Long Type Questions - Enterprise Growth Strategies, Entrepreneurship, Class 12 | Additional Study Material for Commerce PDF Download

Q1. Explain the types of franchising. (TBQ) (6 marks)
Ans.
(i) Product franchise business opportunity : Manufacturers use the product franchise to govern how a retailer distributes his product. The manufacturer grants a store owner the authority to distribute goods by the manufacturer and allows the owner to use the name and trademark owned by the manufacturer. The store owner must pay a fee or purchase a minimum inventory of stock in return for these rights. Some tire stores are good examples of this type of franchise.
(ii) Manufacturing franchise opportunity : These types of franchises provide an organisation with the right to manufacture a product and sell it to the public, using the franchisor’s name and trademark. This type of franchise is found most often in the food and beverage industry. Most bottlers of soft drinks receive a franchise from a company and must use its ingredients to produce, bottle and distribute the soft drinks.
(iii) Business franchise opportunity ventures : These ventures typically require that a business owner purchases and distributes the products for one specific company. The company must provide customers accounts to the business owner and in return, the business owner pays a fee or other consideration as compensation. Examples include vending machine routes and distributorships.
(iv) Business format franchise opportunity : This is the most popular form of franchising. In this approach, a company provides a business owner with a proven method for operating a business using the name and trademark of the company. The company usually provides a significant amount of assistance to the business owner in starting and managing the company. The business owner pays a fee or royalty in return. Typically, a company also requires the owner to purchase supplies from the company.

Q2. Explain the main ingredients of a franchise agreement. (6 marks)
Ans.
(i) Contract Explanation : The contract explanation is the part of the agreement that outlines the type of relationship a franchisee is entering into with the franchisor.
(ii) Operations Manual : The operations manual is the section of the agreement that details the guidelines that the franchisee must legally follow in operating the business as outlined by the franchisor. From time to time amendments may be made and the franchisee must be prepared to adjust operations accordingly. The franchisee needs to be aware that the contents of the document are confidential.
(iii) Proprietary Statements : Proprietary statements outline how the franchise name is to be used, as well as the marketing and advertising procedures in place that the franchisee will be required to follow. Also, the franchisor documents how much the franchisee will be required to contribute towards national advertising efforts.
(iv) Ongoing Site Maintenance : Ongoing site maintenance is another item that is outlined in the agreement. Included in it are the types and timeframes regarding various maintenance items and upgrades that must be made to the franchisee’s location.

Q3. What are the disadvantages of franchising to the franchisee ? (TBQ) (6 marks)
Ans.
(i) Right and the only way of doing things : Entering into a franchise contract limits the degree of freedom for the franchisee. Franchisee loses the freedom to innovate to some extent.
(ii) Continuing cost implication : A percentage of revenue of the franchisee get shared perpetually with the franchisor. The franchisor may also charge additional amounts towards sharing the cost for services provided such as advertising and training.
(iii) Risk of franchisor getting bought : The franchisee faces serious problems and difficulties when the franchisor either fails or it gets bought out by another company.
(iv) Inability to provide services : When franchisor does not provide services, advertising and location the franchisee may be left without any support in important areas.

Q4. Explain the advantages of franchising, both for the franchisor and franchisee. (6 marks)
Ans.
Advantages of franchising to the franchisor : Advantages are related to expansion risk, capital requirements and cost advantages that result from extensive buying power.
(i) Expansion : Fanchisor is able to expand the business with little extra cost.
(ii) Direct Feedback : Franchisee provides a direct feedback to franchisor about the taste, expectation, etc. of customers.
(iii) Enhancing Goodwill : Franchisors are able to enhance goodwill and reputation.
Advantages of franchising to franchisee are as follows :
(i) Product acceptance : Franchisee usually enters into a business that has an accepted name, product or service. The franchisee does not have to spend resources trying to establish credibility of the business.
(ii) Management expertise : Franchisor provides managerial assistance to his franchisees. Each new franchisee is often required to take a training program on all aspects of operating the franchise.
(iii) Capital requirements : Some franchisors conduct location analysis and market research of the area while some can also finance the initial investment to start the franchise operations.
(iv) Knowledge of market : Any established franchise business offers the entrepreneur years of experience in the business and knowledge of the market. This is important because of regional and local differences in markets. Most franchisors constantly evaluate market conditions and determine the most effective strategies to communicate to the franchisees.
(v) Operating and structural controls : Franchisor may offer supplies of items to the franchisee. Standardization in the supplies, products and services provided helps ensure that the entrepreneur will maintain quality standards that are so important. It supports a consistent image on which the franchise business depends for expansion.

Q5. Explain the ways in which an organization can expand. (6 marks)
Ans.
(i) Internal Expansion : It results from the gradual increase in the activities of the concern. The concern may expand its present production capacity by adding more machines or by replacing old machines with the new ones. Internal expansion can also be undertaken by entering new fields on the production and marketing sites. The net result of internal expansion is the increase in business activities and broadening the present capital structure.
(ii) External expansion : External expansion refers to a business combination where two or more concerns combine and expand their business activities. The combination may be among competing units or units engaged in different processes. After combination, the constituted firm pursues for common objectives or goals. The main forms of external expansion are franchising and mergers & acquisitions.

Q6. What are the different activities that an entrepreneur can undertake to expand his enterprise ? (5 marks)
Ans. An entrepreneur can undertake following activities to expand his enterprise :
(i) Raising the level of production : By raising the level of production, the volume of the product produced increases. This leads of expansion.
(ii) Adding another unit of production : By keeping the present unit and adding a new unit of production an enterprise can be expanded.
(iii) Increasing the number of employees : With the increase in the strength of the employees, the expansion takes place provided it is associated with the rise in production.
(iv) Adding more machines : By adding more machines to the existing ones, the turnover also increases. This is referred as expansion.
(v) Opening an ancilliary unit : If the product of one company can be used as raw material for the other product, then a new enterprise can come into existence which is dependent on the main. If the parent company and the ancillary unit are of same enterprise, it is also leading to expansion.

Q7. Explain the features of Franchise. (6 marks)
Ans.
(i) The franchisor owns a trade or service mark and allows a franchisee to use it.
(ii) The franchisee pays for the licence and becomes a part of the network.
(iii) The franchisee makes an initial payment called licence fee. There may be an agreement of payment on percentage of sales or profit to be given monthly or annually by the franchisee to the franchisor.
(iv) The franchisor provides all marketing support and proper equipments for doing business.
(v) The franchisee follows all the policies of the parent company, i.e., franchisor.
(vi) The franchisor may give training to all the personnel working in the franchise es organization.