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Business Ownership: Franchises and Joint Ventures (Cambridge (CIE) A Level Business): Revision Note

Exam code: 9609

Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

Updated on

Franchises

  • Franchising is a business format in which an individual (franchisee) buys the rights to operate a business model

    • The franchisee can use its branding and software tools and receive support from a larger company (franchisor)

    • The franchisee will pay both an initial lump sum plus ongoing royalty fees

  • The franchisee is usually the owner of a private limited company

    • The business is operated under the franchisor's established system and training, marketing support and ongoing assistance are provided

    • Examples of well-known franchises include Domino's Pizza, KFC and Burger King

Examples of fast food franchises 

Grid of various brand logos including McDonald's, Wendy's, Subway, and Burger King, along with other eateries, hotels, and service businesses.
Some well-known businesses operate as franchises

  • A franchise is not a form of business ownership; it is an alternative to starting a brand new business from scratch

    • In most cases, franchisors require businesses to operate as private limited companies as this form of ownership is considered to be more stable than sole traders or partnerships

Evaluating franchise ownership

Advantages

Disadvantages

  • A recognised brand name which is promoted centrally by the franchisor

    • E.g., Dominos sponsored 'The Simpsons' for many years

  • Product training, such as how to consistently make good pizzas, is provided to ensure the quality and consistency of the brand

  • Equipment and supplies are provided by the franchisor so that the product will be the same regardless of where it was purchased

  • Franchisees buy an exclusive area or market to sell to

    • The franchisor will not create any more franchises in that area, limiting competition

  • Advice, training, use of software systems and problem solving are ongoing and the franchisor may also provide services such as loans and insurance

  • A fixed sum must be paid at the start of the franchise for the right to use the business name and resources

  • Regular royalties must also be paid, which vary according to the level of sales, often around 5 - 10 % of sales revenue

  • The franchisor may sell materials or equipment to the franchisee at inflated prices

  • If the franchisee does not make the product to the required standard set by the franchisor, the right to run the franchise can be removed from them

  • Franchisees have little say about how the business is run and lack freedom to introduce new products or change selling prices

Joint ventures

  • A joint venture is a medium- to long-term agreement for two or more separate businesses to join together to achieve a defined business outcome, such as entry into a new market

    • A new combined business entity is formed 

    • Risks and returns are shared by the parties involved in the joint venture

    • Businesses in a joint venture are usually looking to benefit from complementary strengths and resources brought to the venture

  • Many European companies have set up joint ventures with businesses in China

    • Chinese managers and employees understand market needs and consumer tastes, which gives the venture a greater chance of success

    • The Chinese government encourages joint ventures rather than foreign direct investment (FDI)

    • German car manufacturer BMW and Chinese rival Brilliance Auto Group formed a joint venture called BMW Brilliance in 2003 to produce and sell BMW cars in China

Evaluating the use of joint ventures

Advantages

Disadvantages

  • Each partner in the joint venture benefits from sharing expertise and resources, such as distribution channels and R&D expertise

  • Joint ventures are less risky than 'going it alone' if  entering a new market or diversification

  • Local knowledge can be accessed when one of the joint venture partner companies is already based in the country

  • Costs are shared between joint venture companies, which is very important for expensive projects such as new aircraft

  • If the joint venture is successful, profits have to be shared between the partner businesses

  • Disagreements may occur regarding important decisions due to the input of managers in both businesses

  • The objectives of each business may change over time, leading to a conflict of objectives between joint venture partners

  • If the joint venture fails, it may need to be dismantled, reorganised or sold, which is likely to take significant time and resources

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    Author
    Reviewer
    Lisa Eades

    Author: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

    Steve Vorster

    Reviewer: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.