Business Management in Small Industries: Franchising Report

This report provides a comprehensive analysis of business management within small industries, specifically focusing on franchising as a growth strategy. It explores the advantages, such as capital support and access to established management systems, and the disadvantages, including profit sharing and potential litigation. The report examines real-world case studies, like the relationship between Pizza Hut and Eagle Boys, and the dispute between McDonald's and the Ochoa case, to illustrate the complexities of franchisor-franchisee relationships and conflict resolution. The report concludes with a discussion on the volatile nature of these relationships and the importance of clear agreements and effective communication to mitigate potential issues. The report aims to provide insights into the strategic considerations and challenges involved in franchising for small businesses, using the examples to understand the issues and offer potential solutions.

Running head: BUSINESS MANAGEMENT IN SMALL INDUSTRIES
BUSINESS MANAGEMENT IN SMALL INDUSTRIES
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Table of Contents
Introduction................................................................................................................................2
Advantages.................................................................................................................................2
Disadvantages............................................................................................................................4
Tension 1....................................................................................................................................6
Tension 2....................................................................................................................................7
Conclusion..................................................................................................................................9
References................................................................................................................................10

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Introduction
The major limitation faced by the small businesses to emerge as a successful one is
the lack of enough monetary funding to support the business expenditures. The other
limitations include lack of management capabilities at large with respect to managing the
operational processes in an organization (Chen et al. 2018). Due to the shortage of enough
resources and lack of sponsorship, the small businesses are opting out for the innovative
strategies to look up for a successful growth in their upcoming future (Alon, Madanoglu and
Shoham 2017). Hence, the small companies are focusing on becoming a franchisor for the
successful organizations such that they get proper backup and funding in setting up their own
business successfully.
As a franchisor, the small or medium-sized enterprises can allow the reputed and the
successful organizations the right to open their stores and sell out their products or services
(Langemeier and Boehlje 2018). Meanwhile, the franchisor can use the brand and its fame
along with their expertise skill sets and their intellectual property to gain their own
experience in building up a successful brand of their own (Alon and Lattemann 2016).
According to, Haug (2017), apart from the experience, the small business owners can benefit
themselves by receiving a start-up investment money, an annual turnover and a certain
amount of percentage from the profit of the experienced business.
In spite of franchising proving itself a growth strategy, this factor has certain
advantages and disadvantages associated with it too. In this report, both the benefits and risks
of franchising will be discussed by the small business enterprises. Some real case scenarios
will also help to understand, how to resolve the adverse situations in franchising.

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Advantages
Franchising a business has a various advantages for the small developing companies
because they can extract various benefits from the reputed organizations to which they are
providing the rights. Firstly, the small enterprises face huge problems while setting up their
own business in terms of money. They face a certain amount of fear to think about the losses
that might occur if the business run into loss. Hence, they opt out for franchising that will be
a way out of acquiring capital depending upon a reputed business (Gillis, Combs and Yin
2020). The companies that already have their brand image in the market need not think about
the monetary losses incorporated with it. Thus, the small companies by being a franchisor to
those stable organizations need not worry about the loss of the capital because there will be
high chances that their business will turn out to be a successful one. Hence, capital support is
a major benefit of providing franchises to large organizations.
Secondly, the small business owners find it difficult to set up a management team for
their business to carry forward successfully. Any kind of business requires a proper
management in all their operations on a regular basis that will help them to motivate their
workflow in their organization (Sun and Lee 2019). However, the managers hired from
outside for these businesses might not show a proper interest in setting up the business
successfully. In this case, franchising proves to be of great help. Providing franchise to an
already stable business set-up will have a prefixed management system along with a
professional manager to control the system with expertise (Burns 2016). The quality of
operations will be optimum provided by the manager and his team members in the
organization.
Another problem faced by the owners of the small business is their capability to pace
up with the market speed and create a unique stand on themselves amongst the other
competitors in the market. The owners being new to the market definitely requires some

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backup business support to emerge out successfully and create their own successful strategies
(Lawrence, Pietrafesa and Kaufmann 2017). Hence, franchising helps them to follow the
footsteps of the settled businesses and gain experience from them. The large organizations
can help these small enterprises to understand the successful marketing strategies and help
them capture the lead position in the market. The franchisee organization will be responsible
to perform all the operational processes that will help the small business to setup their own
brand image in the market successfully.
The franchisors can completely rely on their franchisee organization to carry out all
the operations that will help them to gain profit from the business they are investing. The
franchisee organization will be solely responsible to select the location of business setup,
negotiate on the lease, promote marketing strategies, manage accounting and payroll of the
employees as well as arrange for training (Craig et al. 2019). Hence, the profit gained after
investing for all these operations will be shared with the franchisor without incorporating any
headache for the operations.
Disadvantages
In spite of having numerous advantages, franchising a business has a few
disadvantages to it also. Any small business enterprises before incorporating franchise as
their business growth strategy should look into these disadvantageous factors in details such
that they can take the risks as well as their protective measures to control the risks.
Firstly, if the owner wants to set up as a franchise provider to an already settled
organization the overall profit will not be acquired by the franchisor (Dutta and Prabhu
2019). Rather, only a small amount of the profit will be in the share of the franchisor because,
the franchisor is only selling rights to the franchisee. The franchisee organization is
responsible to take up all the business strategies and implement them accordingly for making

