Question

Case scenario and exercise
McDonald’s

McDonald’s is an example of brand franchising. McDonald’s, the franchisor, grants the right to sell McDonald’s branded goods to someone wishing to set up their own business, the franchisee. The licence agreement allows McDonald’s to insist on manufacturing or operating methods and the quality of the product. This is an arrangement that can suit both parties very well.

Under a McDonald’s franchise, McDonald’s owns or leases the site and the restaurant building. The franchisee buys the fittings, the equipment and the right to operate the franchise for 20 years. To ensure uniformity throughout the world, all franchisees must use standardised McDonald’s branding, menus, design layouts and administration systems. In return, the franchisee agrees to operate the restaurant in accordance with McDonald’s standards of quality, service, cleanliness and value. McDonald’s regularly checks the quality of the franchise’s output and failure to maintain standards could threaten the licence. The franchisee is also expected to become involved in local events and charities. Ray Kroc believed strongly that a business must be prepared to put something back into the community in which it operates.

McDonald’s recognises the benefits of a franchised operation. Franchises bring entrepreneurs, full of determination and ideas, into the organisation. Franchising enables McDonald’s to enjoy considerably faster growth and the creation of a truly global brand identity. The more restaurants there are, the more McDonald’s can benefit from economies of scale. On the financial side, McDonald’s receives a monthly rent, which is calculated on a sliding scale based on the restaurant’s sales, i.e. the higher the sales, the higher the percentage and vice versa. There is also a service fee of 5% of sales in addition to the contribution to marketing. The purchase price of a restaurant is based on cash flow and is generally about £150 000 upwards. The new franchisee is expected to fund a minimum of 25% of this from their own unencumbered funds.

McDonald’s views the relationship between franchisor, franchisee and supplier to be of paramount importance to the success of the business. Ray Kroc recognised the need very early on for franchisees that would dedicate themselves to their restaurants. He wanted people who had to give up another job to take on the franchise venture, relying on their franchise as their sole source of income and would therefore be highly motivated and dedicated. Consequently, McDonald’s will not offer franchises to partnerships, consortia or absentee investors. The initial capital has to come from the franchisee as a guarantee of their commitment. The selection process is rigorous to ensure that McDonald’s only recruits the right people.

Whilst the franchisees have to agree to operate their restaurants in the McDonald’s way, there still remains some scope for innovation. Many ideas for new items on the menu come from the franchisees responding to customer demand. Developing new products is crucial to any business, even one which has successfully relied on a limited menu for many years. Consumer tastes change over time and a company needs to respond to these changes. Innovation injects dynamism and allows the firm to exploit markets previously overlooked or ignored. The introduction of the Egg McMuffin in 1971, for example, enabled McDonald’s to cater initially for the breakfast trade. Filet-o-Fish, Drive-thru’s and Playlands were all products or concepts developed by franchisees.

The franchisee, for all the training and support McDonald’s offers, is running his or her own business. They fund the franchise themselves and therefore have much to lose as well as gain. This makes them highly motivated and determined to succeed.

Source: The Times 100 case studies. Read more: http://businesscasestudies.co.uk/mcdonalds-restaurants/franchising-andentrepreneurship/advantages-to-the-franchisee.html#ixzz2VuAbTz3V

Exercise

1.Based on the case scenario, interpret whether a McDonald’s franchisee may be considered an entrepreneur or not.

2.Debate whether a franchisee may be considered an entrepreneur by explaining key differences between entrepreneurship, traditional management and small business management.

You may make assumptions about McDonald’s based on your general knowledge of this organisation (however, you must state your assumptions clearly)

Answer 1

PLEASE PLEASE RATE .THANKS!

1.Business people are the people who set up new and innovative companies in the hope of making good profits while taking financial risks. In this case, Mc Donald's franchisees fit as businessmen. In order to make profit, they must make personal investments which entail risks. They also provide the company with new and innovative ideas and therefore act as business people.

2.In no circumstances may a franchisee be considered as a contractor. Only in certain formats does the franchisee participate in procurement and management and can not offer ideas like Mc Donald's. This makes him a managing director only. Traditional role played by modern managers includes planning, organization, leadership and control. The small company management also involves these roles and lower financial risks. But on the other hand, companies take great risks and begin to make huge profits from a new company.