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Industry Report

Industry reports, briefs and video-clips issued by Samsung Economic Research Institute

Key to Service Innovation: Franchising

Key to Service Innovation: Franchising

LEE Sung-Ho

May 6, 2008


Welcome to our video program. I'm Sung-Ho Lee from the Technology and Industry department.

These days, Koreans are seeing an increasing number of franchises on their streets, while some domestic restaurant franchises are expanding overseas. Franchising is thriving because it allows different business organizations to benefit from each other's strengths. Franchisers can raise the investment funds needed to build a nationwide network of branches from fees paid by franchisees, while franchisees share brand assets and standardized service models developed by franchisers. One relatively recent success story in franchising is “Curves,” a chain of fitness clubs for women. Curves developed a simple but immediately popular fitness program for middle-aged women, opening more than 10 thousand franchisees in the 11 years since its opening in 1995. The company has grown into one of the world's largest fitness companies with more than 4 million members in 55 countries today.

Today, we'll take a look at some of the recent strategies for successful franchising.

First, franchising depends on strategic partnerships among franchises that allow sharing of customers. Home Helper's is a US franchise that provides in-house nursing and care services for elderly and recovering patients. If Home Helper's franchisees so desire, they can sell equipment needed for emergency calls provided by Direct Link, another franchise business. In this case, franchisees can expect their sales to increase as they carry two items, while franchisers can see the number of their franchisees rise.

Another form of strategic partnership utilizes multi-brand strategies. “Yum! Brands,” a subsidiary of Pepsi, runs more than 34 thousand KFCs, Pizza Huts, Taco Bells, A&W Restaurants, and Long John Silver's. Some of these franchises feature two brands in the same location, allowing customers to eat pizza and fried chicken at the same place. This multi-brand strategy is very effective in small cities where businesses with limited menus are less viable.

Another successful franchising model involves cooperation between large companies and small- and medium- sized businesses. Areas where economies of scale play out can be handled by large companies, while small-and medium-sized companies can handle areas where local know-how and motivation is crucial. UPS, for example, runs an overall logistics system, but has specific services like delivery, mail boxes, printing, and bookbinding operated by UPS Store, its subsidiary. UPS Stores are run as franchises, and draw on franchisees' superior ability to perform local marketing. While UPS's rival FedEx-Kinko runs around 1,400 retail stores under its direct control, UPS runs 5,900 stores via franchises, enabling it to secure dominance in the market.

The last franchising model is an Internet-based franchise. In industrialized countries, many franchises utilizing IT/communications technology are appearing in knowledge- based service industries, including business.support services and health care. WSI, one of the leading Internet marketing franchises, provides localized Internet marketing consulting for small- and medium-sized companies through around 1,500 franchise consultants in 87 countries. WSI trains its consultants with its own standardized model and franchise consultants have access to WSI's customer management, business support, and e-commerce systems via the Internet.

In particular, WSI strictly manages the quality of its consultants through rigorous training and testing, including an e-learning course for four to six weeks, one-week of intensive training at headquarters, exams for consultant certificates, and three-months of coaching after opening a business.

So far, we've looked at new business models in franchise service industries.

Franchise business models can help you learn how to develop businesses in a rapidly growing area.

Thank you for watching. I'm Sung-Ho Lee.

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