How do franchise firms benefit from economies of scale?
Franchise firms are the small businesses that are operated in such a way that they deal with goods of larger corporations. They usually buy the products from the corporation at a discounted price hence being able to supply them at a fair price. Examples of franchise firms include the McDonald’s restaurants and NAPA Auto Parts among others. Economies of scale on the other hand are the benefits that a business gets through expansion into large scale (Joaquim, 1987, p. 81).
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There are various types of the economies of scale ranging from marketing economies, workforce specialization, production economies, and technical economies just to mention but a few (Gelles and Douglas, 1996, p. 260).
Franchise firms have therefore been known to benefit from the economies of scale of the large corporations since they use the brand names as well as the purchasing power of the corporations while saving on their own investment. This therefore means that the franchise firm will take advantage of the good reputation that the corporation has in order to merchandise their products. As a result the franchise firm will be making supernormal profits while saving on marketing costs. It can thus e said that franchise firms enjoy marketing economies from the larger corporations.
Other than the mentioned economies of scale, the franchise firm may hide its identity from the public since its uses the brand name and publicity of the large corporation (Hardwick, 2002, p. 54).
What might be some potential disadvantages of being a part of a large corporation?
Being part of a large corporation comes with a price as the franchise firms will first of all lack their own independence as they are restricted by the mandates of the corporations. This means that they follow the orders given by the large corporations and apply in their entrepreneurship (Pipes, 2011, p. 1). In addition to the inability to making their own decisions, franchise firms also suffer any misfortunes suffered by the large corporations. Such that in the event the corporation is insolvent or closed down, the franchise firm is affected simultaneously. In addition to this, since the franchise firm operates under the umbrella of the large corporation, it may lead to wrong decision making which might have negative impacts on both firms.
Assume your franchise firm operates in a very competitive market. What might happen to long-run profits of your firm?
A competitive market is one where there are many buyers and sellers of a certain commodity or service (Bade and Parkin, 2001, p. 87). In the event that the franchise firm is located in a very competitive market, means that the marketing costs to be incurred are very high if at all the franchisee wants to make good profit. Thus, this will reduce the profits of the firm aiming the long-rum profits be very low. The low profits will be incurred as a result of the following subsequent scenarios;
- Few sales will be made due to the high number of suppliers
- The commodities or services will be offered at a reduced price due to the market competition
- Increased cost of advertising and marketing the commodity or service
The aforementioned factors will in the long-run make the franchise firm as well as the large corporation to earn low profits.
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Bade, R. and Parkin, M. (2001). Foundations of Microeconomics. Addison Wesley Paperback 1st Edition.
Gelles, M, and Douglas W. (1996). “Returns to scale and economies of scale: Further observations,” Journal of Economic Education 27.
Hardwick, P. (2002). Introduction to modern economics, prentice hall publishers, New York.
Joaquim S. (1987). “Economies and diseconomies of scale,” The New Palgrave: A Dictionary of Economics, v. 2, pp. 80–84.
Pipes, K. (2011).What Kinds of Opportunities Does Franchising Offer? Web.