Market Entry through
Franchising Networks
 Franchising
introduction
 The different commercial vehicles
available
 Factors that influence the choices
of a franchisor
 CASE: Franchising in Slovenia
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.
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
The different commercial
vehicles available
Direct Franchising
Master Franchising
Joint venture
Direct Franchising
Directly into the foreign country
The establishing of a foreign
subsidiary or branch office
Entering into a development
agreement
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
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
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
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.
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
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
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
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
Joint Venture
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
Joint Venture
Advantages
 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
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
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
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
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
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
Transaction cost theory
 Companies prefer contracts when cultural distance is
great
 Companies prefer contract when the environmental
uncertainty (currency- and political risk) is great
Transaction cost theory
The study showed:
 that US franchisor use contract more frequently in areas
with a great culturally distance.
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
Capitalization theory
The study showed:
 that franchisor would more frequently sign contracts in
rich capital countries, while making equity investments
in poor countries
CASE: Franchising in
Slovenia
1998: 25 000 restaurants all over
the world
60% were franchised
1991: McDonalds began to show
interest for Slovenia
First restaurant in Ljubljana
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
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
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
The franchise situation in
Slovenia during the 90s
 1991:
socialist regim fell
 Democracy, liberalization and
integration
 1995: 22 000 smaller companies
 Franchising not well known
 Afraid of losing control
 No laws on franchising
The situation in
eastern Europe






Yugoslavia 1988
Poland 1992
Romania 1995
Croatia 1996
Czech Republic 1992
Hungry ?
Slovenia today
 17
McDonalds
 600
Employees
 60%
Franchised
The Franchise situation in
Slovenia today
McDonalds Worlwide
 70%
Franchisees
 30 000 McDonalds restaurants
 46 million customers in more than
100 countries
 Plan to open 850 traditional
restaurants in 2003
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?