THE FRANCHISE EFFECT: GROWTH THROUGH REPLICATION

Here is a riddle: what is both lean and huge? Answer: a lean, widely franchised
organization. Such huge organizations do not defy the Third Law of Techonomics;
they are simply an effective variation of it. The most successful franchises take
extensive advantage of technology, allowing them to focus on their special offering
of goods and services. Each operation reduces transaction costs by collective purchasing,
and they judiciously outsource many activities to a central service core. So
they have learned how to become lean and grow simultaneously through distributed
geographic replication of efficient endeavors.

The geographically distributed franchise was pioneered in the hospitality industry
(restaurants and hotels). Geographically distributed franchises epitomize the
“think globally, act locally” philosophy. They find a need, figure out the business
model, fill the need, and then rapidly replicate their success. Each unit in the
organization — a storefront or hotel or restaurant — gets leaner and more focused
on its product/service, while the total organization grows by replication (more units
are created). Franchise organizations can grow very rapidly when they take advantage
of the technology networks now available to connect and manage them.
In addition to restaurants and hotels, many other single-purpose, distributed
operations can be viewed as a form of franchise, whether owned in whole by a
central company or in part by owner-operators.

The foundation of franchise success is to understand the key to your value and be the best at providing it.
A secret formula (KFC, Coke), an efficient infrastructure (Federal Express, United Parcel
Service), a well-financed branch structure (Citicorp, Merrill Lynch), a high-quality
service (Kinko’s, ServiceMaster), a low-price merchandiser (Wal-Mart), a focused
market leader (Walgreens, Best Buy, Staples), or any number of business catalysts
now form healthy, expanding units within a larger entity.

The techonomic advantages of the Franchise Effect include:

1. Combined purchasing power.
2. Centralized development of key systems and support technology.
3. Tested financial models and business processes.
4. Distributed operations responsibility and shared financial rewards.
5. Increasing market barriers to entry for competitors.
These advantages contribute to the rapid rise and proliferation of the franchise model
in a time when “right-sizing” is dominating the economic landscape of large, monolithic
companies (General Motors, Xerox).
Franchises outsource many of their functions to suppliers or to a central office.
Take, for example, a restaurant franchise. Restaurant architectural design, signage,
and decorations are controlled by the central franchisee, which probably contracted
out the original concepts. Napkins, plates, glasses, tables, cooking equipment, pointof-
purchase equipment, uniforms, etc. are all procured externally. Contracts for raw
food materials, waste removal, power, and sometimes even cleaning services provide
the infrastructure for the restaurant operation. The restaurant personnel are responsible
for handling the customers, cooking and serving the food, and cleaning the
tables (unless the customer does that, too). The developer of the franchise figures
out the operational and financial model initially, and then the local owner executes
to the plans. As more local operators refine the initial plans, a successful innovation
can be rapidly adopted throughout the system.

The single-minded network of owner/operators sharing experience becomes a valuable asset to the successful franchise.

In this way, one successful idea (mutation in our evolutionary model) can
be replicated thousands of times at distributed locations. The resulting overall organization
is a mammoth, but each “cell” of the organization is focused and lean. As
a result, franchised organizations are expanding in our twenty-first-century economy.

The combined techonomic power of these advantages indicate a challenging
future for one-of-a-kind “mom and pop” operations in the twenty-first-century economy.
As franchise operations effectively outsource more of their supporting activities,
they become more economically efficient than their one-of-a-kind competitors.
Less labor is required to provide the product to the consumer. In fact, many franchises
go to great lengths to figure out new ways for the customer to become the labor
force (pick up your own food: no waiters; clean your own table: no busboys; touch
screen menu entry and automatic credit card payment: no cashiers). This is incremental
Third Law techonomics, delivering the same product with less labor, by
implementing inexpensive technology or process changes.

In this scenario, the Law of Diminishing Organization Size remains true if one
views the individual franchise operator as the organization. The franchise operator’s
dependence on others for business models, inventory, designs, supplies, and even
customer labor allows the franchise unit to deliver more product with less direct
labor. In many successful operations, one measure of continuous improvement is
the steady reduction of labor per unit delivered. Locally, firm size diminishes, while
globally, the successful firm expands as more branches are added. Perhaps the best
example is the McDonald’s hamburger franchise, with over 31,000 restaurants worldwide
and over 1.5 million employees (about 50 employees per location).

Franchises vary widely in their economic structure, but they share a similar
framework of organizational success: master a local model; replicate and improve
that model regionally/nationally; require local responsibility for financial success;
provide strategic advantage through quantity of scale purchasing and shared experience.
As the Third Law suggests, outsource the supporting functions and take
ownership for the economic core of the endeavor.