International Marketing: Franchising and Entrepreneurship

International Marketing Franchising and EntrepreneurshipThe past twenty geezerhood has seen an unprecedented internationalisation of railway line and emersion of multinational governing bodys. Some analysts credit these super multinational firms with more than frugal impact than many nation states. This has greatly changed the way grocery storeing is d unriv every last(predicate)ed. Global foodstuffs ar extremely difficult to define, and vari equals signifi fundamenttly more complex and diverse. The last to take a bon ton bug outside the UK involves careful analysis of block offangerment and benefit factors, consideration and selection of potential foodstuffs, planned commercialize entry, and development of market penetration over quantify. While this can be done by a fleck of strategies, franchising is a growing means of achieving international presence. In particular, McDonalds and The coupled Colors of Benetton represent two distinct yet prosperous examples of useful international marketing in globally franchising firms.DECIDING TO FRANCHISE INTERNATIONALLYWith the increase in international franchising and its impact on marketing, a number of studies affirm 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 ministrant to consider the relationship between parent companies and their subsidiaries, whether licenses, partnerships, or friendship-owned outlets. Structurally, large multinationals such as McDonalds and Benetton are better viewed as inter-organisational networks than monolithic hierarchies, because each supplemental can take actions that affect the lodge as a whole (Birkinshaw 2000, 2). Corporate structure is determined by interplay between parent and subsidiary, with both responding to and unprompted needed changes in the military control environment (Birkinshaw 2000, 4). Som etimes it will be the subsidiary that pursues markets, making a proactive and deliberate pursuit of a crude business opportunity in order to expand its scope of responsibility (Birkinshaw 2000, 2).Eroglu (1992) studied determinants in firms decisions to franchise internationally. He establish two sets of perceptual vari competents perceived risks and perceived benefits determine a companys 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 by the perceptual opinions of decision assoilrs. It is therefore to consider the variables as perceived benefits and perceived risks (Eroglu 1992, 23).Additional research cites factors leash to international franchising as either push factors or pull factors. Push factors include market saturation, opposition, and diminishing national 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 McDonalds restaurant. Should McDonalds continue to build restaurants in a saturated market, they will begin to cannibalise each other, with one McDonalds competing with another cheeseparingby for market share. This is not a wellnessy 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 increase 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 explore other markets where competition is less(prenominal) 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 undertake out franchise opportunities (Alon and McKee 1999, 76).Both McDonalds 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 with its regular(prenominal) franchise license method (Anon 2001, 5). Nigeria was not an initial new market target for McDonalds, as the average worker there will work over eleven hours to pay for a value meal. However, the company has entered the commonwealth successfully at the initiation of topical anesthetic franchisees, who locate their restaurants in more economically viable areas of the state (Vignali 2001, 97). Global market initiatives are oft driven by unmet intersection or market need s amongst non- topical anesthetic suppliers and nodes (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 to the highest degree debated topics in franchising research why the parent company would want to franchise, when company-owned units provide a higher(prenominal) 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. With the right economies of casing, 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, topical anesthetic market knowledge, and managerial talent to open international out lets on their own (Altinay 2004, 427). By recruiting local anesthetic anaesthetic 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 put forwarded 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 McDonalds or Benetton. Interestingly both organisations do have some company-owned holdings. For McDonalds 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 McDonalds properties to unmarried franchisees (Vignali 2001, 97).Agency theory is ground on the relationship between the principal party, in this case the parent company, who owns or pull strings a set of economic assets or functions. They delegate work to the agent, in this case the franchisee, who operate on the principals behalf (Doherty and Quinn 1999, 227). The theory stresses the importance of the regale of the transfer of information, the problem of information asymmetry, and monitor 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 processs that are not communicated to the parent company, and this causes division between the aims of the parent company and the franchisee. This is upraised by the natural tendency for franchisees to operate in their own exceed interests, even at the expense of the parent company (Altinay 2004, 427). Applying Agency Theory to a firms decision 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 McDonalds 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 passing effective way to achieve desired results in all three areas in the retail sector (225). Franchises 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 sys tem and specific marketing activities of the firm as a whole.Any increase in business activity, such as new outlets or product, should generate redundant marketing. In particular, international franchising usually requires adaptation of marketing products to the local cultures. In the case of Benettons 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 events 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 McDonalds has had its own less effective marketing programmes, it has not created the same type of reaction as Benetton. McDonalds thoroughly researches each new market to determine the best, most effective, and least offensive marketing practices. Only then is a ma rketing mix developed. This often leads to the company adapting its global marketing strategy and components for a specific geographic region or cultural group (Vignali 2001, 97).MARKET CHOICEChoice of market has also been a subject of much research. Each ideal and country moldiness 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). 