What Are The Factors For Franchise Success – Part 1
A great piece of information that is important to all franchisors and franchisees is that of Scott Shane and Chester Spell who demonstrate that ¾ of all franchise systems fail within the first 12 years, and less than 1 in 4 survives until the end of the contract.
Originally published in the Sloane Management review in 1998 the article is one of the more common sense pieces of writing covering the franchise industry.
They identified a number of important franchise success factors that should be used to assess the likely success of a franchise system. They are:
- Rapid growth (or planned rapid growth) of the franchise means that they can begin to reach a level to compete with existing players in the marketplace.
- Local management support of the franchise aids rapid growth
- Demonstrable trustworthiness and high quality systems
They studied 157 companies in 27 industries and identified that one third of systems stop franchising in their first four years.
They say “The high death rate of new systems suggests that franchising is not an easy business”.
They developed a model called NewFran which points to the contributing factors of success:
- A recognised successful history before franchising. This resulted in a recognised ‘brand name’ that could not be easily copied. Systems, marketing, premises e.t.c could be easily copied by competitors – a brand could not
- Economies of scale i.e cheaper costs because they are larger, in marketing. This was achieved through being a bigger brand.
- Rapid growth of the franchise allowed the brand name to develop quickly and stop competitors from copying or replicating the business idea.
- Using local franchisees to use their local knowledge to determine local business decisions and operate with fewer ‘local field operations’. This means the franchise resources can be concentrated on branding, marketing and growth. The entrepreneurial ‘drive’ of the franchise owner is concentrated on building the business. The opposite of this is by keeping close control on local franchisees by appointing Master Franchisees. This was shown to develop ‘passive ownership’ which undermines the entrepreneurial incentives of outlet ownership. The said “therefore growing quickly, through master franchising, increases the probability of system failure”
The article recommends some things off the back of this that seem to go against some of the ‘industry norms’ of franchising:
- Franchisees should seek franchisors that are expanding rapidly.
- Franchisees should not seek a franchise that promises a lot of field support
- A lean operation at headquarters is a success predictor
- Franchisees should seek franchisors with strong brands or at least a plan as to how they will develop a strong brand
- Franchisees should be a member of a regulatory body
- Franchisees should be wary of franchises that offer master franchising. Whilst this speeds growth it also increases the likelihood of failure.
You should heed this advice as it is based on scientific research – not the usual hype that surrounds the industry.
I would agree with all of the points raised and would like to just clarify that they suggest that in depth field support is bad – not in depth sales and marketing support.
To Your Franchise Success
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