FRANCHISING IN CHINA.   Term Paper ID:26668 Click to get this paper

Essay Subject: Review of literature on franchise agreements (joint ventures, master franchisee, licensing, etc.), East Asian business environment, problems & opportunities for Americans, examples. Charts.... More...

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Paper Abstract: Review of literature on franchise agreements (joint ventures, master franchisee, licensing, etc.), East Asian business environment, problems & opportunities for Americans, examples. Charts. Paper Introduction: Executive Summary This research examines the issue of franchising and franchising opportunities within China. A review of the literature examines the various relationships which can be developed within the franchising framework (master franchisee, joint venture, licensing, direct investment and government as master franchisee). The literature reveals the importance of having an appropriate partner within China who can help the foreign company understand both the Chinese market and the Chinese way of doing business. Even though the articles do not all discuss franchising within China, this finding suggests that franchising through a master franchisee arrangement has particular benefit to companies considering operations in China since the master franchisee would then be responsible for establishing relationshi Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. The detailed roles and responsibilities of the various participants intraditional and master franchising relationships are explored by Justis andJudd in a 1986 article, "Master Franchising: A New Look." In thisarticle, the authors clearly identify the differences between the masterfranchise agreement and the traditional relationship which exists betweenfranchisor and franchisee (see Table 1). However, the authors also warn that the general approach to businesscan be quite different in China and the United States, and Chan & Justisadvise American companies to use intermediaries in order to make theprocess more effective and efficient. Much of this research was conductedprior to the 1989 political strife which occurred in China, but the long-term prospects within the country discussed here, and the culturalconsiderations, should still be considered valid by American businessprofessionals. If careful consideration is given to the type of franchiseapproach, to the Chinese partner, and to the political and economicenvironment, foreign companies can enjoy considerable success in theChinese market. Introduction Franchising has been used by many different types of companies toeffectively enter new markets, or to expand their existing market share.In a franchise agreement, the franchisor provides training and the rightsto a particular technique or product, and the franchisee assumes the risks(and rewards) associated with the business activity. 79). "Franchise Management in EastAsia," Academy of Management Executive, 4, 2, 199 , 75-76. No international venture is withoutrisk, and the cultural differences between China and the rest of the globalmarket (particularly American companies) can be significant. "Managing Business Risks inChina," Long Range Planning, 31, 4, 1998, pp. 76). In this article, the authors point out the significantincrease in GDP of China compared both to developed and developing nations,and also note the significant amount of foreign investment which helpedChina reach the level of the world's eighth largest economy in 1992(Zhuang, Ritchie, & Zhang, 1998, p. The master franchisee assumes the liability, but alsoreaps the benefit from the association. In addition, the joint venture mayinvolve multiple relationships between the franchising company and otherorganizations, whereas master franchisees are granted exclusive rights to aparticular country or region (Chan & Justis, 199 , p. "Master Franchising: A NewLook," Journal of Small Business Management, July 1986, pp. 82-9 . Justis, Robert T., and Richard Judd. 88). These factorsinclude the issue of guanxi and ensuring that financial arrangements are tothe mutual benefit of all parties. Franchisorsshould also note that since proposals involving local labor sources andwhich transfer technical or management knowledge to the local economyreceive priority from the Chinese government, franchising can be aparticularly attractive way to enter the Chinese market (Zhuang, Ritchie, &Zhang, 1998, p. By acquiring Dino's, Pizza Hut was able torealize the return that it needed to meet its internal goals, and did somore rapidly than if the company had used a non-acquisition strategy(Welch, 1992, p. Companies considering entering the Chinese market should give carefulconsideration as to whether their business lends itself to a franchisearrangement. China, seeking to attract additionalforeign investment, presents its markets as having nearly no risk toforeign investors. James Brunner, Anthony Koh and Xiaogang Lou address the issue of jointventures and how they are perceived by Chinese participants in theirarticle, "Chinese Perceptions of Issues and Obstacles Confronting JointVentures." In this article, the authors report the results of aquestionnaire conducted in person with individuals who had relationshipswith the authors. However, the authors also note that some companies, such as Unilever,experienced both reward and risk. Companies might find that theconstraints imposed by the government make it difficult to conductbusiness, or that the company is unwilling to cede appropriate control tothe joint venture partner. This may include selecting the management and employees,running the operation directly, or simply determining which localparticipants are selected as subfranchisees. These factors have been discussed atlength in other articles related to franchising in China, and are emergingas critical success factors. 