UNIT 4- ENTERPRISE GROWTH STRATEGIES

Class XII
NOTES

Syllabus:
A franchise agreement is the legal document that binds the franchisor and franchisee together. This
document explains what the franchisor expects from the franchisee in running the business.

The main ingredients of a franchise agreement:

• Contract Explanation: The contract explanation is the part of the agreement that outlines the type of
relationship a franchisee is entering into with the franchisor.

• Operations Manual: The operations manual is the section of the agreement that details the guidelines
that the franchisee must legally follow in operating the business as outlined by the franchisor.

• Proprietary Statements: Proprietary statements outline how the franchise name is to be used, as well
as the marketing and advertising procedures in place that the franchisee will be required to follow.

• Ongoing Site Maintenance: Ongoing site maintenance is another item that is outlined in the
agreement. Included are the types and timeframes regarding various maintenance items and upgrades
that must be made to the franchisee's location.

Types of franchising-

1. Product franchise business opportunity: Manufacturers use the product franchise to govern
how a retailer distributes their products. The manufacturer grants a store owner the authority to
distribute goods by the manufacturer and allows the owner to use the name and trademark
owned by the manufacturer.
2. Manufacturing franchise opportunity: These types of franchises provide an organization with
the right to manufacture a product and sell it to the public, using the franchisor's name and
trademark. This type of franchise is found most often in the food and beverage industry.
3. Business franchise opportunity ventures: These ventures typically require that a business owner
purchases and distributes the products for one specific company. Examples include vending
machine routes and distributorships.
4. Business format franchise opportunity: This is the most popular form of franchising. In this
approach, a company provides a business owner with a proven method for operating a business
using the name and trademark of the company.
Advantages to the franchisee

1. Product acceptance: The franchisee usually enters into a business that has an accepted name,
product or service. The franchisee does not have to spend resources trying to establish the
credibility of the business. That credibility already exists based on the years the franchise has
existed.
2. Management expertise Another important advantage to the franchisee is the managerial
assistance provided by the franchisor. Each new franchisee is often required to take a training
program on all aspects of operating the franchise.
3. Capital requirements: As we've seen in previous chapters, starting a new venture can be costly in
terms of both time and money. The franchise offers an opportunity to start a new venture with
up-front support that could save the entrepreneur's significant time and possibly capital.
4. Knowledge of the market: Any established franchise business offers the entrepreneur years of
experience in the business and knowledge of the market. This knowledge is usually reflected in a
plan 150 offered to the franchisee that details the profile of the target customer and the
strategies that should be implemented once the operation has begun.
5. Operating and structural controls: Two problems that many entrepreneurs have in starting a new
venture are maintaining quality control of products and services and establishing effective
managerial controls. The franchisor, particularly in the food business, identifies purveyors and
suppliers that meet the quality standards established.

Advantages of franchising to the franchisor

1.Quick expansion The most obvious advantage of franchising for an entrepreneur is that it
allows the venture to expand quickly using little capital. This advantage is significant when we
reflect on the problems and issues that an entrepreneur faces in trying to manage and grow a
new venture.
2. Cost advantages The mere size of a franchised company offers many advantages to the
franchisees. The franchisor can purchase supplies in large quantities, thus achieving economies
of scale that would not have been possible otherwise

Disadvantages of franchising to the franchisee

1. Right and the only way of doing things: Entering into a franchise contract limits the degree of
freedom for the franchise. As such, one gets an over-guided and over-influenced degree of
control exerted by the franchisor.
2. Right and the only way of doing things: Entering into a franchise contract limits the degree of
freedom for the franchise. As such, one gets an over-guided and over-influenced degree of
control exerted by the franchisor.
3. Risk of franchisor getting bought: The franchisee faces serious problems and difficulties when
the franchisor either fails or gets bought out by another company.
4. Inability to provide services: The disadvantages to the franchisee usually centre around the
inability of the franchisor to provide services advertising and location
Disadvantage to the franchisor

Difficulty in identifying quality franchisees: Above all, even the franchisor may find it difficult to identify
quality franchisees

Mergers A merger is a combination of two companies into one larger company. This action involves stock
swap or cash payment to the target. In merger, the acquiring company takes over the assets and
liabilities of the merged company.

