According to Al-Wugayan and Turki (2009, p.1), the global business environment has undergone rampant growth over the past few years. This has resulted from the fact that the society is increasingly embracing the concept of entrepreneurship. This has been witnessed by both the developed and developing economies. In addition, the policy makers have recognized the significance of entrepreneurship in propagating economic growth and minimizing the problem of unemployment. Increase in the rate of entrepreneurship has culminated into emergence of a high number of small and medium business enterprises commonly referred to as SMEs. The Gulf Cooperative Council (GCC) countries are amongst the countries which have experienced rampant growth of SMEs. This growth has also been witnessed in different economic sectors of Kuwait. Al-Wugayan and Turki (2009, p. 1) asserts that increased incorporation of entrepreneurship by the young generation in Kuwait has enabled them to shift from jobseekers to job creators. Apart from propagating economic growth and job creation, Al-Wugayan and Turki cites other benefits of entrepreneurship to include skill development, stimulation of innovation and investment promotion (p. 1). According to El-Gamal (2007, Para. 2), there were approximately 33,000 SMEs in Kuwait in 2007.Of these SMEs, 85% of them are family owned. However, Kuwait government has improved the business environment to incorporate the establishment of SMEs in the country. For instance, the government has formulated a financial package aimed at funding the development of SMEs in Kuwait. In 2009, the government entered into 15 million KD contract with a private firm aimed at investing in small projects by incorporating the young generation. In addition, most of the government agencies such as Kuwait Industrial Bank, National Technical Project Company, Industrial Public Authority and Kuwait Small Project Development Company are increasing their funding for entrepreneurs in Kuwait (Al-Wugayan& Turki, 2009, p.4).In only 3 hours we’ll deliver a custom Franchising in Kuwait Business essay written 100% from scratch Get help
As a result, more domestic and foreign investors are seeking investment opportunities in Kuwait. One of the economic sectors which have witnessed rampant growth in the number of SMES is the Information Communication Technology (ICT) sector. It is expected that there will be an increment in the size of SMEs market from US $ 406 million during 2006 to US$ 875 million during 2010. The Kuwait government has welcomed bids by both local and foreign investors to venture into the ICT sector in an effort to stimulate economic growth.
However the high rate of globalization has culminated into the business environment becoming more challenging. One of the resultants of a high rate of globalization is an increment in the degree of competition. According to Al-Maqabandi (n.d, p.1), the high rate of globalization which is characterized by increased economic liberalization is culminating into a need of transforming the way in which businesses are managed. As a result, management teams of SMEs in different economic sectors are increasingly shifting their management processes by incorporating strategic management in their operation. The main objective of this shift is to enable the SMEs survive in the long term as going concern entities. In addition, strategic management plays a significant role in the success of firms through identification of feasible business opportunities. In the long run, the SMEs will be able to achieve their profit and wealth maximization objectives. One of the strategies being considered includes formulation of various growth and expansion strategies. Through expansion, firms can be able be attain a high competitive advantage and position itself effectively in the industry. Amongst the expansion strategies being considered by various firms is franchising. Kuwait presents a high opportunity of growth within the franchising market due to its lucrative nature in terms of profitability. For instance, consumer purchasing power in Kuwait is relatively high due to the country’s high rate of economic growth over the past years. Various economic sectors in Kuwait are integrating the concept of franchising. Some of these sectors include fast food restaurants, beauty shops, dry cleaning and laundry enterprises, clothes firms and automotive overhauling centers.
There are diverse reasons which stimulate the management or owners of different firms to consider franchising in their operation. For instance, franchising presents a high opportunity for firms to witness a high growth rate. This is due to the fact that establishing a franchise requires minimal capital compared green investment through establishment of a new outlet. This means that franchising presents a high probability of growth to firms such as SMEs which have low financial capital base. Through franchising a significant proportion of the cost outlay such as cost of land, equipments, furnishing and improvement of premises, supplies, inventory, and working capital are transferred to the franchisee. The franchising firm is only required to cater for the franchise program cost.
In addition, firms considering to franchise jointly contribute towards the establishment of the franchise firm. Both the franchisor and franchisee bring their individual assets to ensure that there is cost efficiency in the process of expansion. As a result, the firms are able to attain synergy in their operation. This means that there is a low probability of the parties involved incurring additional liability for instance through sourcing credit finance.
If a firm operates in an industry characterized by a high growth potential, it is paramount for the firm to grow by venturing into new market segments. To attain this, it is important for firms to establish as strong distribution network. Franchising presents a high opportunity for the SMEs to attain a quick market penetration. This is due to the fact that the SMEs will utilize the franchisee’s distributional contacts and their knowledge of the local market.
Considering the challenging nature of the business environment, approximately 65% of SMEs establishment fail within a period of 3 years from their inception. According to Watson (2003, p.1), SMEs failure is associated with poor management and lack of sufficient financial capital. However, there is a low probability of franchises establishment failing. It is estimated that only 2 per cent to 4 per cent of the franchises fail compared to the non-franchised firms. The low rate of failure is associated with increased access to effective operational procedures by the franchisees which are already developed by the franchisor. This culminates into elimination of possible errors which result into failure of the non-franchised SMEs. This means that the individual characteristics of the parties involved in franchising motivate firms to consider franchising as an expansion strategy.Academic experts
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The owners of the franchises are more committed towards ensuring success of the firms compared to corporate employee. This is due the strong link which exists between the owner or operator and the business. Franchise owners have personal liability to towards the success of the firm since they have invested their capital in the firm. As a result, these individuals are more dedicated towards ensuring that the firm succeeds.
Franchising gives an opportunity to the franchisor to better control of the franchisee. This is due to the fact that the firm’s operational procedures are maintained in the new establishment. The contract between the franchisor and franchisee stipulates that the franchisee have to follow the franchisor’s operational strategy. This contributes towards a rampant rate of progression in the franchisee firm since there is a clear understanding of the franchisor’s operating procedure.
Firms also consider establishing franchises due to the fact that the burden of direct liability resulting franchisees or his employees’ actions is eliminated from the franchisor. Franchising as an expansion strategy makes it possible for the franchisor to transfer all the potential liability which would occur in the course of their operation to the franchisee. This means that the franchisee is entirely responsible for their actions without implicating the franchisor. This results from the fact that the franchisee and franchisor operate under different corporate structures.
Despite the numerous opportunities associated with franchising, SMEs in Kuwait have not effectively integrated the concept of franchising in their expansion strategies. As a result, Kuwait SMEs have witnessed a slow growth rate both in the local and international market. The current status of franchising amongst SMEs in Kuwait has resulted from both internal and external business environment.
There are a number of factors associated with the low level of innovation in Kuwait. Most of the SMEs in Kuwait lack effective innovation and necessary expertise which are key growth points in franchising. This is caused by the lack expertise in the franchising business which mostly consists of family owned businesses. These firms have not sufficiently incorporated effective operational strategies. For instance, most of these SMEs are managed through an individual-style management system which is relatively inefficient. In addition, most of these management teams do not have the necessary financial competences and management skills to enable their businesses survive in the current dynamic business environment. This illustrates the fact that the willingness of Kuwait entrepreneurs to establish SMEs with a high potential of success is low. In addition, franchising in Kuwait SMEs is affected by a number of social problems linked to SMEs startups. For instance, Kuwaitis have developed a negative perception towards the establishment of SMEs as a source of employment due to the attractive employment opportunities in the civil sector (Al-Wugayan& Turki, 2009, p.6).
In addition, the legal environment has not provided sufficient support for the formation of franchises in Kuwait. This means that the contract between the franchisor and franchisee entirely governs the relationship two parties. This demoralizes the commitment of the SMEs towards franchising as an expansion strategy (Ziedmann, 2010, p. 117).
- To explore the current status of franchising amongst SMEs in Kuwait with reference to barriers and determinants of franchising.
- To determine the reasons contributing towards the current status of franchising by SMEs in different economic sectors in Kuwait.
- To determine the effectiveness with which SMEs in Kuwait have expanded through franchising.
- To evaluate how the legal environment has affected franchising in Kuwait SMEs.
- To identify factors that propels management teams of SMEs to consider changing their operation model and incorporate franchising concept.
- To determine alternative expansion models which the SMEs in Kuwait can use in their strategic management.
- What are the internal and external factors contributing towards the current status of franchising amongst SMEs in Kuwait?
- Which strategies are being used by SMEs in Kuwait to attain a high market share?
- To what extent have SMEs in Kuwait expanded in the domestic and international market?
- What legislative changes should be made in Kuwait to support the concept of franchising in business?
- What are the factors which contribute towards the management team of SMEs considering changing their operation model and incorporate franchising?
- What are the alternative expansion models available to Kuwait SMEs?
Significance of the study
The study will benefit both management teams of various SMEs and the Kuwait government. Through the study, it will be possible for the government to understand the contribution of SMEs to the country’s economic growth. This means that Kuwait government will be able to set good platform towards the growth of SMEs. This will be achieved through formulation of policies and regulations aimed at ensuring that SMEs in Kuwait undertake their expansion strategies through franchising more effectively. In addition, the study will enable management teams of SMEs in Kuwait to appreciate the concept of franchising in attaining their growth and expansion goals. This is due to the fact that the management will be able to understand the challenging nature of the business environment and hence the importance of attaining a high market position. The management team will gain knowledge of the internal and external factors which hinder franchising of businesses in Kuwait. This will form the basis for them to make the necessary adjustments.15% OFF Get your very first custom-written academic paper with 15% off Get discount
Definition of terms
Small and Medium Enterprises (SMEs)
Small and Medium Enterprises (SMEs) refers to business establishments whose turnover or headcount is below a certain set limit. In most cases, a firm is considered to be an SME if it has a human resource base of approximately 250 employees. SME should not exceed € 50 in terms of turnover. In addition, the total from its balance sheet should be at or below € 43 million (Hauser, 2005, p 2). Moreover, the firm should not have more than 25% of its shares held by another enterprise.
This refers to a business operation strategy where a firm uses the operation model of another firm.
Franchisor refers to a firm which sells off its rights in relation to the product it deals with or rents its location or products to another firm or allows it to use its name. This means that the franchisor is the owner of the overarching firm, products and trademarks. In return, the franchisor obtains a given predetermined return from the other party.
Franchisee refers to the party who purchases the rights from the franchisor. The franchisee entirely operates the purchased business and is accountable for certain decision. However, decisions related to the premises look, name and products dealt with are stipulated by the franchisor. The franchisee does not have the right to make adjustments on these. In the contract, a franchisee agrees to pay a fixed amount of fee to the franchisor.
Scope and limitations
This paper intends to conduct a deeper analysis of franchising in Kuwait businesses. The analysis will be aimed at determining why SMEs in Kuwait have not to extensively integrate franchising in their expansion strategies. A comprehensive analysis of the internal and internal factors hindering franchising in Kuwait will be conducted. The analysis will also explore Kuwait legal environment to determine how it is contributing towards limited incorporation of franchising as expansion strategy by SMEs. The research will also identify alternative expansion models which Kuwait SMEs can incorporate in expanding both in the domestic and foreign market. Various methods such as sampling and use of interviews will be integrated in the research. Due to time and resource constraints, only a small group of individuals will be interviewed.
The paper gives the background information of SMEs environment in Kuwait and the current trend. An analysis of the extent to which the SMEs have integrated franchising in their expansion strategy is illustrated. In addition, the paper identifies the reasons why firms in the global market are considering franchising as an effective expansion strategy. The problem statement section identifies the factors contributing towards the current status of franchising in Kuwait business with specific reference to SMEs. In addition, a justification of this problem is given. The objectives of the study and the research questions to be used in the study are illustrated. The significance of the study and the parties to benefit are identified. Finally, the key terms used in the study are defined.
According to Sherman and Hart (2006, p.262), a successful franchising system is characterized by a strong brand equity, experienced training, personnel support and a dedicated leadership team. In addition, the system must have a well established customer base resulting from creation of repeat purchase behavior amongst the customers. The system should also have an effective business model and well established and dedicated network of franchisees.Get your customised and 100% plagiarism-free paper on any subject done for only $16.00 $11/page Let us help you
Franchisee satisfaction is a key determinant for the success of franchising. According to Holmes (2006, p.9), the franchisor has a right to impose system standards necessary for the operation of the franchise. This may affect the relationship with the franchisee considering the fact that the franchisees perceive themselves as individual business entities. Importance of creating a relationship with the franchisee results from the strong correlation that exists between the franchisor and franchisee. According to Siebert (2005, p.6), establishment of boundaries between the franchisor and franchisee is paramount in developing the relationship. In addition, there should be a well established communication between the parties.
Advantages and disadvantages of franchising
Currently, a significant proportion of SMEs are considering integrating the franchising model in their operation. In addition, potential investors are considering establishing SMEs by franchising. According to Kuratko (2004, p.163), there are a number benefits which are linked to franchising. Franchising enables small and medium business enterprises to experience the benefits achieved by operating on a large scale such as organizational design and development of a brand name (Dant &Peterson, 2004, p. 5). In addition, franchising also harnesses the firm’s profit incentives. According to a study conducted by International Franchise Association (IFA), a large number of small and independent SMEs experience a high rate of failure compared to franchised small firms. There are a number of factors which stimulate firms to consider integrating the concept of franchising in their operation. Firms in different economic sectors in have integrated the concept of franchising. One of the economic sectors which have witnessed a high rate of franchising amongst the SMEs is the hospitality industry especially the fast food industry (Eina, Svein &Torvald, 2004, p.120).
Considering the fluctuation in economic cycles, a large percentage of individuals are considering owning their own businesses in the form of SMEs rather than being employed. This results from the fact that the individuals are considering the advantages associated with owning their own business entities. For instance, owning a business entity presents a high degree of autonomy for the individual compared to the salaried individuals. In addition, an individual is able to attain his or her desired success.
Training and guidance
According to Kuratko (2004, p.160), establishing a standalone business entity may prove challenging for individual investors due to lack of experience. For instance, the investor may have difficulties in making decisions regarding key issues related to the business. By integrating the concept of franchising, there is a high probability of the firm succeeding. This results from the fact that the franchisee receives support from the franchisor being a veteran in the industry. According to Dant and Peterson (2004, p. 5), franchising offers the franchisees the benefits of being a part of a large chain of well established business entities. Kuratko (2004, p.166) asserts that the franchisor has a well established track record which contributes towards effective training and guidance. The franchisors experience enables the franchisee to avoid possible mistakes in the course of operation. This reduces the probability of the SME failing compared to if the investor established a standalone entity.