81-96. The authors findthat companies seeking an acceptable return from Chinese activities mustwork at developing and maintaining an effective communication system withpartners and contacts within China. As a result, using anintermediary familiar with the business environment of both countries canbe an effective approach to forming a good franchise relationship (Chan &Justis, 199 , p. Zhang. Fast foodrestaurants, dry cleaners and real estate operations are examples ofsuccessful franchise operations in the United States and abroad. 8 ). If the master franchisee isworking with subfranchisees, this approach permits the master franchisee todevelop successful procedures which can then be passed on; if the masterfranchisee intends to operate all stores directly, it expedites theexpansion process. "Franchise Management in East Asia,"Academy of Management Executive, 4, 2, 199 , 75-85. When international franchisees are involved, management ofboth the franchisor and franchisee must put considerable effort intomaintaining a productive and effective working relationship (Welch, 1992,p. The strategy that is presented at some length is franchisingthrough acquisition, a strategy which was used with some success by PizzaHut (an American company) in Australia. This can place considerable barriers on thejoint venture and may cause some American participants to withdraw from theprocess. Zhuang, Ritchie and Zhangsought to discover what actual investors thought about the risk and rewardof Chinese investment, and they conducted both field interviews and surveysby mail to accomplish this. Specifically, the issue of franchisingand franchising opportunities within China will be explored. Shenkar also emphasizes the importance of understanding thenegotiation styles of the Chinese partners, and the importance of selectingthe appropriate partner in China. Ritchie and Q. One of the most trying difficultiesfor both Chinese and American participants is the way in which either partyapproaches negotiation. Itaffects management, personnel, finance and even the arrangement of capitalfinancing, which can be particularly problematic in this still-developingeconomy. Americans are oftenfrustrated in their attempts to build relationships outside of the guanxienvironment, and Chinese business professionals are baffled by theaggressive (as they perceive it) actions of American businesspeople. Welch notes that some franchising activities, particularly those byAmerican corporate giants such as McDonald's, have garnered a great deal ofpublicity. 83). According to Chan and Justis, American companies cansignificantly slow their progress and chance for success if they do notrecognize that there are considerable cultural differences between EastAsia and traditional American markets. Pizza Hut competed against Dial-A-Dino's, a market leader in the pizza delivery business. Ritchie and Q. The Role of the Franchisor in Traditional and Master Franchising|Traditional Franchising |Master Franchising ||Sells franchises |Sells master franchisee territories ||Qualifies franchisees |Qualifies only master franchisees || |(individual subfranchisees are qualified || |by master) ||Receives all franchise fees |Receives only a portion of franchise fees||Collects all royalty fees |Collects minority stake of royalty fees ||Trains all franchisees |Trains only master franchisees ||Supports all franchisees |Supports only master franchisee | Table 1 Source: Justis, Robert T., and Richard Judd. If the company does not have previous franchise experience,it might be wise not to enter the Chinese market as a franchisor; instead,the company should consider gaining franchise experience elsewhere. Americans tend to view negotiation asconfrontations while Chinese participants are more intent on achievingconsensus. Pizza Hut enteredthe market several years after Dino's, and was unable to gain market sharewhich satisfied the company. The authors conclude that Americans who believe they are at adisadvantage in China if they do not speak or understand the Chineselanguage are misguided in that assumption. This is a consideration which has ramificationsfor companies which do not operate on a global level, and for those whichoperate in relatively stable political environments, but is of particularimportance for companies which operate (or are considering operations) involatile political environments where the dynamic social and politicalenvironment can affect the economic and commercial environment. The articles also stress the importance of having an appropriatepartner within China who can help the foreign company understand both theChinese market and the Chinese way of doing business. In thisarrangement, the local government exercises direct control over theoperation. By the end of the 199 s, it was clear that those authors who suggestedthat China was an attractive investment opportunity had been provedcorrect. Even though the articles do not all discuss franchisingwithin China, this finding suggests that franchising through a masterfranchisee arrangement has particular benefit to companies consideringoperations in China since the master franchisee would then be responsiblefor establishing relationships with the subfranchisees. Thereis considerable pressure by the Chinese to generate hard currency; as aresult, both Chinese and American participants acknowledge that Americansare likely to pay more for goods and services. Foreign exchange, political instability and pressure broughtby the international community with regard to China's human rights policiesall have an impact on the business environment within China. Foreign analysts, on the other hand, can present theexact opposite situation and some suggest that China is a particularlyunattractive market despite its economic rise. 17). The authors then discuss the cultural environment which makes EastAsia in general, and China in particular, an attractive franchiseopportunity. However, the political situation in China is particularlyvolatile, and many companies are wary of the risks associated with enteringthis market. 