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profit in the business. The franchisor will not have to be involved out rightly and can observe
the strategies that are being implemented. Hence, they will have to share the maximum profit
with the franchisee. This proves to be disadvantageous for the franchisor.
The second disadvantageous point for the franchisor in developing his business
through franchising large business scales is the factor of litigation. An agreement needs to be
signed between the franchisor and the franchisee such that no one is able to sue each other in
the middle of the period. Due to the small term failures incorporated in their businesses, the
franchisor might not get enough faith in the reputed business scales. On the other hand, if the
franchisor is not investing the sufficient amount, the franchisee organization may suffer from
business failures too, due to the lack of resources (Sekuloska and Erceg 2018). However, due
to these differences created, neither of the parties should sue each other showing any kind of
causes. Thus, an agreement between the parties will bind them with each other and that is a
litigation for both the franchisee and the franchisor.
The controlling issue is another disadvantageous point for the franchisor to
incorporate franchising as the growth strategy in business. Since the franchisor in a business
will not be completely involved with the operations like managing employees, training them,
monitoring the accounts, acquiring resources and many such activities, they will not have a
strong opinion regarding the core business matters (Erceg, Crnković and Dotlić 2019,
January). The franchisee will play a dominating role regarding the operations of the business
matters and will control the issues related to it. Hence, a franchisor needs to have a very
strong point to convince the franchisee about any matter.
Although the franchisee will be responsible for the core business processes, the
franchisor needs to have a sufficient capital investment on their part for the marketing
expenditures. The franchisor needs to create business plans by printing brochures and

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hoardings to promote the business across the various locations (Gravier, Hawkins and
Randall 2018). They also needs to get along with the franchisee and monitor the accounts
based on the expenses on marketing promotions. They also need to check the quality of the
processes and the services and for all these they need to invest their own lump sum amount of
capital.
Tension 1
The relationship shared between a franchisor and a franchisee is a volatile one and
might be disrupted due to various problems faced during the ongoing business processes
between them. One such example is the relationship between the Pizza Hut, the international
retailer of pizza and the 50 Eagle Boys stores that were trading the business of pizza in the
remote locations of Australia. The Pizza Hut manager of finance and marketing Mr Allegro
formed a franchisee deal with the main organization of Yum! Brands. In addition to that, the
Eagle Boys store also acted as the franchisee organization for the Pizza Hut food
organization. The goal of the pizza producing organization was to bring in more stores than
the ones they had already acquired in the year 2016 (Greer 2018). Pizza Hut did not want to
disrupt the marketing chain of the Eagle Boys store and thus wanted to try the other trading
chains within the nation such that no conflict is created within the Eagle Boys organization.
However, as per the agreement signed between the two organizations, the promises
were not kept by the Eagle Boys store of pizzas. The Eagle Boys assured the Pizza Hut
Company to accommodate 60 outlets in various locations of the country (Du, Joo and Wilbur
2018). However, the company failed to do so and Pizza Hut did not get the outlets on their
own name. The Eagle Boys store also promised a market share of 35% to the Pizza Hut
retailer on the profit acquired by selling pizzas. Failing to do this, the franchisee organization
only provided with 15.3% to the Pizza Hut Company.

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These issues turned out to be the vital reasons of the damaging relationship between
the two organizations of the Pizza Hut and the Eagle Boys. To resolve these issues both the
companies should have taken the proper steps on a regular basis. The Eagle Boys should have
taken on the operational responsibility on behalf of the Pizza Hut to build up the customer
brand and quality for the organization. Pizza Hut being new in the market could not
understand the quality management procedures and should have been helped by the
franchisee organization in building up the marketing profile of the organization.
The competitor in the market to Pizza Hut was Dominoes, an organization that flared
up really well amongst the other competitors in the market (Street 2018). However,
Dominoes has a reputable brand in the market and thus the cost of the pizzas in this store is
quite over the standard. People in the country are still looking for stores where quality pizza
will be available and that too at a reasonable price. Hence, the franchisee organization of the
Eagle Hut needs to prepare a legal document of agreement clearly specifying what needs to
be delivered to the franchisor. The franchisee should also rename the outlets of the store in
the name of the ‘Pizza Hut’ and include quality operations that will help both the
organizations to perform well and build their brand in the market.
Tension 2
Another case study that reveals about the dispute amongst the franchisor and the
franchisee is the Ochoa vs. MacDonald’s dispute that happened to occur throughout the year
of 2016 (Grueneberg, Schneiderman and Chiu 2016). The dispute occurred due to the failure
of the franchisee to satisfy their employees with the facilities they promised during their
tenure period. The workers had complains against the reputed food organization in various
aspects. They had complained against the organization about the basic wages that they were
getting and were not satisfied with it. In addition to low wages, they had issues with the