Kuratko (2004, p. 165) accentuates the fact that a large proportion of credit financiers find it difficult to support business ideas of independent investors despite them being viable. In addition, these institutions do not consider extending their loan facilities to independent investors. This results from the fact that they consider individual investors to lack business experience and have poorly developed business plan. However, the franchisee benefits from the franchisors support which makes it easy for them to obtain funds from the financial institution. For instance, the franchisor has a well developed track record which makes even the conservative financial institutions to consider lending to the franchisee (Kuratko (2004, p. 165). The ultimate result is that that the franchisee benefits from a quick startup.
For a firm to be well established, it is paramount that there is a well established business model. A new firm takes a considerable amount time to establish a business model. During this period, the firm may experience difficulties in sustaining its operation. According to Magretta (2003, p.4), business model entails identification and definition of the customer and knowing what the customer values. In addition, the business model clearly defines how the firm intends to attain its profit maximization objective and at the same time deliver value its customers in the most cost effective way. Magretta (2003, p.5) asserts that developing a business model is integrated in the process of developing the firm’s business strategy. In relation to franchising, the franchisee benefits by adopting the business model of the franchisor which is already well established upon entering into the franchise contract. This is due to the fact that by franchising your business n individual develops a business model which is to be utilized by other entrepreneurs in ensuring that their firms attain a high growth rate. Through franchising, the franchisor avoids all the liabilities associated with the operation of the firm. This means that the firm is able to expand its operation with minimal capital.
According to Castrogiovanni, Bennett and Combs (2008, p. 3), profit maximization is one of the objectives as to why business entities are established. For a firm to be able to attain this objective, it is paramount that the firm develops customer loyalty. There are various avenues through which customer loyalty can be attained. One of them relates to ensuring that the customers attain value for their money. For SMEs to succeed in an environment characterized by intense competition, the management must ensure that the firm develops price competitiveness. This would play a significant role in the process of the firm developing its competitive advantage considering the fact that the consumers are price sensitive. Castrogiovanni et al (2003, p. 3) asserts that by establishing a franchise, the firm is able to identify suppliers easily.
Firms also benefits by obtaining discounts from both the manufacturers and the suppliers. As a result, the SMEs are able to pass the benefits to its customers in terms of low price for its products and services compared to the competitors (Castrogiovanni et al, 2003, p. 3). However, an SME which operates on a stand alone principle experiences challenges in pricing its products. This is due to the fact that the firm is forced to set the price for its products at a relatively low point in order to attract the customers. Alternatively, the firm may consider setting the price at a relatively high point. This has an effect of reducing the firm’s customer base (Kurtako, 2004, p.170). However, by incorporating the concept of franchising, SMEs benefit by receiving special facilities due to the volume of its purchases from the manufacturers and suppliers. This means that the franchisees which source their services from the same supplier with a standalone business entity make a higher profit by merchandising the same products and services. The management teams of SMEs also consider integrating the concept of franchising so as to attain customer loyalty by standardizing their customer service. The ultimate result is that the firm is able to attain long term success.
Drawbacks of franchising
Despite the benefits associated with franchising, Kuratko (2004, p.166) asserts that there are a number of drawbacks linked to this expansion strategy. Some of the drawbacks which have been cited relate to cost, control, legal constrains and relationship with the franchisor. According to Holmes (2006, p. 3), a significant amount of cost are involved in the process of integrating the concept of franchising. Some of these costs relate to upfront investment fees. In addition, the franchisee is required to pay royalty fees to the franchisor on regular basis. In addition, there are some franchisors which require the franchisees to contribute to the franchise cost of advertisement. Holmes (2006, p. 4) accentuates that this culminates into an increment in the franchisee cost of operation.
The franchisees are subject to a high level of control by the franchisor. This results from the regulations which are instituted by the franchisor. According to Holmes (2006, p.3), increased regulation limits the ability of the franchisee to exercise individual judgment in the process of conducting business activities such as site selection. In addition, the entrepreneur may be restricted from relocating once the firm has been established. Holmes (2006, p.5), asserts that other restrictions that the entrepreneur may face relate to how the firm conducts the business. Example of operating restriction relate to the number of business hours, products and services offered and accounting procedures used. The control the franchisee by the franchisor extends to areas from where to obtain business supplies. This is regardless of the fact that other suppliers could be willing to supply similar products at a lower cost.
Despite the fact that the franchisee may greatly benefit from the association developed with the franchisor, there are some instances where the franchisee may suffer. Holmes (2006, p. 7), cites the case where the franchisor is experiencing public relations problems or financial constraints. In such instances, the effects will trickle down to the franchisee.
Theories of franchising
A number of theories have been advanced to explain the reasons which motivate entrepreneurs to consider franchising. These are analyzed below.
Resource scarcity theory
Scarcity of resources is a major challenge that SMEs face in their operation. As a survival strategy, SMEs are considering integrating the concept of franchising. Castrogiovanni et al (2006, p. 26) asserts that franchising is increasingly being perceived as one of the ways through which SMEs can access the scarce resources. This means that franchising increases the probability of firms accessing diverse resources such as human and financial capital or managerial capital necessary for the firm to attain a high level of economic growth. Due to lack of sufficient resources, business entities choose to franchise (Domingo, 2005, p. 1020). In addition, the new establishments with unique characteristics recognize the need of attaining a rapid expansion and gaining a significant market share in their operation. The young SMEs are confronted with intense pressure to attain a rapid growth in order to survive in the long term. To attain this, these SMEs should have the necessary human and financial capital. New stand alone business entities may not have the resource requirements. According to Welsh et al (2006, p. 136), franchising is one of the mechanisms through which business enterprises such as SMEs can attain the required resources. The franchisee avails the start up capital required to establish the franchised units and plays a significant role in ensuring that the franchise is well managed. In addition, the franchisee is required to pay a certain amount to the franchisor in form of royalties at predetermined time intervals (Luis, 2005, p.450). In most cases, the royalty mainly accounts for 5 per cent to 15 per cent of the firm’s (franchisee’s) gross volume. This contributes and effective method of obtaining the required financial capital towards enhancing the firm’s financial stability which makes franchising a cost effective method. According to Castrogiovanni et al (2005, p. 25), the franchisors cease to relay on franchising as a source of the necessary resources as the firm grows. Findings of a research conducted by Castrogiovanni and his colleagues revealed that as an industry matures, the firms become less dependent on franchising as an expansion strategy. This result from the fact that the firm will have developed sufficient amount of internal resources to enable it conduct its expansion process effectively. This means that the firm will not require accessing the scarce resources externally. The ultimate result is that the firms will be in a position to operate its own franchised outlets hence increasing its level of profit. However, increased dependence on franchising is evident in new firms entering a particular industry in an effort to grow and survive (Herrera & Rafael, 2009, p.9).
In addition, the new business may not have the necessary capital to enable the firm undertake expansion according to the rate desired by the management team. Franchising also enables firms to attain a high level of administrative efficiency. This results from the fact that the cost of monitoring the various units within the franchise network is minimized. In sourcing for capital to start a new business entity, the investor may consider utilizing debt finance by issuing shares to the public. This culminates into the firm having a large number of shareholders. This makes control of the firm to be ineffective due to time consumption in the process of making decisions (Castrogiovanni et al, 2006, p. 25).
According to Castrogiovanni et al (2006, p.26), an agency relationship results from delegation of authority by one party (principal) to another (agent). Agency relationship is evident in franchising whereby the franchisor is considered to be the principle while the franchisee is the agent. However, such a relationship results into emergence of a number of problems. This arises from conflict if interest between the parties involved as each pursues their self interest (Lammers, 2010, p.179). In accordance to the agency approach, franchising is viewed as a reimbursement scheme that organizes the rewards acquired by the franchisee the franchisors’. This means that franchising contributes towards the firm minimizing the agency problems involved in agency relationships (Franchine, 2005, p.5). Through franchising, the franchisee is assured a significant proportion of the profits resulting from the enterprise. This increases the franchisees commitment towards ensuring that the firm attains its profit maximization objective hence minimizing the cost of monitoring.
Castrogiaovanni et al (2006, p.26) asserts that there is a high probability of the firm benefiting through free riding. In addition, the franchisees are considered to be more motivated towards ensuring that the firm succeeds. This results from the fact that the franchisees have a considerable proportion of their investment at stake. In addition, their high level of motivation also arises from the fact the franchisee receive a proportion of the total franchises profits. Consequently, the managing teams of a franchise are inspired and hence ascertain the maximization of productivity. As a result, minimal effort is required to monitor the operations of the franchises. Franchising presents an opportunity for SMEs to be effectively positioned in the market. This results from the fact that firms which have incorporated franchising benefits from the franchise trade name, service and trade mark (Castrogiovanni et al, (2003, p. 3). These features play a significant role in the firm’s marketing process. This is due to the fact that the public can be able to identify the firm as a part of a large network (Mendelssohn, 2004, p. 7).
For SMEs to develop a high competitive advantage in the market, it is paramount that the respective management teams to consider expanding into the international market. According to Welsh (2006, p. 136), a number of advantages are associated with expanding into the foreign and domestic market through franchising. These include minimal financial resource requirement, less susceptibility to economic cultural and political risks. In addition, franchises are more conversant with the local language, culture, laws and business practices (Dant, Perrigot, & Gérard, 2008, p.290).
According to Sherman and Hart (2006,p. 262), incorporating the concept of franchising enables the small firms to shift various responsibility such as personnel management, training and other administrative tasks to the franchisee. In addition, firms consider franchising so as to be access a wide market. This arises from the fact that the firm is able to supply its products and services to the target market by utilizing the franchisors promotional and advertising channels.
Through franchising, the small firms are able to attain economies of scale in their operation. This culminates into a reduction in the cost of operation by attaining a high level of efficiency. The ultimate result is that the SMEs are able to attain their profit maximization objectives (Sherman & Hart, 2006, p. 262).
Growth of franchising in GCC countries
The concept of franchising as an expansion strategy has greatly been greatly incorporated by a large number of firms in the Gulf Cooperation Council (GCC) countries. This results from the fact that the Middle East is experiencing a high growth rate in the number of SMEs being established in different economic sectors such as education, tourism and tourism (Welsh, Ilon & Falbe, 2006, p. 131). Welsh et al (2006, p. 131) asserts that the emerging economies are increasingly being targeted by franchisors due to their high market potential.A large number of foreign investors are considering investing within the GCC.
According to a 2009 franchising report by Franchising Midddle East, GCC countries received numerous enquiries from international companies intending to expand through franchising. In an effort to penetrate GCC countries, these firms participate in annual franchising exhibition conducted in GCC countries. This enables them to gain knowledge on the countries business environment (Jessica, 2009, P. 2). Some of the factors contributing to a large number of foreign investors being attracted to this region include efficient policies which have been adopted by the respective governments. For instance, most of the governments have implemented efficient tax policies, well developed infrastructure and government support on the SMEs. In addition, emerging economies characterized by a high rate of economic growth and development. This has played a significant role towards the development of SMEs (Rashid, 2010, p. 1).
The various types of franchising which have been integrated by SMEs in different economic sectors include manufacturer and wholesaler, manufacturer and retailer, wholesaler and retailer and retailer and retailer. Franchising in GCC countries is highly experienced within the retail sector. According to Mendelssohn (2004, p. 7), manufacturers and retailer form of franchise mainly entails firms within the automobile and oil industry. In addition, a high rate of franchising is being experienced in the food industry. This arises from the high market demand for fast food products which is enhanced by a high spending power amongst individual consumers. According to Jessica (2009, P. 3), fast food retail firms account for more that 60% of the total market in GCC countries. As a result, GCC countries are witnessing an annual growth rate of more than 27%. In 2007, annual franchise sales amongst GCC countries averaged $ 35 billion. These sales are expected to continue in the future. Currently, there more than 850 master franchisees and indigenous franchisees in GCC countries.
According to Sorenson and Soensen (2003, p. 713), franchising provides an effective opportunity through which SMEs can enhance their entrepreneurial wealth. In addition, franchising is contributing to an increase in the rate at which retail firms are growing. Sorenson and Soensen (2003, p. 713) assert that increment in the rate of franchising has resulted from a number of pull and push factors. The push factors relate to increment in the degree of competition, market saturation and reduction in the size of the domestic market. On the other hand, the push factors relate to market liberalization and formation of trading blocks. In addition, the push factors also relate to emergence of newly industrialized countries due to an increase in the rate of globalization.
According to Alon and McKee (2006, p.98), the high rate of franchising is also associated with an increment in the rate of competition within the business environment, a large percent of investors are considering how they can develop ea competitive advantage. In addition, the high rate of growth in SMEs in GCC countries is associated with a number of factors. Some of these factors relate to increase in the rate of competition culminating into market saturation. As a result, a large number of SMEs in GCC countries are considering adopting new operational strategies to expand both in the domestic and foreign market. In addition, sectoral and broader market led opportunities are culminating into an increase in the number of investors venturing various economic sectors through establishment of SMEs. More countries are considering forming trading blocs due to an increment in the level of competition within the business environment.
One of the Kuwait economic sectors where Franchising has been integrated as an expansion strategy is the oil industry. For instance, manufacturer and retailer franchises are evident in between the petrol companies and the sole proprietors operating their own filling stations. In addition, this form of franchise is evident in Kuwait whereby the convenience store operators are granted the right to establish their stores in the forecourts of the petrol stations. In addition, there are also wholesalers and retailers form of franchises. These exist between business establishments such as supermarkets, hardware stores, automobile aftercare firms and chemist shops. Retail firms can get into different types of retailers and retailers’ franchises.
According to Welsh et al (2006, p.131), the high rate of economic growth in Kuwait is resulting into emergence of a large number of SMEs in different economic sectors. Kuwait has a relatively high number of SMEs which have been established. According to data released by Kuwait Chamber of Commerce and Industry (KCCI), the country has more than 32,000 registered companies. Of these, it is estimated that 85% of these firms are family owned SMEs operating as sole proprietorship form of business. This shows that Kuwait has a substantial number of SMEs which are already in operation. However most of these firms do not have the necessary know-how to enable them compete effectively with the large domestic enterprises. This translates into a low rate of growth amongst the SMEs in Kuwait.