In general, when the combination involves firms that are of similar size, the term, consolidation, is
applied. When the two firms differ significantly by size, the term merger is used. Merger commonly takes
two forms. In the first form amalgamation, two entities combine together and form a new entity,
extinguishing both the existing entities. In the second form absorption, one entity gets absorbed into
another. The latter does not lose its entity. Thus, in any type of merger at least one entity loses its entity.

Hence, A + B = A, where company B is merged into company A (Absorption) A + B = C, where C is an

entirely new company (Amalgamation or Consolidation)

1. Conglomerate A merger between firms that are involved in totally unrelated business activities.
There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers
involve firms with nothing in common, while mixed conglomerate mergers involve firms that are
looking for product extensions or market extensions. Example: A leading manufacturer of
athletic shoes merges with a soft drink firm
 2. Horizontal merger A merger occurring between companies in the same industry. Horizontal
merger is a business consolidation that occurs between firms which operate in the same space,
often as competitors offering the same goods or service. Example: A merger between Coca-Cola
and the Pepsi beverage division
3. Market extension mergers A market extension merger takes place between two companies that
deal in the same products but in separate markets. The main purpose of the market extension
merger is to make sure that the merging companies can get access to a bigger market and that
ensures a bigger client base. Example: A very good example of market extension merger is the
acquisition of Eagle Bancshares Inc. by the RBC Centura.
4. Product extension mergers A product extension merger takes place between two business
organizations that deal in products that are related to each other and operate in the same
market. The product extension merger allows the merging companies to group together their
products and get access to a bigger set of consumers. This ensures that they earn higher profits.
Example: The acquisition of Mobilink Telecom Inc. by Broadcom is a proper example of product
extension merger.
5. Vertical merger A merger between two companies producing different goods or services for one
specific finished product. A vertical merger occurs when two or more firms, operating at
different levels within an industry's supply chain, merge operations. Example: A vertical merger
joins two companies that may not compete with each other, but exist in the same supply chain.

Acquisitions
Acquisition is a more general term, enveloping in itself a range of acquisition transactions. It could be
acquisition of control, leading to takeover of a company. It could be acquisition of tangible assets,
intangible assets, rights and other kinds of obligations. They could also be independent transactions and
may not lead to any kind of takeovers or mergers.

Types
There are four types of acquisitions:
1. Friendly acquisition- Both the companies approve of the acquisition under friendly terms. There is no
forceful acquisition and the entire process is cordial.
2. Reverse acquisition- A private company takes over a public company.
3. Back flip acquisition- A very rare case of acquisition in which the purchasing company becomes a
subsidiary of the purchased company.
4. Hostile acquisition- Here, as the name suggests, the entire process is done by force.

Reasons for mergers and acquisitions:

1.Synergy -Synergy is the most essential component of mergers. In mergers, synergy between the
participating firms determines 160 the increase in value of the combined entity. In other words, it refers
to the difference between the value of the combined firm and the value of the sum of the participants.
Synergy can take the following forms:
a) Operating synergy This refers to the cost savings that come through economies of scale or increased
sales and profits. It leads to the overall growth of the firm.
b) financial synergy This is the direct result of financial factors such as lower taxes, higher debt capacity
or better use of idle cash.
2. Acquiring new technology- To remain competitive, companies need to constantly upgrade their
technology and business applications. To upgrade technology, a company need not always acquire
technology. A good example is a merger of a logistics company such as a land transport entity with an
air-line cargo company

3. Improved profitability- Companies explore the possibilities of a merger when they anticipate that it
will improve their profitability.

4. Acquiring a competency- Companies also opt for M&A to acquire a competency or capability that they
do not have and which the other firm does. For example, the ICICI ITC alliance made the retailer network
and depositor base available to the merging entity.

5. Entry into new markets- Mergers are often looked upon as a tool for hassle-free entry into new
markets. Under normal conditions, a company can enter a new market, but may have to face stiff
competition from the existing companies and may have to battle out for a share in the existing market.

6.Access to funds- Often a company finds it difficult to access funds from the capital market. This
weakness deprives the company of funds to pursue its growth objectives effectively.