FRANCHISING as a method of internationalization - SUBWAY case

Term Paper , 2005 , 42 Pages , Grade: 1-

Business economics - General

INTRODUCTION

With the decision to carry out a business internationally, there are several issues arising which managers have to take into account and which they have to find an optimal solution to. One of the questions companies are facing while planning to spread their business is the question on the operation mode. What kind of possibilities of becoming international do we have, what are the advantages and disadvantages come along with the different kind of possibilities and which one, finally, fits best to our company? To goal of our term paper is to investigate one of the different operation modes companies can choose, also on their domestic market, but especially when carrying out operations on international markets. To introduce the method of franchising, we will present the most important knowledge on this topic in the next chapters.

Beginning with the theoretical part, we are giving an overview on the history and development of franchising, “how did it start and where is it going?” Followed by that, the method of franchising as it is applied nowadays is explained very carefully. We are giving answers on what franchising is, what role it is playing in the process of the internationalization of a firm and the different modes of franchising. Additionally, the situation on the franchising market in three different regions, Europe, Germany and the United States are presented. Based on the theory, we are taking the subject a step forward by investigating a real franchising case from the practical life. The company we chose is the worldleading sandwich restaurant chain which is operating not less than 26,000 restaurants worldwide through franchising. The company will be introduced briefly before we start to show how franchising works at Subway, what comes along with becoming a franchisee of Subway, like requirements which have to be fulfilled and, probably the most interesting part, the financial flow between the franchisee and Subway as franchisor. So the reader gets especially a view on how Subway is earning money even though they are not running their restaurants directly by themselves. This will be followed by the explanation of the franchising mode used by Subway and the key success factors which are critical for Subway to become such a great example on the applicability of franchising to internationalize a company.

TABLE OF CONTENT

1. INTRODUCTION

2. THE THEORY OF FRANCHISING
2.1 The development of franchising
2.1.1 Origin of the Franchising Term
2.1.2 Development of the First Franchise Systems
2.1.3 Development of the Modern Franchising
2.1.4 World-Wide Break-Through of Franchising
2.1.5 Future Prospects for Franchising
2.2 The Franchising System
2.2.1 Overview
2.2.2 Direct Unit Franchising
2.2.3 Master Franchising
2.2.4 Direct Subsidiary Franchising
2.3 Advantages and Disadvantages of Franchising
2.4 Franchising Situation in Three Chosen Markets
2.4.1 Europe
2.4.2 Germany
2.4.3 USA

3. FRANCHISING IN PRACTICE: “The Subway Case”
3.1 Introduction
3.1.1 Company Background
3.1.2 Products
3.1.3 Distribution System
3.2 Franchising at Subway
3.2.1 Franchising Operation Mode
3.2.2 Constraints and Support
3.2.3 Key Success Factors
3.3 Internationalization

4 CONCLUSION

REFERENCES

1. INTRODUCTION

With the decision to carry out a business internationally, there are several issues arising which managers have to take into account and which they have to find an optimal solution to. One of the questions companies are facing while planning to spread their business is the question on the operation mode. What kind of possibilities of becoming international do we have, what are the advantages and disadvantages come along with the different kind of possibilities and which one, finally, fits best to our company?

To goal of our term paper is to investigate one of the different operation modes companies can choose, also on their domestic market, but especially when carrying out operations on international markets. To introduce the method of franchising, we will present the most important knowledge on this topic in the next chapters.

Beginning with the theoretical part, we are giving an overview on the history and development of franchising, “how did it start and where is it going?” Followed by that, the method of franchising as it is applied nowadays is explained very carefully. We are giving answers on what franchising is, what role it is playing in the process of the internationalization of a firm and the different modes of franchising. Additionally, the situation on the franchising market in three different regions, Europe, Germany and the United States are presented.

Based on the theory, we are taking the subject a step forward by investigating a real franchising case from the practical life. The company we chose is the world-leading sandwich restaurant chain which is operating not less than 26,000 restaurants worldwide through franchising. The company will be introduced briefly before we start to show how franchising works at Subway, what comes along with becoming a franchisee of Subway, like requirements which have to be fulfilled and, probably the most interesting part, the financial flow between the franchisee and Subway as franchisor. So the reader gets especially a view on how Subway is earning money even though they are not running their restaurants directly by themselves.

