee purchases the rights to develop franchise units within a specific area; this territory is often an entire country.   â€Å"After establishing a successful track record, the franchisee may be granted additional territories† (Maynard 1995, 67).   Master franchising requires minimal cost an d involvement on the part of the parent company, yet provides some accountability within the geographic region (Maynard 1995, 68).   Most importantly, â€Å"the master franchisee provides local expertise and oversight of the sub-franchisees whom it chooses to operate individual stores† (Maynard 1995, 68).   Finally, franchisers are â€Å"often approached by would-be master franchisees, who perceive a market for the product or service in a region† (Maynard 1995, 69).   Such contacts â€Å"have opened the door to international expansion for many companies† (Maynard 1995, 69).   Some initiatives put forth by franchisees involve operations within the company.   â€Å"The most critical facilitator of internal market initiatives is the credibility of the subsidiary in the eyes of the parent company† (Birkinshaw 2000, 26).   Such initiatives are geared towards rationalising and reconfiguring the systems within the parent company and increasing the efficiency of resource use, rather than improving external variables or increasing the firm’s resource base (Birkinshaw 2000, 27-28).  Ã‚   McDonald’s has is positioned itself as inexpensive fast food in the United States; its pricing is relatively low as are customers’ quality expectations (Vignali 2001, 97).   In the UK, restaurant prices are significantly higher in general.   Consumers are willing to spend more for restaurant food but also have higher expectations of product quality and service (Vignali 2001, 97).   McDonald’s determines prices for its franchisees based on their local positioning and the prices of competitors (Vignali 2001, 97). In addition, McDonalds’ strategy of place is standardised; the organisation seeks easily-access, high traffic locations regardless of the country or region where the restaurant will be located.   Facilities are also similar, although with subtle regional variations (Vignali 2001, 97).   Benetton similarly emphasises location; as a high-end fashion retailer it is imperative its retailers locate in upscale shopping areas, again regardless of the country where the new outlet is located (Barela 2003, 116).   This allows them to support the higher prices and quality of their products.   For these reasons both organisations require location approval from their franchisees, and do not allow movement of outlets without permission from the head office (Vignali 2001, 97; Barela 2003, 116). Overall, direct and master franchising are the most commonly used methods for market entry by UK firms.   They allow firms of various sizes, from small chains to large multinationals, to successfully internationalise.   Companies can both grow globally and â€Å"reap the benefits of size without sacrificing the benefits of local presence† (Birkinshaw 2000, 1).   The British Franchise Association (BFA) reports nearly seven hundred franchise systems are currently operational in the UK, accounting for more than 30,000 business units (Hoar 2003, 77).   These franchises employ 330,000 people, and represented a total turnover of  £9.5 billion in 2002 (Hoar 2003, 77).   While British firms have been slow to franchise overseas, particularly compared to companies from the US and Japan, they are rapidly catching up.   Over one-third of British retailers with operations outside the country employ franchising to some degree (Doherty and Quinn 1999, 225).   This number incr eases with the number of countries in which a particular firm has operations (Hoar 2003, 77). Factors driving franchisings international expansion â€Å"include heightened awareness of global markets, relaxation of trade barriers, saturation of some existing domestic markets, increasing prosperity and demand for consumer goods in many regions overseas, and increasing ease of doing business internationally because of improved communications and transportation systems† (Maynard 1995, 66).   Both McDonald’s and Benetton have been impacted by at least three of these variables. DEVELOPING THE LOCAL MARKET Finally, entrepreneurs exhibit various strategies to develop the local market, even if they do so as agents or franchisees of a global firm.   The traditional role of a subsidiary or franchisee is to adapt the parent company’s product to local tastes, â€Å"then act as a ‘global scanner,’ sending signals about changing demands back to the head office† (Birkinshaw 2000, 21).   Examples of this would be McDonald’s menu changes, often suggested or proposed by local franchisees, and the use of Ronald McDonald as a spokesman, which was first initiated by local franchisees (Anon 2003, 16).  Ã‚   It is imperative, therefore, that large organisations, particularly those that franchise, create systems and structural contexts in which local entrepreneurial activity is both encouraged and controlled (Birkinshaw 2000, 31).   