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Franchised Business and Standardization: The Brave New World of Designed Business Systems
by Jimmy Sun
The boom of franchised businesses is imminent and you cannot escape them. They will arrive in the form of your friendly neighbourhood retail stores, your suppliers, business partners, even your competitors, selling everything from coffee, televisions, automobiles, vacations and real estate services.
According to the International Franchise Association, in 2000, franchised businesses accounted for $1 trillion in annual retail sales in the U.S. alone. There are 320,000 franchised small businesses in 75 industries, accounting for roughly 40% of all retail sales in the U.S.
Industry analysts estimate that franchising employs more than 8 million people, a new franchise outlet opens somewhere in the U.S. every 8 minutes, and approximately one of every 12 retail business establishments is a franchised business. It is predicted that in 2010, franchised businesses will account for 75% of all retail sales in the U.S.
Some sceptics would say that recently, the most sensational and most innovative success stories are not franchised businesses. Walmart, Starbucks, Loblaws, Gap and Dell Computer, the star distributors in their respective industry, are not franchised businesses. Franchised business models are not as threatening or as dominating as franchise enthusiasts make it out to be.
While some of these retailing giants do not fit the exact definition of a franchised system, their success stories should not be read as a reason to underestimate the revolutions taking place in the market place and in the business world.
The most recognizable feature that commonly defines a franchise business is the ownership structure between the franchisor and franchisee, between the head office that provides the expertise in product development, marketing, quality control and the front line retail store operators which execute the policy and operational details.
While the owner-operator-franchisee concept is a powerful tool to develop and expand a business quickly and economically, it is not the only driving force that propels success stories behind some of the best known marketing miracles.
Among all the recent successes, whether franchised or non-franchised businesses, there is a common thread - a well designed business model based on thorough research. The relentless research and re-design go into every aspect of a business organization, from product development, distribution channels, operational details, relational structure of business partners, down to the exact square footage and required parking spaces of an outlet. The trend is towards optimization, standardization and multiplication.
Once an optimal design is developed, its structural and operational aspects will be standardized. The optimized and standardized business system will be multiplied quickly through a franchised system, initial public offering or money raised from risk capital funds to build footholds in the most suitable locations in order to establish pre-eminence before any potential competitors or copycats catch on.
There is a revolution underway. Whether it falls into the definition of a franchised system is no longer important. There is a race towards optimal standardization, seeking domination in the market before any other competitors arrive.
If one does not pay heed, one will be left behind and disappear from the marketplace. Giants like Simpsons, Eatons, small businesses like mom-and-pop coffee shops and donut houses, independent gas stations that once populated the landscape are prime examples of the consequences that may result.
Globally, the future looks ever brighter for standardized, franchised and designed business systems. For standardized business systems to perform well, they need a homogeneous market of certain size for the economies of scale to dominate and overcome the advantages of localized businesses. Franchised system thrives in the U.S. because of the homogeneity and the size of its market.
The rise of China and India offers two of the largest economies in the world with rapidly growing purchasing power. The sheer size of these two markets is astonishing. Some time in the near future, with the gradual decreases in local political interferences and when they become less fragmented, these markets will offer more opportunities than the existing U.S. market for standardized business systems.
The world is marching towards globalization. The internet will ensure the unification of language and aspirations of the Net generation. As the world becomes wealthier, the underdeveloped countries will be urbanized with city centres modelled after that of the developed countries, draining the rural country sides of their population and making the two worlds comparable. This indicates a fertile future for standardized products and businesses. We will see as many “pop star products” in consumer products as pop stars in movie and music businesses. The world has yet to see the rise of pop consumerism, the Golden Age for standardized, franchised and designed business systems.
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