To boost the rate of growth amongst the SMEs, the Kuwait government through the parliament has adopted a bill aimed at establishing an independent authority to monitor the growth of SMEs. This results from a realization of the fact that the success the country’s SMEs in the global economy depends on the effectiveness with which the SMEs create a strong productivity bases. Most of the Members of Parliament (MPs) opined to the fact that SMEs greatly contribute towards the development of a country and should therefore be considered in the country’s strategic planning process. In addition, SMEs are considered to be more flexible and respond quickly to changes within the global and domestic markets. Alasadi and Albdelrahim (2007, p. 7), the growth of SMEs plays a significant role in the process of improving the country’s level of living standards. This means that growth of SMEs can contribute towards a country attaining a high rate of effectiveness in ensuring effective distribution of wealth and fair development. The government noted a number of problems that SMEs in the country face. Some of the problems noted include lack of marketing competency, investment and managerial support and human capital. These problems limit the rate at which the SMEs incorporate various expansion strategies to attain greater productivity. For instance, lack of managerial skills is culminating into inefficient planning and decision making.
Factors limiting franchising in amongst SMEs in Kuwait
Most of the Gulf Council Cooperation (GCC) countries are undergoing a high rate of transition by opening up their economies. However, some domestic factors are not well developed to support the growth of Small and Medium Enterprises (SMEs). This is making the SMEs to be at a disadvantage in an effort to expand compared to the large enterprises. As an expansion strategy, the concept of franchising has undergone rampant evolution over the past decades as economies of different nations change (Oliver& Vinay, 2008, p.149). According to Castrogiovanni, Combs and Justis (2006, p.26), franchising entails issuing a license to the franchisee by the franchisor thus giving the franchisee legal capacity to use the franchisor’s brand name in the process of distributing its goods and services. Castrogiovanni et al (2006, p.26) asserts that, franchising is more viable in some economic sectors than others. One of the sectors that these authors cite includes the hospitality industry. This results from the fact that it is difficult to separate the production process from consumption. In addition, since production and consumption processes within the hospitality industry are simultaneous, the firms have to be geographically distributed and strategically located to ensure ease of access by a large number of customers. Currently, franchising industry is highly regulated and offers a good investment opportunity to individuals who would like to venture into business in various economic sectors. Effective control of the franchising results from the fact that the parties involved (franchisor and franchisee) is governed by a comprehensive agreement (Castrogiovanni et al, 2006, p. 24). However, the success of a franchise is determined by both internal and external factors. Kuwait has witnessed a low rate of growth amongst the SME sector. Castrogiovanni et al (2006, p. 36) accentuates that this has resulted from a number of external environmental factors.
Bureaucracy and financial constraints
The financial environment plays a significant role in the success of franchises. This is due to the fact that it supplies capital necessary for the firm to expand. The Kuwait financial sector has not adequately supported the growth of SMEs. This has limited the growth rate of SMEs through incorporation of various strategies such as franchising. According to a report to the 2004 Article IV, some of the bank officers attested to the fact that their institutions do not involve themselves in ‘plain-vanilla’ or simple credit relationship with the SMEs (International Monetary Fund, 2005, p.55).In addition, these banks do not maintain a simple relationship with large enterprises. In addition, the banks only extend their credit services to firms that they consider profitable to deal with. Some of the institutional customers considered by the government to be potential investors include the companies which demand comprehensive financial products from banks. These customers are considered due to the high probability of cross subsidizing their loans with other sources of income such as from services. As a result, the commercial banks do not consider extending loan facilities to the SMEs. According to a survey conducted by the World Bank and Kuwait University on a sample of 483 SMEs during 2000, the findings revealed that there is a high level of difficulty for the SMEs in accessing credit from commercial banks. For instance, the survey further asserts that commercial banks in Kuwait do not offer favorable loan terms to SMEs such as the volume of loan (International Monetary Fund, 2005, p.55).
The Kuwait government is highly committed towards ensuring that the spirit of entrepreneurship thrives within the country. This has resulted from a realization of the fact that entrepreneurship can play a significant role towards the country’s economic growth. One of the components that the government has considered as a major element towards the growth of entrepreneurship is financial capital. As a result, the government has established a financing program to enable potential entrepreneurs’ can access financial capital through various governmental agencies. Some of these agencies include the Kuwait Industrial Bank (KIB), Kuwait Small Projects Development Company (KSPDC), National Technological Projects Company (NTPC) and Industrial Public Authority (IPA).In addition, the SMEs can access financial capital from Islamic banks (International Monetary Fund, 2005, p.55).These sources have provided alternative sources of finance through which SMEs can access financial capital.
In his analysis on the rate of franchising in Kuwait, O’shea cites the political environment as one of the factors causing low rate of franchising in Kuwait. Despite the high level of funding supplied by the government, a large proportion of investors in Kuwait have not considered expanding their firms through franchising. This results from the high level of bureaucracy which characterized Kuwait government. This is similar to Syria which is characterized by a high level of centralization. As a result, the growth of SMEs in Syria is also hindered by the nature of government structure adopted. However, the Syrian government has recognized the importance of decentralizing its government operations in an effort to propagate the growth of SMEs in the country. According to Alasadi and Abdelrahim (2007, p. 2), there are two main avenues through which the growth of SMEs can be propagated, these include attracting foreign investors or fostering the domestic firms to grow. However, fostering a good environment for the growth of SMEs is considered to be more efficient and effective form of developing the SME sector. According to a study conducted by Yuzbasioglu (2007, p. 45) on the growth of SMEs, the study revealed that a large number of governments are considering SMEs in the process of formulating their policies in an effort to stimulate the rate of employment and economic regeneration. Despite the high rate of centralization in Kuwait, the sector has played a significant role in creating new employment. This has resulted from adoption of effective expansion strategies such as formation of joint ventures. It is estimated that approximately 200,000 new jobs are created in Syria every year. 90,000 of these jobs are created within SMEs in various economic sectors. The high rate of growth in SMEs results from the commitment by the government to support the growth of SMEs. For instance, the government has formulated the Investment Promotion Laws (IPL) aimed at encouraging potential investors to establish SMEs in different economic sectors.
O’shea (2004, p.31) asserts that bureaucracy in the Kuwait government has been in existence for a long period of time since the discovery of oil. The high level of bureaucracy results from the monarchy system of government adopted by the country. In this system, the country is governed by the Emir who must come from the Al-Sabah family (‘Executive report on strategies in Kuwait, 2007, Para. 7). In addition, the country is ruled through a consultative institution which is mainly the National Assembly. Most of the government institutions have adopted a bureaucratic style of leadership (O’shea, 1999, p. 35). This has had a negative impact on the growth of SMEs in the country. For instance, the process of obtaining a license from the relevant authorities has become too complex. This demoralizes the existing and potential investors who would like to incorporate the concept of franchising as an operating strategy. According to O’shea (2004,p.35), it is estimated that obtaining a license to establish a franchise in Kuwait takes approximately 4 to 6 months which is a relatively long duration for investors to be patient. In addition, during this period, the investors have to incur various operational costs such as rent.
In relation to bureaucracy, Kuwait government has not adopted effective market governance. Welsh et al (2006, p. 134) defines market governance to include the degree of free-market activity, market system stability, control of key resources by the government and the extent to which the market is regulated. According to Welsh et al (2006, p. 134), market governance is used in evaluating markets in the emerging economies. Market governance has an influence on the level of country risk such the level of political stability, control of financial capital flow, government regulation and ownership restriction. Due to the bureaucratic nature of the government, Kuwait is experiencing a low rate of economic liberalization which is hindering the growth of franchising amongst the SMEs.
Inefficient legal system
For franchising to be successful, it is paramount that there is well established regulation system. This serves in ensuring that operation of firms in this sector are fair. In addition, the regulation system should control the relationship between the franchisor and the franchisee. According to Mendelsohn (2004, p. 6), franchising entails a contractual relationship between the franchisor and the franchisee. As a result, this relationship is based on the general contract law. Brickley, Sanjog and Lawrence (2006, p. 180) asserts that the franchisor is obliged by the contract to maintain the relationship by acting in the best interest of the franchisee.
Kuwait’s legal system entails a reflection of the country’s social ethos and history. The operations of businesses are governed by the commercial law. However, these laws have been influenced by Latin civil law such as the Egyptian civil law making it to be inefficient in governing the operation of businesses in various economic sectors. In addition, the country’s legal system does not integrate the concept of precedent in the legal process (Ziedman, 2010, p.119). As a result, there is no definite procedure in making legal settlement. This result into an increment in court delays in the process of executing justice related to franchises which has adverse effects on the operations of SMEs. In relation to this, Kuwait government has not adequately recognized franchises in its legal system (Ziedman, 2010, p.120). This results from lack of consensus in the definition of SMEs. The legal system has not clearly given a description of what constitutes an organization to be called an SME. The current definition of SME in Kuwait is limited to capital base. According to Castrogavanni et al (2006, p. 11), a firm is considered to be an SME in Kuwait if it has a capital base which ranges between 1 million KD to 10 million KD despite its growth stage. This makes it difficult for the SMEs to identify and address their target market effectively. In addition, this is limiting the rate at which the SMEs in the country have incorporated the concept of franchising. The Kuwaiti government considers franchise relationship as being an agency type of relationship. Shani and Lichtenthal (2004, p.214) defines agency relationship as the agreement between a principal and the agent. As a result, franchise firms in Kuwait are governed through the general commercial law outlined by Kuwait government through its Commercial Law. In addition, Kuwait does not have any laws or governmental agencies that are charged with the responsibility of regulating the sale and offer of franchises (Ziedman, 2010, p.118). On the other hand the Commercial Law is not well established. This is evident from the fact that the regulations only govern relationships which are construed to be of a franchise type (Ziedman, 2010, p.116).
The Kuwait government has not laid down restrictions governing the entry of foreign SMEs into the country through franchising. The only requirement for these firms is their mode of conducting business. These firms are required to conduct business according to the rules and regulation governing businesses in Kuwait (Ziedman, 2010, p.117). In expanding their SMEs through franchising, these SMEs are required to adopt the use of local agents. Alternatively, the foreign investor can establish a legal entity through partnership with a Kuwaiti partner. In such a case, it is required that the Kuwaiti investor be the controlling firm by owning approximately 51% of the capital. As a result, SMEs in Kuwait are presented with a high level of unfair competition from foreign firms entering the domestic market. Intense competition poses a threat to the success of SMEs in Kuwait. The legal environment has not also provided a clear description regarding the ability of the franchisor to terminate his or her franchise relationship (Ziedman, 2010, p.117). In most cases, it is the franchisor that benefits from the franchise agreement. In the event that the franchise agreement is terminated, the franchisee may incur a huge financial loss. In addition, the local franchisee has a legal right to receive compensation from the foreign franchisor upon termination or expiry of the franchise agreement.
Social factors and economic factors
According to Alasadi and Albdelrahim (2007, p. 6), the success of SMEs is not only determined by the behavior of its owners or its managers but also on social and economic behaviors of the environment in which the firm operates. Franchising in Kuwait is also being affected by the general perception developed amongst the citizens. Most of the Kuwait citizens downplay the establishment of new SMEs as a source of employment opportunity. Instead, a large proportion of the individuals prefer being employed in the government sectors than being self employed through establishment of SMEs (Alasadi & Albdelrahim, 2007, p. 6). This results from the fact that most of the government sectors have developed good remuneration packages for the civil servants. As a result, a significant proportion of SMEs are not committed towards ensuring that their firms expand within the domestic market through incorporation of various expansion strategies. Growth of SMEs is also affected by age as a social factor. Alasadi and Albdelrahim (2007, p.8) asserts that the success of SMEs in a given country is influenced by age as a demographic factor. According to their study, SMEs which are owned by young entrepreneurs have a high probability of succeeding compared to those which are owned by the elderly.
The expansion of SMEs through various strategies such as franchising is also affected by different economic factors. According to a study by Alasadi and Albdelrahim (2007, p.8), it has been established that economic cycles (boom and recession) affect the growth of SMEs. During boom, SMEs experience a high rate of growth. This results from an increment in purchasing power amongst the consumers. On the other hand, during recession, the growth of SMEs through various expansion strategies is challenged. During recession, the global economy is characterized by an increment in the cost of raw materials and price instability. This makes the products which the SMEs deal with to be more expensive. This results into a reduction in the competitiveness of the SMEs.
Lack of managerial skills
According to Johannisson (2006, p. 4), effective skills are paramount in the success of entrepreneurship. According to Alasadi and Abdelrahim (2007, p.1), the quality of human capital in an SME determines the health of the SME. Alasadi and Abdelrahim further assert that the health of SMEs is important in the effort of a country boosting its productivity and attaining a high rate of economic growth. The quality of human capital in a given country is determined by the quality of the country’s education system. Higher education results into advanced training which increases the probability of the firm attaining a high growth rate.The education system has also contributed towards a low rate of franchising amongst SMEs in Kuwait. The strength of the education system is paramount in ensuring that the country’s labor market is well acquainted with managerial skills (Jonathan, 2003, p.27). It is estimate that a large proportion of SMEs after a few years of their establishment due to lack of managerial skills. According to Jonathan (2003, p. 3), entrepreneurship entails the development of managerial skills in relation to establishment and management of a business entity. Gibb asserts that entrepreneurship can be greatly enhanced through the education system. This results from the fact that entrepreneurship can be considered as being both an art and science. Entrepreneurship is considered to be an art due to functional skills involved while on the other hand is considered an art due to the creative aspect involved. According to Alasadi and Abdelrahim (2007, p.6), the university education should be focused on developing the creative aspect of entrepreneurship. This can be attained by creating an environment through which individuals can learn and practice the skills which they learn in the respective business courses. Kuwait education system has not sufficiently enhanced the development of managerial skills amongst entrepreneurs in Kuwaiti. For instance, the country’s university education has not sufficiently contributed towards the development of knowledge related to establishment and expansion of small businesses. As a result, SMEs in Kuwait are characterized by inadequate and unqualified human capital.
