INTERNATIONAL FRANCHISE EXPANSION STRATEGIES: Opportunities and Risks

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INTERNATIONAL FRANCHISE EXPANSION
STRATEGIESOpportunities and Risks

• IFA International Symposium
• Los Angles, California
• November 5, 2008
• Udo Schlentrich, Ph.D.
• Rosenberg International Center of Franchising
• Whittemore School of Business and Economics
• University of New Hampshire

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Opportunity Risk Assessment
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Common International Franchise Expansion
Strategies

• Trial and Error
• Follow the leader
• Reactionary
• Intuition/emotional
• Business as usual

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International Expansion Risk

• Political/Economic Terrorist attack at Marriott
  
• International hotel in Indonesia (2003)
• Legal/Regulatory Danone legal battle with
  Chinese joint venture partner (2006-2008)
• Market Opportunity Dunkin Donuts exited UK due
  to lack of profitability (1991)
• Cultural Distance Euro-Disney accused of
  cultural imperialism by media (1993)

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Proposed International Franchise Expansion
Strategy

• Evaluate external environment
• (opportunities risks)
• Evaluate internal environment
• (culture capabilities of the firm)
• Determine required resources

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Advice From Baseball CoachYogi Berra
When you arrive at a fork in the road, take it.
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Advice from Economist
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Definitions

• Strategic analysis the systematic investigation
  of a firm and its environment (foundation of the
  strategic management process)
• Risk a situation that would lead to negative
  consequences
• Risk (probability of risk occurring) x
  (impact of risk occurring)
• Opportunity a possibility due to a favorable
  combination of circumstances

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Strategic PlanningWhere do we want to be X
years from now

• Goal
• 2008 2009 2010 2011
  2012 Time

Goal
Today
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Projected GrowthWhat can we do to grow at X
each year?

• Goal
• 2008 2009 2010 2011
  2012 Time

Goal
X
X
X
Today
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Domestic vs. Foreign Profitability of U.S.
Companies
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US Franchisor Survey
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US Franchisors Planning to Expand into EU
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US Franchisor Survey
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Research Objectives

• Assessment of international markets for US-based
  franchisors
• Development of International Franchise Assessment
  Model Index

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Research Methodology

• Academic Research
• Review of literature on international
  franchising and country risk assessment
• Franchise Practitioners Input
• Interviews Survey of GLOMAK and other IFA
  members
• Development of International Franchise Assessment
  Model Index

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International Assessment ModelHierarchical
3-Level Model

• Section One Macro-environmental factors
• (Target Countries)
• Section Two Micro-environmental factors
• (Franchise System)
• Section Three Strategic and financial factors
• (Expansion Modes)

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INTERNATIONAL FRANCHISE ASSESSMENT MODEL
SECTION ONE Macro- environment
MARKET RISKS
MARKET OPPORTUNITIES
SECTION TWO Micro-Environment
DISTANCE
SECTION THREE Selection of Expansion Mode(s)
Financial Assessment
Pure Franchising
Master Franchising
Plural Form
Licensing / Joint Venture
Acquisition Expansion
Pure Company (FDI)
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Section One Macro-environment
Target Countries
Distance
Market Risks
Market Opportunities
Geographic Distance
Cultural Distance
Purchasing Power
Market Size
Legal / Regulatory Risk
Political / Economic Risk
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• Political / Economic Risk Proxies
• System specific weightings
• Political risk
• Economic performance
• Debt indicators
• Debt in default
• Credit ratings
• Access to bank finance
• Access to short term markets
• Access to capital markets
• Forfeiting

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Legal / Regulatory Risk ProxiesSystem specific
weightings

• Ease of starting a business
• Dealing with licenses
• Employing workers
• Registering property
• Getting credit
• Protecting investors
• Paying taxes
• Trading across borders
• Enforcing contracts
• Closing a business

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Market Opportunity Proxies

• System specific weightings
• Population (potential customers)
• GDP per capita (purchasing power)

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Distance Proxies

• System specific weightings
• Cultural Distance (Hofstede)
• Uncertainty avoidance
• Individualism
• Masculinity
• Power distance
• Geographical Distance
• Travel time from host country

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Integrated Franchise Index

• Integrated Index
• Incorporates Academic Findings Franchisor
  Survey
• Academic Findings (identification of key
  measures)
• Market Risk
• Market Opportunity
• Distance
• Franchisor Survey (relative weight of key
  measures)
• Market Risk 40
• Market Opportunity 50
• Distance 10

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Section Two Micro-environment
Target Countries
Firm Characteristics
Local Market
Financial
Strategic
General
Real Estate
Supply Chain
Infrastructure
Labor
Competition
Demographics
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Section Three Strategic Assessment
Financial Assessment Selection of Expansion
Mode(s)
Pure Franchising
Master Franchising
Licensing or Joint Venture
Plural Form
Pure Company (FDI)
Acquisition Expansion
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Section Three Strategic Assessment
Macro Factors
Micro Factors
Financial Assessment Selection of
Expansion Mode(s)
Pure Franchising
Master Franchising
Licensing / Joint Venture
Plural Form
Pure Company (FDI)
Acquisition Expansion
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Case Study Application of Model

• 216 countries regions to
• 153 countries to
• Top 25 countries (Aggressive, Conservative, or
  Balanced strategy)

Section 1 Macro-Environmental Assessment

• Top 25 Countries (Balanced Strategy) and/or
• Regional Clusters

Section 2 Micro-Environmental Assessment
Section 3 Financial Assessment Selection
of Expansion Mode(s)

• Top 25 Countries
• Feasibility study

• Actual versus projected results
• Periodic update

• Follow-Up
• Re-assessment of Macro, Micro and Financial
  measures

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Benefits of International Franchise Assessment
Model Index

• Section One
• Evaluate select potential target countries for
  expansion
• Section Two
• Adapt franchise system to selected host country
• Section Three
• Assess financial parameters select optimal
  expansion mode(s)

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Peter Drucker

• The most important thing for a business
• is to stay in business.

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