613). Welch, Lawrence S. It is also critical that companies carefully consider the exact formthat they want the franchise relationship to take. 87). 77). Literature Review In their article, "Franchise Management in East Asia," Peng Chan andRobert Justis examine the franchise environment in East Asia with aparticular emphasis on Japan and China. According to Chan and Justis,master franchisees typically establish one or two stores and ensure theirsuccess before expanding their operation. The gross domestic product (GDP) growth rate of China faroutpaced that of the United States during the 199 to 1995 period (seeFigure 3), and the joint venture concerns which were cited in otherarticles were outpaced by the high level of foreign investment in China. There will bea review of the literature regarding this topic, and a discussion of theimplications for management of companies interested in entering the Chinesemarket. However, the authors notethat few Americans appreciate the use of "go-betweens" or intermediaries ineveryday negotiations, and even fewer understand or appreciate the role ofguanxi in Chinese business life (Brunner, Koh, & Lou, 1992, p. Executive Summary This research examines the issue of franchising and franchisingopportunities within China. Purpose of Study The purpose of this study is to examine the literature regardingbusiness opportunities in China. Thisshould not be done without consulting with companies in similar situationswho have embarked on this type of endeavor. Theinfluence of guanxi cannot be underestimated according to the authors. Muchof the article is devoted to presenting the research framework andapproach; personal interviews among Chinese professionals doing businesswith Americans constituted the primary research approach. There can be significant barriers to directinvestment (where the franchising company directly owns subsidiaries in thetarget market), many of which are imposed by the local government. Written in 199 , the article givesa good overview of how franchising had been implemented in East Asia up tothat time, and the prospects which franchisees faced. This article brings to light some important issues which Americansconsidering franchising in China need to take into account. Shenkar, Oded. 114). The relationship between franchisors and franchisees is criticalto the success of the franchise endeavor, and can be difficult in domesticoperations. In some cases, thecompany may want to enter into a master franchise relationship, or perhapsa joint venture where the Chinese government is the primary contact. Although the articledoes not specifically address issues related to China, the prevalence ofthe franchise relationship in China, and the particular use of the masterfranchise relationship there makes this a highly valuable article for anycompanies considering entering the Chinese market using this method. Since many franchiseoperations remain family-owned and operated, they are well-suited tocultures (such as both China and Japan) where family values continue to bevalued highly by citizens (Chan & Justis, 199 , p. 118). Companies or individuals considering franchising in today'senvironment would be well-advised to use this information as background,but should focus on more recent developments in China to provide them withcurrent information about franchising in that nation. 6 6-613. 92). This finding is certainly in keepingwith other research in the area, and reinforces the idea that companiesparticipating in the Chinese economy cannot do so without carefulcoordination including a Chinese partner. Managerial Implications Managers considering doing business in China can learn from thearticles included in this review of literature. This approach can provide ahelpful guideline to those business professionals interested in forming afranchise relationship, but who are unclear as to which relationship offersthe greatest advantage (Justis & Judd, 1986, p. Where the previous two articles focused on franchising in East Asia,and in China in particular, Lawrence Welch takes on the larger issue ofinternational franchising in "Developments in International Franchising."Welch notes that international franchising is on the increase, but thatinternational franchisors are facing many of the same problems confrontingother global marketers, including controlling their marketing activities inthe target country and overcoming cultural differences between the home andtarget markets (Welch, 1992, p. Idea Development Each of the articles discussed here highlights the various advantagesthat franchising offers in general, and several point out the importance offranchising as a way to gain market penetration and success within China.However, the articles also indicate that franchising in any context is notwithout risk, and that any economic investment in China, includingfranchising, poses particular problems. 97-126. Instead, Chinese professionalsare increasingly fluent in English, or willing to rely on translators whoare readily available for service to business. 