Despite the role played by various educational institutions such as universities in propagating the growth of SMEs, they have not managed to attract a substantial number of serious entrepreneurs. According to Jonathan (2003, p. 5), the success of a firm is affected by the success of a firm is affected by the effectiveness and the level of efficiency with which the firm is managed. This means that the rate at which a firm grows is dependent on the choice and decision made by the entrepreneurs. As a result, the management has to be efficient in its planning process. In most cases, successful business establishment are those whose owners had considered alternative ventures, prepared the firm’s financial plan, maintained financial records and used the financial targets in accessing the firm’s performance (Alasadi & Albdelrahim, 2007, p. 6). In addition, the SMEs which succeed are mainly owned by individuals who had previous experience in managing private business. According to a study conducted by Eina, Svein &Torvald (2004, p.122), planning plays a significant role towards the success of SMEs. Herrera and Rafael (2009, p.9) asserts that a firm’s internal factors such as the degree of confidence in establishing a business venture plays a significant role in the firms’ growth and development. Considering the high rate of globalization being experienced in the 21st century, franchisees are being faced with a challenge in dealing with an environment characterized by a high level of dynamism. As a result, firms are being forced to adjust their operational strategies in an effort to cope with the environmental forces and develop a high level of competitive advantage.
Due to lack of managerial skills, most of the SMEs in Kuwait are not able to incorporate diverse expansion strategies such as franchising effectively. This is mainly associated with lack of confidence amongst the investors. The apprehension can be attributed to the lack of pragmatic and optimistic insight concerning an individual‘s strength. Considering the fact that entrepreneurship entails potential investors who prefer to establish their own businesses, it is expected that they should believe that they have the capacity to attain the stipulated goals and objectives. This will contribute towards the firm surviving in the long term as a going concern entity. As a result, the entrepreneurs should have a high level of competence and self- esteem in relation to his or her business affairs. Herrera and Rafae (2009, p. 8) asserts that self-confidence is a key element in the success of SMEs. In addition, these scholars assert that entrepreneurs have a relatively high degree of self confidence compared to non-entrepreneurs. These scholars assert that all franchisees initially perceive a high level of confidence in the initial phase of establishing the firm. However, this confidence fades upon the establishment of the firm. This results from the realization of the fact that they have to deal with real challenges associated with being a franchisee. The franchisees become frustrated if the new establishment does not culminate to the desired results within the timeframe that they have established. The end result is that the franchisees blame the failure on the franchisor and the system adopted. On the other hand, the franchisors put blame on the franchisee (Steven & Combs, 2008, p. 85).
The slow rate of franchising in Kuwait is also associated also with lack of managerial skills amongst the entrepreneurs in relation to various aspects. For instance, the entrepreneurs do not have sufficient skills to undertake effective marketing and product development through innovation. This results from the fact that a franchise business goes beyond a collection of tasks, job description and other related business activities. However, franchising entails combing all these aspects (Pierre& Scott, 2001, p.350). Therefore is paramount for the entrepreneurs to have strong marketing and innovative skill in order for their enterprises to cope with market changes. Effective marketing is very important in the success of franchise establishment. Levvitt 2010 asserts that, a franchise system can only become cost-effective after several units are operating. This means that the initial franchisees within the system will not benefit from group advertising. As a result, the development of franchise establishment is highly dependent on the effectiveness with which the concept of marketing has been incorporated. According to Tiexeira (2009, p.5), the franchisor must market his enterprise to unrelated third parties. Tiexeira (2009, p. 6), further asserts that marketing a franchise establishment is a different type of marketing. Therefore for an SME to be successful in marketing its franchise, it is paramount for the management to have specialized skills. Teixeira (2009, p. 6) asserts that development of poor marketing strategy for the franchise can result into the firm experiencing problems in the future in its marketing process. If an SME does not have the necessary skills to ensure that marketing the franchise is effectively incorporated, a number of alternatives can be considered. These include hiring franchising consultants or recruiting an individual with the necessary skills. According to Dalberg (2009, p. 17), challenges of human capital facing franchise establishment can be resolved through incorporation of management contracts. In these contracts, it is the franchisor who provides the required human capital. Alternatively, the franchisor may consider hiring the services of a well established franchise marketing organization. However, the firm will face a challenge from in searching for franchise marketing personnel who would accept the firm’s remuneration package. Through effective franchise marketing, firms are able to develop a high level of competitive advantage compared to its competitors. This results from the fact that the firm is able to meet the market requirements. Alasadi and Albdelrahim (2007, p. 29) defines innovativeness to include all the activities related to developing a perception aimed at creating new or unique ways of operation. In their operation, SMEs should integrate the concept of product and services innovation. This requires the entrepreneurs to incorporate a certain degree of risk in their operation. This is due to the fact that innovativeness depends on the degree of firms to tolerate failures. This means that a firm which has a high level of inclination towards innovativeness stands a high chance of attaining a greater entrepreneurial inclination. In addition, a large number of the SME owners do not want to incorporate the concept of franchising due of fear of losing autonomy. This results from the fact that most of the SMEs are family owned establishments. According to Alasadi and Abdelrahim (2007, p.4), the success of SMEs is determined by the extent to which the concept of risk taking and innovation have been incorporated. Effective training is a key element in the success of franchises. SMEs which are established by partners with advanced training have a high probability of succeeding than family owned SMEs (Scott, Venkatesh & Ashwin, 2006, p. 780).
Franchising as a business expansion strategy requires the parties involved to standardize their business processes. This culminates into a reduction in the innovative capacity of individual business entity which limits the ability of the firms to respond to the market needs. Through franchising, a firm loses substantial amount of control to the franchisor. Welsh et al (2006, p.136) asserts that there various generic franchising options available for SMEs to adopt. These include direct franchising, master or indirect franchising and area development. A significant proportion of SMEs in Kuwait have not incorporated these expansion strategies. Indirect franchising entails the use of master franchise in the process of developing the business entity. This method of franchising is associated with a number of advantages which include access to managerial knowledge and resources and enabling the firm to adapt to the market. Indirect franchising also has a number of disadvantages associated with it. Some of these include low level of profit for both the franchisee and franchisor and increment in monitoring issues resulting from loss of control (Welsh et al, 2006, p.135). In some cases, the sub-franchisee may be held captive to compete in opposition to the franchisor. In such a case, the firm’s success is determined by the capabilities, resources and energy of master franchisee.
Alternative expansion models
The business environment has become very challenging for SMEs in various economic sectors. In addition, the degree of uncertainity and complexity has increased making it difficult for firms to compete autonomously. As a result, most of the firms are experiencing increased pressure in an effort to attain and sustain their desired growth. One of the strategies that these firms have considered incorporating includes expansion strategy. According to John and Hoffman (2006, p. 30), there are other strategies that SMEs in Kuwait can integrate in their expansion process other than franchising. These strategies can be integrated in the process of expanding within the domestic and foreign market. Some of these strategies include growing the existing operation (organic growth), joint ventures, legal restructuring, and formation of mergers, acquisitions and strategic alliances. John and Hoffman (2006, p. 31) asserts that a firm should select and implement the most effective and efficient expansion strategy.
The SMEs can consider integrating the concept of organic growth in an effort to expand within the domestic and foreign market. Organic growth is attained by establishing other retail outlets as a result of an increment in the firm’s sales volume and hence the sales revenue. For a firm to be able to integrate the concept of organic growth effectively, there are a number of elements that must be considered. These include revenue, public relation, headcount and quality. The operations of different firms mostly depend on the size of revenue. For instance, with sufficient revenue, a firm can be able to meet its financial obligations to the various stakeholders such as the suppliers and employees efficiently (Thadhani & Morente, 2005, p. 5). In order for SMEs to attain their organic growth objectives, the management teams must be committed towards ensuring that the firm attains sufficient revenue growth. The ultimate result is that the firm will be able to maximize on its profitability and hence attaining its organic growth strategies. By growing its revenue level, the SMEs are in a position to improve on their human capital by hiring additional staff thus enhancing the firm’s operations. In an effort to grow organically, it is paramount for the SMEs management teams to ensure high quality in the products and services that they deal with. High quality products and services contribute towards the firms developing their competitive advantage by attaining a high level of customer loyalty (Margarita & Monroy, 2005, 590). The loyalty of customers can be obtained if firms integrated quality control in their operations so that customers can receive quality products. In addition, SMEs in Kuwait should ensure that they develop a good relationship with its employees and the society in which the firm operates. This can be achieved by integrating the element of public relations in their operation.
In an effort to expand within the domestic market, the SMEs in Kuwait can also integrate the concept of joint ventures. According to Yasuda (2005, p. 6), joint venture is defined as an association or economic cooperation between two or more firms with the same goals and objectives. As an expansion strategy, joint ventures enable firms to share the risks and profits in the course of their operation. In addition, the parties involved are able to share their assets, expertise and other resources. According to Farok (2003, p.13), joint ventures contribute towards the SMEs attaining a high rate of expansion through pooling their complementary skills and technologies. This results from the fact that the individual member contributes a significant proportion of the missing resource. The ultimate result is that the firm is able to produce high quality products and services (Reuer, 2004, p. 116).
Over the past decade, joint ventures have become a common expansion strategy that firms in different economic sectors are considering in an effort to attain their growth objectives. This trend has resulted from an increment in the rate of globalization which is affecting SMEs established in different economic sectors. Through formation of joint ventures, the SMEs in Kuwait can be able to expand their operations and cope with the associated market risks. Yasuda (2005, p.6) asserts that there is a high probability of the firms attaining a high level of managerial efficiency by sharing various management resources. This means that SMEs in Kuwait can be able to overcome the managerial challenge that they are currently facing. According to Yasuda (2005, p.8), formation of a joint venture enables a firm to attain knowledge on how to manage employees, people and its intellectual properties. In the process of forming a joint venture, individual firms are required to contribute a given percentage of financial capital. As a result, the firms are committed towards ensuring that the firm attaints its goal (Parmigiani &Will, 2009, p. 1067).
Legal restructuring presents another alternative through which SMEs in Kuwait can achieve their expansion goal. This strategy entails a particular firm changing its operations and incorporating a completely different legal entity. According to Thadhani and Morente (2005, p. 5), legal restructuring is considered as an internal expansion strategy. By incorporating this strategy, the SMEs have a high probability of expanding their operations within the domestic market. This results from the fact that the SMEs can be able to offer diverse products and services to their customers. As an expansion strategy, legal restructuring gives a firm a legal capacity to involve itself with other diverse products and services. Product and services diversity can contribute towards the SMEs increasing the level of customer satisfaction and hence their loyalty. In addition, legal restructuring presents an opportunity to the SMEs to expand their market share by targeting a new customer segment.
According to Yasuda (2005, p. 1), attainment of knowledge-based competencies are key factors in an effort of firms to succeed in the long term. However, SMEs can experience difficulty in attaining the knowledge-based competencies due to limited functional expertise and investment capital. Yasuda (2005, p.2) asserts that both SMEs and large enterprises require diverse categories of management resources which include human, financial, physical, managerial, organizational and technological resources. The SMEs have limited resources in relation to size and scope compared to large enterprises. If the SMEs cannot be able to build these resources internally within the stipulated (acceptable) timeframe, it is paramount for the management team to formulate alternative strategies.
Strategic alliances can either be symmetrical or asymmetrical. Symmetrical alliances entail exchanging similar management resources while asymmetrical strategic alliances involve exchanging different management resources (Yasuda, 2005, p.2). To attain a high expansion rate, the SMEs in Kuwait should consider utilizing both symmetrical and asymmetrical alliances. Symmetrical alliances would enable the SMEs to supplement the limited resources with those of its strategic partner.
One of the strategies that SMEs in Kuwait can incorporate includes collaborating with the large enterprises through formation of strategic alliances. According to Zaman (2005, p.6), a large number of SMEs are incorporating the concept of strategic alliance in their strategic management processes. The main objective behind this trend is to enable the firms attain their desired growth while at the same time access new markets. The strategic alliances should be formed with firms in the respective industries in which the firm operates (Steven & Janet, 2009, p.195). Through such an association, the SMEs are in a position to utilize the resources of the large enterprises to develop their own strength. This illustrates the rationale for which the strategic alliances are formed. The strategic alliances present an effective opportunity through which the SMEs can access diverse capabilities and acquire external knowledge (Yasuda, 2005, p. 3). Strategic alliances are defined as collaborative organizational arrangements which utilize governance structures and resources for other existing organizations. Despite formation of the alliance, the respective firms remain independent but their operations are interdependent. The mutual interdependence culminates into a large the firm utilizing the same management and control mechanisms. By forming strategic alliances, SMEs in Kuwait are in a position to experience a high rate of expansion and creation of a high value by pooling resources. According to Freeman, Hitt and Harrison (2003, p.411), value creation entails combining resources and the capabilities of the respective partners to ensure that the firms have a potential of performing a given task more effectively.
In today’s competitive environment, attaining a high level of efficiency in the execution of various business tasks is an important consideration. As a result, a large number of SMEs are considering forming alliances compared expanding through internal development. This is due to the fact that strategic alliances enhance the process of strategy implementation which culminates into an increment in the productivity of the firm. For instance, an SME may have good innovative ideas regarding its products and services but lacks the necessary resources such as capital to implement them. By collaborating with large enterprises with these resources, the SME stands a high chance of attaining its growth objectives. This means that strategic alliance supports the SME’s growth strategies. The ultimate result is that the firm is able to expand by increasing the size of its market for its products and services. In addition, strategic alliances enable the firms to attain economies of scale through integration of effective manufacturing, distribution and marketing strategies. According to Yasuda (2005, p. 5), it is important for SMEs to offer quality products and services to the customers to ensure that a high level of customer satisfaction is attained. To attain this, sufficient amount of resources are required. Considering the dynamic nature of business environment, the scope, quality and quantity of resources required to develop the products and services keep on changing. This makes the SMEs to consider product and service development to be unsatisfactory since it results into weakening of the firm’s core competences. To prevent this, the SMEs should increase their focus on technical resources in relation to its core fields and instead make use of the resources of its strategic partner to fill the gap of the missing resources. As a result, the SME will be able to undertake joint development. Yasuda (2005, p.5) defines joint development as a framework which entails pooling of technical resources by firms in an effort to develop products in relation to predetermined specifications and schedules. Hart and Sherman sums up the various reasons why firms consider forming joint ventures and strategic alliance. Some of the reasons cited include acquiring capital, access marketing and distributional capability, pool resources for production purpose and development of new products. In addition, strategic alliances and joint ventures are formed to share technology and be able to execute government contract.
