This is a question that many franchisors ask themselves when they start to grow and their model is in high demand.

 

There is an intuitive notion that you cannot grow indefinitely, and that all growth has a limit. But a strategist knows that there is a more or less exact measure to grow, and that's what this post is about.

 

It is also intuitive and in practice painful, that growth brings with it an increasing demand for cash, and that then it is necessary to regulate it a lot so as not to fall into financial valleys that can drown the franchising company.

 

The fundamental problem that exists according to my experience with franchisors, is that very few know (or make efforts to know) what is the turnover of their close direct competitors. This results in that few franchisors know their share in the territory, and therefore, they cannot relate to competitors and design and implement a competitive strategy.

 

More than 20 years ago I developed a simple model to analyze the leadership of an economic sector, which can be seen in the figure:

Approximately 70% of the turnover of a territory in a certain area (direct competitors) is due to 6 competitors, who are "organized" (obviously by the market) in 3 levels: 1 leader, who is the one who bills the most, 2 challengers, who try to reach it, turn it and eliminate it, although they rarely succeed, and 3 followers, who have found a niche that does not interest either the leader or the two challengers, and that they move very well there, without too many shocks and with a higher operating profitability than the leader and the two challengers.

 

These 3 followers are attacked by the fourth level, the smallest companies in the sector (always in terms of turnover), and the attacks they receive are not furious, as are all the attacks at the upper levels of the leader and the challengers.

 

Like all images, the image above is worth a thousand words.

 

Here are some of the things the image says that serve both to plan the growth of a franchisor, as well as to plan the growth of a franchisee that is established in a territory:

 

1- When you enter a sector, it is smarter to enter as number 4 or number 3. Not only is the investment much less, but it also does not lead to unnecessary wear and tear with powerful players such as the leader and the challengers in the early stages of the business, almost always being the chances on the side of those already established.

 

2- If you enter as number 4, which is the most common case, the logical way is to start the upward race by attacking one of the 3 numbers 3. Being number 4 has some advantages, but if the objective is to build a Brand, staying as number 4 will not take us very far.

 

3- To attack a number 3 you have to identify what are the value attributes of your brand in the niche that it serves, improve them, create an advantage and sell at a different price, it can be lower or higher. This must be known by the niche, so it has to be shown, and that investment in communication is going to be the most important investment of the attacking number 4.

 

4- If you enter as number 3, it is advisable to buy an existing operation. It is not smart to fight until killing a number 3 from the guerrilla position that has a number 4. It can be a long battle in which both contenders lose many resources. Sun Tzu always advises that battles should be short, and that “a battle that is not won in advance, should never be fought”. Buying an operation in operation to convert it to a certain brand is a fairly common fact, especially in gastronomy.

 

5- Once the position of number 3 has been reached, then you can start to consider a growth strategy. How far to grow is a political decision. But there is a natural limit to when the growing player in question begins to annoy one of the two challengers. Level 2 is the most aggressive level on the market, and it will destroy anyone who bothers it, even if it is not for a strategic matter, leaving pride behind.

 

6- I do not even consider attacking a number 1. This is not a brave, motivating, courageous entrepreneurial action. It is stupid.

 

7- According to my criteria, if a player, in the process of building a Brand, wants to continue growing beyond the number 3 level, then he must:

 

a- acquire or merge with another number 3

b- create a new brand in the same business

c- create a new business

 

There is a reason why there are businesses that grow and others that disappear. The only ones that can grow indefinitely are number 1 and both number 2. The battle at these levels has to do with corporate, government, tax, political, banking, and other misfortunes. Far from the entrepreneur spirit.

 

As can be seen, none of the above can be stated and analyzed, if each competitor’s territorial revenue  is not known, which is approximately the sum of the  6 main competitors’s revenues.

 

Knowing the share of each competitor, you can consider a competitive strategy and clearly set how far you want to grow.