If no such structure exists, franchisees will often act as free agents, making decisions and taking actions â€Å"that they believ e are in the best interests of the corporation as a whole,† whether or not these conform to the expressed desires of the parent company (Birkinshaw 2000, 2). Research indicates that four factors enhance initiative at the subsidiary or franchise level:   autonomy, resources, integration and communication (Birkinshaw 2000, 31).   High levels of autonomy and resources enhance local and global initiative, but detract from internal initiative.   High levels of integration and communication enhance internal initiative, but detract from local and global initiative (Birkinshaw 2000, 31).   â€Å"Local market initiatives are facilitated most effectively through a moderate level of autonomy in the subsidiary coupled with a fairly strong relationship with the parent company† (Birkinshaw 2000, 23).   In terms of marketing, local franchises have valuable input needed by the marketing teams at the corporate office, and should be respected for both their ideas and their first-hand knowledge of whether something is working.   If this does not occur, the company will suffer from information asymmetry problems, as previously discussed under agency theory (Doherty and Quinn 1999, 224).  Ã‚   When McDonalds decided to use famous athletes in its promotional materials, ads, and television commercials several years ago, they queried local franchisees for suggestions.   As a result, the company was able to choose sports figures recognised in each market area, rather than one internationally known athlete, such as a Tiger Woods, who might have less impact in local markets (Vignali 2001, 97).  Ã‚   A basketball star was featured in ads in the United States, a footballer in the UK, and so forth.   This allowed McDonalds to project a locally appropriate image through its marketing camp aign and further position align local franchises as part of the community, rather than as a foreign restaurant (Vignali 2001, 97).  Ã‚   The company was able to do this because they had previously established systems by which ideas and input could be communicated back and forth between franchisees and the corporate headquarters (Vignali 2001, 97).  Ã‚   Developing market requires initiating or building the demand of the public for a product, and positioning and pricing the product where it is available to meet such public demand (Johnson and Scholes 2002, 370).   The entrepreneur franchisee, therefore, has several strategies available.   He or she can make suggestions to the corporate office.   These are more likely to be well received if backed by solid market data, particularly data not available to headquarters.   The entrepreneur can produce his or her own marketing scheme, if not prohibited from doing so by headquarters.   He or she can become highly active in community activities and use the franchise or its products for market development.   In the case of Benetton, local retailers could, for example, become involved with groups addressing world hunger.   Whatever the strategy, it must result in an increased affinity for the consumer towards the product, brand or retailer, and a corresponding increase in purchas ing. MCDONALD’S CASE STUDY McDonald’s started as a single family-owned restaurant.   In 1948, Dick and Mac McDonald had started a self-service drive-up restaurant in California, using a very efficient delivery system they had invented and named the Speedee Service System.   Ray Kroc, a milkshake salesman, visited the restaurant in 1954, and was so impressed with the system that he convinced the brothers to franchise their restaurant, a novel approach to business expansion at the time (Anon 2003, 10).   The company incorporated and opened its first franchise in 1955, also in California (Anon 2003, 10).   Fifty years later McDonald’s was one of the world’s largest multi-national organisations, operating more than 31,000 stores in 119 countries.   Over eighty percent of restaurants, including almost all international outlets, are franchised (Anon 2003, 123).   McDonald’s actively promotes its core values of quality, service, cleanliness and value, and requires this emphasis of all its franchises, regardless of location or local culture (Anon 2003, 123).   When it comes to choosing franchisees, therefore, McDonald’s is highly selective (Noren 2001, 60).   Franchisees must go through a lengthy interviewing and training process, usually two years or more, without pay.   They are also required to make significant capital investments, a high percentage of which must be from their own (non-financed) resources (Noren 2001, 61-63).   â€Å"Franchisees are required in their contract to become involved in their local community,† a practise which further localises the international chain (Noren 2001, 62).   It is important to note that McDonald’s franchises are under a great deal more organisational control than many other companies’ franchising models.   This prevents devaluing the McDonald’s product through loss of uniformity or free-riding from local operators, but also inhibits entrepreneurial innovation (Noren 2001, 63).   