Types of franchising: advantages and disadvantages

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Lviv Polytechnic National University

Types of franchising: advantages and disadvantages

Drymalovska Kh.V.

Introduction

Integration processes lead to the strengthening of interaction between the national economies of different countries in the field of trade and economic relations, which also manifests itself in the interaction of representatives of large and small businesses. As a result, various forms of integration associations are distinguished in the direction of business development, for example, leasing, cooperation, venture financing, etc. However, franchising is considered to be the most effective form of interaction between large and small businesses. Thanks to franchising, the competitiveness of countries' economies is increased through the attraction of foreign investments, the exchange of the latest technologies, the implementation of innovative projects, the use of modern scientific and technical developments, and the introduction of higher standards in production and non-production spheres.

Presentation of the main material

By franchising, we understand an effective model of business development based on the conclusion and execution of an agreement between the participants (franchisor and franchisee) regarding the transfer of the right to use an object of industrial or intellectual activity in order to achieve the goals defined by them, guided by the fundamental principles of forming legal and economically beneficial legal relations [1].

The development of global franchising took place in several stages [2]:

- I stage. The birth of franchising (16th century-40s of the 20th century): issuing permits for the purpose of selling goods on markets and participating in fairs, creating trade guilds. During this period, such companies as Singer (1851), General Motors (1898), Coca-Cola, Pepsi, and 7-Ur (early XX century) began to create the first franchise systems;

II stage. The development of classic franchising (40s-80s of the 20th century)--the Law "On Trademarks" (1946) was adopted in the USA, the emergence of new types of franchises. The companies Baskin & Robbins (1945), Service Master (1949), Holiday Inn (1952), Burger Inn (1954);

III stage. Spread of franchising (1980s-2009): companies increasingly use franchise models to ensure business development (operates in more than 75 industries worldwide farms in more than 140 countries of the world);

IV stage. Innovative development of franchising (2009- present): the creation of a significant number of franchise systems in industrially developed countries, this business model is considered an advanced innovation.

As we can see from the above stages, the essence of the franchise model was the granting of permission by large companies to sell goods or provide services. In addition, the formation of this economic phenomenon was accompanied by the improvement of legislation through the adoption of normative legal acts aimed at regulating relations between the participants in this form of cooperation. Thanks to the formation of franchise systems as an innovative method of conducting business, successful large companies spread their influence in different countries of the world, determining the development of national economies in the world economy during the period of global financial crises.

Franchising is becoming more common not only in industrially developed countries but also in developing countries. This, in turn, strengthens the integration processes of the countries' economies, which can be followed by the example of

the EU market and neighboring countries that seek to become members of this union. The trends of European franchising are marked, firstly, by the strengthening of the level of internationalization, the growth in the number of franchise units, the creation of European franchising associations, and the growth in the number of introductions of the latest technologies [3].

In their writings, scientists distinguish different types of franchising. Therefore, let's focus on research and highlight the main classification features of franchising types. Lazorenko T. and Frolova A. distinguish types of franchising according to the nature of the object's activity: products; trademarks; business franchising [4]. Karmazina N.V. offers forms of franchising according to criteria in accordance with international business practices [5]:

by branch of economic activity: industrial (production), distribution, service, and business "business format";

by the level of mediation between participants: direct and franchising master.

From the standpoint of conducting accounting operations, N.I. Zenkler and Nemesh M. formed a generalized classification of types of franchising contracts [6]:

commodity - sale of finished goods by the franchisee, whose activity is aimed at further sale of products without interaction with the franchisor's competitors;

production - franchising for the production of goods, according to which the main company has developed technology for the production of a certain type of product;

business format franchising - this type involves the sale by the franchisor of a license to other companies for the right to create retail outlets under his name to sell products or provide services;

corporate - a complicated form of franchising aimed at creating a network of franchise enterprises. Such enterprises are managed by hired managers who report to the franchisee;

conversion - a method of increasing the franchise network through the joining of independent enterprises based on the conclusion of a franchise agreement.

The authors of the scientific work [7] revealed the essence of the types of franchising by highlighting their features and identifying the main representatives:

commercial: successful sale of products through the use of proven sales methods, the brand of the company owner; the franchisor provides assistance in the formation of the assortment, staff training, the use of effective marketing methods for attracting and retaining customers, the internal and external design of the sales representative office, etc. (Lukoil, Columbia Sportwear, General Motors, Sensys, Gregory Arber, Wittchen, Merx, LAROME parfumes, Solar, BABYART , Top Secret);

production: production of products on the basis of obtaining permission for the possibility of using the developed technology, applying the technical experience of the developing company, as well as selling products under its trademark (CocaCola, Pepsi, Mars, 7 Up, Nestle, Danone);

business format: the franchisee exercises the right to create a retail network using the franchisor's brand; this type of franchising is accompanied by the payment of permanent contributions, the possibility of renting fixed assets, and the possibility of financing (McDonald's, Baskin Robbins, Holiday Inn, Hilton, Kodak, Fuji).

