Franchising In Malaysia

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1.0 Franchising

“Franchising is not a “form” of business, but essentially is a method or system where companies (franchisee) are granted the right to operate a business according to a special contract with a parent organisation (franchisor).” (www.malaysia.gov.my, n.d.)

“Franchising may be defined as a business opportunity by which the owner (producer or distributor) of a service or a trademarked product grants exclusive right to an individual for local distribution and/or sale of the service or product, and in return receives a payment or royalty and conformance to quality standards.” (Justis and Judd, 2003, p1-3)

Franchising is a type of system or method of business that usually has agreement with both companies (franchisee) and organisation (franchisor) to allow the franchisee to operate regarding to the contract to sell product or to provide services that have been agree in the contract and franchisor will receives payment or royalty from franchisee.  It meaning that franchising is the similar to giving permission to particular representative to using their logo and trademark provide certain products or services to their target customers. The permission will be agree by both sides to have a special business contract for law enforcement.

There are two types of franchising format.  The first one is product-and-trade-name franchising.  This type of franchising is the franchisee having contract with franchisor to buy or sell a particular products.  Besides that, franchisee also will use the name, trademark, or product that provide by franchisor.  The base or core of the value that they need to delivery to customer is certain types of products.

Another type of franchising is business-format franchising.  Business-format franchising has five different types of format categories.  That is business opportunity, pattern or method of doing business, franchise opportunity, licensing relationship, and continuing relationship.  It will be show as below:

Business Opportunity

This is a business format franchising where the producer or distributor of certain services that given right including their trademark to other individual to distributor their services in certain area. In the return of the right given the producer or distributor will receive payment or loyalty and maintain the quality standard.

Pattern or Method of Doing Business

This is a business format franchising where the franchisee get the right from franchisor to distribute certain goods or services by using a particular marketing format which is fix by the franchisor. It needs to follow the way or the marketing format to distribute the goods or services to their customer.

Franchise Opportunity

This is a business format franchising where the franchisee need to follow the marketing plan and payment of royalty to franchisor after grant the trademark, logo, or the use of a product or services.

Licensing Relationship

This is a business format franchising where the distributor grant distribution right to affiliated dealers (franchisee) of a product, services, or business method. Normally it access to the geography area by this method.

Continuing Relationship

Lastly, this is a business format franchising where a franchisor provides continuing management, technical assistance, and training to the franchisee where the franchisee need t grant the license from the franchisor first.

2.0 The Discussion on Franchising Future in Malaysia

This discussion will be focus on different perspective of influences factors to discuss the franchise future in Malaysia. There are few factors that will influence the growth of franchising in Malaysia in the future; government policy, financial support, population and economic condition, and advantages factors of franchising itself.

2.1 Advantages Factors of Franchising itself

The role of franchise system is guiding the organization and evaluating performance.  Before becoming franchise system, a certain companies or outlet will form a set of system which will be test by their self.  In Malaysia, a particular organization would like to register as franchisor, it need to take three years experience in the business to test whether the system work or does not work.  There are several processes before transform a business into franchising business system, for example the franchisor business plan and the franchise PERT Chart.

For further understanding we need to understand the advantages and disadvantages of the both side franchisor and franchisee in franchising.

Advantage of becoming franchisee

The franchisee will have certain of advantage from franchisor, for example having established product or service from franchisor, technical and managerial assistance that franchisor provides, the quality control standards franchisor fixed, less operating capital because of franchisor experience in that business, and opportunities for growth because the proven franchisor successful business.

Disadvantage of becoming franchisee

The franchisee will have several disadvantages like failed expectation to franchisor, having high service cost, sometime will over-dependence to the franchisor, less freedom of the ownership that the owner have, risk of the termination of agreement, and competitor performance of other franchisee.

Advantage of franchisor

Franchisors have certain advantages like, opportunities of expansion, motivation to improve, and operation of non-union business.

Disadvantage of franchisor

There are several disadvantage of franchisor have is, company-owned versus franchised unit which not owning but license to other party, that also have many potential problem when franchisees increase like communication and loss of freedom.

According to Hamid, Othman, Selamat, and Mastor (2003) in their conclusion of their research they note that the successful factors of franchising are have strong establishment between franchisor and the franchisee including their excellent training, communication, support in the business relationship. Besides that, they need to focus on customer relationship, and lastly is franchisee management expertise.

From the research we can understand having a strong establishment and continuing relationship between franchisor and franchisee will have encourage factor of growth of franchising in Malaysia in the futures.  The example of strong establishment and continuing relationship franchisor and franchisee can be looking form the current successful franchisor.

2.2 Government Policy

“MFA together with it members strive to complement the government’s efforts in supporting the franchise development activities in Malaysia.” (Mohd Nadzmi, n.d.)

