Business Ownership: Franchises and Joint Ventures (Cambridge International AS Business)
Exam board Cambridge International · ASUpdated 2025-06-09
Franchises
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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
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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
Some well-known businesses operate as franchises
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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
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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
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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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