• What franchising really is
• What it takes to succeed
• Why franchising works
• Whether franchising is right for you
• More than 50% of franchisor winners are DC Strategy clients
• 40% of all finalists are DC Strategy clients

DC Strategy is a consulting firm focussed on building business value through franchising. In the recent Franchising Council of Australia’s Excellence in Franchising Awards:

• More than 50% of franchisor winners are DC Strategy clients
• 40% of all finalists are DC Strategy clients

David Stafford is an experienced management professional with a diverse background in sales, marketing, manufacturing, distribution and channel management, product management, franchising and consulting. He is one of Australia’s leading channel and franchise experts and analysts, keenly sought out by clients due to his sharp market analysis and business model innovation. View full profile

Of course, there is no magical formula, but in our experience; successful companies understand a few basic factors:

• A key point of difference is required to build value
• Building a substantial coverage in only a few markets will drive greater value than an insignificant coverage in many markets
• International expansion requires thorough planning and forethought
• The balance between capital constraints and the time taken to produce the targeted returns in each market

Our experience tells us that the risks and downsides associated with poor execution can be mitigated by understanding, from the very beginning, the markets and customers to target. Our view is that companies have limited resources and to produce the greatest possible outcomes can only be delivered by focusing on understanding:

• Where the company’s strengths truly lie and how that can be used to differentiate its offer from that of its local competitors. This sounds like a motherhood and apple-pie statement, but understanding what the company is good at and how that will drive value in a foreign market demands the company both understands the foreign market and also considers in which areas it needs support and assistance
• Which countries to enter. Careful and considered country selection is an absolute must. If companies don’t get this basic element right, they risk huge sums of money at massive opportunity cost. The best strategy is to select a few markets carefully, enter one, build value and then move on. A piecemeal approach spells disaster.
• Who will make a great partner? In the international market place, partnerships are generally for the long term – not a short fling. It’s like getting married rather than just dating for while. Select your partner carefully and make sure they have complementary skill sets and knowledge.

Expanding internationally almost certainly means you will be faced with a myriad of decisions and choices – careful selection of markets, customer segments, product offers, partners and partnering arrangements can mean the difference between success and failure.

DC Strategy is your business growth specialist. For more information on taking your business offshore please contact:

Anthony Richardson
General Manager – DCS International
anthony.richardson@dcstrategy.com
03 8615 7254

It is estimated that India has over 25 Million businesses operated mainly by individual proprietors or family members. Of these, over 14 Million are retail businesses and the vast majority fall into what is described as the unorganised retail sector.

The emergence of branded chains, (organised retailing) is just beginning. At the same time, an emerging aspirational consumer middle class fuelled by the socio-demographics of India with 54% of India’s population under the age of 25 is looking for opportunities and a retail experience. As a result the opportunities for franchise networks to grow in India are enourmous.

Over the previous decade many global brands have sought to grab the first mover advantage by rushing to India. During the early stages of this gold rush the common perception was that the owner-operator effect, when combined with the local knowlegde of franchisees, would guarantee success. However, this misconception, inadequate consideration of complex cultural and social dynamics and supply chain issues served to thwarte many initial forays. Yum Brands, with its KFC outlets, was one of the more prominent early failures due to a combination of the above factors.

Domestic Indian businesses have embraced franchising especially over the past 5 years and the types of businesses that are franchising are diverse. Motilal Oswald, one of India’s biggest financial services companies has over 1500 franchisees selling broking and other financial services and plans to have over 5000 franchisees by 2012. Euro Kids a pre-school provider is market leader in India with over 350 franchisees and is projecting growth of 20% growth per year over the next 10 years. Cafe Coffee Day now operates from over 733 company-owned and franchised locations in 103 Indian cities providing a cafe lifestyle experience to the younger aspirational consumer.

As is evident in many retail precincts in India, franchising is flourishing.

How to choose an international business model.

Planning to expand internationally? Your domestic business model may not work overseas. Here are some considerations you need to make before you lay foundations in a new country.

Businesses contemplating expansion into international markets face the daunting task of answering a myriad of questions when determining their expansion strategy. Among these, the issue of selecting the most appropriate business model is key. There is more than ample anecdotale evidence to demonstrate how the selection of an inappropriate business model has contributed to the failure of many international expansion efforts.

Given the evidence, the question is: what issues should businesses consider when selecting their intended international business model, or models?