Mergers and acquisitions
Mergers and acquisitions are important strategies towards expansion of SMEs. Integration of the same would bring benefits in Kuwait. According to Bruner (2004, p.5), formation of mergers entails combining a number of firms into one entity. On the other hand, acquisitions relate to organization gaining control over other firms by purchasing their shares or assets. There are a number of forces which are stimulating firms in different economic sectors to consider integrating the concept of mergers and acquisitions. Some of these factors include changes in the technological environment, increment in the level of competition, change in consumer tastes and preference and a general reduction in demand amongst the consumers (Hart & Sherman, 2006, p. 13).
According to Weaver and Weston (2004, p. 12), formation of mergers and acquisition is categorized as an intensive expansion strategy due to resource requirements and the degree of risk involved. There are various structures that Kuwait SMEs can consider in their expansion strategy. These include vertical, horizontal or formation of conglomerates. According to Weston (2004, p.12), horizontal mergers relate to integration of business entities whose operations are similar and operating within the same industry. On the other hand, vertical mergers entail firms which are in different production stages while formation of conglomerates considers firms which are in different businesses. In order to survive in the competitive environment, SMEs in Kuwait should consider diversifying their operations. Hart and Sherman (2006, p. 13) claim that formation of mergers and acquisitions present an effective strategy through which SMEs can be able to expand. This can be attained through various strategies such as venturing into new markets and product line extension.
An alternative expansion strategy which can be utilized by SMEs in Kuwait is licensing. According to Mendelssohn (2004, p.26), licensing entails a particular party authorizing another party to perform certain tasks necessary for the operation of the firm. Through licensing, a firm is able to minimize on the cost of undertaking such tasks. As a result, the firm is able to develop substantial financial strength to enable it attain its growth objectives. In the event that the party fails to execute the tasks as per the stipulations of the agreement, this considered as a violation of the assigned rights. In most cases, licensing as an expansion strategy is evident where manufacturing processes are involved. For instance, the licensee may be required to produce complementary products that the firm deals with.
Kuwait financial sector does not sufficiently support the growth of SMEs. This is evident from the fact that most of the commercial banks are not willing to extend loan facilities to the SMEs. As a result, growth of SMEs is hampered due to limited capital. To cope with this challenge, the management teams of SMEs in Kuwait should consider integrating equity investment in their operation. Yasuda (2005, p.8) defines equity investment as an arrangement between two firms whereby one firm obtains financial capital from the other in exchange of equity. Through this strategy, the SMEs can be able to raise the financial capital that they require to expand on their own. According to Yasuda (2005, p. 8), the objective of forming equity investment differs across the firms involved. For instance, one of the partners may have the objective of influencing the partner’s management policy. In such a case, the degree to which equity investment is integrated by the SME depends on the level of management influence that the firm expects to acquire. In the event that equity investment exceeds 50% of the firm’s outstanding shares, the firm supplying the required equity is able to gain substantial control of the firm’s managerial policy.
The purpose of this research study is to evaluate why franchising as an expansion strategy has not been effectively integrated by SMEs in Kuwait. The study lays more emphasis on the internal and external causes of low rate of franchising amongst the SMEs. To attain this, both qualitative and quantitative research designs shall be adopted in the study to evaluate the barriers to franchising in Kuwait. The study also evaluates the various alternatives that SMEs in Kuwait can incorporate in an effort to expand both in the domestic and foreign market. This chapter also entails the process through which the subjects to be considered in the study will be selected. In addition, the methods to be used in collecting the data from the field will be explored. Use of interview and questionnaires has been considered in collecting the data. The questionnaires used are semi-structured in nature. Analysis of the data collected shall be conducted through use of grounded theory.
In conducting the study, both qualitative and quantitative research design were incorporated. Creswell (2003, p.205) defines a research design as a framework which assists the researcher in collecting the necessary data to conduct a study regarding a certain phenomenon. Alternatively, Maxwell (2004, p. 2), defines research design as the various tasks or stages which are involved in conducting a study. The objective of integrating a research design is to ensure that study results into logical and appropriate findings of the study. According to Creswell (2003, p. 206), the research design selected should contribute towards the study being of a high degree of accuracy. In addition, Maxwell (2004, p.2), asserts that a good design should enable all the components in the research to work harmoniously to promote the study’s success. The design adopted should be reflexive of the entire research process. These include the process of collecting, analyzing and elaborating the research questions. Qualitative research design is also considered as being detailed which enables it to provide in-depth assessment of the issue under consideration.
Qualitative research design was integrated by considering the fact that most of the data collected from the market was qualitative in nature. In addition, qualitative research design gave the researcher ability to collect a wide range of information regarding franchising amongst the SMEs in Kuwait. This is due to the fact that qualitative research seeks at understanding a given research phenomenon from the local population. In conducting the study, the researcher focused at individuals from Kuwait so as to gain understanding on their views regarding opinions regarding franchising in Kuwait. According to Kent (2007, p.228), qualitative data is non-numerical in nature and usually results into statements, commentaries, phrases and detailed descriptions. Kent (2007, p. 228), asserts that the data obtained from the field through qualitative research is comprehensive and requires further interpretation. This makes the design to be interpretive whereby the researcher analyzes the data to identify the themes and categories. Interpreting the data enables the researcher to make effective conclusions. In addition, the respondents may sometimes give responses which are concise. Such responses can be used by the researcher to gain further understanding of the subject under investigation through elaboration of the views, attitude and opinions of the respondents. Qualitative research design is considered to be flexible by allowing greater interaction between the respondents and the researcher. According to Huberman and Miles (2007, p.6), qualitative research results into prolonged and intense interaction between the researcher and the field from which he or she gathers the data. The sole objective of this interaction is to ensure that the researcher obtains a holistic understanding of the phenomenon under study. The relationship between the researcher and the respondent in qualitative research is informal in nature which enables the researcher to extract intense information from the respondents. This gives the respondent an opportunity to be elaborate in responding to the research questions. In addition, the researchers can be able to respond to the feedback he or she receives by tailoring additional questions based on the information that the respondent has provided. This means that a high degree of flexibility is incorporated.
Qualitative research design was also considered due to its capacity to give the researcher insight culminating into new discoveries in relation to franchising. This is due to the fact that qualitative research provides complex and textual description of the respondents in relation to the issue under investigation. In addition, qualitative research is more effective in providing information related to intangible various intangible factors for example social norms and socio-economic status. By linking the qualitative research with the quantitative research, it becomes possible for the researcher to gain new ideas in relation to the issue under investigation. This characteristic arises from the particularistic nature of the research other than being comparative. In addition, linking qualitative research with quantitative research, the researcher is able to interpret and gin better understanding of complex issues. According to Creswell (2003, p. 245), qualitative research is characterized by a high degree of openness compared with quantitative research. Participation of both parts is evident in this method which enables the parties to discuss possible problems and explain ambiguities. Quantitative research does not integrate this kind of depth and details since the questions are mostly closed. The ultimate result is that the researcher is able to expand the scope of his or her study. Quantitative research design enhances the qualitative research in the process of finding a sample which is representative of the entire population by identifying the deviant cases.
By considering this design, the researcher was able to obtain information from its natural setting. This resulted from the need by the researcher to obtain information based on the experience of the respondents. In addition, integrating qualitative research was aimed at ensuring a high validity of the data collected. Qualitative research was also considered due to the fact that it makes the process of data collection to be easy. To attain this, descriptive research was integrated. This enabled the researcher to identify the causes of low rate of franchising amongst SMEs in Kuwait. As a result; the validity of the result is enhanced. Creswell (2003, p. 207) asserts that, qualitative research provides a more detailed and comprehensive analysis of the specific issue being investigated. This is due to the fact that the design gives the respondents considered in the study (owners and managers of SMEs) the ability to express their views regarding franchising as an expansion strategy.
According to Creswell (2003, p. 68), qualitative research enables the researcher to focus on the issue under investigation thus gaining a better understanding of the phenomenon. Qualitative research design gives the researcher the ability to better understand his or her respondents understanding of the issue under investigation. This is due to the fact that the respondents give the researcher their own experience regarding the phenomenon being investigated. According to Creswell (2003, p. 218), the quantitative element of research can also be integrated within the qualitative research design. This results from the fact that some of the data collected from the field can be quantitative in nature. The objective of the integrating quantitative research with qualitative research is to enrich the description given by the sample participants. As a result, the researcher is able to give a deep analysis of the thus providing rich details (Creswell, 2003, p. 245).
By linking qualitative data with quantitative research, the researcher is able to incorporate the concept of triangulation. According to Flick (2009, p.26), triangulation is defined as the process of combining various qualitative methods in the process of conducting a research. Flick (2009, p. 26) asserts that the concept of triangulation enables the researcher to effectively focus on the issue under study. This means that the researcher can be able to converge data which is collected from various sources. In addition, quantitative research design was integrated in an effort to determine the extent to which franchising has been incorporated by SMEs in Kuwait. Qualitative data gives the researcher ability to describe quantitative aspects of research which cannot be quantified. However, quantitative element was incorporated in an effort to analyze the extent to which internal and external factors identified have contributed to a low rate of franchising by SMEs in Kuwait. According to Maxwell (2004, p. 23), quantitative research is aimed at investigating whether and the extent in which a certain component causes variation in another element under consideration. On the other hand, qualitative research enables the researcher to identify the effect caused by a given factor (x) on another (y). As a result, the researcher is able to integrate the quantitative element through coding the data obtained from the field.
According to Flick (2009, p.131), data collection entails the process through which the researcher prepares collects data from the field in order to ensure that the study provides information which benefits the intended parties. Flick (2009, p. 130) asserts that data collection is an important consideration in ensuring that the research design utilized is effective. This is due to the fact that the quality of research is determined by the quality of data collected. Site selection also has an influence on the quality of data collected. Salkind and Miller (2003, p. 200) defines site as the place where the data is gathered. In conducting the study, the researcher utilized the field as the main source of data. The method of data collection used depends on the site from which the data is gathered. A number of methods can be utilized in the process of collecting data from the field. To ensure that the quality of data collected is realistic, some primary methods were used to collect data. According to Pearce and William (2006, p.28), integrating different methods of data collection ensures that the process of data collection is comprehensive. The ultimate result is that the quality of the study is enhanced. The various methods of data collection considered in the study include use of interviews and questionnaires. The respondents targeted in the study included managers and business owners of SMEs in Kuwait.
To ensure that the process of data collection was effective; the researcher conducted a reconnaissance to familiarize himself with SMEs in Kuwait..This involved a preliminary research. According to According to Pearce and William (2006, p.28), preliminary research enhances the process of data collection by improving the quality and efficiency of the entire process. Preliminary research entails learning everything related to the subject under study. In addition, preliminary research enables the researcher to understand various issues such as language, practices, norms and social issues before going into the field. The However, Pearce and William cautions that preliminary research should not be intensive since it can jeopardize the resources set apart for conducting the actual research. To prevent this, the researcher should make increased use of documented work related to his or her study population Information obtained from preliminary research serves in guiding the researcher on how to adjust his or her study. Through the reconnaissance, the researcher identified a number of SMEs to which the questionnaires were mailed. The questionnaires used were self-administered in nature. Use of questionnaires was considered so as to ensure that a high degree of freedom in responding to the questions is attained. The questionnaires were structured in various forms which include closed, open ended and attitude questions. Use of open ended questions was considered so as to give room to the respondents to expound the earlier questions. Use of open ended questions enabled the researcher avoid pre-judging the response thus eliminating any form of bias which might result by suggesting responses to the questions like in the case of closed questions. In addition, the closed questions were integrated to enable the researcher obtain factual information relating to franchising in Kuwait. The closed questions were based on yes or no answers. On the other hand, attitude questions were incorporated so as to gain understanding regarding the respondents’ opinion about franchising amongst SMEs in Kuwait. In an effort to ensure that sufficient data was gathered through the questionnaires gathered, it was ensured that the questionnaires were clear and easy to understand. This was attained by reviewing the questions prior to sending them so as to eliminate any form of ambiguity. Longnecker (2008, p. 30) asserts that well structured questionnaires results into an increases the rate of respondents participation. In addition, use of self administered questionnaires is cost effective since the interviewers are not required.
Data collection was also conducted through use of telephone interviews. This was considered so as to minimize the cost involved. Longnecker (2008, p.31), interviewing enables the researcher to understand the underlying reasons in relation to a certain individuals or a groups attitude or behavior. To ensure that data collection through the telephone was effective, a voice recorder was used. In addition, notes were taken in the process of interviewee responding to the specific questions. Use of voice recorder made it possible to re-play the interviewees response later. This made it possible for the researcher to analyze the responses by identifying the thematic elements. The research study employed semi-structured interviews. This was attained by asking questions in which the respondents had an opportunity to express themselves at length. Longnecker (2008, p. 36) asserts that semi-structured questionnaires are more flexible compared to the structured interviews. In addition, the structured interviews are characterized by limited questions which tend to be formalized. Semi-structured interviews results into the interviewer bringing new questions in the process of the interview. This is due to the fact that the interviewer can enquire more basing on the interviewee responses. Creswell (2003, p.195) asserts that it is important for the interviewer to review the questions before administering them to the respondents. The questions were reviewed to ensure that they had the capacity of providing the information required. To ensure that the interview was well conducted, an interview guide was developed. According to Creswell (2003, p.195), interview guide enables the researcher to emphasize on the topic under consideration during the actual process of conducting the interview.
The data collected was assigned codes based on the responses. Data coding was considered so as to increase the ease of the data analysis process. Longnecker (2008, p. 56) defines data coding as a systematic process through which extensive data is condensed into smaller and analyzable units. This is attained through creation of categories which are derived from the data. Alternatively, data coding can be defined as the process through which the data collected from the field is transformed into another for to ensure that data can be analyzed by use of computer.Through data coding, the researcher was able to incorporate various statistical data analysis tools such as the Statistical Package for Social Sciences (SPSS) and Microsoft Excel (MS Excel). This arises from the fact that the qualitative data is transformed into variables which are easy for the two data analysis tools can understand. To ensure effectiveness in the utilization of the SPSS, the various codes were developed into a matrix by considering the various responses. This was attained by utilizing the Likert scale in which the various responses were arranged into columns and rows. The Likert scale was utilized in analyzing the attitude of the respondents towards franchising as domestic and foreign expansion strategy. The likert scale was integrated in the questionnaire so as to obtain the respondents views. Data coding greatly results into an improvement in qualitative research considering the extensive nature data obtained from the research. This is due to the fact that the data reduced into a manageable volume. Longnecker (2008, p. 56) asserts that data reduction results into the data becoming more sharp, focused and enables the researcher to discard some of the data which is not relevant. In addition, data coding makes the process of displaying the data more effective by reducing the volume of the data collected from the field.
