Microfranchising is a business model that applies elements and concepts of traditional franchising to small businesses in the developing world. It refers to the systemization and replication of micro-enterprises. Microfranchising is broadly defined as small businesses that can easily be replicated by following proven marketing and operational concepts.
The overall objective of microfranchising is to promote economic development by developing sound business models that can be replicated by entrepreneurs at the base of the socio-economic pyramid (bottom of the pyramid or BoP); therefore, helping to solve the “necessity entrepreneur” dilemma by providing job opportunities to those who lack fundamental entrepreneurial skills. The key principles are replication, sustainability, and social impact.
There is a lack of employment opportunities in developing countries leaving nearly one half of the worlds population (3 billion people) living in acute poverty (living on less than two dollars a day). Therefore, many people have no choice but to start microenterprises in order to survive. The International Labor Organizations indicate that 72 percent of Sub-Saharan Africas population operates within the informal sector, eking out a hand-to-mouth survival.
In Latin America 51 percent operate within the informal economy, and 65 percent in Asia. Furthermore, many of the small businesses operated by people in developing countries fail or exist on subsistence levels, leaving hundreds of millions in poverty. MicroFranchising is a new tool designed specifically to assist these entrepreneurs to become more successful and reach economic self-reliance, through the provision of successful business models with the necessary initial and on-going training needed to succeed.
One key strength of the microfranchise model is that the franchisor creates and standardizes the business model for a successful enterprise. Thus, all the microfranchisee needs to do is manage the business by following explicit directions. Microfranchising is beneficial in the developing world primarily because of the shortage of basic education and well-developed infrastructure. New business ideas result as industry builds off industry. Since industry in developing countries often lacks variation, business idea creation is more difficult. For people whose primary activity is merely trying to survive, finding the amount of time and effort needed to grow a profitable business is challenging and unrealistic.
The difference between franchising and microfranchising is the social component (see Figure 1). There are three primary components to microfranchising: micro, franchising, and for-profit. Micro means more than “small.” Micro embodies a meaning of benevolence, poverty assistance, and helping the poor. Franchising means the replication of businesses. For-profit simply means that microfranchises are not charities; they are created with the intent to generate income. A true microfranchise business must include all three components.
“Microfranchising has enormous promise. First, the model makes sense: it fits the reality of the bottom of the pyramid, has the right incentive structure, and can enable more people to have good jobs than the microfinance model (which truly requires entrepreneurial talent). Second, the model allows social entrepreneurs to invest in poor countries, allowing them to ‘do well and do good’ at the same time.”
—Katherine Terrell, Professor of Business Economics and Public Policy, University of Michigan
Source: Jason Fairbourne