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overtime they were working. They had the right to fight against the organization on the terms
of payment as well as the time and effort that they had to put in building the reputation of the
organization.
The employees were also forced to maintain their dress code during their schedules
such that they represent the brand of the organization they belong to. Maintaining a uniform
on a daily basis were not included in the franchise agreement. Along with that, they got very
few meal breaks in between their schedule. These are the challenging conditions faced by the
employees working on behalf of the franchisee organization of the MacDonald’s. However,
the main complaint was by the franchisor organization of Ochoa that complained against the
franchisee over their copyright on everything.
The MacDonald has had their brand name already setup in the market and yet they
were greedy enough for their marketing throughout the world. In spite of being in a joint
liability, they had their name printed everywhere. The website was on the name of the
organization and the employees that applied for job were regarded as the employees of the
MacDonald Company (Harper 2019). The uniform that was provided to the employees had
their names printed on the uniform given to them. There was no sign of any other
organizations that were also liable to the agreement.
Apart from the employees, the food company also wanted to have their sole copyright
in the services sector too. All the outlets were in the name of the organization that were
available in the market. Starting from the food boxes to the orientation materials as well as
the pay slips had the stamp of the organization itself (Ajwang 2018). The name and the logo
of the company of MacDonald was printed on every little thing that was associated with the
organization. This proved to be a sole copyright that was not acceptable by the joint holders.

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Hence, to resolve these issues legal steps were taken on behalf of the other smaller
franchisors that were involved. In the court cases that happened to occur, the court was at first
gave orders in favour of the company of MacDonald’s. However, later on, the employees
were also given importance and their issues were listened. Hence, to resolve issues between
the franchisor and the franchisee, the best option is to involve the legal organizations in
between such that all disputes could be resolved in a legal manner.
Conclusion
Any kind of business needs to have a certain backup and support at its nascent stage.
The start-up business owners thus needs to gather substantial experiences in order to set up
the business successfully. To gain this experience, they need to follow the ways of the
branded organizations. If they need to follow their ways, they need to observe the ways from
a closer picture. With that, the idea of franchisor ship came into existence. The smaller
enterprises invest their amount and incorporates with the larger reputed organizations such
that they can gather the ideas on business strategies from a closer view. They also check their
business strategies along with the marketing strategies such that they can take the lead
position in the market in the near future. Doing so, the franchisor focuses on the learning
phase of the period and grabs the details of a running a business successfully.
However, the idea of franchisee ship has advantages and disadvantages associated
with it. Becoming a franchisor is definitely a wise option to expand the business in all
horizons, in terms of money, profit, training of employees and many more. Although, there
are disadvantages too that needs to be looked upon before becoming a franchisor. There can
be disputes with the partners and that needs to be resolved in legal terms. Hence, in
conclusion it can be said that, one needs to have the wisdom to understand the business
strategies before leaping into becoming a franchisor. In addition to that, one should also be

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mentally prepared enough to face the adverse situation if the business fails to succeed
accordingly.

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References
Ajwang, F.O., 2018. The Structure and Nature of Vertical Co-ordination and Regulation
Systems in the Kenyan Fresh Fruits and Vegetables Export Value Chain: Transaction Cost
Approach (Doctoral dissertation, The Open University). Retrieved from:
http://oro.open.ac.uk/57190/1/Fredrick%20Odhiambo%20Ajwang%20Final%20Thesis
%20%282%29.pdf
Alon, I. and Lattemann, C., 2016. Tchibo Goes Global: Implementing a Hybrid Franchising
Strategy at Germany's Leading Coffee Retailer. Global Business and Organizational
Excellence, 35(2), pp.18-30. Retrieved from:
https://www.researchgate.net/profile/Ilan_Alon/publication/287375513_Tchibo_Goes_Global
_Implementing_a_Hybrid_Franchising_Strategy_at_Germany
%27s_Leading_Coffee_Retailer/links/59e9195e458515c3633baf0f/Tchibo-Goes-Global-
Implementing-a-Hybrid-Franchising-Strategy-at-Germanys-Leading-Coffee-Retailer.pdf
Alon, I., Madanoglu, M. and Shoham, A., 2017. Strategic agility explanations for managing
franchising expansion during economic cycles. Competitiveness Review: An International
Business Journal, 27(2), pp.113-131. Retrieved from:
https://uia.brage.unit.no/uia-xmlui/bitstream/handle/11250/2493455/2017+stragtegic+agility+
Competitiveness+Review%20(1).pdf?sequence=5
Burns, P., 2016. Entrepreneurship and small business. Palgrave Macmillan Limited.
Retrieved from: http://edf-vec.org/gen/html/azl/kitabxana/62.pdf
Chen, Y.S., Liu, C., Zeng, Q. and Azevedo, R.F., 2018. E-Business and Analytics Strategy in
Franchising. In Operations and Service Management: Concepts, Methodologies, Tools, and
Applications (pp. 389-406). IGI Global. Retrieved from:
https://pdfs.semanticscholar.org/9e9d/2631528f36e52046cf7dccd8e140088e482e.pdf