Ren Xingzhou

Research Report No 191, 2003

I. Essential Characteristics of Commercial Franchise

Different from administrative franchise, commercial franchise refers to the granting by the franchisor to the franchisee, in the form of authorization (through the form of franchise contracts), the right to use the registered trademark (including the trademark of services), name, patent, special technology, business mode, or any other business symbols the franchisor owns, together with all-round guidance and substantial assistance from the former to the latter in personnel training, establishment of organizational structures, business management, and procurement and distribution of commodities. Following stipulations in the franchise contract, the franchisee would carry out business operations according to the unified mode of business management and operation developed by the franchisor and pay the latter for it accordingly. It can be seen, therefore, that franchised operation is a form of business operation centering on transfer of franchise rights and based on contractual relations. The essential characteristics of franchised operation can be explained in the following three ways:

First of all, franchised operation is a mode of business development in which the patented technology of one party is integrated with the capital of another party to expand the scale of business operations. The key of franchised operation lies, therefore, in the extension of the value of technology and brand. It is an effective form of disposition of capital focused on patented technology and famous brands.

Secondly, franchised operation is a form of organization in which the management and decision-making powers of the franchisor are integrated organically with the ownership and executive powers of the franchisee. Once having made investment in a licensed shop, the franchisee wins the right to own and manage the shop. The mode and technology adopted for the management of this licensed shop is commanded and taught, however, by the franchisor and the franchisee must carry out management and operation activities in strict accordance with the unified mode of management and operation established by the franchisor.

Thirdly, successful franchised operation is a mode of business with win-win results. In other words, the franchisee will earn bigger profits from franchised operations than from independent operations; enjoy the successful technology, brand and intangible assets of another party with small investment; enter a business field from a comparatively higher point of start, save time and money and minimize risks when starting a new undertaking, and makes profits in a comparatively steady way. The franchisor, meanwhile, can extend the value of its brand and patented technology through franchised operation, thus achieving expansion of its business scale at low costs and earns economic returns accordingly. To truly achieve success in franchised operation depends, of course, on mutual support and earnest cooperation between the franchisor and the franchisee.

It is precisely due to its great enchantment that franchised operation has developed rapidly in numerous commercial and service sectors across the world in the 20th century including retailing, catering, automobile sale and maintenance, education and training, travel, recreation, marketing of audio-visual products and books, printing, construction and fitting-up of housing, intermediary service in real estate, lease of equipment, body-building and beauty treatment, nursing and care of children, and sanitation service (totaling more than 70 sectors, according to statistics). Resorting to this method of rapid expansion of their business scales, some enterprises have managed to enter the ranks of large transnational corporations.

II. The Important Role of Franchised Operation in China’s Economic Development

In view of its nature and marked characteristics, it is of great urgency to vigorously promote development of commercial franchise in the 21st century when China forges ahead in its strategic move to build a fairly well-off society because franchised operation can play an important role in the development of a market economy in China.

1. Franchised operation is conducive to the integration of China’s circulation industry and service market and promoting the rapid increase of the degree of organization of Chinese enterprises

The characteristics of the mode of commercial franchise decides its unique role in promoting the standardized and scale development of enterprises. Facing the trend of China’s entry into the World Trade Organization and economic globalization, China’s distribution sector and service market are commonly found with dispersion and small scale of operation and low degree of organization. Since this situation is blunting the cutting edge of Chinese enterprises, market restructuring and integration are badly needed. Through franchised operation, small and medium-sized enterprises will be able to climb into the ranks of leading enterprises boasting both advanced expertise and name brands and win access to the creditability, name, patented technology and management expertise of the franchisor, thus both increasing their degree of organization, harvesting excellent economic results with the help of others, and strengthening their capacity of survival, development and competition.

2. Franchised operation is conducive to the achievement of expansion of business scale by enterprises with a cutting edge and the rapid rise of a number of Chinese enterprises big in scale and powerful in strength

With the advance of the process of economic globalization, international competition for markets and resources will become fiercer and fiercer with each passing day. Boasting advantages in their respective trades and sectors, large transnational corporations will undoubtedly be more powerful in competition. Those Chinese enterprises boasting established brands, patented technology and management expertise, however, can hardly expect to rapidly grow in business scale or competitive ability during their process of development due to restrictions of their strength of funding and capacity of market expansion. By way of franchised operation, however, the patented technology of one party and the capital of another party can be integrated to achieve rapid expansion of the scale of business operations. So franchised operation is an effective mode of development for these enterprises to achieve rapid growth. The experiences of some foreign enterprises in development and expansion have proved this fact. Take the development of the 7-11 Chain Store in Japan for an example. In February, 1997, its net annual sales rose above those of its parent company, ITOYOKADO, recording a growth rate of 8.9 per cent year-on-year. The achievement was attributable to the considerable number of licensed houses and the profiting ability of each of these houses. In 1993, its number of licensed shops was 5,000. By now, the figure has grown to over 8,000, more than 40 per cent of the 7-11 Chain Stores scattering across the world. Franchised operation has been the chief form adopted by this company to set up licensed houses at a fast pace and in big density. Similar examples of scale expansion through development of chain outlets can also be found in world-famous snack counters including Kentucky, Macdonald, and Pizza.

3. Franchised operation is conducive to effective implementation of brand-developing strategies

A major characteristic of franchised operation is expansion of the value of technology and brand names, including the name and trademark of a product, the title of a shop, and management expertise. The formation and development of brands is a process of crystalization of the value of knowledge and organic integration of tangible and intangible assets. In franchised operation, permission is given to the use of these kinds of brands so that they are used even more efficiently and widely and with bigger economic returns. This will not only best affirm a brand, but also increase the degree of intensity through its use in such a unique way. As the situation stands, franchised operation will undoubtedly further facilitate implementation of the brand-developing strategy so that some Chinese brands will strike a deeper root in the heart of the people, gain greater reputation in the society, snatch bigger market shares, become even more competitive, and produce even better social results from an overall point of view.

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