Feasibility of Franchising Rohan in Iran - Case Study Example

Feasibility of Franchising Rohan in Iran By (Name) Name of the Class (Course) Professor (Tutor) Name of the School (University) City and State where it is located Date Feasibility of Franchising Rohan in Iran Recently, Iran has been making the headlines in the dailies as well as evening program shows, but unlike previous times, the news reports are positive. This has to do with the conclusion of peaceful negotiations between Iran and the UN Security Council over Iran’s nuclear program[AlJ15]. The result has been a lifting of the economic and political sanctions that had been implemented against Iran, which had led to a steep decline in the value of the Iranian Rial and the economic state of Iran in general[The12]. An easement of these sanctions is expected to reverse the decline in the economic state of Iran. This change in Iran’s political and economic state makes it a favorable candidate for Rohan to venture into. Rohan is a British Outdoor clothes and footwear designer that has 61 stores and an annual turnover of £30 million. Their products are manufactured in Milton Keynes, Buckinghamshire, UK and sold internationally. Rohan Manufactures unique products which include trousers and shirts made from mosquito repellent and UV protection fabrics, thermal fleeces, hats, socks and shoes. The company has also introduced a system for rating the suitability of their clothing for different Climate Zones. The clothing has been rated for its practicality rather than stylishness. Their diverse range of clothing tailored for its comfort, practicality and durability can be worn in a diverse range of earth’s climate zones where it will still perform excellently. As a business and as individuals they take ethical trading very seriously. Rohan has been a member of the Ethical Trading Initiative (ETI) since 2005, is an alliance of companies, non-governmental organizations (NGOs) and trade union organizations working together to improve the conditions for overseas workers producing for the UK market. Rohan is also deeply concerned about the environment and the impact of its activities. Therefore, it strongly follows the 3Rs policy; Reduce, Reuse and Recycle to mitigate the effects of its actions as well as introducing a fourth measure, Offset, where it pays a voluntary carbon off-setting tax to pay for the environmental cost of its activities. Rohan Designs have over 60 stores around the UK and have identified a further 20 to 30 areas in which they wish to open franchised Rohan. The company is looking for franchisee owners who possess enthusiasm, a passion for the Rohan brand and its associated products, high standards of professionalism and a commitment to building good customer relationships through excellent service standards. Marketing Analysis In this section we will conduct a macro-environment audit of Iran using a P.E.S.T.L.E. analysis. We will also conduct a microenvironment analysis of Rohan in Iran. These two audits will help us identify the Opportunities and Threats expected when venturing into the new market. Macro-Environment Analysis P.E.S.T.L.E. analysis is an acronym for Political, Economic, Socio-cultural, technological, legal, Environment and ethics analysis of place. This analysis will help illustrate the stability of a region, assess the risk involved in setting up a business and therefore come up with a business plan. It helps detail large trends and movements in the industry and the expected recovery times from these effects[Alf10]. Political Analysis of Iran This section focuses on the extent the government affects the clothing industry in Iran. especially if it is foreign-owned. Iran being an Islamic State strictly abides by Sharia Law. This law dictates most of the things that a person may or may not do and every enterprise has to follow these rules in order to operate in the country. The fiscal year starts on March 21 and ends on March 20. Iran has a tax system that is highly risky for foreign investors. The corporate tax rate has been lowered to 25% from a previous high of 60% thus encouraging foreign investors to begin investing in the country. The main forms of tax are Income tax, Islamic taxes, Real estate taxes, Capital gains tax and Indirect taxes[Soh94]. Tensions between Iran and the rest of the world powers have eased greatly after the nuclear deal of July, 2015. This has encouraged people to begin trading with Iran gains, and the political sanctions that had been facing have been removed. Economic Analysis In 2014, Iran GDP was $404.1 billion with a Purchasing Power Parity (PPP) per capita income of $17,100. This places Iran as an Upper-Middle-Income Country as ranked by the World Bank[Wor155]. The main industries driving the economy are oil production and export, service industry, private trading and village agriculture. The unemployment rate is 11.65% and the minimum wage is $134 per month. The unemployment rate for women is double that for men. The inflation rate for Iran as of November 1, 2015 is 11.17%. The inflation rate has been fluctuating up and down as a result of the implementation and release of the sanctions. However, the general trend is that the inflation rate has been gradually increasing and it is forecasted to keep increasing over the next year[Tra157]. Iran’s manufacturing industries in the fields of automobile-manufacture and transportation, construction materials, home appliances, food and agricultural products, armaments, pharmaceuticals, information technology, power and petrochemicals are considered among the best in the Middle