Franchising and Geometry: The Triangle Rule in Economics

Sometimes it’s hard for us to understand some concepts. In such situations, an excellent solution is to draw analogies. Today we will talk about franchising, its role, advantages and disadvantages, visible from different points of view. And for simplicity of understanding, we impose a system on one rule from the course of school geometry.

We all went to school, and even if the years erased from our memory the value of the sine of the angle 30 °, in general terms we still remember what they teach in geometry lessons. Most of us have an idea about franchising, although often very superficial. Today we look at several slices of this business model, superimposing them on one simple geometric rule.

Why geometry?

If you try to define franchising in the most general terms, then we can say that this is a type of business. Any business - development, forward movement, direction or - vector. In geometry, there is a fairly simple and logical rule - the triangle rule. It says: if vector B is deferred from the end of vector A, then the vector A + B connecting the beginning of A and the end of B will be their sum. This principle is also relevant for the economy, and everyone understands it, therefore it is on it that we will see what franchising gives to each of its “vectors”.

Of course, this business model could be compared with an organism consisting of cells, and with the structure of a poem - with any system that depends on its components. But business, like mathematics, loves accuracy and accuracy of actions, moreover, it always has a certain development vector.

Vector A - Franchisor

The franchisor is a kind of starting point for a business. It has an already working system, a model that can be replicated, as well as a specific consumer market and reputation. How profitable to be a franchisor, what are the pros and cons in such a business?

Positive direction

1. The rapid development of new markets and the strengthening of existing positions. Thanks to the franchising system, the brand becomes known in a new segment, and franchisee contributions allow the founder to invest more in the development and advertising of the company.

2. Opportunities to attract additional financing for business development. Each franchisee must pay a certain basic fee for working with a franchise, but in addition to this, there are additional agreements, for example, involving the acquisition by subsidiaries of marketing, consulting, and employee training services.

3. Increased recognition and reduced advertising costs. This advantage is closely related to the previous two: as franchises are launched in different regions, more and more people are learning about the existence of such a brand. With the growth of fame, not only does the flow of customers increase, and as a result, cash flow, but also due to deductions from the franchisee to the general marketing fund, the total cost of advertising is reduced while maintaining its quality.

4. Continuity of subsidiaries in terms of positive experience. The franchisor usually tests new technologies and work systems at the parent organization, and in the case of a positive outcome, transfers the experience to all of his franchisees. This multiplies the positive effect.

5. Separation of responsibilities and competencies. A franchisee is a separate business entity; therefore, it bears a certain responsibility for its business. He independently hires staff, builds internal management, is responsible for his financial results. Thus, the franchisor loses the lion's share of worries about the development of their offspring.

Negative direction

In addition to the advantages, the role of the franchisor has certain risks, dangers, and disadvantages.

1. The likelihood of losing control of part of the business. Often successful and ambitious franchisees, having achieved high results, want to separate from the parent company and become independent. He can begin to compete with the franchisor, which is not only unpleasant, but also quite dangerous, franchise knows the market and business from the inside, imagines the strengths and weaknesses of the franchisor. To prevent the development of such a situation, the agreement concluded upon the franchisee entering the business should have a clause prohibiting him from conducting his activities that will be competitive with the franchisor. But, of course, this condition cannot make this ban permanent.

2. Competition from former franchisees and the likelihood of information leakage. This risk arises from the previous one. Once a successful franchisee may decide that he is close to the franchise, he wants to start his own business in the same field. For the reasons stated above, he can be a strong competitor, which is not at all in the hands of the franchisor. Thus, in the "estate" of the franchisor, "two birds with one stone" are immediately shot down: he loses an experienced and competent manager and at the same time acquires an equally sophisticated competitor. In addition, the more people have access to information constituting a trade secret, the higher the likelihood of its leak.

3. The "shadow economy" of a subsidiary. Nobody likes to share their profits, even in the case of franchising, when without a parent company, franchisees would never have become franchisees. Therefore, if the volume of franchise deductions under the contract depends on the volume of sales, there is a risk that the subsidiary will hide its real turnover in order to reduce payments.

4. Difficulties in quality control. This risk immediately lies in two planes: legislative and purely human. Firstly, from the point of view of jurisprudence, the franchisee is an independent entrepreneur, therefore, orders that are characteristic of ordinary employees cannot be issued to him. Secondly, the human factor plays an important role. If the franchisee - as they say, a person with a character and he will not be able or unwilling to implement any requirements of the franchisor, it will be very difficult to oblige him to this. And this reduces the quality of control and can affect the reputation of the entire franchise, because for consumers all enterprises are part of one whole.

5. The complexity of the development of documentation. A package of franchising documents requires taking into account the many smallest details, a lot of time, effort and money. At the same time, there is always a risk that franchise buyers who fit all the requirements cannot be found, which means that the costs will not pay off.