This will be followed by the explanation of the franchising mode used by Subway and the key success factors which are critical for Subway to become such a great example on the applicability of franchising to internationalize a company.

2. THE THEORY OF FRANCHISING

2.1 The development of franchising

2.1.1 Origin of the Franchising Term

The origin of the franchise term can be found in France in the middle ages where it described the release from duties and taxes. Later, under this term craftsmen and salesmen acquired permission for organizing markets or fairs on the land of the seigneurs. In 17th and 18th century the term changed for the first time into the meaning of description of privileges, which the state assigned to individuals. In the middle of the 19th century finally franchising described the permission for the commercial use of rights of a third person.

2.1.2 Development of the First Franchise Systems

The development of the first franchise systems reaches back to time of the beginning industrialization. This time the American "Singer Sewing Machine Company" equipped driving dealers 1860 with the right to sell their sewing machines on own calculation and in their own name. This distribution system was used until the middle of the 20th century by some automobile and beverage manufacturers and nowadays it is called "Product distribution franchising" or "Product and trade name franchising". Most well-known example of this procedure is the license allocation of the American beverage manufacturer Coca Cola, which covers the bottling and the selling of the well-known caffeine-containing lemonade under a uniform label name.

2.1.3 Development of the Modern Franchising

The motherland of the modern "Business format franchising" is the USA, where the world-wide triumphant procession of the modern franchising began after the Second World War. In contrast to its traditional form the modern franchising is much more than the assignments of trademark and the passing on of know-how. It covers an extensive package of established achievements of the franchisor, which ensure an accurate duplication of a successful system. As a return service for the provided know-how, the assignments of rights as well as the support with the building up and the guidance of its enterprise, the franchisee commits himself to the payment of royalties. One of the inventors of this modern franchising is the fast-food chain McDonald's, which nowadays possesses a global network of more than 26,000 restaurants. Beside small differences, the design, organization and products of McDonald's are similar in every country.

2.1.4 World-Wide Break-Through of Franchising

In the 60`s the unreflected transmission of American franchise systems on other continents and states proved increasingly problematic and adversarial for a rapid spreading of franchising in the world. Only when the enormous consume demand of the post-war period waned and customers became more choosy again, the franchise systems could emphasize their advantages. In the 70's the modern franchising succeeded also in Europe and new franchise systems provider appeared rapidly but also traditional enterprises were leveraged by franchising again, because the use of a franchising package proved often profitable. In the beginning the major use of franchising system in Europe was in the retail trade and the restaurant branch. In the meantime the concept of franchising is present in nearly all countries and the number of franchise systems world-wide is approximately estimated 17,000.

2.1.5 Future Prospects for Franchising

With the development from a supplier- to a customer's market the competition gets worse. Innovations and specializations require marketing forms up-to-date, whereby the franchise systems are especially successful with the marketing of services as well as with training and service-intensive products. Modern franchise systems are almost in all industries on the advance.

Due to the advantages of franchising for the manufacturers in relation to the traditional marketing forms, the share of the franchise systems in the total retail branch turnover in the USA will raise on approximately 75% (American Ministry of Trade). Some industries such as hotels and restaurants, retail trade as well as courier services and car rental services seem to be qualified in a special way for using franchising as an internationalization strategy.

With the in 1994 established "World franchise Council" (WFC), whose secretariat is the German franchise federation, a world-wide harmonization and spreading of franchising should be achieved. In opinion of the American trend researcher John Naisbitt the franchising will develop up to the leading distribution form world-wide until 2010. Due to the rapid change of numerous basic conditions, however also a dramatic adjustment process is approaching for the franchising. The future belongs to that franchisors, which know to understand themselves as business avantgarde and to use the chances of the change. In the course of a polarization the high performance franchisors will develop themselves further to comprehensive service centers for its partners, while other franchisors will have to reduce their scope of service to the level of licensing systems.

(Franchise-net.de and Franchiseportal.de)

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• College: Lappeenranta University of Technology (Business administration)
• Course: Internationalization of the firm
• Grade: 1-
• Authors: Peter Strehle (Author), Göksen Iyiköy (Author), Henning Isbrecht (Author)
• Publication Year: 2005
• Pages: 42
• Catalog Number: V37396
• ISBN (eBook): 9783638367486
• Language: English
• Tags: FRANCHISING, SUBWAY, Internationalization