INTERNATIONAL FRANCHISE EXPANSION STRATEGIES: Opportunities and Risks

1. INTERNATIONAL FRANCHISE EXPANSION STRATEGIES:Opportunities and Risks IFA International Symposium Los Angles, California November 5, 2008 Udo Schlentrich, Ph.D. Rosenberg International Center of Franchising Whittemore School of Business and Economics University of New Hampshire

2. Opportunity & Risk Assessment

3. Common International Franchise Expansion Strategies “Trial and Error” • Follow the leader • Reactionary • Intuition/emotional • Business as usual

4. International Expansion Risk • Political/Economic Terrorist attack at Marriott International hotel in Indonesia (2003) • Legal/Regulatory Danone legal battle with Chinese joint venture partner (2006-2008) • Market Opportunity Dunkin’ Donuts exited UK due to lack of profitability (1991) • Cultural Distance Euro-Disney accused of ‘cultural imperialism’ by media (1993)

5. Proposed International Franchise Expansion Strategy • Evaluate external environment (opportunities & risks) • Evaluate internal environment (culture & capabilities of the firm) • Determine required resources

6. Advice From Baseball CoachYogi Berra “When you arrive at a fork in the road, take it.”

7. Advice from Economist

8. Definitions • Strategic analysis = the systematic investigation of a firm and its environment (foundation of the strategic management process) • Risk = a situation that would lead to negative consequences Risk = (probability of risk occurring) x (impact of risk occurring) • Opportunity = a possibility due to a favorable combination of circumstances

9. Strategic Planning“Where do we want to be ‘X’ years from now” Goal Today Goal 2008 2009 2010 2011 2012 Time

10. Projected Growth“What can we do to grow at X% each year?” Goal X% X% X% Today Goal 2008 2009 2010 2011 2012 Time

11. Domestic vs. Foreign Profitability of U.S. Companies

12. US Franchisor Survey Franchisors with Units Outside USA 100% 80% 60% 40% 52% 44% 20% 34% 0% Walker 1989 Anderson 1995 Schlentrich/Aliouche ‘06 12

13. US Franchisors Planning to Expand into EU 100% 80% 60% 79% 40% 55% 47% 20% 0% Walker 1989 Anderson 1996 Schlentrich & Aliouche 2006 13

14. US Franchisor Survey 14

15. Research Objectives Assessment of international markets for US-based franchisors Development of International Franchise Assessment Model & Index 15

16. Research Methodology • Academic Research Review of literature on international franchising and country risk assessment • Franchise Practitioners’ Input Interviews & Survey of GLOMAK and other IFA members • Development of International Franchise Assessment Model& Index

17. International Assessment Model:Hierarchical 3-Level Model • Section One: Macro-environmental factors (Target Countries) • Section Two: Micro-environmental factors (Franchise System) • Section Three: Strategic and financial factors (Expansion Modes) 17

18. INTERNATIONAL FRANCHISE ASSESSMENT MODEL SECTION ONE Macro- environment MARKET RISKS MARKET OPPORTUNITIES SECTION TWO Micro-Environment DISTANCE SECTION THREE Selection of Expansion Mode(s) & Financial Assessment Pure Franchising Master Franchising Plural Form Licensing / Joint Venture Acquisition & Expansion Pure Company (FDI) 18

19. Section One: Macro-environment Target Countries Market Risks Market Opportunities Distance Political / Economic Risk Legal / Regulatory Risk Market Size Purchasing Power Cultural Distance Geographic Distance

20. Political / Economic Risk Proxies System specific weightings • Political risk • Economic performance • Debt indicators • Debt in default • Credit ratings • Access to bank finance • Access to short term markets • Access to capital markets • Forfeiting

21. Legal / Regulatory Risk ProxiesSystem specific weightings • Ease of starting a business • Dealing with licenses • Employing workers • Registering property • Getting credit • Protecting investors • Paying taxes • Trading across borders • Enforcing contracts • Closing a business

22. Market Opportunity Proxies System specific weightings • Population (potential customers) • GDP per capita (purchasing power)

23. Distance Proxies System specific weightings Cultural Distance (Hofstede): • Uncertainty avoidance • Individualism • Masculinity • Power distance Geographical Distance: • Travel time from host country

24. Integrated Franchise Index • Integrated Index • Incorporates Academic Findings & Franchisor Survey • Academic Findings (identification of key measures) • Market Risk • Market Opportunity • Distance • Franchisor Survey (relative weight of key measures) • Market Risk 40% • Market Opportunity 50% • Distance 10% 24

25. Section Two: Micro-environment Target Countries Local Market Firm Characteristics Labor Infrastructure Supply Chain Real Estate General Strategic Financial Competition Demographics 25

26. Section Three: Strategic Assessment Financial Assessment & Selection of Expansion Mode(s) Pure Franchising Master Franchising Plural Form Licensing or Joint Venture Acquisition & Expansion Pure Company (FDI) 26

27. Section Three: Strategic Assessment Macro Factors Micro Factors Financial Assessment & Selection of Expansion Mode(s) Pure Franchising Master Franchising Plural Form Licensing / Joint Venture Acquisition & Expansion Pure Company (FDI)

28. Case Study: Application of Model • 216 countries & regions to • 153 countries to • Top 25 countries (Aggressive, Conservative, or Balanced strategy) Section 1: Macro-Environmental Assessment • Top 25 Countries (Balanced Strategy) and/or • Regional Clusters Section 2: Micro-Environmental Assessment Section 3: Financial Assessment & Selection of Expansion Mode(s) • Top 25 Countries • Feasibility study • Follow-Up: • Re-assessment of Macro, Micro and Financial measures • Actual versus projected results • Periodic update 28

29. Benefits of International Franchise Assessment Model & Index Section One: Evaluate & select potential target countries for expansion Section Two: Adapt franchise system to selected host country Section Three: Assess financial parameters & select optimal expansion mode(s)

30. Peter Drucker “The most important thing for a business is to stay in business.” 30