78). [pic] Figure 3 Source: Zhuang, L., R. It is this foreign investment which concerns Zhuang, Ritchie and Zhangin their article, "Managing Business Risks in China," an article whichappeared in 1998. China is one of the most rapidly growing economies in the world, and anumber of American companies are interested in participating in thismarket. If these questions and issues can be resolvedahead of time, there is a greater likelihood of success. Entering the Chinese market using afranchising relationship can be an effective strategy for those companieswhich already engage in franchising, and the master franchisee structure isone which has already enjoyed considerable success in China (particularlywhen the Chinese government is engaged as the master franchisee in thisrelationship). Companies considering entering theChinese market should give careful consideration as to whether theirbusiness lends itself to a franchise arrangement. Licensing agreements permit specific entities to use a product,trademark or other trade asset in return for a royalty fee. The Chinese participants are also likely to move much moreslowly than American companies might desire, which can lead to frustrationif the American companies are not prepared. 119). This arrangement provides the local government with thegreatest amount of control over the activities of the franchisees, but alsoprovides for the influx of foreign capital. If careful consideration is givento the type of franchise approach, to the Chinese partner, and to thepolitical and economic environment, foreign companies can enjoyconsiderable success in the Chinese market. "Chinese Perceptions ofIssues and Obstacles Confronting Joint Ventures," Journal of GlobalMarketing, 6, 1/2, 1992, pp. Culturally, the family nature of many franchisingoperations can be conducive to franchising success, and the governmentwelcomes the involvement of local resources which franchising typicallyinvolves. Welch suggests that these well-known franchise activities aremerely symptomatic of a larger movement toward franchising on aninternational level because franchising provides the franchisors with rapidmarket access (Welch, 1992, p. Zhuang, L., R. Under a master franchisee agreement, a single coordinating entity isset up which then establishes subfranchisees in addition to any franchisesit owns itself. 82). 6 7). There were considerably fewer franchises operating in China,but the authors note that the environment in China is appropriate forfranchising opportunities, a theme which they return to later in thearticle. Hewlett-Packard in particular credits itssuccess in China to building an organization which was created specificallyfor the franchise endeavor, and thus the company avoided having to retrainemployees who were predisposed to other ways of conducting business(Shenkar, 199 , p. The fourth type of franchise arrangement considered by Chan & Justisis that of direct investment. 78). To some degree, the master franchiseearrangement is a special form of joint venture where the master franchiseeis granted the right to subfranchise any, all or none of the operation.This is not true of joint ventures. "Master Franchising: ANew Look," Journal of Small Business Management, July 1986, 18. However, Shenkar also notes that companiesmust choose an appropriate location within China for their activities.While his article addresses joint ventures in general, and not necessarilyfranchises in particular, there are considerable advantages to locatingwithin Special Economic Zones or within particular provinces. Guanxi is the complicated (to Americans) process by which business andpersonal relationships are formed, and the guanxi process can take aconsiderable amount of time and patience to build. Theylater note that some of these (master franchisee, joint venture and workingwith the local government) are variations on a common theme of franchising. Regionalproblems and economic development may well influence the success enjoyed byfranchising operations (Shenkar, 199 , p. Chan and Justis begin their article with an examination of the fivestrategies which can be used for franchising in East Asia: masterfranchisee, joint venture, licensing, direct investment and working withthe local government as the franchisee (Chan & Justis, 199 , p. If companiesdo not recognize that they need to involve a Chinese partner, and if theydo not take care in selecting that partner, they may find that they areunable to generate the results that they expect. References Brunner, James, Anthony Koh and Xiaogang Lou. The articles also indicate the importance of understanding thepolitical and economic environment in China, and, since several werewritten shortly after particularly chaotic political events which hadeconomic ramifications, the importance of keeping current with politicalevents is to be stressed. However, the article is alsodated and does not provide current information about developments in theseareas. 16-21. He cites the case ofArby's in the United States where more than 175 franchisees sought theremoval of Arby's chairman due to dissatisfaction with the chairman'spolicies. "Franchise Management in EastAsia," Academy of Management Executive, 4, 2, 199 , 77. The last type of franchise arrangement discussed by Chan and Justis isthat of invoking the government as the local franchisee; this isessentially a special form of the master franchisee arrangement. Appendices [pic] Figure 1 Source: Chan, Peng, and Robert Justis. 