Of course, as in any business, there are pros and cons. The entrepreneur’s task is to decide to launch a franchise, carefully analyze all the nuances, look at various sections of the business, perhaps with the help of experts, first try to develop the parent company and only if it functions successfully expand according to the current model. But suppose the franchisor succeeded, he opened a business, asked him a certain direction of development, reached a certain point. And here the second vector appears - the franchisee.

Vector B - Franchisee

Franchisees can be conditionally compared with an athlete taking a relay baton, with the only difference being that the first athlete continues to run nearby. But still, the main role now remains with the franchisee, because the franchisor has led his business to success, has occupied a certain niche, but further development and expansion is the task of his "successor".

Positive direction

1. Support. Since the franchisee does not start his business from scratch, behind him is the parent company with a ready-made business model, successful experience, valuable knowledge, and he is not left alone with his difficulties. The franchisor provides ongoing training, shares information, advises on emerging issues and warns against making wrong decisions. Although the franchisee is an independent business owner, the franchisor is interested in its success, since the results of a particular business entity leave an imprint on the entire network of enterprises from both a financial and reputation point of view.

2. Fast start. Since the franchisor provides a ready-made business scheme, the franchisee is required to provide the material component: to find and equip the premises, to select personnel. At the same time, recommendations on choosing a place specifically for this business are provided, as well as advice on design and quality control of employees. This also includes the savings of several years, which would go to study the basics of doing business, as well as the nerves of mistakes.

3. "Ready" reputation and recognizable brand. As a rule, only a successful business that has achieved certain successes becomes a franchise. Accordingly, he has already established himself in the market and consumers know him. If the reputation is good, then for the franchisee this is a great help in the development of their business.

4. Lack of competition on the part of "their". Under the terms of the franchise agreement, the region and specific territorial boundaries are specified within which the franchisee has the right to conduct business. As a result, there is no possibility of competition between representatives of the same franchise.

Negative direction

1. Control and a clear set of rules. According to the agreement, together with a huge base of useful knowledge, experience and support, the franchisee receives a list of requirements that must be adhered to. They can relate to absolutely all areas of business, and with some of them the head of a subsidiary may not always agree, but nevertheless, he is obliged to comply with them. Plus, the parent organization exercises control over all activities, which the franchisee also does not always like.

2. Standing payments. Everyone knows that an admission fee is required to obtain a franchise. But the payments do not end there. The franchisee is required to make payments to the general marketing fund and pay for training in business management. As practice shows, the more successful the franchise, the greater the amount payable by the franchisee. This is a kind of fee for minimizing risks and gaining knowledge.

3. Inheritance of errors. Franchisors are also people and can make a mistake. And if the innovations introduced by them do not justify themselves, then this will happen immediately in the entire network of companies. Thus, both losses and damaged business reputation are shared among all franchisees. If the franchisor goes bankrupt, then the franchise agreement will be canceled.

As you can see, on this side there are pluses and minuses. What do we have in the end? There is a vector A - the franchisor, there is a vector B - the franchisee, which can move exactly in the same direction, and can also somewhat deviate from the path traveled by its predecessor. But, one way or another, a network of companies receives a result consisting of a combination of actions of the franchisor and franchisee. Roughly the same thing is happening at the macroeconomic level.

Vector A + B - Franchising

In geometry, according to the triangle rule, the vector connecting the beginning of A and the end of B is their sum. And in the economy, everything is similar - the sum of the efforts of the parent and subsidiary companies forms a unified franchising system. Moreover, if we take into account not one specific franchise, but the totality of all businesses of this kind in the country, then we can analyze their impact on the economy as a whole, also highlighting the advantages and disadvantages of franchising for the state.

Positive direction

Today, franchising is spread almost all over the world. In Russia, this type of business is less widely represented than, say, in the United States, because of its youth in our country and the prevalence of conservatism in the mentality of the people. It is important to understand that the essence of franchising is the acquisition by the entrepreneur of ready-made technologies, business methods, goods and a trademark. The main thing here is precisely the schemes, practical experience and experience, and not the right to use the brand, as many mistakenly believe.

Franchising contributes to the development of small and medium-sized businesses, and this, in turn, gives us the following:

1. Allows you to create new jobs.

2. Simplifies the process of innovation.

3. Attracts investments to the country's economy.

4. Promotes the development of fair competition.

5. Forms a system of practical training for entrepreneurship without creating specialized training places.

6. Increases business transparency and tax collection.

7. It allows to involve the broader masses of the population and a younger audience in economic relations.

8. Develops the economy, social sphere and infrastructure of the regions.

9. Promotes the development of the service sector.

10. Allows you to improve the standard of living of the population, as well as the demand for products.

11. Minimizes the gap in the difference in economic development between the center and the periphery.