Business expansion is the attempt of a company to grow the size of its business. It aims to increase the scale of operations. Expansion is a way to grow the business and generate more money for the company’s shareholders. Several reasons explain why expansion is essential to companies, including (‘Business Expansion: Meaning, Importance, Types, Advantages, Disadvantages’):
Make more money by selling more output to more customers
Increase competitiveness by building more enormous resources
Dominate the market by controlling a higher market share
Increase bargaining power with stakeholders, including bargaining power with suppliers, customers, distributors, and suppliers
Achieve market leadership to further influence market prices.
Increases economies of scale and can spread costs across more outputs, lowering unit costs
Increase shareholder value in line with positive expectations for company growth and profits
Branching and Franchising
Two of the most popular modes of business expansion are Branching and Franchising. While both are forms of physical expansion of the business’s outreach, there are important differences as well. Branch is run by the company itself, where franchise is run by a third party on behalf of the company. The difference between branch and franchise has been explained below (‘Branch and Franchise Difference’):
Operation Responsibility: In case of branching, the business itself is responsible to run the operation within the branch. Whereas, in case of franchising, the day to day operation is run by a third party known as the Franchisee. Here, the original business owner is the Franchisor.
Product & Services: In case of branching, product and services both relate to the business. Whereas, in case of franchising, services are offered by the third party (Franchisee), where the product relates to the company. For example, there may be a franchise for a shoe company, where the Franchisor’s shoes are sold by the third party (Franchisee).
Financing & Investment: In branching, the entire investment is made by the business itself. Whereas, in Franchising, the investment is made by the Franchisee in the franchise outlet.
Profit: In branching, profits are not shared with other parties and all profit goes to the business. Whereas, in Franchising, a certain agreed percentage of the profit goes to the Franchisor.
Quality of Services: In branching, quality is directly maintained by the business. Whereas, in franchising, quality is maintained by the Franchisor but is monitored by the Franchisor. Franchise may be cancelled for non compliance with quality standards..
Employees & Staffing: In branching, employees are directly hired by the business itself and draw salary from the company’s payroll. Whereas, in franchising, employees are hired by the franchisee and such employees have no relation with the franchisor.
Benefits of Franchising
Franchising is a form of marketing and distribution with a strong relationship between the franchisor and the franchisee. The franchisor is the owner of the business and brand who grants the right, a licensed privilege to the franchisee (an individual or a group of people) to sell the business’ products and services (‘7 benefits of expanding your business through franchising’).
The primary advantage for people investing in a franchise is that the franchisor assists in organising, training, merchandising, marketing, and managing in return for monetary consideration. However, there are several benefits to the franchisor as well as the brand gets to easily expand its business through franchising. It is often said that franchising is the shortcut to business success because of the myriad of opportunities that it brings. Some of the benefits are discussed below:
Strategic Identity: A brand needs to hold an identity that can be easily identified by the audience. In franchising, this identity is already given to a franchisee and often they are highly recognisable at a global level.As a franchise investor, the franchisee will own and run one of your brand outlets in a different location. This provides a strategic identity to the franchised outlet and is an effective method for the parent brand to quickly expand in the market. Corporate brands such as McDonald’s and Domino’s have taken full advantage of this and have emerged successful in the franchising market.With a good brand identity comes a loyal consumer base seeking the same experience and products in different locations. This benefits the franchisors whose franchise is getting popular.
Capital: For an existing business that needs expansion, capital is the biggest problem. With franchising, the franchisor gets capital acquisition from the franchise investor for opening and operating a franchise unit.It allows the franchisor to grow using the resources of others and unfettered by debt. When the franchisee signs the lease and commits to various contracts, it allows franchising to expand virtually with no contingent liability which reduces the risk to the franchisor greatly.
Ease of Supervision and Management: It takes several months for a business to look for and train a new manager or any other staff member. And after putting so much effort into training them, they often leave or get hired by competitors. There is also a lack of genuine commitment to their jobs which makes supervising them from a distance a great challenge.In franchising, the owner gets substituted for the manager. Franchisees will assume majority of the responsibilities that are otherwise shouldered by the business, thus allowing the franchisor to focus on the big picture.Franchisees are also likely to have more motivation than a regular manager, since they have a vested interest in the success of their business and act as entrepreneurs running separate profit entities.
Constant Growth: It involves a lot of money and time to set up a single unit and businesses have a fear of getting lost in the crowd of competitors. Often, these fears are based on reality. Franchising ensures that the franchisor can capture a market leadership position before the competitors can respond. McDonald’s’s, OYO, Levi’s, Ferns N Petals, Lenskart, Domino’s, Miniso and many more top brands have established market leadership through franchising, which would have otherwise been impossible through independent expansion.
Profitability: Since the cost involved in financing a franchise outlet and the overall day to day responsibility is borne by the franchisee, the franchisor’s company is usually much leaner. The franchisor also receives franchise fees and royalties on all products sold by the franchisee which as a result makes the franchisor organization more profitable.
Purchasing Power: As the franchise grows, the store marketing strategies, multiple locations, and huge customer base leads to an increase in the turnover, profits, and ultimately the purchasing power. This allows the franchisor to develop better deals with suppliers and enable other business purchases such as vehicles and equipment.
Minimized Risk: Franchising helps mitigate many risks that are involved in expanding a business with company-owned outlets. A franchisor not only requires less capital to expand but also the risk is limited to the capital a franchisor invests in developing the franchise company. This capital amount is far less than opening one additional company-owned location. Since all the responsibility for the investment in the franchise operation are borne by the franchisee, the start-up risk is substantially reduced for the franchisors.