East[UKT06]. The economy of Iran is expected to improve in leaps and bounds and become one of the most prominent n the Persian Gulf and Asia region. This is because the sanctions have allowed Iran to be self-sufficient and by import substitution. Socio-Cultural Analysis Iran has a population of 78,192,200 people as of 2013[BBC15]. There is a disconnect between the government and the people, a situation that creates tension. This tension may escalate given the right conditions and may result into social unrest and rioting, a situation that could lead to the loss of property. In Iran, the family is the functional social unit. Female members of the family are sheltered and protected excessively. It is inappropriate to ask questions about a person’s wife or other female relatives. Loyalty to the family is more important than business loyalty or any other form of social loyalty. Iranians have two distinct personalities, the private personality expressed at home and the public personality that is used to conduct business. The Iranians have a diverse culture with far-plunging roots. Their literature, their architecture, their music and art are all highly sophisticated and considered to be among the best in the world. A few aspects of the Iranian Culture has been granted the privilege of being considered as “Masterpieces of the Oral and Intangible Heritage of Humanity” by United Nations Educational, Cultural and Scientific Organization (UNESCO) Technological analysis Iran has a fairly advanced technology space the biotechnology, nanotechnology and pharmaceutical industries are flourishing. In addition, it has a developed aerospace and armaments industries where most of the planes and satellites are manufactured within the country, reducing the cost and need for importing these commodities. According to the World Bank[Wor156], internet penetration in the country is at 31. 4%. Legal Analysis The main legal issues in Iran are the incorporation of religion into state and business affairs. The court system is quite rigid and more often than not, their decisions are final and cannot be appealed[Ira15]. There are different types of court to handle different types of people according to their social status. The law is based on Islamic Sharia law scripture. Environmental analysis Vehicles emissions, oil refinery operations and industrial effluents contribute to poor air quality. Most cars use leaded gas and lack emission control equipment. Buses and cars running on natural gas are expected to replace the existing public transportation fleet in effect. Iran is suffering from overgrazing and deforestation. Wet land and bodies of fresh water are being destroyed as industries are increasing and more space is needed to accommodate them. The international rush to develop oil and gas reserves in the Caspian Sea presents that region with a new set of environmental threats[Lot10]. Microenvironment Analysis Structure of the industry Rohan specializes in the manufacture and sale of performance clothing. Rohan emphasizes effortless adventure by providing lightweight, easy care, protective, packable and versatile clothing for both men and women. Rohan has quite a number of retail stores from which it sells its products. It also sells its products online via its website. The company offers free shipping for purchases that are over £75. Competitive dynamics Rohan has created a brand for itself as one of the lead manufacturers of performance and sports clothing. There are 73 globally recognized brands that specialize in the manufacture and sale of outdoor clothing. Thus, competition is rife in this niche fashion industry. These industries use various methods to market their products, including television and magazine adverts and draws among its customers. In order to increase its market share and increase number of sales in its stores, Rohan has implemented the use of tracking technologies in its stores in order to record and analyze customer behavior and be able to adjust its policies based on these results in order to increase sales[Ess15]. This strategy has helped improve Rohan’s financial positions especially following the 2008/2009 financial crisis and the global recession that followed it. Rohan has posted a pre-tax profit of £1.2 million. Sales through the internet and in like-for-like stores grew at 6.8 % in the 52-week period. The internet continued to outperform the retail stores with a growth of 14.5%, hence most of the sales are conducted online[Ins14] Strategic relationships Rohan is a franchisor. Rohan thus makes strategic relationships with interested partners to open retail stores in various parts of the country. Recently, Rohan announced 20 new franchising opportunities in the United Kingdom[Sta13]. Apart from its internet sales, Franchising is Rohan’s strategic approach to getting its products to the market. Using a unique approach, Rohan has established a variety of retail stores and continues to open more franchise stores where available with minimal risk to the Franchisee. Its relatively easy and flexible franchising plan has made it an attractive franchisor for entrepreneurs seeking to venture into the performance clothing industry [The154] Value chain analysis Inbound Logistics- Rohan manufactures its clothes in Milton-Keynes, UK. The raw materials are sourced from local retailers and shipped from various sources Operations- Manufacturing of Rohan products occurs in China, Vietnam, Portugal, Taiwan, South Africa, and Northern Ireland. We regularly visit our factories to ensure that they operate to high ethical standards[Roh15]. Outbound Logistics-products can be stored in warehouses in their manufacturing countries to be shipped to Iran when required. Marketing and Sales-Marketing and sales are be carried out using advertisements on Television, radio and newspapers. Internet penetration in Iran is quite high, so further marketing can be carried out online on social media[Ess15]. Service- Rohan clothing is designed to offer maximum service long after they have been bought. This is ensured by incorporating durable technologies into the design of the clothing. Such designs include water repellency, elemental protection, waterproofing among others.