ENT3173 Exam elaborations 2024
1.Four Types of Policies: -Appropriate rules toward ownership of
franchised out- lets
-The right mechanisms to ensure that franchisees act in the best interes
of the franchise system
-The correct term for a franchise agreement, as well as its possible
renewal
-The appropriate policies for advertising, both national and local
2.Ownership of Franchised Outlets: -Will a firm allow passive ownership?
--Only 24% of franchisors do not allow passive ownership
--Often a cheaper option when multiunit franchising is used --Multiunit
owners tend to free ride less than owners of individual units
--Most passively owned franchises are investments for wealthy individua
-Passive ownership reduces performance
--Store manager is an employee, not an owner
--Passive owners tend to treat their stores as investments, not jobs
--Can create hybrid arrangements where ownership is passive but
manager owns part of the operation
---East Coast Original Custard - outlet operator must own 15% of the
business
3.Overall Lessons Related to Ownership: -Don't allow passive ownership
in a new franchise system if you need to provide outlet operators with
strong ownership incentives
-Don't automatically reject passive ownership if the benefits from
multiunit franchis- ing are high; the benefits might outweigh the costs
4.Mechanisms to Control Franchisees
Writing detailed contracts: -Must maintain tight control over the brand
name
-Contracts must clearly specify franchisees' responsibilities --Procedures
equip- ment, maintenance, dress code
--McDonald's contracts tell when and how to clean floors and even the
specific cleaning solution to use
-Contracts must clearly specify consequences of not meeting these
responsibilities
5.Mechanisms to Control Franchisees
Reserving termination rights: -Franchisor needs to establish its right to en
the franchise agreement and take back the outlet if franchisee fails to
uphold standards
--Choice Hotels: 20 year term, can terminate every 5 years without caus
-Must return operating manual
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16
, ENT3173 Exam elaborations 2024
-Termination is a complex and often difficult legal process
--TasteeFreez controls franchisees by leasing the pump used to make th
ice cream
6.Mechanisms to Control Franchisees
Controlling sources of supply: -Limit the sources of raw materials
2/
16
, ENT3173 Exam elaborations 2024
-Can only be done with inputs that are proprietary to a system
-Can provide a list of approved suppliers and/or specify key product
characteristics
7.Mechanisms to Control Franchisees
Requiring exclusive dealing: -Prevent franchisees from selling the
products of other companies
-Maintain the right to purchase any outlet that a franchisee wants to sell
8.Mechanisms to Control Franchisees
Ensuring payment of royalties: -Make it difficult to under-report sales
--Computerization
-Audit franchisees
9.Mechanisms to Control Franchisees
Providing franchisees with excess profits: -Make the franchise so profitable
that franchisees have no reason to cheat
-Minimizes the need to monitor franchisees
-"Win-win"
10.Overall Lessons Related to Control Mechanisms: -Must create very
detailed contracts
-Don't extract all of the profits of your system from franchisees through
your fees; it will make controlling their behavior very difficult
11.Term of the Contract: -Very few franchisors offer contracts in perpetuit
-91% offer franchisees the right to renew
-Average term is 10.3 years, with an 8 year renewal
--Printing/copying: 18.6 years
--Travel: 5.7 years
12.Term of the Contract
Longer terms offer:: -Better opportunity for franchisees to amortize their
invest- ment
-Better chance for a franchisee to sell the outlet if desired
-More assurance for the franchisee that the franchisor will not engage in
extortion
-Less incentive for franchisees to cheat and free-ride
13.Term of the Contract
Longer terms create:: -Difficulty in changing key elements, such as the
royalty rate
-Problems if a firm is poor at picking franchisees
-Problems with outlets looking dated and stale
14.Overall Lessons Related to Contract Length: -Don't use short term
contracts if you want franchisees to invest heavily in their outlets
3/
16
1.Four Types of Policies: -Appropriate rules toward ownership of
franchised out- lets
-The right mechanisms to ensure that franchisees act in the best interes
of the franchise system
-The correct term for a franchise agreement, as well as its possible
renewal
-The appropriate policies for advertising, both national and local
2.Ownership of Franchised Outlets: -Will a firm allow passive ownership?
--Only 24% of franchisors do not allow passive ownership
--Often a cheaper option when multiunit franchising is used --Multiunit
owners tend to free ride less than owners of individual units
--Most passively owned franchises are investments for wealthy individua
-Passive ownership reduces performance
--Store manager is an employee, not an owner
--Passive owners tend to treat their stores as investments, not jobs
--Can create hybrid arrangements where ownership is passive but
manager owns part of the operation
---East Coast Original Custard - outlet operator must own 15% of the
business
3.Overall Lessons Related to Ownership: -Don't allow passive ownership
in a new franchise system if you need to provide outlet operators with
strong ownership incentives
-Don't automatically reject passive ownership if the benefits from
multiunit franchis- ing are high; the benefits might outweigh the costs
4.Mechanisms to Control Franchisees
Writing detailed contracts: -Must maintain tight control over the brand
name
-Contracts must clearly specify franchisees' responsibilities --Procedures
equip- ment, maintenance, dress code
--McDonald's contracts tell when and how to clean floors and even the
specific cleaning solution to use
-Contracts must clearly specify consequences of not meeting these
responsibilities
5.Mechanisms to Control Franchisees
Reserving termination rights: -Franchisor needs to establish its right to en
the franchise agreement and take back the outlet if franchisee fails to
uphold standards
--Choice Hotels: 20 year term, can terminate every 5 years without caus
-Must return operating manual
1/
16
, ENT3173 Exam elaborations 2024
-Termination is a complex and often difficult legal process
--TasteeFreez controls franchisees by leasing the pump used to make th
ice cream
6.Mechanisms to Control Franchisees
Controlling sources of supply: -Limit the sources of raw materials
2/
16
, ENT3173 Exam elaborations 2024
-Can only be done with inputs that are proprietary to a system
-Can provide a list of approved suppliers and/or specify key product
characteristics
7.Mechanisms to Control Franchisees
Requiring exclusive dealing: -Prevent franchisees from selling the
products of other companies
-Maintain the right to purchase any outlet that a franchisee wants to sell
8.Mechanisms to Control Franchisees
Ensuring payment of royalties: -Make it difficult to under-report sales
--Computerization
-Audit franchisees
9.Mechanisms to Control Franchisees
Providing franchisees with excess profits: -Make the franchise so profitable
that franchisees have no reason to cheat
-Minimizes the need to monitor franchisees
-"Win-win"
10.Overall Lessons Related to Control Mechanisms: -Must create very
detailed contracts
-Don't extract all of the profits of your system from franchisees through
your fees; it will make controlling their behavior very difficult
11.Term of the Contract: -Very few franchisors offer contracts in perpetuit
-91% offer franchisees the right to renew
-Average term is 10.3 years, with an 8 year renewal
--Printing/copying: 18.6 years
--Travel: 5.7 years
12.Term of the Contract
Longer terms offer:: -Better opportunity for franchisees to amortize their
invest- ment
-Better chance for a franchisee to sell the outlet if desired
-More assurance for the franchisee that the franchisor will not engage in
extortion
-Less incentive for franchisees to cheat and free-ride
13.Term of the Contract
Longer terms create:: -Difficulty in changing key elements, such as the
royalty rate
-Problems if a firm is poor at picking franchisees
-Problems with outlets looking dated and stale
14.Overall Lessons Related to Contract Length: -Don't use short term
contracts if you want franchisees to invest heavily in their outlets
3/
16
