Franchising in Kuwait Business

Subject: Economics
Pages: 9
Words: 2418
Reading time:
9 min
Study level: Master

Introduction

Background information

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 society is increasingly embracing the concept of entrepreneurship. This has been witnessed by both the developed and developing economies. In addition, the policymakers have recognized the significance of entrepreneurship in propagating economic growth and minimizing the problem of unemployment. An increase in the rate of entrepreneurship has culminated in 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) assert that increased incorporation of entrepreneurship by the young generation in Kuwait has enabled them to shift from job seekers to job creators. Apart from propagating economic growth and job creation, Al-Wugayan and Turki cite 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% 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).

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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 in 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 in 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 themselves effectively in the industry. Amongst the expansion strategies being considered by various firms is franchising. Kuwait presents a high opportunity for 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 to green investment through establishment of a news 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, equipment, furnishing and improvement of premises, supplies, inventory, and working capital is transferred to the franchisee. The franchising firm is only required to cater to the franchise program cost.

In addition, firms considering franchises 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 a 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 SME establishments 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 percent to 4 percent 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 in elimination of possible errors which fail 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.

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The owners of the franchises are more committed to ensuring success of the firms compared to corporate employees. This is due to the strong link which exists between the owner or operator and the business. Franchise owners have personal liability for the success of the firm since they have invested their capital in the firm. As a result, these individuals are more dedicated to ensuring that the firm succeeds.

Franchising gives an opportunity to the franchisor to better control 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 has 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 in franchisees or their 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.

Problem statement

Despite the numerous opportunities associated with franchising, SMEs in Kuwait have not effectively integrated the concept of franchising into their expansion strategies. As a result, Kuwait SMEs have witnessed a slow growth rate both in the local and international markets. The low rate of franchising has been contributed by both internal and external business environments.

Justification

There are a number of factors associated with the low level of integration of innovation in Kuwait. Most of the SMEs in Kuwait lack effective innovation and necessary expertise which are key growth points in franchising. This results from the fact that most of the SMEs in Kuwait are 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 competencies 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 for success is low. In addition, low level of franchising in Kuwait SMEs is associated with some social problems linked to SME 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 is due to the fact that there are no well-stipulated laws to regulate the relationship between the parties involved (franchisor and franchisee) upon the franchise contract coming into effect. This means that the contract between the franchisor and franchisee entirely governs the relationship between two parties. This demoralizes the commitment of the SMEs towards franchising as an expansion strategy (Ziedmann, 2010, p. 117).

Objectives

In analyzing franchising in Kuwait, a number of objectives have been considered. These objectives are outlined below:

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  • To analyze the factors contributing to the low rate of franchising by SMEs in different economic sectors in Kuwait.
  • To evaluate the sources of various barriers limiting the incorporation of franchising amongst SMEs in Kuwait.
  • To identify factors that propel management teams of SMEs to consider changing their operating model and incorporate franchising concept.
  • To determine alternative expansion models which the SMEs in Kuwait can use in their strategic management.

Research questions

  1. What are the internal and external factors contributing to the low rate of franchising amongst SMEs in Kuwait?
  2. To what extent has the concept of franchising been utilized by SMEs in Kuwait in their national and international expansion strategy?
  3. What legislative changes should be by Kuwait government to limit the legal and political barriers to franchising amongst the SMEs?
  4. What are the alternative expansion models available to Kuwait SMEs in an effort to gain a high market share?

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 the Kuwait government will be able to set good platform for 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.

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. The firm should not have a turnover greater than € 50 million while its balance sheet total should not exceed € 43 million (Hauser, 2005, p 2). In addition, the firm should not have more than 25% of its shares held by another enterprise.

Franchising

This refers to a business operation strategy where a firm uses the operation model of another firm.

Franchisor

Franchisor refers to a firm that 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

Franchisee refers to the party who purchases the rights from the franchisor. The franchisee entirely operates the purchased business and is accountable for certain decisions. 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 to these. The franchisee pays a given fee to the franchisor as determined in the franchise contract.

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 incorporated 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’s 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 the use of interviews will be integrated into the research. Due to time and resource constraints, only a small group of individuals will be interviewed.

Summary

The paper gives the background information of SME’s 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 low rate of franchising in Kuwait business with specific reference to SMEs. In addition, a justification for 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 is identified. Finally, the key terms used in the study are defined.

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Reference

Al-Gamal, R. 2007. Forum debates challenges and advantages for SMEs in Kuwait. Web.

Al-Maqabandi, J. N.D. Altering the SME business landscape in the region. 2010. Web.

Al-Wugayan, A. & Turki, A. 2009. An encouragement of entrepreneurship in affluent economies: the case of Kuwait. Web. 

Hauster, J. 2005.A qualitative definition of SME. (On-line). Bonn, Germany: Institute of Fur Mittelstandforschung. Web.

Watson, J.2003. Potential impact of accessing advice on SME failure rates. Web.

Zeidmann, P. 2010. Franchise. (On-line). Getting the Deal Through. Web.