99). Coca-Cola, for example,experimented with various Chinese characters for its brand in China beforedeciding on characters which translate approximately as "permit the mouthto rejoice" (Chan & Justis, 199 , p. Companies need to be mindful of the risks associated with theinternational venture, however, and particularly with the risks associatedwith choosing the wrong partner or even locating in the wrong area of thecountry. Thesebarriers are erected in order to keep profits from the operation fromleaving the country, and also to encourage the transfer of business andtechnical knowledge from the franchisor to the local economy. Master franchise arrangements were the most popularform of international franchising at the time of this article (see Figure2) (Chan & Justis, 199 , p. 8 ). The literature reveals theimportance of having an appropriate partner within China who can help theforeign company understand both the Chinese market and the Chinese way ofdoing business. "International Joint Ventures' Problems in China:Risks and Remedies," Long Range Planning, 23, 3, 199 , pp. Even those articles which do not address franchising in Chinaspecifically offer strong guidelines for franchising in general, or forunderstanding the Chinese economy. Even those articles whichdo not address franchising in China specifically offer strong guidelinesfor franchising in general, or for understanding the Chinese economy. However, Welch also cautions against franchisors assuming that theyare above reproach in the franchising relationship. While franchising is not addressed specifically by the authors, theirguidelines can be applied to the franchise environment. "Managing BusinessRisks in China," Long Range Planning, 31, 4, 1998, 6 7. Chan, Peng, and Robert Justis. In addition, governmentregulations require that joint ventures show a positive net foreignexchange (with greater monies coming into China than leaving it) (Brunner,Koh, and Lou, 1992, p. Oded Shenkar assesses the success of several less well-known jointventures in China in his article, "International Joint Ventures' Problemsin China: Risks and Remedies." In this article, the author specificallysuggests that franchisors refrain from taking over existing operations asPizza Hut did in Australia. Goods and services may have to bemodified before they can be accepted in these markets, or the marketingapproach itself may have to be changed. A review of the literature examines thevarious relationships which can be developed within the franchisingframework (master franchisee, joint venture, licensing, direct investmentand government as master franchisee). The confidentiality of the respondents was assured, andthe trust which existed between the respondents and the interviewers wascredited with eliciting honest answers which accurately portray Chineseimpressions of American business (Brunner, Koh, & Lou, 1992, p. For companies which are already acquainted with the intricacies offranchising however, the Chinese cultural and economic environment can lenditself to franchising. Welch also presents new strategies for entering internationalfranchising markets, particularly when there are already competitors inthat market. Under the joint venture, the franchising company works with localorganizations to develop operations. Even though thearticles do not all discuss franchising within China, this finding suggeststhat franchising through a master franchisee arrangement has particularbenefit to companies considering operations in China since the masterfranchisee would then be responsible for establishing relationships withthe subfranchisees. The franchisor benefits from having little exposed risk inthe arrangement (risk is transferred to the franchisee or licensee) and thefranchisor is able to enter markets more quickly than if a master franchisearrangement were developed (Chan & Justis, 199 , p. By requiringthat foreign companies have only a minority stake in companies, governmentsbelieve that they are able to prevent the outflow of resources (bothtechnical and monetary) and encourage the development of the local economy(Chan & Justis, 199 , p. At the time of this article, there were more than 35 Americancompanies which participated in franchising, and more than 31, international outlets. The authors also suggest thatcompanies need to monitor the legislative environment as well as economicand commercial risks which may be developing in the market. This does not mean that companies should dismiss the risks associatedeither with international trade in general, franchising in particular, orwith the Chinese market specifically. Conclusion The Chinese economy is one of the most rapidly expanding economies inthe global market, and it represents a significant opportunity forcompanies willing to assume some risk. Zhang. If the company does nothave previous franchise experience, it might be wise not to enter theChinese market as a franchisor; instead, the company should considergaining franchise experience elsewhere. The benefit tothe franchisee in this arrangement is that there is no research anddevelopment cost, and the franchisee also benefits from the reputation ofthe franchisor. 77). In fact, financing and foreign exchange issues provide some of themost significant obstacles to be overcome in joint ventures involvingAmerican and Chinese entities (Brunner, Koh, and Lou, 1992, p. This arrangement has beenused with considerable success in China, which is not surprising given thepolitical and economic systems in place in that country (Chan & Justis,199 , p. "Developments in International Franchising,"Journal of Global Marketing, 6, 1/2, 1992, pp. This article provides a good background on international franchisingapproaches and the environment of East Asia. Of these, more than 73 were located in Japan (seeFigure 1). 85). 78). From a business perspective, the environment of East Asia in generaland China in particular can be conducive to strong franchise arrangements.This is due in large part to the influence of Confucius on the culture ofthe nation and the strong role of the family. [pic] Figure 2 Source: Chan, Peng, and Robert Justis. 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