In the first part of this article, I explained that franchising allows franchisee entrepreneurs to invest in an existing business model. It leverages a franchisor’s business model and brand and the franchisee’s drive to own their own business. While very different from the traditional corporate model, the franchise model offers lessons that companies of all kinds can benefit from.
Franchises
A franchised company builds in mutual accountability and alignment. The success of franchisor and franchisees is inter-dependent. The franchisor gets continuous feedback from current and prospective franchisees about all aspects of the business: the model, processes and training, advertising and technology. A franchisor feels pressure to grow by attracting more franchisees. The market holds the franchisor accountable for its marketing strategy—and for the financial performance of its franchisees. A prospective franchisee evaluates how well current franchisees are doing. He considers the franchisor’s track record in achieving brand awareness and effectiveness in driving profitable sales, the training and operational support they provide--in relation to the investment and fees required to acquire a franchise.
Traditional Companies
In traditional businesses, by contrast, development and execution of strategy is the exclusive responsibility of management at the top. Execution of sales and other operations are the responsibility of the “front line.” Lack of alignment with management—agreement on what to do and how to do it—can lead employees to feel that they don’t have a stake in the business. Employees who don’t buy into the company’s vision or feel that they will benefit from the company’s success tend to avoid being held accountable for performance. They often feel that problems are “someone else’s fault” or “not my problem.” When widespread, this lack of alignment between management and employees hurts the company’s performance, perhaps fatally.
In my experience, when the franchise model is executed well, it yields a high degree of alignment between franchisor and franchisees. Close cooperation in solving problems leads to finding innovative ways to produce value to customers. Not only do franchisees have “skin in the game” because they have invested and own a large share of the upside. Seeing other franchisees succeed motivates them to apply the franchisor’s model rigorously. Also, royalty payments to the franchisor raise the franchisee’s break-even point, leading them to focus incessantly on cash flow, driving even higher levels of effort.
Traditional companies sometimes struggle to motivate their employees to think and work as franchisees do--for example, to minimize expenses for the good of the business. In the final article of this series I will explain how all companies can emulate what franchises do well.
About the Author
Mark Street’s executive experience includes extensive background in an industry that offers great opportunity to entrepreneurs: franchising. Contact or learn more about Mark here.
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