Intrapreneurship and Corporate Venturing 411- There were over 2,500 franchising systems (companies that sell franchises) in the United
States. Seventeen of eighteen categories grew in 2005. - The largest categories of existing systems are fast food (20 percent, 500 systems) and retail-
ing and services (both growing at 11 percent). - The smallest category of existing systems is travel, and travel is the only category that
decreased in 2005. - Retail food is the fastest growing category with 67 percent growth in the period from 2003
through 2005. - One-third of all franchise systems have 100+ units and nearly half have 50 units; 25 percent
of all franchise systems have 10 units or less. - Franchise sales topped $1.5 trillion dollars.
- Franchise systems employ over 18 million Americans.
Franchising is also one of the most prevalent corporate venturing strategies in international
markets. For example, both McDonald’s and Yum Brands (KFC) are in intense competition to
expand their franchises in China. They want to attract the best entrepreneurs from the emerging
Chinese entrepreneurial class. Yum is expected to launch over 300 new Kentucky Fried Chicken
franchises a year for the next decade and McDonald’s has a goal of over 1,000 units by 2008.
Both companies offer intensive support to their franchisees. KFC requires thirteen weeks of
training in a restaurant before it will consider an application, and McDonald’s trains its prospects
at the Hong Kong branch of Hamburger University.^3
The fantastic success of franchising is one of the fundamental changes in business since World
War II, but why is it so successful? How does it work?
Theoretical Foundations
Franchising is a method of implementing the growth strategy of the franchisor’s venture. The
successful franchisor possesses resources that are rare, valuable, imperfectly imitable, and nonsub-
stitutable. Usually these resources are a business concept, an operating system, a brand name, and
an actual or potential national reputation. Franchising enables the franchisor to multiply the rents
collected on the four-attribute resource through the franchise agreement. Each franchisee
becomes an outlet for the value added by the special resource configuration. The basic assump-
tion is that value has been created and captured through careful operation, testing, and documen-
tation of a commercially viable idea.^4
Franchising enables the franchisor’s venture to grow using the franchisee’s money, knowledge
of the specific locale, and human resources. It also allows the franchisor to enjoy increasing
economies of scale in purchasing, building development and improvements, and advertising and
promotions. Finally, it enables the firm to enjoy two traditional strategic advantages at once: local
control of costs through close supervision of the franchisee, and effective national or internation-
al product and service differentiation through the marketing efforts of the franchisor.^5
However, there are times when the franchisor’s desire for growth is a liability. Consider
Boston Market. The company grew from 20 stores in the late 1980s to over 900 stores in the
1990s. They were making a high five-figure fee on each franchise unit opened, but the stores
themselves were losing money. “If you are not making money at a single outlet, chances are pret-
ty great that you’re not going to make a lot of money at a lot of outlets,” says Scott Shane, a