Business strategy

Every company or firm develops its strategy, i.e., its overall method of achieving its objectives. The strategy must be very flexible, because only a flexible strategy permits taking into account market conditions, which are constantly changing.

Strategy depends on long-term and short-term objectives and prospects. The long-term objective is always profits. But a company may be ready to cut its profits for some time to have a greater share of the market to sell its products. Greater market share means greater profits in the future. So, a company may put gaining market share as its short-term objective. To achieve this, the company has to reduce its prices. But then, the margins will be lower. Margins are the differences between what it costs to manufacture a product and the price at which it is sold. Lowering the margins means cutting the profits.

In this case, in order to increase profits over the long term, the company needs to increase production. Gaining market share allows it to increase production, and that increase cuts of the unit cost (i.e., the cost to manufacture one unit of what the company produces).

On the other hand, increasing production may cut profits as well, because the increased production requires new investments into machinery and technology.

The strategy, then, has to be oriented in two directions – the market and the manufacturing process. If we focus on the market, then the strategy is to gain market share. If we focus on manufacture as a source of profitability, then the quality of products should be improved. In that case, prices may be raised as well, in their turn raising the profits.

But this strategy does not work well if the market is competitive. Price increases, whatever the quality, may result in a drop in sales. A firm that does not increase prices, or the one that even reduces them, adapts to the market more easily.

To reduce costs without increasing (or even reducing) prices, companies often have to sub-contract some of their production. That means joblosses in the company itself, though the remaining jobs become more stable and secure.

It may be said that developing a sound and flexible strategy is very difficult, because every strategy has its advantages and disadvantages. Many factors have to be taken into account.

Ø Questions for comprehension check-up and discussion:

1. What is a business strategy?

2. What are the objectives that every strategy depends on?

3. Name two directions a Nationalgy can be oriented in.

4. Why do companies have sometimes to sub-contract their production?

5. What factors, in your opinion, have to be taken into account in order to develop a sound strategy?

11. FRANCHISING

Lead-in:

1. franchising –привілей, ексклюзівні права і привілеї

на переведення торгівлі чи бізнесу

2. agreement –згода, договір, угода

3. accounting– бухгалтерія, облік, розрахунок

4. bookkeeping –бухгалтерія

5. penalty –покарання, кара, штраф

6. trademark –фабрична марка, торгівельна марка

7. marketing strategy –стратегія торгівлі (маркетингу)

8. operating manual –підручник, посібник

9. quality control –контроль якості

10. renewal –відновлення

One of the fastest-growing and most important segments of business is franchising.

There are many different franchise agreements. Franchising is a marketing system based on a legal arrangement that permits one party – the franchisee – to conduct business as an individual owner while abiding by the terms and conditions set by the second party – the franchiser. The franchise is the contract granting the right to do business and specifying the terms and conditions under which the business will be conducted.

The franchisee is usually an independent local business person who agrees with the franchise owner to operate the business. The franchiser is the company that owns the franchise’s name and distinctive elements (such as signs, symbols and patents) and that provides operating systems, such as accounting, advertising, bookkeeping, marketing and other services. While the franchisee is given the right to produce and market the franchiser’s designated goods or services, that production and marketing must be done according to the terms of the licensing agreement. The contract specifies what the franchisee can and cannot do and prescribes certain penalties for non-compliance.

There are two types of franchising systems: product and trademarkfranchising and business format franchising.

Product franchising is an independent sales relationship between the franchiser and the franchisee in which the latter is given the right to use some of the franchiser’s identity.

Business format franchising is characterized by an on going business relationship between franchiser and franchisee that includes not only the product service and trademark(or trade name) but also the other components of the operating system: marketing strategy and plan, operatingmanuals and standards, training programs for operating the system, quality control, and communication between franchiser and franchisee.

Franchisees get training from the company that helps them to manage their business and advertising. This continuous support is one of great advantages of franchising. Not less important is using the brand name of a company that is known and advertised nationally, or even worldwide. It is easier for a franchisee to raise money from banks than it is for a sole proprietor because a franchisee has a large company’s support.

But there are disadvantages as well:

– A franchisee has less independence than other sole proprietors;

– He or she has to pay part of his or her profits to the company (royalty payments).

– A franchisee cannot sell his or her business if he or she does not have a franchiser’s agreement of doing so;

– Renewalof the franchise is not automatic, so a franchisee can lose his or her franchise.

Ø Questions for comprehension check-up and discussion:

1. What is franchising (the franchise)?

2. What is the franchisee?

3. What is the franchiser?

4. How many types of franchising systems do you know?

5. Is it easier for a franchisee to raise money from banks than it is for a sole proprietor? Why?

6. What are advantages and disadvantages of franchising?