For example, headquarters can relocate a restaurant if they so desire, and often own the property and facility, which is leased back to the franchisee.   Local operators are not allowed any variance in product without permission from the parent organisation (Noren 2001, 62).   Training is very specific and highly regulated throughout the company.   However, franchisees do have considerable input at the organisation, provided they follow the proper channels and secure approval before acting.   Many of McDonald’s promotional and menu items have come through the suggestion of local franchisees.   A franchisee in Cincinnati, Ohio, first suggested fish sandwiches so as to be able to attract Roman Catholic families on Fridays.   A franchisee in Pittsburgh suggested the Big Mac, another in California developed the Egg McMuffin, and two restaurant operators in Washington, DC, first used Ronald McDonald as their local spokesman (Anon 2003, 16).  Ã‚   Another supported the company’s first investment in what would become the Ronald McDonald House Charities (RMHC), a foundation began in 1974 that gave families of sick children a place to stay near their children’s hospital.   Besides providing a much-needed social service, the charities have been an excellent public relations strategy.   Current services ha ve been expanded to include scholarships and free health care through mobile health trucks.   RMHC currently operates in twenty-six countries (Anon 2003, 122).   In recent years McDonald’s has further increased the ability of local franchisees to run their own local promotions.   For example, a long-time McDonald’s owner in Florida (USA) reported a twenty-percent increase in same store sales, and attributed this increase to local advertising on television and in print.   He creates his own ads in line with national promotions, such as showing pictures of McDonald’s products at sale prices, with the national theme music of McDonald’s current marketing campaign playing in the background (Kramer 1999, 6).   Critics contend such loosening of marketing standards threatens brand dilution, although the company differs in opinion.   McDonalds has benefited from the input of their franchisees in other countries, who assist the restaurant in adapting the menu and marketing to local tastes and needs (Vignali 2001, 97).   Some McDonalds products are standard throughout the organisation.   For example, french fries are included on all McDonalds menus worldwide and are subjected to intense quality control to maintain sameness (Vignali 2001, 97).   Other products are adapted to the local tastes of the region.   At a McDonald’s in France, wine is available with a meal, while in the United States the strongest beverage on the menu is chocolate milk.   Israeli McDonald’s serve sandwiches without cheese, a kosher requirement, Japanese McDonald’s offer rice and salads featuring teriyaki, and some other Asian outlets offer goat (Vignali 2001, 97; Anon 2003a, 99).   The company’s primary product mix of hamburger, fries, and a coke, however, remains constant throughout McDonald’s worldwide.   Most importantly, the organisation provides a system of input to its franchisees that allows controlled entrepreneurial activity at the franchise level. BENETTON CASE STUDY Luciano Benetton founded his colourful sweater retailer shortly after the end of World War II, and the company remains family-owned and operated.   The company is known for its innovative operation and management methods, and its large network of subcontractors who produce the Benetton products (Barela 2003, 113).   Acting as a franchisor, Benetton â€Å"sells and distributes its products through regional agents, each of whom is responsible for developing a certain market area† (Barela 2003, 113).   The company arranges licensing agreements with local business people through these master franchisors, who then sell Benetton products.   There are eight-three agents internationally, who are supervised by seven area managers (Barela 2003, 115).   As a manufacturer, the company has high control of its product quality and design, and can control its franchisees through withdraw of product.   â€Å"Its success has become an example for multinational businesses around the world† (Barela 2003, 114).   Benetton currently has more than 7,000 franchises worldwide (Ivey 2002, 13). The company provides franchisees with product and the use of the Benetton name.   It â€Å"expects each store to develop its market successfully,† with the help of some global marketing support (Barela 2003, 115).   This allows a wide variety of entrepreneurial activity on the part of local franchisees, who can develop and run marketing programmes alongside those provided by corporate headquarters.   Store location and control, product display and choice, and community involvement are all decisions left up to the individual franchise owner (Ivey 2002, 14). The company has recently begun to move into directly operated stores, particularly in high-cost areas where franchisees have been difficult to attract, such as the Madison Avenue area of New York City and   High Street in London (Ivey 2002, 14).   This allows it to maintain its market position as a superior