Prysvitla O.V., revealing the essence of the formation of the franchising form of doing business, differentiated its types according to the following criteria: type of activity, know-how of the franchisor, and organization of the system. According to the

type of activity, it is divided into trading, service, production, and mixed; for the franchisor's know-how - franchising of product distribution and business format; and by system organization - direct franchising, territory development, and master franchising [2].

Danylovich-Kropyvnytska M.L. outlines the peculiarities of regional franchising through the lens of its advantages and prerequisites for development. Usually, participants in this form of cooperation are large and small enterprises. Regional franchising for large companies means capturing new regional markets with increased sales and profit. At that time, it is an opportunity for small businesses to gain business experience and a stable, guaranteed income. In turn, regional franchising causes a reaction from small regional companies, which manifests itself in the development and use of innovative methods for the implementation of successful business projects. This type of franchising creates a number of advantages for the regions: an increase in the volume of foreign investments; promotion of innovative, scientific, and technical activities; development of new business technologies; formation of business culture through the adoption of modern standards causing trust among consumers, etc. [8].

According to the position of M. L. Goncharenko, such types of franchising as production, commercial, and service form integrative ties between representatives of large and small businesses. Thanks to the production franchise, the franchisor has the opportunity to master the production of products and implement business ideas in new markets and economically advantageous regions through the transfer of ownership of patents, technical know-how, and trademarks to the buyer of the franchise. The commercial type of franchising is directly related to the sale of products through the formation of optimal product and material flows. In this case, the characteristic features of the manufacturer's products, the brand, and the trademark play an important role in order to ensure the differentiation of the consumer's product choice. Service franchising is related to the field of services, which allows the franchisee to carry out certain operations using the franchisor's trademark and in accordance with its technology [9].

In the scientific work of Martynenko O.O. and Shuby M.V. the focus is on traditional franchising and business franchising. Traditional franchising is associated with the transfer of the franchisee's right to sell finished products, providing services to consumers of the franchisor's goods. This type of franchising is used in the fields of individual and business services, restaurant business, and retail trade. Unlike the traditional type, business franchising means the transfer of the right to a complex business management system, as a result of which the franchisee also receives support for choosing the location of the franchise unit, standards and rules for ensuring the quality system, and the use of marketing materials. However, the established franchise business model implementation unit is under the supervision and control of the owner. Business franchising is widespread in the service sector and the hotel and restaurant business [10].

One of the types of franchising is direct. Direct franchising is understood as a direct way of interaction between the franchisor and the franchisee, and the number of such agreements can be significant with different franchisees [11]. Woodwood V.V. and Bilous A.Ya. cite the main four classification features of franchising: by type (direct and transit - concluding a franchise agreement through intermediaries), by sales method (production, extended, and service), by term of use (long-term and short-term), and by type of franchise package conditions (clear fixation of conditions, possibility of regulation of certain conditions) [12]. In

addition to the well-known types of franchising, the authors of the scientific work [13] provide the following criteria for the classification of the studied economic category: by the number of enterprises owned by one franchisee (single-element, multielement, and combination); by the right of the franchisee to carry out other types of activities (restrictive, partially restrictive, non- restrictive); by location and residence of the subjects of relations (domestic, national, and international); by the presence and role of intermediaries between the franchisor and the franchisee (direct, indirect, regional, sub-franchising, and master franchising).

Studying literary sources on the problem [1-13] made it possible to propose a generalized classification of types of franchising according to a number of essential and independent features:

by object orientation: commodity, production, service, business;

according to the method of interaction of subjects of economic activity: direct, transit;

by the term of the agreement: long-term, medium-term, short-term;

by form of formation: corporate, conversion;

by level of coverage: domestic, national, international;

by the nature of the conditions specified in the concluded agreement regarding the rights of the franchisee: restrictive, partially restrictive, and non-restrictive.

As we can see, the above types of franchising are well- known, but they are assigned to the corresponding classification features. The isolated characteristics of the classification of franchise types are aimed, firstly, at delineating the characteristic features of each type of franchise. That is, based on the above signs, it is possible to determine what is the object of the franchise; for what period the agreement is concluded; the nature of interaction between interested parties, their rights and obligations; the optimal choice of the form of creating franchise networks; the level of franchising relationship formation; specific conditions of execution and compliance with the terms of the concluded agreement, etc. All this, in turn, has an impact on obtaining positive results from the implementation of the chosen type of franchising. Therefore, highlighting the likely benefits and risks as a result of franchising activities is also a fundamentally important issue. The advantages and disadvantages of franchising for both parties (franchisor and franchisee) are shown in Table 1.

Table 1

Advantages and disadvantages of franchising for franchisor and franchisee [14] franchising representative franchisee

Conclusions

As a result of research, a generalized classification of franchising types was proposed based on a number of essential and independent features. All types of franchising are aimed at creating conditions for promising business through the attraction of investments, advanced technologies, and effective business practices. At the same time, it is important to choose the type of franchising by taking into account the type of economic activity, studying the market situation, and analyzing financial information at the macro and micro levels in order to avoid possible risks on the part of the franchisor and the franchisee.

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