Strength in diversity

A recent item in the Sydney Morning Herald records that "The Guolizhuang penis restaurant has expanded to five franchises after opening in Beijing three years ago" (Mary-Ann Tay, Waiter, my menu is a menagerie, July 25, 2008). Although a regular visitor to Beijing I have not knowingly sampled the delights of lobster with donkey penis, or horse penis with testicles and chilli dip.

Two thoughts flow from this item. One is the incredible diversity of the franchise sector. As the Guolizhuang Penis Restaurant illustrates, there is a franchise for every Dick, Tom and Harry. The other is that despite our globalised interconnected world some franchise concepts are not born to travel.

Diversity is a great strength of the franchise sector worldwide that has thrived by exploiting niche markets generally not well served by the non-franchised national chains. Harvey Norman may be an exception although the discrete divisions within the store are operated by different franchisees. Jim's Group has of course long since moved beyond lawn mowing and has evolved into a broad domestic service group with over a score of distinct home services but each niche offered is a separate franchise. Prospective franchisees have a very broad range of franchising opportunities covering all consumer goods and services and most business services.

I am frequently asked - but rarely give a straight answer - what franchise I would recommend. The sheer diversity of the sector in terms of concepts available, entry costs, commitment and the like conspire to make a simple answer impossible anyway.

Sometimes the franchisor will require particular skills, experience or capabilities but in most cases it is people skills and life skills which are most valued. Technical skills can be taught. Management skills can be learned.

A prospective franchisee must of course have an affinity with the concept and what is involved in its operation. Any prospective franchisee must of course rigorously evaluate and exercise due diligence in relation to the concept, the business, the franchisor, the financial equation but it is equally as important for the prospective franchisee to undertake an introspective personal assessment. They need to ask: What do I like? What am I good at? What will inspire me? What can I commit to?

The other thought that the Guolizhuang Penis Restaurant provokes is the globalisation factor. Franchising has been the leader in the internationalisation of business, not always to universal acclaim as the title of George Ritzer's book The McDonaldisation of Society (1995), suggests in a less than subtle tone.

The prospective franchisee in Australia has a wide choice of possible franchises - more than 1000 -including new and established systems from both overseas and Australia. Another question I am frequently asked is which is better - the new or established system? Is it the overseas or local system? These are also questions that cannot be answered simply.

Ultimately, a concept is not successful simply because it is franchised. It is successful because what is franchised is a proven concept.

A successful foreign system starting in Australia is not radically different to an Australian start-up system. The cautious prospective franchisee who is not a risk-taker may sensibly decide that the lower entry cost does not outweigh the lack of local traction.

A recent New Zealand High Court decision provides a salutary reminder for franchisors and prospective franchisees that a proven franchise concept in a home market does not necessarily equate to a proven concept in an overseas market. The NZ master franchisee for James Home Services - a successful Australian system - was successfully sued for representations that "the James formula is successful in the marketplace where it counts" and was a "proven system for success". These representations were held to lack basis in NZ.

Any prospective franchisee for the first Guolizhuang Penis Restaurant in Australia should bear this in mind.

Andrew Terry - Australian School of Business at UNSW and Special Counsel to Deacons

This article appears courtesy of Franchising Magazine