IM/U2 Topic 16 Manufacturing & Franchising
Manufacturing is the processing of raw materials into finished goods through the use of tools and processes. Manufacturing is a value-adding process allowing businesses to sell finished products at a premium over the value of the raw materials used.
Humans have historically sought ways to turn raw materials, such as ore, wood, and foodstuffs, into finished products, such as metal goods furniture and processed foods. By refining and processing this raw material into something more useful, individuals and businesses have added value. This added value increased the price of finished products, rendering manufacturing a profitable endeavor. People began to specialize in the skills required to manufacture goods while others provided funds to businesses to purchase tools and materials.
How products are manufactured has changed over time. The amount and type of labor required in manufacturing vary according to the type of product being produced. On one end of the spectrum, products are manufactured by hand or through the use of basic tools using more traditional processes. This type of manufacturing is associated with decorative art, textile or leather work, carpentry, and some metal work. At the other end of the spectrum, mechanization is used to produce items on a more industrial scale. This type of manufacturing does not require as much manual manipulation of materials and is often associated with mass production.
The industrial process used to turn raw materials into products in high volumes emerged during the Industrial Revolution of the 19th century. Before this period, handmade products dominated the market. The development of steam engines and related technologies allowed companies to use machines in the manufacturing process reducing the number of personnel required to produce goods while also increasing the volume of goods that could be produced.
Mass production and assembly line manufacturing allowed companies to create parts that could be used interchangeably and allowing finished products to be made more readily by reducing the need for part customization. The use of mass production techniques in manufacturing was popularized by the Ford Motor Company in the early 20th century. Computers and precision electronic equipment have since allowed companies to pioneer high-tech manufacturing methods. Products made using these methods typically carry a higher price but also require more specialized labor and more expensive capital inputs.
The skills required to operate machines and develop the processes used in manufacturing have changed drastically over time. Many low skill manufacturing jobs have shifted from developed countries to developing countries because labor in developing countries tends to be less expensive. More skilled manufacturing, particularly of precision and high-end products, tend to be undertaken in developed economies. Technology has made manufacturing more efficient and employees more productive; therefore, although the volume and number of goods manufactured have increased, the number of workers required has declined.
Economists and government statisticians use various ratios when evaluating the role manufacturing plays in the economy. Manufacturing value added (MVA), for example, is an indicator that compares manufacturing output to the size of the overall economy. It is expressed as a percentage of GDP – gross domestic product. The ISM Manufacturing Index uses surveys of manufacturing firms to estimate employment, inventories and new orders and is an indicator of the health of the manufacturing sector.
The term ‘franchise‘ is understood as an exclusive right conferred by the parent organization to an individual or enterprise to use the former’s successful business model, in stipulated areas. Franchising is a business relationship; wherein the owner authorises another party to use their brand, product, business system and process in return for adequate consideration.
In finer terms, franchising is an arrangement, in which the manufacturer, permits another firm, the right to use its diverse intellectual property rights such as trademark, brand name, technical know-how, designs, etc., in addition to the proven name, goodwill and marketing strategies, for a certain sum. E.g. Mc Donald’s, Subway, & Eleven, Domino’s, Dunkin’ Donuts, etc.
In franchising, the firm that grants a license is called franchiser, and the individual or entity to whom the right is conferred is franchisee. The franchisee acquires franchise by paying initial startup and annual licensing fees to the franchiser, who in return provides training and assistance to the franchisee at regular intervals.
Franchising Agreement is a special agreement between both the parties, under which rights are given, and also the terms and conditions relating to franchising are stated clearly.
Characteristics of Franchising
The franchisee gets the right to use, franchiser’s trademark under a license.
The franchisee must follow the policies concerning the mode of conducting business, as stated in the agreement.
- Marketing support and technology
Franchisee is supplied with continuous market support and technology, by the franchiser, to undertake business, in the manner stated in the franchising agreement.
Complete training and assistance are provided to the personnel working in the franchisee’s enterprise.
For making use of a well-known business model, the franchisee pays the royalty to the franchiser.
- Limited period
Franchisee is allowed to use the business know-how and brand name for a specified period, as mentioned in the franchise agreement. Although, the agreement can be renewed further.
Franchising is a most common practice of expanding the business, through a licensing relationship, wherein the owner provides training, equipment, ingredients, and marketing support to the other entity.
Importance of Franchising
(i) It allows franchiser to augment his distribution chain in minimum time.
(ii) It provides feedback to the franchiser regarding the product popularity, needs and choices of customers, etc.
(iii) It expands the network of franchiser which helps in increasing goodwill.
(iv) As the business is already established, the franchisee need not make efforts in promoting the product.
(v) Franchisee get sole rights in providing the product or service
Franchising is a great alternative to developing chain stores, to provide goods and services to the customers and avoid investment. But there are certain demerits attached to it such as there is always a fear that franchisee may open the same business with a different name, after the expiry of the said term. The franchiser’s brand name and reputation will suffer if the franchisee does not provide quality service to the target audience.