To ensure that the study results into credible results, the researcher identified a target population which composed of owners and managers of SMEs. According to Longnecker (2008, p. 4), identifying a target population is paramount in conducting a research study. This is due to the fact that the researcher is able to identify to collect the right information related to the study from the field.
In the process of data collection, sampling method was integrated by selecting a sample. The sampling method was selected by considering the fact that it was not possible to collect data from the entire field in an effort to ensure validity of the findings. In addition, sampling was considered as being an efficient method of data collection due to its capacity to overcome cost and time limitations. Sampling is defined as a technique or process through which a suitable sample to be used in conducting a study is selected from the entire population. As a result, a sample population was selected. Longnecker (2008, p. 24) defines sample population as the total number objects which have the potential of being selected as the actual sample. A sample is defined as a finite part of a statistical population which is considered in the study thus acting as a representative of the entire population. The sampling method was considered since it is cheap to study a segment of the population than the total population. A cluster sample was selected from the population through simple random sampling. To ensure that the probability of each element to be selected from the population was equal, simple random sampling was used. In addition, simple random sampling was considered in an effort to eliminate sampling bias. In addition, simple random sampling does not require the researcher to have prior knowledge of the sample. To ensure that the sample selected is representative, the researcher considered the element of gender in evaluating the sample. As a result, the researcher integrated the concept of stratified sampling in conducting the study. This enabled the researcher to identify the extent to which firm ownership by the different genders
Sample size and selection of respondents
The study considered 60 SMEs which were already established in Kuwait. These SMEs were selected from all the six provinces in Kuwait which include Al-Kuwayt, Al-Farwaniyah, Hawalli, Al-Ahmadi, Al-Jahrah and Mubarak Al-Kabir. To ensure that the sample size was representative, the SMEs considered were of different size in terms of capital and human resource base. In selecting the respondents, the researcher was more specific by clearly defining the sample. According to Kent (2004, p.23), the respondents should have common characteristic to ensure that the feedback is related. From the sample size, the research considered 35 SME owners and 25 SME managers as the respondents. Random sampling ensures that the members of a given population have equal chances of being included in the sample. This was guided by the need to ensure that the sample selected was representative. The researcher considered these parties in selecting the sample due to their knowledge of the SME environment in Kuwait. As a result, the researcher was able to obtain relevant information from the field.
Justification of the sample selection
Considering the fact that there are many SMEs in Kuwait, it would be challenging to consider all the firms due to resource scarcity in relation to time and financial requirements. Through simple random sampling, it was possible to identify a sample which is representative of the entire market. Simple random sampling was considered so as to eliminate any form of bias, thus increasing the credibility of the data collected. The six provinces were considered so as to ensure that the sample selected was representative of the all SMEs in Kuwait. SMEs considered in the research were selected both from urban and rural areas.
The data collected shall be analyzed by integrating grounded theory which involves a research method in which the data collected is used in developing the theory. According to Lincoln and Denzin (2003, p.249), grounded theory is qualitative in nature and utilizes systematic procedures in an effort to develop theories related to a given phenomenon. Grounded theory enables the researcher to expand the on a given phenomenon by identifying various elements related to the subject under study. As a result, the researcher is able to generate a wide view of the situation in the event that the explanations given are inadequate to capture a complex situation. In addition, grounded theory is important in conducting a research if the researcher intends to generate or explain a given situation. The elements identified are categorized depending on the nature of relationship with the specific phenomenon. Through grounded theory, it will be easy for the targeted parties to trace back the original data collected from the respondents. Coding is utilized during the advanced stage of developing the theory. Concepts regarding the study will be developed and core categories created. As a result, it will be possible to illuminate the data, collected.
To ensure that the study resulted into extensive information from the field, a number of ethical considerations or principles were incorporated. The researcher shall ensure that all the participants involved in the study are respected. This will serve in enhancing the autonomy of all the research participants. Respect for all persons will serve in protecting the respondents from exploitation due to their vulnerability. In addition, it will be ensured that dignity of all the research participants is respected. Compliance with is principle will enable that the research participants are not only used to accomplish the research objectives. In addition, the principle of beneficence will be integrated. This will serve in reducing the risk associated with the research such as social and psychological risks and increase on the benefits accrued by the participants.
In addition, the researcher ensured that there was informed consent in the process of conducting the research. This was attained by making sure that all the participants understood what is involved by participating in the research. By ensuring informed consent, the participants shall be able to make a conscious decision on whether to participate in the research or not. In addition, creating an informed consent greatly contributes towards ensuring that there is a high level of respect during the process of conducting the research. In conducting the research, the researcher obtained consent from the local authorities. This will be attained by approaching the leaders and explaining the objective of conducting the research. By approaching the community leaders, it will be possible to minimize suspicion from the public during the process of conducting the research. The local leaders will facilitate a forum to ensure that the public understands the objectives of the research. In accessing information from the SMEs, the researcher will obtain formal permission from the management of the respective SMEs before commencing the research.
Considering the fact that the study will integrate use of in-depth interview, the respondents will be informed prior to the actual research. Some of the issues which the researcher will be informed of include the rationale of the research, how confidentiality of the information will be ensured, risks (social and psychological) and benefits involved in the research. The researcher will integrate confidentially of the information obtained from the respondents. The need to protect confidentiality arises from the realization of the fact that qualitative research is conversational in nature and hence it is important for the researchers to maintain a well defined boundary of what they tell the participants and what they are told. In addition, participation in the research will be voluntary and the participant will be granted freedom to withdraw without any form of negative repercussions.
As is the trend in most studies, this study also faced some limitations. For instance, the sample size selected was small compared to the total number of SMEs in Kuwait. However, it was assumed that the sample selected was representative of the entire market to enable the researcher make the right deductions. In addition, it was also assumed that the sample selected was conversant with the concept of franchising as an expansion strategy. The small size of the sample was considered due to time limitations and financial constraints. Conducting a research on all the SMEs in Kuwait would take considerable amount of time and financial resource.
Findings and data analysis
In the 21st century, business environment has become very challenging. This has resulted from an increment in the rate of globalization. To survive in the long run as going concern entities, it is paramount for firms in different economic sectors to be effective in their operation. One of the ways in which this can be attained is through incorporation of expansion strategy. The core objective of this study is to evaluate status of franchising amongst entrepreneurs operating small and medium enterprises in Kuwait. Specific focus is given to the determinants and barriers of franchising. The design used in this study is aimed at gaining more understanding with regard to franchising amongst SMEs in Kuwait. The chapter is organized into a number of sections as outlined below. The first section entails a descriptive characteristic of the respondents. Some of the key characteristics considered include gender, educational qualification, nationality and age. The second section entails an analysis of the research questions used in conducting the study. The respective questions are analyzed individually. In addition, the methods used in analyzing the various components of the research questions are illustrated.
Description of the respondents
In conducting the study, management teams and owners of SMEs were considered as the main respondents. This is due to the fact that these parties have got comprehensive understanding of the elements associated operation of SMEs. A variety of demographic data was also evaluated in conducting the research. Demographic data was also utilized in conducting the study. This was attained by considering a number of demographic variables which included gender of the entrepreneurs, managerial experience and their respective educational attainment, nationality of the entrepreneurs. These variables have been in the following sections.
Gender: 60% of respondents considered in the study were male entrepreneurs while the rest (40%) were female entrepreneurs.
Educational qualifications of the SME managers and owners: In relation to education, the respondents had attained different educational qualification. The various qualifications are represented in table 1.
Nationality: In order to achieve a comprehensive feedback regarding franchising amongst SMEs in Kuwait, diversity of respondents in relation to nationality was considered. This was achieved by considering both Kuwaiti and foreign investors in the SME sector.
Age: The study also took into consideration age diversity which exists amongst entrepreneurs operating SMEs in Kuwait. The age range which was considered in the study is illustrated table 1.
|Presentation of demographic data|
Male (60%), Female (40%)
Kuwaiti (75%), Foreign investors (25%)
|Educational qualification||Total number of respondents|
|Vocational high school||4||2|
|51 and above||5||3|
Analysis of Research questions
In order to enhance the effectiveness of data analysis, the six research questions were analyzed individually. This was attained by breaking down the research questions used in conducting the study into their constituent components. The various issues which were considered in the study include:
- Factors affecting franchising amongst SMEs in Kuwait
- Strategies incorporated by SMEs in Kuwait to attain high market share.
- Degree to which the SMEs have expanded in the domestic and international market.
- Legislative changes which should be undertaken to enhance incorporation of franchising in SMEs.
- Reasons as to why owners of SMEs consider changing their operation model and incorporate the franchising model.
- The alternative expansion model available to SMEs in Kuwait.
The analysis of the research questions is critical in determining the outcomes of the research. Basically, this section entailed the best and most logical answers are given by responded to the questions. From this sensible conclusions were drawn.
To begin with, the question about reasons to consider in adopting business expansion t through franchising was assessed. The best responses that were noted are; “that franchise business options offer a reliable track record for achievement. This is because, any firm that is successful in franchising must have over time been able to develop a means of conducting business that is very effective and provides successful outcomes. Even better, they just have to offer the franchisee with a great deal o9f information concerning the business as you investigate and confirm the response with other franchisee that are already in operation before coming to a final decision.
A second best response was about the brands that are available for franchise in Kuwait. This stated that “the biggest advantage that franchising has is that most of the firms that are offering franchises are reputable. This means that the have developed a strong brand of their products. When a brand is recognized on regional and national grounds, then the brand should be marketable and should be seen as important by the clients that I am trying to attract”.
Concerning the benefits that one gets from adopting a franchise rather than starting a new business in Kuwait, A question; what benefits do you perceive by adopting franchising strategy? Was posed, there are several benefits that were noted by the participants. However, many of them described benefits from training and support from franchiser. The best responses explaining these benefits are; “the best franchise firms have developed very efficient training programs that are intended to help you to reach the highest level of performance as required by the business. This mean that you as trained on the best practices developed by the company and the successful methods that have been proved to be successful for the business. They also provide a lot of reference materials that help you in dealing with variety of situations that could come up when you are already running the business”.
Another major benefit noted to be provided when one chooses a franchise as a way is that there are operational support services in place. The best response describing this was that; “Franchising firms often have people whom are employed to provide ongoing help to the companies’ franchisees. These dedicated staff work hard meaning that you are never alone when building and operating your business. Furthermore, they are more experienced and can be called upon anytime when you are faced with rough spot or you need new ideas for expanding the business”.
Implementing franchise business can be a great huddle to face especially when the business starter is not well prepared to fee the challenge that come with investment. There are several requirements that have to be met before the business can be started. These requirements greatly contribute to success despite the fact that the franchiser will always be there to offer assistance. In order to find out whether the people in Kuwait understood the other requirement need in order to efficiently run a franchised a question was posed asking, “What are the requirements for you to be able to implement the concept of franchising?” several responses were given for this question which indicated that many respondents actually knew the necessary requirement for implementing the franchise concept. This analysis considers the following to be the ideal requirements are identified by the respondents. “Experience- for any business to be successful, significant experience is required. This means that when have the relevant t experience in conducting business, I will be able to manage a franchise.” This implies that respondent understood that managing a franchise was not an easy task to be overlooked. “Business plan- as a potential franchisee I should be able to develop a workable and succeeding plan. This means that I should also be able to execute the operation of the business with ease. This is essential for the rapid growth expected of the business.” Basically operating with a plane implies that the franchisee tags set goals that are achievable and measurable. This is essential for success. “Ability to manage finances- as a franchisee I will be expected to deal with finances all ten time this therefore means that I should posses a vast understanding of how to manage finances including preparation of all the financial statements”. “training- this is an essential requirement, which means that I should be prepared to undergo the training and be willing to finish a comprehensive program for training so as to the proficient in all the operating dimensions of running a franchise”. “Management skill- I will be required to be the manager of the franchise, this therefore means I need experiences in management. This will enable in running the daily operations smoothly. Duties like recruiting, training and motivation of employees will then be made easy with experience”.
In order to find out what people thought about the cost of p0erating a business as a franchise as opposed to starting a new one, we sought to know what people thought about affordability of the franchise. Some people thought that a franchise was very costly. However a majority believed that operating a franchise was cheaper. The reason was that; “many people thing that the franchisee fee is very high, and that totally turns them off when they think about a franchise as an investment option. Yet, the fixed fee is some kind of hedge bet against failing. Whereas starting your own business would mean enjoying all the proceeds, the reverse applies as well when the business fails. In the case of a franchise, the fixed fee is a sort of future investment against the business failing”.
Notable to consider in analysis was the legal requirements for beginning a franchise. The respondents showed that they understood the requirements set by the government. Accordingly, the response was; “franchising in Kuwait was regulated by laws and regulations that needed the franchising company to inform the government everything about the business. Nonetheless, Kuwait does not specifically distinguish franchises therefore there are not laws specifically set for franchise operations”
Considering that the world is facing the difficulties of economic recession and other financial problems due to globalization, they research sought to find out the implication of economic challenges on franchise business in Kuwait. It was several that the economic recession in 2008 had a great impact on vastly all sectors of economy as well as franchise businesses. There is anticipated downturn even after years with a much slowed process of recovery.
It was also important to consider the socio-cultural barrier that stand in the way of successful implementation of franchise as a business. For this reason, a question was posed to state some of the “Social and Cultural Differences” that are bound to exist as a hindrance. The main responses included; “language differences, traditions and customs between the mother nation of the business and Kuwait, social values of individual associated with certain products and also religious attitudes”.
The research also sought to find out whether one would consider a franchise as opposed to other business models. As a consequence, a question “As an owner/manager of SME in Kuwait, would you consider incorporating franchising as an expansion strategy over other strategies?” was asked. The responses to this question highlighted the benefits of franchise and they included; “instant recognition- since many franchising firms are reputable across the world or the region, acquiring a franchise would mean that the business gets to be known immediately since the brand identity is already built and much advertising has already been done. However, opening a small business is tough since it has to fight the big names on the market. Customers on the other hand prefer turning to firms that they already recognize with and trust. It takes years for starters to attain such kind of credibility”.