The chairman from Malaysian Franchise Association said that government have always given support to local entrepreneur those who are interest to becoming franchisor or franchisee.  It proves Government in Malaysia have support of the franchise business format when we study more about the Law of Malaysia Act590: Franchise Act 1998 and the “Program Pembangunan Francais (PPF)”.

Besides that, Malaysian Franchise Association always provides training to local franchisor and franchisee,  for example, Franchise Development Course for Franchise Consultant (KPPF) (Kuala Lumpur, from 14 Aug 2009 to 16 Aug 2009), and Basic Franchise Course (KAPF) (Kuala Lumpur, from 08 Aug 2009 to 09 Aug 2009).

Having the continuing support of Malaysian Franchise Association and government, will definitely encouraging the growth of franchising in Malaysia.

2.3 Financial Supports

There are two categories of financial supports in franchising business; financial support from government and banks.

First, government of Malaysia are providing financial support to local entrepreneur in franchise business activity.  The Bank Kerjasama Rakyat Malaysia Bhd (Bank Rakyat) has collaborating with Perbadanan Nasional Bhd (PNS), which is an agency under the Ministry of Entrepreneur and Cooperative Development (MECD) to allocates RM15 million under I-rakyat Loan Scheme. The I-rakyat Loan Scheme is offers to Women Franchise Programme and the Graduate Franchise Programme, which all of this is franchise business activity.

Other than that, Malaysia government also encourage banks in Malaysia to provide loan for small and medium enterprises, good example we can looking it from SME Bank and Maybank in Malaysia.  The banks itself have providing loan to small and medium enterprises and of course for franchising business.

“Most entrepreneurs will tell you that the single most difficult part of starting a company is raising money.” (Baron, Shane, 2008, p175)

Financial capital is important factor that influence the growth of franchising.  And yet, now Malaysia has the capital fund to growth the franchise format business.  It can be sure franchising will growth in Malaysia in the future, ceteris paribus.

2.4 Population and Economic Condition

There several factors that might influence the growth of franchising in Malaysia in future.  In this part, we will discuss about the population, incidence of poverty, and education factors influence the total consumption and how it relate to the growth of franchising.

Table: 2.4.1 Population

Source: Ministry of Finance, Malaysia

Population will have positive relationship with the consumption in the market.  Population in Malaysia is increasing and of course will increase the total consumption in our country.  People are getting increase and need a lot of products and services to fulfil the need of the market.  There are probably bringing growth potential to the all types of business, and it sure including franchising growth in future.

Table: 2.4.2 Incidence of Poverty

Source: Ministry of Finance, Malaysia

Poverty has the negative relationship will consumption in the market. When poverty increase in certain country, that is mean number of people who are having income of below RM500 (poverty line set in 2007) was increase.  In the opposite when poverty decrease the country has less poverty people and people who able to afford middle-class goods are increases.  The graph of table 2.4.2 incidence of poverty show that the poverty in Malaysia was decreasing, it show that in the indirectly the business activity in Malaysia will increase, and of course franchising activity will growth in current and future, ceteris paribus.

Table: 2.4.3 Public University Enrolment

Source: Ministry of Finance, Malaysia

The increase of candidate of public university enrolment will increase number of citizen who has higher education level in Malaysia.  Higher education level will increase their income and they will have more spending power.  This has the indirect influence of the growth of franchising in Malaysia in the futures.  People will higher income increase will influence the total consumption in Malaysia, and it will increase the growth of business activity including franchising business.

3.0 Conclusion

After the study of different factor and review of certain reading and information material, based on the discussion result I strongly agree that franchising having a bright future in Malaysia.

4.0 Referents

Abu Bakar A Hamid, Mohd Hassan Mohd Othman, Rozita Selamat & Norhamimah Mastor. (2003). An Encouraging Factors for Entrepreneur in Franchising: A Malaysia Experience. A paper for the Small Enterprise Association of Australia and New Zealand 16th Annual Conference, Ballarat. Retrived February 5, 2009 from, http://www.cecc.com.au/programs/resource_manager/accounts/seaanz_papers/78HamidOthmanSelematMastor.pdf

Baron, R.A., and Shane, S.A. (2008). Entrepreneurship: A Process Perspective. China: Thomson South-Western.

Franchising. (n.d.). Retrieved July 23, 2009, from, http://www.malaysia.gov.my/EN/Relevant Topics/MakeaBusiness/Business/PlanBusiness/Franchising/Pages/Franchising.aspx

Justis, R.T., and Judd, R.J. (2003). Franchising. United States of America: Thomson Custom Publishing.

Selected Socio-economic Statistics. (2009). Retrieved July 28, 2009, from, http://www.treasury.gov.my/pdf/ekonomi/le/0809/jp9_1.pdf

Welcome From Chairman. Retrieved July 28, 2009, from, http://www.mfa.org.my/?about_mfa:welcome-from-chairman

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