[Roh15] Routes to market The main routes that Rohan products make their way into the market is through sales in franchised retails stores and online sales Customer profiles Rohan manufactures performance clothing designed to withstand the elements and provide comfort and protection to the wearer in extreme and diverse environments. Thus, these clothes are suitable for adventurers, sportspersons and people who simply want to live a more comfortable everyday life. Macro-environment: Key issues for Rohan to Consider The key Macro-economic issue that Rohan need be concerned about in Iran is the religious fervor in Iran. The country being a religious state places a heavy emphasis on Islamic observances. Therefore, Rohan needs to analyze its policies and management positions to check their compatibility with Islamic ordinances. For example, none of the raw materials used to make the clothing should be in violation of Islamic code. For instance, o cloths are made from the offal of animals or from any part of swine. In addition, Islam dictates strict dress code for men and women. In order to appeal to the Iranian population, Rohan should design clothing as prescribed by the Islamic Ordnances in order to encourage and increase sales. The second key issue is the weak Iranian currency. Due to the sanctions that had been imposed and only recently lifted, the Iranian currency is unstable. This factor coupled with the high inflation rate should be a cause for concern as it may result in the Company incurring losses when dealing in the currency due to sudden exchange rate shifts that may not be adjusted quickly enough in the retail stores. Furthermore, constantly hiring financial experts to calculate the prices of items on the stalls is a drain on the company. Additionally, constantly shifting retail prices may undermine the customer’s perception of the quality of the products, therefore causing them to refrain from buying the products and in the long-term undermine brand loyalty. This may be mitigated by quoting item prices in a stable internationally recognized currency such as the Dollar. The third key issue is the problem of introducing the relatively exotic concept of Franchising to the Iranians. The more business-savvy individuals in the population will certain grasp the concept, but for the less savvy, they may have a hard time wrapping their heads around it. A successful business should appeal to all persons equally, regardless of social, political or academic boundaries. Therefore, before Rohan should consider carrying out a comprehensive public awareness campaign among the target population in order to address this challenge. Fourth, Iran’s laws are different from United Kingdom Laws. Due to the delicate nature of Franchise, there are laws and regulations that have been enacted by various countries in order to guide the procedures for their establishment that clearly define the relationships between the Franchisor and the Franchisee. These laws are quite detailed in the United Kingdom but they are less so, or non-existent in Iran. Therefore, Rohan needs to consult a lawyer in order to establish the legal framework for the venture in Iran, and the legal courses available in case of disputes. The merits and demerits of Iran’s Legal framework, their past records on cases involving foreign businesses, and the perceived fairness of the justice system in dealing with disputes. This will help to make clear Rohan’s legal position, options, and risk while operating in Iran, and they can, therefore, cover themselves using detailed contracts. On the positive side, Iran represents a predicatively profitable market. The high middle-income status of the population indicates that the people will appreciate the service that Rohan is offering and the quality of their products, and will be willing to purchase these products at the stipulated prices. Iran is a diverse country with geographical features ranging from cool mountain climates to deserts. The people are of industrious nature, and they utilize these resources at their disposal to their fullest and are willing to inquire and investigate more in order to find further uses of their resources. This extensive exploration will require that the people carrying it out are up to the task. Rohan clothing is the perfect fit for their endeavors. Its comfort, practicality, and durability will quickly ensure that it becomes a favorite among the working population. Therefore, venturing into Iran is a profitable move for Rohan. Strategic Plan for Rohan Franchising in Iran Identify Target population to sell franchises to. This can include Small and Micro Enterprise (SME) owners wishing to expand their businesses, Entrepreneurs, Businesses in areas with high traffic of people who might be motivated to buy Rohan Clothing, such as Mountain Climbing Resorts, popular holiday resorts, Airports and popular places such as national monuments. Conduct an extensive public awareness campaign of the concept of franchising. This