“Franchises are also beneficial as in they offer support when designing the business layout construction with therefore done by trusted professionals and a perfect mix of equipment is ensured for efficiency once operations begin”.
What are the internal and external factors contributing towards the current status of franchising amongst SMEs in Kuwait?
The factors contributing towards the current status of franchising amongst firms in Kuwait were categorized into internal and external factors. When asked of the internal factors affecting franchising, the respondents cited diverse factors. A significant proportion of the respondents cited managerial skills as the major internal factors. 70% of the respondents asserted that they have not developed sufficient managerial skills in relation to franchising. In relation to external factors, a wide range of factors were mentioned by the respondents as to contribute to the current status of franchising.
The table below gives an illustration of the key factors which were mentioned by the respondents.
|Social-cultural factors (perception of self employment through establishment of SME||21%|
A significant proportion of the respondents cited economic factors with regard to financing as the major hindrance to franchising. The legal environment was the second to be cited as the key factor contributing towards the current status of franchising. 21% of the respondents’ identified socio-cultural factors as key factors hindering franchising by SMEs in Kuwait.
Which strategies are being used by SMEs in Kuwait to attain a high market share?
In relation to analyzing the methods used to gain a significant market share within the domestic market, a number of franchising methods were considered. These include direct franchising, master or indirect franchising and area development. A significant proportion of domestic and foreign entrepreneurs interviewed on the major strategies utilized by SMEs with regard to franchising had varied responses. The table below gives an illustration of the responses given in relation to the various franchising methods identified.
|Method of franchising||SME managers (%)||SME owners (%)|
|Single unit franchise||25||20|
Most of the SME owners and managers interviewed on the franchising method they consider most appropriate as an expansion strategy cited single unit franchise. 25% of these respondents were of the opinion that single unit franchising is the best method of franchising for SMEs. When asked the reason behind their inclination towards this method, these respondents asserted that there is a high degree of freedom in running single unit franchise. In addition, the respondents asserted that single unit franchises are easy to set since minimal cost is involved. The fact that single unit franchises gives the entrepreneur absolute right to operate the firm in a given area tended to attract SME managers and owners towards this form of franchising (Floyd, 2010, para.1).On the other hand, area development was also seemed to take prominence amongst both categories of SMEs respondents as illustrated in the table above. However, consideration of master franchising as an alternative SME expansion strategy was relatively low compared to the other strategies. This is mainly due to the complexity of managing such an enterprise (Kaufmann, 2009, p.56).
In addition, other methods of expansion which were considered in the study included production distribution franchising and business format methods of franchising. Similarly, the respondents had different responses. 75% of the respondents revealed that they would consider integrating business format method of franchising. On the other hand, 25% of the respondents were of the opinion that production distribution franchising is the best method of expanding within Kuwait. The graph below gives an illustration of the diverse responses in relation to these methods.
Method of franchising
What are the reasons as to why owners and managers of SMEs consider changing their operation model and incorporate the franchising model?
In order to gain a comprehensive understanding of the reasons that motivates SME owners and managers to incorporate franchising, the study evaluated some of the key reasons. The criterion which was utilized in assessing this is outlined below.
85% of the respondents interviewed asserted that economic reason is the key motivator for firms to integrate franchising. This is due to the fact that business owners and managers would be able to achieve their profit maximizing objective. On the other hand 45% of the respondents would consider franchising due to the associated technology transfer. These respondents cited the possibility of benefiting from the effectiveness with which the franchisors have incorporated management information systems. Brand value as a key reason for franchising was considered by 70% of the respondents. When asked to explain further, these parties were of the opinion that franchising would enable them benefit from the franchisor’s already established business model
What are the legislative changes which should be undertaken to enhance incorporation of franchising in SMEs?
Findings from most of the SMEs owners and managers indicated that were of the opinion that the country’s legal environment does not promote incorporation of franchising as an expansion strategy. In evaluating the legal environment in relation to franchising, various categories of laws governing franchising were considered. These included commercial law, civil code, Commercial and Civil Procedure Law (CCPL), intellectual Property Right Degree and the tax law. Commercial law is supposed to govern the relationship between parties in a contract. The CCPL ensures that the legal disputes in a contract proceeds efficiently. The researcher interviewed SME owners and managers on these categories to determine their perception.70% of the respondents asserted that Kuwait does not have a well formulated legislation which defines the relationship between the franchisor and the franchisee.
Following an increment in the intensity of competition amongst SMEs operating in different economic sectors, it is paramount for small and medium enterprises to consider evaluating strategies on how survive in the long run. Some of the strategies that can be integrated relate to expansion both in the domestic and foreign market. There are a number of expansion strategies that owners and managers of SMEs can integrate in their operation. Some of these strategies entail formation of mergers, strategic alliances and franchising.
Currently, one of the strategies that are increasingly being incorporated by SMEs globally is franchising. Apart from achieving their profit maximization objective, firms which incorporate franchising as an expansion strategy also attain a high competitive advantage. Franchising is a key strategy that SMEs should consider in their operation. This will enable them to attain their profit maximization objective. For franchising to be effectively implemented, it is paramount for the external environment to support it. Some of the key external factors affecting franchising relate to economic factors, legal environment, and social cultural environment. In addition, internal factors also have an impact on franchising. These mainly relate to managerial skills. The success of franchising depends on the effectiveness with which the strategy is formulated and implemented. Some of the key managerial skills which contribute to success of franchising relate to marketing, financing, accounting and distribution. However, the degree with which franchising has been incorporated by various countries varies. This is due to the diversity of factors across different countries.
It was the objective of this study to explore the current status of franchising amongst SMEs in Kuwait with reference to associated barriers and determinants. This results from the fact that franchising is affected by the entire business environment.
This chapter is organized in a numbers of sections. The sections mainly entail a discussion of the findings according to the respondents. The first part entails an analysis of the reasons for franchising amongst the SMEs. In addition, the relationship between gender and entrepreneurship is analyzed. The second part entails an evaluation of the managerial abilities, skills and roles. This is conducted through consideration of the key managerial roles required for the success of franchise establishment. The third section entails an analysis of economic factors hindering integration of franchising by SMEs in Kuwait with specific reference to financing. Fourthly, the legal environment which is considered as a key hindrance to franchising is evaluated. The fifth part gives the social factors which have contributed to the current status of franchising amongst SMEs
Why incorporate franchising
When asked the reasons for considering franchising, a large number of respondents cited the ease of expansion associated with franchising. Franchising enables a firm to conduct rapid expansion. Most of the respondents were of the opinion that franchising associated with a low degree of risk compared to establishing a firm themselves. A significant proportion of the respondents revealed that they would consider franchising in their expansion strategy due to lack of know how associated with establishment of franchise. Through franchising, firms minimize the probability of failure through risk avoidance. According to Dalberg (2009, p.1 7), franchising eliminates some a significant proportion of challenges associated with establishing a firm from scratch. 85% of the respondents cited the ease with which a franchise develops the brand as the key factor to integrate franchising. In addition to attaining economies of scale, incorporating franchising concept culminates into development of the brand name. The ultimate result is that the firm is able to attain a high competitive edge by minimizing the probability of competitors copying the firm’s business idea.
As an expansion strategy, most of the respondents asserted that that they would consider franchising as an expansion strategy due to its effectiveness. Franchising enables firms to overcome financial difficulties which limit business expansion. In addition, franchising can enable businesses to expand into the international market. This arises from the fact that the firm would be able to penetrate the local market more effectively. In addition, minimal overhead costs are incurred in establishing the outlet. A significant proportion of franchising cost is incurred by the franchisee. For example, as a result of integrating franchising in their operation, SMEs in US witnesses a high growth rate. The number of SMEs increased from 400,000 in 1993 to 770,000 in 2003(DLA Piper, 2007, p.13). As a result of rapid expansion, their profitability level also increased. Foreign investors consider franchising as an alternative mode of expanding in the international market due to the fact that the indigenous franchisees are aware of their home market. As a result, foreign investors are able to tap the local market more effectively. Foreign investors are able to gain business knowledge which might have been beyond their capability.
Gender and entrepreneurship
The success of SME industry in a given country is affected by the nature of entrepreneurs in relation to gender. A society which is dominated by male entrepreneurs tends to be more competitive. This is due to the fact that male entrepreneurs are more risk taking compared to their female counterparts. According to CGO Insight (2005, p. 2) there is a tendency where female entrepreneurs consider investing a small proportion of start up capital compared to their male counterparts. The low level of capital intensity results from diversity in entrepreneurial investment sectors which attract various genders. CGO Insight (2005, p. 2) asserts that most of the female entrepreneurs are attracted to health, consumer retail and beauty sectors.
Considering the fact that Kuwait is a male-dominant society, there is a high probability of the males venturing into small businesses than the females. According to a study conducted by Al-Wugayan and Alshmmiri (2009, p. 5), Kuwait is classified as a masculine society in which the male gender dominates. These results are similar to those conducted by Hofstede in 1980. In addition, their traits are more diffused and hence there is a high propensity of them establishing entrepreneurial projects. The findings of this study are in line with the findings of these scholars. This is well illustrated in Kuwait Small Project Development Company (KSPDC) which operates as a venture capital enterprise which has the capacity of investing in all the economic sectors. During the period ranging from 1997 to 2003, the firm managed to establish 42 SMEs within Kuwait. The firm’s total capital was approximately $24 million. However, only 31% of the firm owners were female while 69% were male (Al-Saif, 2004, p. 4). In this study, only 10% of the female respondents revealed that they would consider integrating franchising as an expansion strategy. This represents a small proportion of the total number of female entrepreneurs within Kuwait. On the other hand 45% male respondents asserted that they would consider franchising as an alternative expansion strategy.
Managerial abilities, skills and roles
The success of every business venture is determined by the effectiveness and efficiency with which its operational strategies are formulated and implemented. In order to attain this, it is paramount for both entrepreneurs and SME managers to integrate effective managerial skills. According to Papulova and Mokros (2007, p.2), knowledge is required during and after establishment of the firm. These scholars assert that this is due to the fact that in the initial stages, the entire management of the establishment is conducted by the owner. As a result, the entrepreneur must undertake the entire decisions needed for the survival of the firm. With time, the business venture may experience a high rate of expansion. The ultimate result is that it becomes challenging for the owner with regard to management of the firm. This is mainly due to lack of relevant managerial skills and knowledge.
When asked about the key managerial skills required for effective operation of SME upon integrating the concept of franchising, 75% of all the respondents cited similar skills. Some of the entrepreneurial skills cited included creativity, intuition, goal-oriented, responsibility, self-confidence, initiative, independence, responsibility, self confidence, independence, cautiousness, persistence and optimism. In this context, creativity refers to the ability to find new solutions to a given phenomenon.
Being a manager is a complex task. This is due to the fact that it involves dealing with a wide range of issues. According to Al-Wugayan and Alshmmiri (2009, p. 4), every individual has got his or her own hidden potential. In order to be successful, managers should influence the behavior of their subordinates in an effort to attain the set goals and objectives. This can only be attained through effective implementation of managerial functions which include planning, leading and controlling. One of the ways in which these managerial skills can be enhanced is by attaining relevant educational qualifications with regard to entrepreneurship. This is due to the fact that these skills can be enhanced through training. When asked of the key managerial skills necessary for success of franchising, a number of relevant skills were identified. A significant proportion of the respondents cited marketing, accounting, financing and technical skills as the key skills required. According to CGO Insight (2005, p. 1), education system in many developing countries neglects women entrepreneurs. This culminates into in adequate attainment of managerial skills in this gender.
Findings of the study revealed that there is a direct relationship between educational achievement and the willingness of the both SME managers and the owners to integrate franchising as an operational strategy. Majority of the parties interviewed were of the opinion that enhancing managerial skills would play a significant role in promoting incorporation of franchising amongst SMEs in Kuwait. According to a study conducted by Al-Wugayan and Alshmmiri (2009, p. 9) on entrepreneurship in Kuwait, the findings revealed that individuals graduating from higher educational institution of learning have a high probability of venturing into entrepreneurship. This is due to the fact that they will have enhanced their inborn entrepreneurial potential with other skills relevant for managerial skills. According to this study, a significant proportion of entrepreneurs with doctor of philosophy, masters, bachelors’ degree, diploma and higher diploma depicted the highest degree of appreciation of franchising. On the other hand, the respondents with only vocational training did not appreciate the concept of franchising. However, the educational institutions in Kuwait do not provide all the relevant skills necessary for success of SMEs in Kuwait. As a result, it is vital for the government to ensure that educational institutions provide skills which will entrench entrepreneurial skills amongst the various genders. The ultimate result is that potential investors will appreciate entrepreneurship thus breaking the perception that self employment is not good. This will culminate into an enhancement of the entrepreneurial skills and associated strategies such as franchising.
Despite the fact that most of the respondents realized the importance of attaining managerial skills in order to incorporate franchising effectively, a significant proportion of them had not developed these skills sufficiently. This was cited as one of the reasons why franchising amongst SMEs in Kuwait is low. As a result, franchising has not been extensively integrated as an expansion strategy by SMEs both in the domestic and foreign market. Findings of the study revealed that a significant proportion of SMEs which are owned by families do not have the required innovation and skills to enable them incorporate franchising.
The success of any business through incorporation of key franchising requires sufficient amount of financial capital. This is due to the fact that a substantial amount of finances are required to successfully integrate franchising.
Financing the operation of SMEs in Kuwait from external sources has not been easy. A significant proportion of individuals are required to source for the necessary financial capital from external sources. However, the external financial markets have not been efficient in supplying the necessary capital. 80% of the respondents were of the opinion that Kuwait financial market is characterized by a high level of bureaucracy. This is in line with findings of International Monetary Fund (2005, p.57) which was conducted to evaluate financing SMEs in Kuwait. The findings of the study revealed that SMEs in Kuwait are faced with difficulties in accessing credit from financial banks. According to this study, Kuwait banks do not advance loans to SMEs in sufficient amount. This is mainly associated with interest rate caps which make it difficult for commercial banks to price loans in order to cover the risks associated with the culture of lending either for investment purposes or consumption.