Deciding Factors

Any business contemplating expansion into international markets should meet the three key non-negotiables:

1. The business must be proven, profitable and have sufficient cash flow to fund the desired business model, regardless of what that might be.
2. The business must have strong and stable processes, systems, and procedures.
3. The business must be able to fund a key executive whose sole responsibility is to focus on the international development strategy and its implementation.

The business stands a significant chance of failing to achieve its international growth objectives if these three factors are not met. Any business model, frequently referred to as a distribution or channel model, can be described in terms of cost, control and coverage. Cost refers to the cost to serve the channel: what it takes in terms of support, training and services given the division of roles and responsibilities between the channel partner and the principal.

The business owner will also need to look at how much control the model provides the channel principal, over what elements, and ask how much is actually required, given the nature of the products, selling cycle, customer buying behaviour and strength of the brand.

Then, the business needs to look at whether the model provides sufficient coverage of the target market or market segments. Is there a sufficiently large pool of prospective channel partners from which the channel principal can select good quality partners?

Each type of channel model exhibits a different mix of these three characteristics. The key to selecting a business or channel model for expansion is understanding the interplay between these characteristics and the resulting implications for the channel principal. Cost, control and coverage are often represented on a spectrum with cost and control working in direct correlation with each other, and coverage in the opposite direction as in the diagram below.

There are many channel model variants that we could discuss, but the most common could be grouped into three main categories: company owned operations, either as a wholly owned or joint venture arrangement; tied distribution models, such as franchising and licensing; and non-tied distribution models such as agents, stockists, distributors and wholesalers. Each of these three has a different combination of cost, control and coverage and is, therefore appropriate in different situations.

Company or Joint Venture Operations

Company owned or joint venture operations usually have relatively high cost and therefore offer generally comparatively lower coverage of a given market. Company operations typically provide the channel principal with a high degree of control of the channel its operations and performance.

Key reasons for adopting a company-owned or joint venture channel include greater control of branding, especially if customers have a high propensity to switch brands and the brand is synonymous with a particular level of service or support. If the sales process or product is highly technical, or if the perception of product quality depends on the quality of its installation or application, then it also makes sense to set up in the country. Other factors may point to a company owned or local joint venture strategy in an international context, such as the level of local regulatory acceptance of foreign investment and businesses, relatively relaxed foreign exchange controls and no local citizen directorship requirements. On a market level, indicators that this model may suit include if the customer base is readily identifiable or substantial in size and/or of strategic importance, and there is a low cost of establishing a channel to market.

Joint venturing may be an appropriate strategy for your business in situations where:

• Capital requirements exceed the business’ capacity.
• The business risks are unacceptably high for a company-owned operation.
• Local language, culture and networking play a significant role in ‘doing business’.
• The business requires additional expertise, know-how or management skills.

Tied Distribution Models

Tied distribution models reger to models where the channel is required to sell the channel principal’s products and/or services. While they may be some flexibility around the range of products or services to be offered, the channel is ‘tied’ to the channel principal, offering a relatively high degree of certainty around the distribution of its products and services. There is a wide range of tied distribution models, from full format franchises, such as the major fast food networks, to simple banner groups, as in many of the real estate groups. These exhibit quite different levels of cost, control and coverage. However, it would be reasonable to say that most tied distribution models offer a relatively high degree of control.

The cost of operating and supporting tied distribution also varies considerably, but in general, the channel partner – a franchisee, licensee or similar – takes on the major cost of operationand relieves the channel principal of these obligations and the associated costs.

Tied distribution models allow for moderate to high levels of coverage. In the most common form of tied distribution, full format franchising, the franchisee bears the establishment costs of the business. Therefore, the channel principal can expand the network at virtually no capital cost to itself. As a result, coverage can be relatively high providing the channel principal, usually the franchiser or licensor, can attract the appropriate number of willing participants.

In an international context, a tied distribution model may come to life through a master franchise, licence or area developer model.

Such models are often applied in situations where:

• Limited capital is available for expansion.
• There are easily replicable methods of operation, processes and systems.
• There is systemised method of doing business.
• The sales cycle is relatively simple.
• The product or service is associated with a strong brand identity.

Tied distribution models are quite often used in circumstances where local regulatory structures restrict foreign company operations and local language, culture and networking play a significant role in ‘doing business’, or the business requires a degree of refinement for application in each local market. In the example of fast food, this may mean refining the menu offer. In other businesses, this may mean changing the look and feel of the retail outlet, type of products on offer or the seasonal cycle.

Tied distribution models in general, and franchising in particular, are becoming increasingly regulated around the world and the types of regulations vary considerably. Any consideration of business models in the international context must include the consideration of local regulatory regimes and their implications.