includes articles in the newspapers, the television and other mass media. Conduct surveys to establish public opinion of franchising and potential customers, conduct seminars where potential franchisees are encouraged to attend. This plan will most likely involve hiring an Iranian Marketing and Advertising Consulting Company to spearhead the campaign. Hire Iranian and United Kingdom Lawyers to work together to analyze the Legal Framework of the Franchise, draw contracts and generally advise Rohan on the venture. Get insurance cover for the franchises Support the franchisees in establishing and maintaining the franchises by offering training, equipment and Information Technology necessary to successfully run the business Establish a robust supply chain from source to store shelves that will ensure efficiency in the delivery of products. Create a Rohan website with Iranian domain for the online market and establish an efficient logistics system to ensure that online purchases reach their destinations quickly and safely. Establish a customer feedback system by incorporating a competent Customer Relations Management(CRM) System Management The Management at Rohan will be crucial in determining the success of this venture. This is because the implementation of this plan depends on the proficiency and efficiency of the persons charged with the responsibility of carrying it out. In his article featured in the book Readings in Accounting for Management Control, Robert Simons[Sim92] brought under scrutiny the role of managers in implementing organizational goals, emphasizing on their influence of success or failure outcome. Like a wise man said, a poor Plan A with an excellent implementation team B is superior and more likely to succeed compared to an excellent Plan B with a poor implementation team A. Therefore, Rohan’s management needs to be in tip-top shape in order to carry out this implementation strategy with the expectation of success. A management audit is necessary. Key Human Resource Issues Pros Following the 2008 global financial crisis and the severe recession that followed it, Rohan initially recorded a £1.31 million pretax loss followed by a £31,500 pretax loss and then reported a £1.26 million pretax profit[The154]. This shows that Rohan has improved admirably from the spout of hard times and come out of the financial fray with its corporate flag flying high. This challenge proves that the management at Rohan is quite capable of handing difficult and challenging situations. Therefore, armed with this experience, the team is expected to venture into Iran expecting a challenge, and they are qualified to handle it. Rohan’s business model is Retail Franchise. Therefore, it shares the risk of the enterprise with the franchisee. This shared risk reduces the individual risk for both parties engaged in the contract. Rohan handles the corporate and supplies aspect of the business while the franchisee operates the stores and is responsible for sales. Thus, in Iran, a local retail store owner is more familiar with the business practices and has a better chance of making high-profit margins; Home Ground Advantage. Cons The unique nature of Rohan’s operational structure exposes the company to the risk of supply chain failure. The franchisees may not fully understand how the system works, and this may result in poor operational performance while they are still learning to navigate within the system. This may cast Rohan some sales as the system is not working at full efficiency. However, this problem is largely unavoidable, and can only be resolved by Johnson and Scholes Method According to Johnson and Scholes, “Strategy is the direction and scope of an organization over the long-term: that achieves an advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations"[Joh08]. In this regard, the model encourages a P.E.S.T.L.E analysis as well as a SWOT analysis as crucial elements of business strategy formulation and implementation with the aim of success. Holistic Business Model This is an approach developed by IBM fro modeling and analyzing an enterprise. It is a logical map of the business components that can be depicted on a single page. It is used to analyze the adjustment of an enterprise strategy with the organizational capabilities and investment, identify redundancies within the organization, analyze sourcing options for materials and is used to generate a diagrammatic representation of the interplay between the enterprise and the organization[Sun12] Figure 1: Holistic Business model of Rohan Iran Franchise This diagram shows the organizational structure of Rohan and the communication levels between the headquarters in the UK and the retail store in Iran SWOT Analysis Strengths Sound organizational and management system and structure in place Rohan Products Target a Niche of the economy, performance wear. This is a profitable economic sector in Iran, and, therefore, the likelihood of success is high. Reduced risk as a result of sharing the risk with the retailer via a franchise model Rohan has over 60 retail stores in the UK hence this venture is diversified, and the amount of money spent in implementing this strategy can be recovered from other business activities in the case of failure. The concept has been proven to work profitably elsewhere, and hence uncertainty is reduced Weaknesses Risk of investing in a politically volatile Middle East Country where political atmosphere may change without forewarning The implementation plan is capital intensive as a result of the large difference in culture between the country of origin’s culture