How Franchising Works

The Philippine Franchise Association (PFA) is the Philippines’ pioneer and largest franchise association. It’s officers list includes the who’s who of business with Samie Lim of BLIMS Furniture as chairman emeritus, Yvette Orbeta of Wendy’s as chairperson, Bing Limjoco of Francorp and Robert Trota of Max’s Group as vice chairmen and Franklin Go of Goldilocks as president . Its membership includes homegrown as well as international franchise concepts involved in food, retail and services.

In 2013, I was privileged to be invited by the PFA to give a talk in their national convention. There, I introduced the Mansmith Franchise Diamond Framework on how franchising works. My motivation came from when I was searching for a franchise as a potential investment; I got different answers from different franchisors and franchisees on how the system actually works. Being chief marketing strategist of the consulting and training firm Mansmith and Fielders Inc, I was blessed to have worked with some franchisors and retailers. I had been exposed to “voice of customers” from franchisors, franchisees and consumers, I was able to see and listen to what they did and didn’t like about a franchise, as well as their wish list and “overkill” list.  I was also inspired with another business model, that of multi-level marketing (MLM) which is sometimes called the poor man’s franchise, the latter triggered me to compare these two ways of doing business. While totally different, I was surprised their fundamental elements are quite similar.  Due to space constraint, I will write about how MLM works as a separate topic in the future.

After the convention, I was invited again by the PFA to repeat the presentation in their general membership meeting as some members were not able to attend my talk. Later, I was really flattered when the PFA asked me if I can develop the framework further into a full blown seminar, thus the Mansmith-PFA Franchise Diamond seminar was born in 2014.

The framework has two sides, one for the franchisor and another for their franchisees. Imagine each side with a triangle put together to form a diamond -shaped model with each side having three indispensable elements. For the franchisors, the three elements are quality of product value, quality of company and quality of return on investment (ROI). The franchisee, on the other hand, involves three distinct elements: quality of prospects, quality of local efforts and quality of leadership.

For quality of product value, it includes the product and its packaging, the brand and it’s pricing. Doing this well mitigates search risk for a winning concept. For quality of company, it includes having systems and manuals, regular training, franchise support and prompt communication. Doing this well mitigates organization silo risk with customers as the center of a firm’s strategy. For quality of ROI, it includes fees and royalty, stocks availability, terms and conditions as well as having the right location. Doing this well mitigates business model risk of how a company sources its revenue in a sustainable manner. All the above when done well can make a good franchisor.

As previously mentioned, the indispensable half of the Mansmith Franchise Diamond includes three other parts from the franchisees. For quality of prospects, it includes foot traffic and capture rate. Doing this well mitigates scale risk, as a franchisee needs to gain and maintain a profitable critical mass of customers buying from them. It is noteworthy to mention that doing business with a reputable franchisor that has been able to mitigate their search risk (with a winning concept), organization risk (with orderly execution) and business model risk (with deliberate strategy) will actually lead to franchisees mitigating their scale risk by way of their screening method of both the qualification of the franchisor as well as the viability of that of his or her proposed location.

For quality of local efforts, it includes local promotions and local area supervision. Doing this well mitigates planning risk instead of running a company based on guessing games. For quality of leadership, it includes the background of the franchisee as well as his KASH (meaning his knowledge, attitude, skills and habits). Doing this well mitigates execution risk as a franchisee with business training and exposure combined with good attitude and habits, has the head start  advantage versus another that has never been involved in an organization in the past.

 

(Thanks to BusinessWorld for publishing this article. Thanks to Go Negosyo for the video).

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Josiah Go features the movers and shakers of the business world and writes about marketing, strategy, innovation, execution and entrepreneurship

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