What makes franchising work?

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Can you buy a franchise with a magic ingredient? Image: entrepreneur-com.espxWhat is the magic ingredient in franchising? If we could nail that we'd be set up for life. Wouldn't we? If only it were that simple. But, we'll give it a go.

When it comes to franchising we have to divide this in two:

1. the magic ingredient which makes franchising a more successful distribution strategy than operating through a company owned network of managed outlets

2. the magic ingredient which makes some franchise systems more successful than other franchise systems. 

Franchised versus non franchised operations 

Unlike certain magic ingredients - the recipe for Coca Cola or KFC's 11 herbs and spices which remain trade secrets entrusted, apparently, to only two senior executives who are not allowed to travel on the same plane - the magic ingredient for franchising is not a secret component.  

All efficient enterprises whether operating though a network of managed branches or a franchised network harness the power of brands, of systems, of management, of technology, of communication, of economies of scale, of information sharing.

What provides the X factor or the magic ingredient in franchising is not a state secret. It's the   proprietorship of the franchisee - the financial and psychological commitment, driven to a large extent by self interest, which results in franchisees outperforming managers irrespective of various incentive strategies that may be available to the latter. 

The value-add that flows from franchisees having a stake in the business that a manager doesn't provides the edge.

The franchisor of course must provide the formula to enable the franchisee to succeed and the franchisee must have the appropriate temperament and skill set but if these are in place the hands-on commitment of the franchisee drives the business forward. 

Can you buy success?

Success is the magic ingredient we'd love to bottle but it's much more difficult. 

Why are some systems more successful than others given, as suggested above, that the magic ingredient is not a tightly-held secret?  If the recipe for Coca Cola or KFC's 11 herbs and spices were in the public domain - and a Google search suggests that they may be - would it make much of a difference? Unlikely. The secrecy of the recipe adds a mystique but cannot explain the success of these enterprises.

And it is the same with franchising. We recognise the magic ingredient but it is the total package and how it is implemented which makes all the difference. 

The factors that influence successful franchising are a matter of record: a viable and successful business concept, a viable and proven business system, a committed and competent franchisor, a committed and capable franchisee, and a financial equation that makes sense for both franchisor and franchisee. 

But these ingredients of successful franchising are easier to state than to apply. The reality for the prospective franchisee looking for the magic ingredient which explains why one franchise model is more successful than another is that, unfortunately, there isn't one. It's not the individual ingredients which determine success but the manner in which they are combined and applied and developed. 

When you buy a franchise

The good news for prospective franchisees is that you are, in my opinion, the magic ingredient in the franchising success story. The bad news is that, at the level of particular franchise systems, this is not enough to ensure your personal success. Your best friend here is your mature understanding of the factors that characterise successful franchise systems and your informed, rigorous and objective assessment of them in relation to the particular opportunity. 

Andrew Terry

Andrew Terry is Professor of Business Regulation at the University of Sydney's Business School and Honorary Dean at Beijing Normal University's Franchise Management School. Andrew has been inducted into the Franchise Council of Australia's Hall of Fame. View More...
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