and the target country’s culture. Intensive capital expenditure is necessary in order to penetrate the market and gain market share Opportunities Establishing Rohan in Iran where performance apparel is a new concept hence there are not many companies offering similar products The Franchise approach is an incentive to the locals since it relieves them of the problem of buying stock and staff training as well as the initial cost of Business start-up. Threats The main competitors to Rohan are the other companies that also sell performance clothing online. Therefore, they are in direct competition with Rohan on this platform. Conclusion The management of Rohan is in tip-top condition to implement the enterprise in Iran. They have the necessary skills and experience to tackle this challenge in a competent manner. The SWOT analysis reveals that the problems facing the venture into Iran are general problems that any company generally faces in a new venture and that the likelihood of success is optimistic. Financial Analysis INDICATOR YEARS 2015 2014 2013 2012 2011 Gross Profit(in £‘000) 18,250 17,833 17,106 15,478 9,574 Working Capital (in £‘000) 5,401 4,890 3,066 3,094 791 Gearing (%) 84.3 276.5 -3161.4 -2311.5 13.6 Current (%) ratio 2.25 2.01 1.69 1.58 1.15 Acid ratio (%) 1.42 1.23 0.93 0.86 0.54 STOCK TURNOVER (%) 12.75 13.74 12.86 15.92 22.78 Source: [Com15] Analytical Objectives To assess the financial health of Rohan Designs limited and the trends in their finances to determine the company’s capability for franchising in Iran. Figure 2: Graphical representations of company indicators Value Analysis and Inference Gross profit- Rohan has been experiencing an increasing gross profit over the last five years. However, the gross profits graph is tapering off indicating that profit margins are decreasing. This can be attributed to the Law of Diminishing Returns as the company reaches market saturation. Thus in order for Rohan to increase I profit margins once more, they need to find a new market for their products. Iran is a good prospective market Working Capital- The working capital has been increasing relatively linearly. This can be attributed to Rohan opening up new franchises and the cost of maintaining these new franchises. Te working capital is a meager percentage of the gross profits and thus, Rohan has the capability of increasing this figure in order to open new Franchises in Iran. Gearing Ratio- Rohan Designs has a gearing ratio that is widely fluctuating. This can be attributed to the financial shock of the global crisis. However, as of January 2015, the gearing ratio is at 13.6%. This is an optimistic figure meaning that Rohan can comfortably pay its recurring debt. This means that Rohan designs is in relatively good financial health and can afford to take the risky venture in Iran. Current Ratio- Rohan’s current ratio has been increasing steadily over the last five years. This means that its financial health has been steadily increasing as the company is able to meet its debt obligations. This reflects good management decisions and a positive outlook on the company. Thus, with this good bill of financial health, Rohan is capable of venturing into Iran. Acid Ratio- The company has the ability to meet its short term debt obligations. The Acid Ratio has been increasing over the last five years indicating that Rohan Designs has been improving on its ability to pay its debt obligations. The small difference between its current ratio and its Acid ratio indicate that Rohan’s Profitability is not reliant on its inventory. This indicates that Rohan can absorb the shocks of a new enterprise with little damage to its overall financial position; hence expanding into Iran is an optimistic risk. Stock Turnover- the high stock turnover ratio for Rohan indicates that their products are being bought by consumers, they are recording high sales. This is a good sign, since it indicates that consumers trust these products. It indicates that sales are high. This is a Good indicator of Rohan’s performance in the market. Conclusion Rohan is in relatively good financial health. Their strong performance in the free market indicates that their marketing strategies are bearing fruit and that their products have demand in the market. Therefore, in order to increase its profitability, they have to expand, as is the objective of every profit-driven business. Their five year performance indicates that Rohan is capable of weathering volatile market conditions. True to its mission and vision statements, Rohan is intent on offering protective, light-weight, packable and versatile clothing, Any- wear, Every wear. A delightful pun. It has the capability to live true to its words, and venturing into Iran is an organizational goal true to its nature. Therefore, Rohan Designs should venture into Iran, a promising venture, and a step into new exciting horizons that hold the promise of a better tomorrow. References AlJ15: , (Al-Jazeera, 2015), The12: , (The Economist, 2012), Alf10: , (Warner, 2010, p. 27), Soh94: , (Behdad, 1994), Wor155: , (2015), Tra157: , (Trading Economics, 2015), UKT06: , (UK Trade& Investment, 2006), BBC15: , (BBC News, 2015), Wor156: , (2015), Ira15: , (Iran Chamber Society, 2015), Lot10: , (Lotfalipour, et al., 2010), Ess15: , (Essential Retail, 2015), Ins14: , (Insider Media Limited, 2014), Sta13: , (Startups, 2013), The154: , (The Franchise Magazine, 2015), Roh15: , (Rohan, 2015), Sim92: , (1992), The154: , (The Franchise Magazine, 2015), Joh08: , (Johnson, et al., 2008), Sun12: , (Sun, et al., 2012), Com15: , (Company Check, 2015), Read More