For the long haul: Adopting franchising as the way forward

Published: March 30, 2015
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Your chances of success are higher as you are associating yourself with proven products and methods. STOCK IMAGE

Your chances of success are higher as you are associating yourself with proven products and methods. STOCK IMAGE

KARACHI: If one thinks of Pakistan and its troubles, the top issues ranges from the severe energy crisis, poverty, growing unemployment to widespread terrorism.  However, one common thread goes through all of them, which is our country’s extremely poor economic growth.

This results in low development funds, which drives low or no investment in education, health, judiciary and infrastructure. It boosts unemployment and poverty, which eventually sways people to lawlessness and acts of terrorism.

Pakistan’s GDP growth has literally plummeted over the last decade (see graph), excluding 2014 where GDP poked its head over the 4% mark; the previous seven years it has averaged a pitiful 2.7%. This coupled with one of the highest population growth in South Asia has compounded the issue. If we are to help reduce poverty and get back on track to be called a developing nation, we must grow our GDP at 7% or above (the dotted line in graph).

Based on the existing lacklustre economic performance, we desperately need some intervention. Something that would jumpstart our economic engine and provide an array of job opportunities to the army of graduates coming of age. It is estimated that in the next 10 years, Pakistan must create a minimum of 36 million new jobs.

If we look at other developed nations as well as key emerging economies, one factor stands out which is unfortunately absent in Pakistan – strong presence of entrepreneurship or new business start-ups, which in their case represent 80% of their economic growth.

Risky business in Pakistan

Entrepreneurship in Pakistan is, unfortunately, facing countless challenges such lack of financing, unfriendly regulation, lack of business-related subjects in schools and colleges, rampant corruption, absence of a risk-taking culture, and the list goes on. All these factors visibly discourage new business start-ups. However, in this gloomy environment, there is a unique business model, which can make a difference. Here I am talking about the concept of “franchising”.

It is a well-known fact that starting a new, even a small business, and sustaining it is not an easy job. In fact, many do fail. The problems and challenges for new start-ups are substantial, but many of these challenges are mitigated in the “franchising” model.

Road towards franchising

Some benefits for a franchisee include the idea, service or product has already been tested, has created widespread brand-name recognition, which otherwise would take a new entrepreneur many years to establish. Your chances of success are higher as you are associating yourself with proven products and methods. In this model, training and clear operational guidelines are provided. In fact, the franchisor de facto acts as a mentor with vested interest in your success. For beginners, maintaining proper standard and quality is aided as it is mandated by the franchising agreement.

This model also helps novices step into the business world with good advice on site selections, its construction, interior designs, advertising assistance all the way to customer service and purchasing.

There is fascinating statistics attributed to Professor Ken Morse, founder of MIT Entrepreneurship Forum, who stated that if as a new business owner you have a single mentor, your chances of success go up by 30%, and if you have two mentors, your odds improve by 70%. Franchising is a unique business model, which not only provides you with a mentor who has vested interest in your success, but also provides manuals on business practices, operational procedures, recipes, and much more.

The downside

Franchising also has its disadvantages. Firstly, the franchisee is not completely independent. They are required to operate the business within defined procedures and limitations. These restrictions range from what products you can sell, what services you can deliver, pricing, quality of purchases and even the geographic locations you can serve or operate in. In addition, franchisee is burdened by fees and other levies.

However, to be fair, it’s a win-win for both, the franchisee and franchisor. Franchisor gets to spread their risk. Imagine if someone comes up with a great business model, tests it and creates a strong brand name but does not have deep enough pockets to replicate the model in other cities or locations. Franchising allows him to expand, gain financially, while spreading risks and making extra profit via franchising fees.

Franchisor also benefits as they can operate with a much smaller central organisation as opposed to having the franchise at different locations. Other benefits include improved cash flow, reduced operating expenses, higher economies of scale in purchasing and extra time to do further research and development and come up with new products and ideas.

Facts

In the US, it is estimated that there are over 900,000 franchise businesses, providing over 18 million jobs and adding $2.1 trillion to the economy.  There are over 300 different industries and business categories using the franchising business model.

It is projected that every 8 minutes of every business-day a new franchise business opens.

Our government must work towards creating an environment to help this model. This includes introducing a fair trade franchising legislation, proper code of conduct, promulgate intellectual property laws and provide tempting tax rates to attract investors.

THE WRITER IS ASSOCIATED WITH THE CORPORATE SECTOR AND A SUPPORTER OF MANY SOCIAL ENTERPRISES AND FOUNDATIONS

Published in The Express Tribune, March  30th,  2015.

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