Franchises, Joint Ventures & Social Enterprises (Cambridge International IGCSE Business)
Exam board Cambridge International · IGCSEUpdated 2025-08-27
Franchises
Spec point — advantages and disadvantages of franchises for the franchisor and franchisee
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Franchising involves a business (franchisee) buying the rights to operate an existing successful business model (franchisor)
- This right includes the use of its branding *and software tools as well as business support , in exchange for an initial lump sum plus ongoing royalties
*Some of the many food franchises available in the US *
- The franchisee operates the business under the franchisor's established system and receives training, marketing support and ongoing assistance
- Franchisors usually require the franchisee to operate as a private limited company
Evaluating franchise ownership
| Advantages | Disadvantages |
|---|---|
| - A ready-made, recognised brand name which is promoted centrally by the franchisor - The franchisor provides training, such as how to make pizzas properly, to ensure consistent quality - Equipment and supplies are provided through the franchisor - The franchisor guarantees an exclusive geographical area or market to the franchisee so competition is limited - **Advice, training **and the use of software systems - The franchisor may also provide loans, insurance and recruitment support | - The** cost of purchasing** a well-known franchise is likely to be high compared to starting a business from scratch - Core decisions are made by the the franchisor, reducing the autonomy of business owners - Royalties linked to the level of sales must be paid regularly, regardless of profit - Required materials, supplies or equipment sold by the franchisor may be sold to the franchisee at inflated prices - If the franchisee does not follow strict franchise rules or fails to meet quality expectations, their franchise rights can be removed |
- For the franchisor, allowing other businesses to buy franchises has a range of advantages and disadvantages
Evaluating the sale of franchises
| Advantages | Disadvantages |
|---|---|
| - Rapid business growth can be achieved with less financial risk - Earns income from franchise fees and royalties - Expands a business's brand presence without directly managing each outlet | - The franchisor has less control over day-to-day operations of each franchise - There is a risk of franchisees damaging the brand's reputation - Time and resources are needed to support and monitor franchisees |
Exam Hint A franchise is not a form of business ownership. It is an alternative to starting up a business from scratch
Joint ventures
Spec point — advantages and disadvantages of 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 structure 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 each others' strengths and resources brought to the venture
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Some 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 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 diversifying - 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 | - If the joint venture is successful, profits have to be shared between the partner businesses - Disagreements may occur between managers in both businesses - The objectives of each business may change over time, leading to conflict 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 |
Social enterprises
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A social enterprise is a business that has the primary purpose of creating social or environmental impacts, in addition to generating profits
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Cooperatives are a common form of social enterprise
- They are owned and controlled by workers or customers (often called members) who share profits, contribute to key decisions and have the right to elect directors
Objectives of social enterprises
| Social | Environmental |
|---|---|
| - Provide jobs and support for disadvantaged groups in society, such as the disabled or homeless | - Protect the natural world, animals and their habitats, and reduce the impacts of pollution or overdevelopment |
| Ethical | Financial |
| - Operate the business in a responsible way by treating stakeholders, including employees and suppliers, fairly | - Make a profit to invest back into the social enterprise to expand the social work that it performs |
Case Study Grameen Bank, Bangladesh
- Grameen Bank was founded in 1976 with the mission of alleviating poverty in rural Bangladesh
- The bank gives loans without asking for any collateral, unlike normal banks
- Grameen Bank brings its services directly to the homes of its customers, where they feel comfortable and safe
- The bank has helped millions of people escape poverty by providing small 'microloans' to help them start or grow their businesses
Evaluating social enterprises
| Advantages | Disadvantages |
|---|---|
| - Social enterprises often have a good reputation, which can attract highly-qualified employees and encourage customer loyalty - Profit-focused rivals may be encouraged to improve their business practices to better compete with social enterprises - Deserving causes receive much-needed financial support | - Social enterprises may face media scrutiny so must ensure they behave responsibly at all times - Profits (surpluses) available for reinvestment are limited as they are shared with members or good causes - Decision-making is often slow, as many stakeholders need to be consulted |
Exam Hint When discussing social enterprises, always stress that their aim is not just profit but also social or environmental objectives. Examiners often look for this distinction from traditional businesses
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