The legal environment
According to Gay (2001, p.1), effective franchising is based on a well formulated document. The document defines the relationship existing between the parties involved. Existence of legal constrains and high level of bureaucracies within a country’s legal structure limits the extent to which SMEs incorporate franchising as an expansion strategy (Welsh, Alon, Falbe, 2006, p. 14).Considering that business enterprises are supposed to operate within a defined legal structure, it is paramount for Kuwait government to develop legislation which governs franchising. As a result, entrepreneurs will feel secure in venturing into a particular business. According to Ziedman (2010, p.119), creation of an effective legal environment plays a significant role in enhancing the performance of SMEs. This is due to the fact that both domestic and foreign investors are attracted to establish firms within the sector.
A number of social factors were also identified as contributing to the state of SMEs in the country. 80% of the respondents were of the opinion that establishing SMEs in Kuwait cannot be compared to being employed within the public sector. According to Shah (2007, p.7), this trend has been in existence since 1990’s. For example, approximately 90% of Kuwaitis were employed in the public sector during the period ranging from 1980 to 1990. However, there was a decline in this trend during the period ranging from 1995 to 2005. During this period 87% and 85% of males and females considered being employed in the public sector as the best form of occupation. Currently, there is a reduction in this trend. This results from increased encouragement of individuals by the government to engage in private sector. According to Shah (2007, p. 8), only a small proportion (25%) of non-Kuwaiti females and males consider being employed by the government. This percentage has been declining over the years.
The respondents gave various reasons as to why they consider being employed by the government as the best option. 75% of the respondents considered the security of tenure associated with being hired by the government. This is due to the fact that there is a low probability of an individual being firmed by the government as the employee compared to private institutions. In addition, working hours in public sector are usually conducted during the day. On the other hand, being employed in the private sector or self employment is demanding since it requires and individual to work for long hours.
The accompanying retirement benefits were also cited as a major factor contributing to increased consideration of being employed by the government. For example, an individual can retire from the public sector after serving for 15 to 20 years and receive retirement income equivalent to their full total salary (Shah, 2007, p. 8). It was also revealed that the demanding nature of operating SMEs make Kuwaitis not to establish SMEs. When asked why they do not consider expanding through incorporation of franchising, 80% of the respondents cited the high level of efficiency and productivity required to operate a franchise as the key challenge.
Conclusion and recommendation
The objective of the study was to analyze the status of franchising amongst SMEs in Kuwaiti. This was done by considering the key barriers and determinants of franchising. The scope of the study was specific to SMEs within Kuwait. A number of research objectives to guide the study were considered. This was conducted by conducting both a practical study and reviewing the literature. Currently, a number of SMEs in Kuwait have not effectively integrated franchising in their operation. This mainly results from limitations from both internal and external environment. For instance, the legal environment does not effectively stipulate the relationship between the parties to a franchise. This chapter gives a summary of entire study. This is attained by considering all the research objective and research questions. In addition, the chapter also illustrates the various recommendations that should be considered in an effort of fostering franchising amongst SMEs in Kuwait. Finally, future research is analyzed. This is undertaken by identification of gaps that exists with regard to franchising by SMEs. These gaps were identified during the process of conducting the literature review.
Summary of the study
From study, it was evident that there are a diverse environmental factors hindering incorporation of franchising as an expansion strategy by SMEs. From the study, the external factors identified range from economic factors, social factors, political factors, administrative factors. With regard to administrative factors, it was revealed that a large number of commercial banks in Kuwait do not extend the required financial capital to SMEs. There is a high level of discrimination by commercial banks in offering credit finance. The commercial banks only issue loans to institutions that they consider profitable to deal with. In addition, commercial banks charge exorbitant rates to SMEs upon extending loan services. This makes it difficult for SMEs to source the capital required to expand through franchising. This is due to the fact that SMEs have to incur huge cost of capital. The high level of bureaucracy in commercial banks limits the government’s effort to propagate the concept of franchising in an effort to attain its economic growth goals. Over the past few years, there has been increased reduction in difficult of financing amongst SMEs. For example, the barriers of obtaining credit finance from commercial banks are being reduced by increased commitment by Islamic financial institutions to finance SMEs. In addition, there has been an elimination of lending rate ceiling resulting from an increment in the number of public sector sponsoring establishment of SMEs (International Monetary Fund, 2005, p. 56). Lack of access to financial capital by SMEs limits the rate with which they integrate franchising. This is due to the fact that a substantial amount of financial capital is required. For instance, upon incorporating the concept of franchising the SMEs would be required to make royalty payments to the franchisor on regular basis. This may burden the firm’s operation. In order to attain this, it is paramount for SME managers and owners to consider other alternative sources. According to the study by International Monetary Fund (2005, p. 56), there are a number of alternative sources that SMEs in Kuwait should consider integrating apart from commercial banks. One of these sources that owners and managers should consider is the government subsidized and other Islamic financial products. The subsidized credit for the SMEs is distributed through Industrial Bank of Kuwait (IBK). The IBK sources these finances from the government and channels them to the small and medium enterprises at a rate below that charged by the central bank. On the other hand, a number of Islamic investment funds and non-bank institutions also provide investment funds to SMEs. To cope with financing challenge, it is paramount for SMEs managers and owners to consider external sources of finance.
Kuwait is characterized by a high degree of bureaucracy which results from the monarch system of administration which has been in existence for a long time. The bureaucratic system of administration is also evident in most of the government institutions. This limits the efficiency with which investors can venture into self employment through incorporation of entrepreneurship.
Kuwait legal environment does not sufficiently support franchising by SMEs. This results from the fact that there are no clearly defined legislations with regard to franchising. For example, there are no legislations which regulate the relationship between franchisor and franchisee (that is the entire franchise system). This arises from the fact that there is no clear cut definition of what constitutes an SME. This increases the probability of the franchisee incurring loss in the event of the franchise system collapsing. The legal system does not adequately limit entry by foreign investors into the country. This has posed a high degree of competition to the local SMEs. Some of the foreign firms venturing into Kuwait through establishment of SMEs in various economic sectors have already developed a high competitive advantage compared to local firms. In order to cope with this challenge, it is vital for the government to formulate policies aimed at checking entry of foreign firm’s into the country’s SMEs industry.
In order to enhance, integration of franchising by SMEs as an expansion strategy, it is paramount for Kuwait government to amend its commercial law to incorporate franchising. As a result, relationship between the franchisee and franchisor will cease from being considered as an agency relationship. One of the amendments should relate to settlement of disputes amongst parties to a franchise. Precedents should be set to ease the process of settling dispute amongst the parties involved. In addition, Kuwait government should ensure that there is a concise definition of agency relationship. Currently, the existing definition of agency relationship is broad and liberal (Ziedman, 2010, p. 117). This would make it clear whether franchises are a part of agency relationship. Despite the fact that there are no restrictions to foreign investors venturing into Kuwait SME sector, it is important for the government to ensure that their activities are regulated. This can be attained by determining the mode of entry that should be used. For instance, it may be required that all foreign investors entering the country must establish businesses through partnering with local firms. This will limit chances of unfair competition for the local SMEs. To enhance integration of franchising by SMEs in Kuwait, a number of legislative changes should be undertaken. For instance, the Civil and Commercial Procedures Law should clearly define the how disputes between the franchisor and franchisee should be resolved. This will play a significant role in promoting the relationship between the franchisor and franchisee. On the other hand Civil Code should be incorporated so as to guide contractual principles between parties to a franchise. The legislative environment should also safeguard SMEs innovativeness. This s can be attained through formulation of Intellectual Property Right Order (Ziedmann, 2010, p. 117).
This decree should protect entrepreneurs’ intellectual property rights. As a result, SMEs would be able to attain competitive advantage through innovativeness.
A number of social factors were also cited to be a determinant of the franchising amongst SMEs in Kuwait. Most of Kuwaitis prefer being employed by the government in various sectors than being self employed through establishment of SMEs. This trend is results from the high level of standards associated with being employed by the government. There is a general perception amongst Kuwaitis that being employed by the government is associated with high returns as compared to being self employed. In addition, most of Kuwaitis associate being employed in the government sector to have a relatively high security of tenure compared to being self employed. This decreases Kuwaitis commitment to establishing SMEs and hence the low franchising as an expansion strategy by the existing SMEs.
The low level of franchising amongst SMEs also results from a number of internal factors. One of the key factors is lack of managerial skills. Managing a franchise requires sufficient amount of managerial skills. This result from the degree of complexity involved. Lack of managerial skills is associated with poorly developed education system within the country. This culminates into lack of the required confidence to operate a franchise. Most of the SMEs owners and managers do not have the required skills to manage a franchise. This arises from the fact that most of the SMEs are family owned which limits their commitment to expansion through franchising. Lack of managerial skills limits the owners and managers capacity to deal with the challenges associated with franchising. Owners of SMEs also lack innovative skills such as marketing which are paramount for franchises to cope with the high level of competition characterizing the SMEs. This results from the fact that franchising is broad and goes beyond job description to incorporate other concepts such as product development. As a result, SMEs in Kuwait develop poor marketing skills which limit their competitiveness in the global market. In order to improve managerial skills of human capital, the government should ensure that the country’s education system results into high quality human capital.
Firms in various economic sectors have incorporated the concept of franchising. The retail sector has witnessed increased incorporation of franchising. This has resulted from the intensity of competition and hence the needs to incorporate effective operational strategies. Another sector which has witnessed increased incorporation of franchising is the real sector. This makes it evident that franchising is being appreciated by investors in different economic sectors.
There is diversity in the type of factors considered by owners and managers of SMEs in integrating franchising as an operational strategy. Most of the respondents cited efficiency of expansion associated with franchising as the key reason why they consider franchising. This arises from the fact that minimum amount of capital is required to under expand through franchising. In franchising, it is the franchisee who incurs a significant cost of establishing the firm. The franchisee is required to make certain payment to the franchisor at regular intervals in terms of royalties. This means that a firm which have adopted franchising model has a high probability of succeeding in the future. In addition, the franchisee benefits from the already established marketing aspects such as the brand and marketing network. Through brand recognition, the franchisor is able to penetrate the market more efficiently. This means that a firm can be able to thrive in an environment characterized by a high degree of competition.
As an expansion strategy, there are different methods of franchising that can be integrated by owners of SMEs. These include formation of master franchise, area development and single unit business. However, the choice of the best franchising strategy depends on the degree of complexity associated. For instance, single business unit method and area development methods of franchising appeared to be more prominent. This arises from the fact that minimal degree of complexity is involved as compared to master franchising which is considered to be more expensive thus limiting its attractiveness to business owners and managers.
Apart from franchising, entrepreneurs and business managers are faced with a wide range of strategies they can use in undertaking business expansion. Some of these include formation of mergers, strategic alliances and acquisitions (Reuer, 2004, p. 116).
Consideration of integrating formation of mergers and acquisitions can result from a number of reasons. Formation of mergers and acquisitions mainly results from factors such as change in consumer tastes and preferences, changes in technological environment and an increment in competition. A large amount of financial capital is required in forming mergers and acquisition compared to franchising since it is an intensive expansion strategy. Firms may also consider integrating licensing in their expansion strategy. Licensing entails issuing rights to another party to conduct certain tasks as per the stipulation of the agreement. Violation of the agreement may culminate into the party being sued. Licensing as an expansion strategy is most appropriate in manufacturing companies (Mendelssohn, 2004, p.26). For example, the firm may require its business partner to produce other complementary goods. Another alternative that firms can consider is equity investment. This is mainly used when a firm does not have sufficient capital to undertake expansion. As a result, the firm seeks financial capital from other companies by issuing equity to that firm. However, the extent to which a firm uses equity investment should be minimal if it does not want to los control of the firm. This is due to the fact that if the new firm acquires more than 51% of the controlling company, the firm may gain substantial control over the firm.
In order to succeed in the long run as going concern entities upon incorporating the concept of franchising, it is paramount for firm’s management team and owners to gain the relevant managerial skills. These skills gained should contribute towards the firm’s survival in an environment characterized by intense competition. In addition, attainment of these skills would ensure that the firm attains a relatively high competitive advantage compared to its competitors. This arises from the fact that the owners and managers would be able to formulate and implement effective operational strategies. The key managerial skills that should be emphasized include planning, leading, organizing, controlling and leading. In addition, the success of franchising for SMEs should also be enhanced through attainment of skills related to financing, marketing, competition and market development. Through market development and marketing skills, there is a high probability of the franchising succeeding. This arises from the fact that the success of franchises is dependent on the innovative capability of the firm. Managerial skills can be attained through formulation of training program. The training program should be aimed at speeding up the best methods of running a franchise. Management of firms should ensure that they consult from business specialists on the best expansion strategy to adopt. Considering the limited knowledge of franchising amongst SMEs managers and owners, it is vital that more knowledge be gained through consultative efforts. Managers and SMEs owners should ensure that they develop a database from which they can refer in the process of making business decisions.
SMEs in Kuwait should consider integrating domestic or indigenous franchising in an effort to stimulate their expansion. This entails a form of franchising where a firm imports managerial skills through equity involvement thus enabling it to diffuse the concept of franchising.According to Joint Africa Institute (2004,p.5), a well developed franchising strategy can play a significant role in enabling SMEs expand. The ultimate result is that the firms will be able to attain a high competitive advantage. This arises from the fact that the firms can easily identify markets which they can exploit through franchising.
Managers and owners of SMEs should develop effective criteria in selecting the franchisor to consider in its expansion strategy. Some of the factors that should be considered include the franchisors potential of rapid expansion and ability of franchisor to provide field support. In addition, the strength of brand should also be considered.
In order for entrepreneurs operating SMEs in different economic sectors to consider integrating franchising in their operation, it is paramount for both the franchisor and franchisee to consider minimizing the control that is associated with franchising. In order to attain this, the parties involved should evaluate the best ways to minimize the control. This is due to the fact that the control associated with franchising results into a reduction in the rate with which SMEs undertake invention and innovation upon integrating franchising in their operation. This is due to the fact that the franchisee’s capacity to make decisions is limited by the franchisor. Increased regulation limits the ability of the franchisee to exercise individual judgment in the process of conducting business activities. This is due to the fact that the franchisee is required to obtain direction from the franchisor on a number of issues such as site selection. In addition, the entrepreneur may be restricted from relocating once the firm has been established.
The intensity of control by the franchisor may result into ineffective operation of the SME despite integrating franchising as an expansion strategy. This is due to the fact that a large number of decisions will be undertaken by the franchisor.
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