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 adopt ed block exemption for franchises, which protects them from antitrust laws. France, Mexico, and Brazil have enacted laws corresponding to those 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 without delay impact market survival. Organisation size greatly determines the number of franchises that can be support, as each must be supplied with product and support (Altinay 2004, 429). in operation(p) 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 winning to potential investors (Altinay 2004, 429). For example, some governments have highly restrictive business laws, while others provide little or no protection for franchisers. The former makes both starting time 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. early(a) 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 he ad 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, quite than ones far removed. After geographically present(prenominal) countries, the next areas targeted for franchise are those with similar cultures to the organisations 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. Training, 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, wh ile 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, McDonalds both requires market justification from franchisees and carefully evaluates each new market opportunity before allowing franchisees to proceed (Vignali 2001, 97). Market praise 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 ENTRYVarious 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 passkey franchising are all common. In direct franchising, the parent company seeks out potential franchisees in market areas it has selec ted 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 mankindwide in some areas Benetton relies on a surpass franchiser, described below (Barela 2003, 116). McDonalds develops most of its franchises through a hybrid form of direct franchising, although individual franchisees initiate the franchising opportunity with McDonalds, 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 o r 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). Joint ventures create more-cumber-some evaluate and financial issues than the other two approaches, but they have other advantages, which vary depending on the partnership arrangement (Maynard 1995, 68). 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 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 territorial dominion is often an entire country. After establishing a successful track record, the franchisee may be granted additional territories (Maynard 1995, 67). Master franchising requires minimal cost and involvement on the part of the parent company, yet provides some accountability within the geographic region (Maynard 1995, 68). Most importantly, 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 often approached by would-be master franchisees, who perceive a market for the product or service in a region (Maynard 1995, 69). much (prenominal) contacts have opened the door to international expansion for many companies (Maynard 1995, 69).Some initiatives put forth by franchisees involve operations within the company. The most diminutive 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 increase the efficiency of resource use, rather than improving external variables or increasing the firms resource base (Birkinshaw 2000, 27-28).McDonalds has is positioned itself as inexpensive profuse 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). McDonalds deter mines prices for its franchisees based on their local positioning and the prices of competitors (Vignali 2001, 97). In addition, McDonalds strategy of place is exemplarised 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 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 increases with the number of countries in which a particular firm has operations (Hoar 2003, 77).Factors driving franchisings international expansion i nclude 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 McDonalds and Benetton have been impacted by at least three of these variables.DEVELOPING THE LOCAL MARKETFinally, 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 companys product to local tastes, then act as a global scanner, sending signals about changing demands back to the head office (Birkinshaw 2000, 21). Examples of this would be McDonalds menu changes, often suggested or proposed by local franchisees, and the use of Ronald McDonald as a spokesman, which was first initiated by local fr anchisees (Anon 2003, 16). 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 that they entrust 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 carry away from internal initiative. High levels of integration and communication enhance internal initiative, but detract from local and global initiative (Birkinshaw 2000, 31). Local market initiatives are facilita ted 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 arousal 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). When McDonalds decided to use famous athletes in its promotional materials, ads, and television commercials several years ago, they queried local franchisees for specks. 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). A basketball star was featured in ads in the Unit ed States, a footballer in the UK, and so forth. This allowed McDonalds to project a locally appropriate image through its marketing campaign and further position align local franchises as part of the community, rather than as a foreign restaurant (Vignali 2001, 97). 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 supply (Vignali 2001, 97).Developing market requires initiating or construction 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 entropy, particularly data not available to headquarters. The entrepreneur can produce his or her own marke ting 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, tag or retailer, and a corresponding increase in purchasing.MCDONALDS CASE areaMcDonalds started as a single family-owned restaurant. In 1948, Dick and Mac McDonald had started a self-service drive-up restaurant in calcium, using a very in force(p) 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 firs t franchise in 1955, also in California (Anon 2003, 10). Fifty years later McDonalds was one of the worlds 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).McDonalds 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, McDonalds 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). Franchisees are required in their contract to become involved in their local community, a practise which further localise s the international chain (Noren 2001, 62).It is important to note that McDonalds franchises are under a great deal more organisational control than many other companies franchising models. This prevents devaluing the McDonalds 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 stochastic variable 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 McDonalds 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). Another supported the companys 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 childrens hospital. Besides providing a much-needed social service, the charities have been an excellent public relations strategy. Current services have 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 McDonalds has further increased the ability of local franchisees to run their own local promotions. For example, a long-time McDonalds 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 McDonalds products at sale prices, with the national theme music of McDonalds 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 McDonalds in France, wine is available with a meal, while in the United States the strongest beverage on the menu is chocolate milk. Israeli McDonalds serve sandwiches without cheese, a kosher requirement, Japanese McDonalds offer rice and salads featuring teriyaki, and some other Asian outlets offer goat (Vignali 2001, 97 Anon 2003a, 99). The companys primary product mix of hamburger, fries, and a coke, however, remains constant throughout McDonalds worldwide. Most importantly, the organisation provides a system of input to its franchisees that allows controlled entrepreneurial activity at the franchise level.BENETTON CASE STUDYLuciano 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 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. 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 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 pr ogrammes alongside those provided by corporate headquarters. Store location and control, product march 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