Non-tied Distribution Models

Non-tied distribution models include distributors, wholesalers, stockists, resellers and agents. Again, the range of cost, control and coverage is quite vast but, in general, this group of channel models has relatively low cost to serve and offers relatively high coverage. The ability to control these types of channels is usually substantially lower than either tied distribution or company owned models.

Non-tied distribution models are often applied in situations where product or service is not the complete solution and may require accessories or other products to complete the sale, or the target market is either highly defined and identifiable or extremely broad and diverse. If the industry or products offered are highly specialised, third party suppliers may be a typical form of distribution in the relevant industry.

The key issue with adopting a non-tied distribution model is that the individual channel partners may not be fully committed to the channel principal’s products or services. The channel principal often competes for ‘head space’ among the range of similar or complementary products and services. Consequently, businesses intent on adopting a non-tied distribution model need to consider commitment and capability.

Commitment refers to the propensity of the channel partner to support a particular principal’s products or services. Partners consider a wide range of factors that can be summed up in a simple equation: return on effort. Ther will almost invariably favour products and services that provide a higher return on their effort.

Capability regers to the channel’s ability to close the sales. Almost certainly, capability depends on the quality of training, development and sales tools the channel principal provides. As such, driving channel capability has a significant effect on the cost to serve a particular channel.

More To Consider

While the choice of business model in the international context can be determined at a high level by comparing the cost, control and coverage requirements in a given situation, the final choice must also consider other issues

• Recruitment: How large is the pool of qualified channel partners of potential employees? Is this sufficiently large so the channel principal can select a range of quality channel partners?
• Legal structure: What legal structure will be used and how will this be manigested in any legal agreements to protect the channel principal’s interests?
• Ongoing management: How will the channel principal provide any required ongoing support, training and development? What will be the implications on the principal’s organisation structure, information systems, processes and procedures?
• Induction: How will the channel principal induct hew channel partners into the network? What initial training is provided, where, in what language, why? How often should this be followed up?
• Culture: What business models and ways of doing business are present and accepted in the target countries and markets?
• Compliance: How will the channel principal deal with any legal compliance issues relating to product sagety, chemical composition, food and drug approvals and other such regulatory regimes?

Getting It Right

The selection of an appropriate business model is a critical step in developing an international expansion strategy. But it is only one of the steps involved. A business owner must ensure the business is ready, according to the three non-negotiables, and objectively select the target countries and markets rather than simply relying on gut-feel or subjectivecriteria.

Preparation should include testing and evaluating the financial implications of various models and the benefits all participants might receive under each and ensuring adequate protection of key intellectual property. The business also needs to develop a clear division of roles and responsibilities for each model employed and determine the most appropriate corporate structure. This should take into account that effective international expansion is not a case of one-size-fits-all, and it is highly likely multiple models will be required for any one business.

Successful international expansion requires considerable planning, development and forethought and encompasses a wide range of issues. Selecting the right business model is a critical step that must be considered in the light of a range of other equally important issues.

First, it is important to reflect upon your company’s fundamental reasons for expanding internationally. Is it cheaper labor and production costs? Or is it to explore larger markets? Answering this question will help narrow down the list of target countries.

After choosing the target countries in which to grow your business, be prepared to spend some time building a deep understanding of each of them. There is a long list of potential considerations: What are the costs of doing business in different countries? What are the cultural differences? Are there specific government regulations and laws that may inhibit or enhance your potential for success?  Answering these questions will help determine if the company’s core competencies and processes – which have been a success in the local market – are capable of being adapted to a foreign environment.

So, are you ready to tailor your offering?  Even well known brands sometimes assume their business can simply be replicated in a different market. This is not necessarily true. Make sure you look at businesses with a similar offering operating in those markets and compare their proposition to yours. Making appropriate changes to your products or services in a foreign market requires a deep understanding of the cultural traits and habits that influence the decision making process of the potential customer. The ability to adapt your offering whilst not undermining your company’s current business model is often the difference between success and failure in an international context.

So, if you think you are ready, this is not the end. You still have to be patient to succeed, but you can go through this process it will pay off.

Whilst there is much more to be done, these brief points will help guide your early decision making process and set you on the road to reaping international rewards.

DCS International is your business growth specialist. For more information in relation to international expansion, please contact:

Ana Luisa Laudisio
Executive Consultant
ana.luisa.laudisio@dcstrategy.com
02 8220 8714