Franchising - Fundamentals And Managing Relationships

BLS Institute of Management Feb 6, 2010

What is Franchising? “A franchise operation is a contractual relationship between the franchisor and franchisee in which the franchisor offers or is obliged to maintain a continuing interest in the business of the franchisee in such areas as know-how and training; wherein the franchisee operates under a common trade name, format and/or procedure owned or controlled by the franchisor, and in which the franchisee has or will make a substantial capital investment in his business from his own resources.” - Definition by International Franchise Association NIIT Confidential – Perspective Plan 2011-13 2

Why Franchise? • Legal and commercial arrangement concerning the successful business of a franchisor • Use of franchisor’s trade name, format, system and/or procedure under license • Means to raise capital and expand quickly • Assistance to franchisee – Marketing, management, advertising, store design, standards specifications • Payment by franchisee by way of royalty, licensee fee or other means 3

Fundamentals  Why Franchising? – Model for Multiplication, Synergising – Profitability – For both  Key attributes of a Franchisee – Is an entrepreneur / Owns the Business – Invests money, time & emotions into managing operations – Return on investment a key driver – Trust 4 4

Why buy a Franchise ? • Group Advertising power • Owning your business & making day to day decisions guided by franchisor’s experience • Benefit of identification of trademarks, proprietary information, patents & designs • Systematic training from experts • Lower risk of failure and/or loss of investments • Being a part of uniform operations throughout the country • Assistance in financial & accounting matters from the franchisor, as well as ongoing support • Enhancement of management abilities 5 5

Types of franchise 1. Product distribution franchise 2. Business format franchise 3. Management franchise 6 6

Types of franchise: Product distribution franchise • A product distribution franchise model is very much like a supplier- dealer relationship. • Typically, the franchisee merely sells the franchisor’s products. However, this type of franchise will also include some form of integration of the business activities. • Some Examples: 7

Types of franchise: Product distribution franchise Produces the syrup concentrate Sells the syrup concentrate Produces the final drink FRANCHISEE Retail Stores Vending Machine Restaurants & F&B Operators Outlets 8

Types of franchise: Business Format franchise • In a business format franchise, the integration of the business is more complete. • The franchisee not only distributes the franchisor’s products and services under the franchisor’s trade mark, but also implements the franchisor’s format and procedure of conducting the business. 9

Types of franchise: Business Format franchise Outlet in France Outlet in Australia Outlet in India NIIT Confidential – Perspective Plan 2011-13 10

Types of franchise: Management Franchise • A form of service agreement. • The franchisee provides the management expertise, format and/or procedure for conducting the business. 11

Key dimensions  Financial  Marketing  License Agreements  Territory Management  Systems & Communications  Engagement  Conflict Resolution  Principles of Continuity 12 12

Financial  Financial Model: Win-Win – And not that of squeezing the franchisee profits – Risk vs. reward balance  Cost of Franchise: – Uniform and consistent across franchisees – Initial fee – Royalty fee / Management fee – Capital required 13 13

Marketing  Branding – Centralised, Local Marketing – Standard designs / messages  Understanding Customer needs & environmental trends – Technology – Customer needs, requirements – Customer profile – Competition (familiar, unfamiliar) – Feedback from Franchisees – Inputs from independent sources 14 14

Marketing  Advertising and Branding  Trademark Usage  Product / Price: – Being competitive – Meeting customer needs – Introduction of new products and phasing out of existing products 15 15

Systems & Communications  MIS: Franchisee & franchisor  Systems & Processes:  For managing the franchise outlet  Support  Physical Monitoring  Communications – Communicate actively – Document communications, meetings, decisions 16 16

License Agreements • Contains details of the relationship like: – IPRs – Fee to be paid: Initial and ongoing – Duration of the Agreement – What Franchisor is expected to do – What Franchisee is expected to do – What none is expected to do – What is that we exist for – What are the conditions under which we would not continue with this relationship Standardise Agreements 17

Territory Management  Territory/Area of operation  Carve territories with a long term perspective  Do not create competition for existing franchisees 18 18

Engagement  Training of Franchisee & their Employees  Ongoing support  Franchisee Meets  Recognition & Awards for Franchisees & their Employees  Do not treat Franchisee & their Employees as subordinates: – Strong tendency among front end executives of the franchisor to do so. 19 19

Conflict Resolution  Three levels of conflicts: – Operational – Resolve at field level – Policy matters – Resolve at corporate level – Major disputes – Address at appropriate level  Transactional conflicts are likely to arise. – Resolve them proactively – Don’t let them come in the way of long term relationship  Remedy non-conformances speedily – Corrective actions matching with the degree of non-compliance. Avoid Litigation & Arbitrations 20 20

Principles of Continuity: 1. Win-Win relationship 2. Business sense to each other 3. Alignment of Values & Business Ethics 21 21

NIIT's ten commandments of partnership Rationale  Customer success  Shared vision of future Rules of engagement  Win-win or no deal  Nurture openness, trust and mutual respect  Co-invest, co-promote, co-benefit  Entrepreneurial and people development Outcomes  Partner Success comes first  Continual growth is imperative Building a future  Reinvent, rejuvenate, reinvigorate  And keep falling in love again and again….. 22

Customer Delight Council: Objective & Focus Areas Objective: To create sustainable competitiveness by pooling in the rich experience of seasoned NIIT-ians • Customer Delight • Market Addressal • Pain reduction

Think Tank of Senior franchisees 24 24

Involvement in Strategic Issues 25 25

Be in each other’s shoes 26 26

Nurture openness, mutual trust & respect 27 27

Franchising is all about 28

Leadership in the Century of the mind 29

Franchising - Fundamentals And Managing Relationships

by Ajay Goel

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