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Transaction Cost Theory FOR THE Franchise Corporations Economics Essay

The purpose of this paper is to discus the application of transaction cost theory on the franchise businesses. Over the past 40 years, transaction cost economics (TCE) has grown in importance as a central point of view germane to various domains of financial and business research (Dahlstrom, 2010). In 1937, Ronald Coase, who was simply a winner of Noble prize, introduced the theory of the deal cost in his publication "The Nature of the Firm". Predicated on his deal cost theory, the franchise is the process of the trading in public areas market transferring in to the intra firm trading. Thereby, the business has reduced its exchange cost to the minimum amount level. The huge benefits embodied in the savings on transaction costs. In other word, the purchase reduces the internalization of transaction costs. Assessing to the one company mode, which has many 3rd party stores, string stores unified the purchase that reduces the information costs for looking the trading lovers. It was seen that information exchange among supply chain partners lead to better supply franchises in terms of quality and efficiency (Wong, 2010). Furthermore, the head office unified management the inner transfer cost in order to coordinate and eliminate of the information costs for price evaluations.

Furthermore, the problems and countermeasures of the franchises in China will also be examined in this newspaper. The problems of franchise in China are lacking in variety and size, lone jogging type, backward in management and reckless growth. All the problems need to be targeted and solved by appropriate methods.

Transaction cost and the franchise

Transaction is constituted by people's time, energy, construction and cost. Deal costs generally refers to all costs besides the direct production costs of companies in the business process. In other term, it is cost that must definitely be faced in the market purchase inside or beyond your enterprises. The main details of Ronald Coase include the following contents.

Firstly, there is an opportunity cost. Companies must timely discover the potential consumer demand of consumers and guide consumers to react in a timely manner. During this time period, companies need to invest some costs and discover others' demand.

Secondly, there's a deal cost. Business contracts, negotiations and paperwork must be looked into before the development. To spend a certain cost, the negotiations will take time, money and manpower, which is the price tag on the deal.

Thirdly, there's a monitoring cost. After the enterprise is necessary to purchase the goods, it is necessary to inspect them, that will take a certain amount of cost (David & Han, 2004). That's to oversee the execution of the deal cost.

Then, there's a deal performance cost. When the merchandise quality is certain, the venture have to visit the bank to pay for others. It also takes some time and cost that can be viewed as the delivery cost of the contract. If agreement disputes arise during the implementation process, you will see some costs for coping with the disputes. That is also related to the exchange costs.

Therefore, the expenses will increase when the marketplace is jogging and transaction. Transaction costs is significant for business and societies, so most companies are seeking ways to reduce exchange costs (Wong, 2010). The franchise is one of the better business modes to lessen the purchase costs successfully.

Franchise is today's business management methods and organizational form. It refers to the circulation industry in several shops with the industry to jointly purchase, give franchises, etc. in to the chain. In order to achieve standardization of services, business professional, standardized management, writing of size and reduce market transfer costs (Lee & Clark, 1996). The set up of the chain system significant saves in exchange costs. Thereby, it does increase economic efficiency and stimulates economic growth. The advantages of franchise are:

Franchise can reduce the procurement cost. Stores purchase large volumes, hence the purchase price is low, purchase volume and price is inversely proportional (Spinelli & Birley, 1999). Stores purchase large quantities from manufacturers to obtain advertising savings, quality products, deferred repayment, well-timed delivery and other benefits. In addition, the string from the headquarters personnel for the purchase, personnel and time required is a lot less, thus will save the procurement personnel costs.

Franchise can save transportation and storage space costs. Stores, which purchase large volumes, usually can be given preferential treatment or even free shipping and delivery. With centralized distribution of goods methods, the travelling costs are low because the price tag on shipping large levels of a tiny batch amount is very good below the price of shipping. Moreover, the store has no warehouse, because the products are stored in the distribution center for safekeeping. Therefore, stores can reduce the management, storage space and reduce product damage. String stores not only save storage costs, but also ensure quality.

Franchise could save the price tag on advertising and beautification. Together with the increasing development of advertising expenses in recently days and nights, advertising has become an important commercial campaign method. The string system has a unified commercial identity system like the shop varieties are similar, and greatly distributed. So that it is good effect advertising for itself (Spinelli & Birley, 1999). Also only 1 advertisements can let all s (Alon & Welsh, 2001)tores profit, thus total sales of advertising costs can be reduced. In addition, a unified design shade chain can save design fees, the majority purchase, designing materials and capital equipment. In addition, it cam obtain price special discounts and other benefits for minimizing the material costs.

Franchise can lower the management cost. It has a clear section of labor within the string system, also it commonly used by advanced science and management equipment, tools and methods. Simplification of the operation and management, civilization˜expertise and standardization, making the string of management research and effective (Lee & Clark, 1996). Efficient management reduces problems anticipated to mismanagement and the loss, also can avoid the management of loopholes. These can help manage the cost savings.

In addition, the franchise format between participants of the venture can effectively inhibit the opportunistic habit. Chain of the internal control is diversity and overall flexibility that can effectively reduce the expense of trading activities. Also thef's structural can enhance the efficiency of information transmitting and decrease the information costs (David & Han, 2004).

The emergence of string is the consequence of commercial retail and institutional change. Chain compared to any form of institutional preparations in the past has advanced points, since it greatly will save you the business deal costs. This is actually the reason behind franchise, also the development dynamic of the franchise (Lee & Clark, 1996). Commercial string institutional operation happens to be among the best choices.

The problems and countermeasures of the franchise in China

With the deepening of reform of blood circulation and the accelerating tempo of checking lately, chain stores in China have observed quick development. However, set alongside the foreign chain enterprises our string enterprises still have many problems.

The string stores lack in volume and the size is too small. The data point out that the countrywide average each chain has stores in only 14, while developed countries generally have hundreds of chain stores (Alon & Welsh, 2001). Franchise is able to provide customers with lower prices of goods, because after achieving a certain size size chains system can keep your charges down through bulk purchase procurement and purchase of goods significantly. Thus the string is to enhance the vitality of the amount of organization and enterprise range, keep your charges down and increase market share.

The franchise type is exclusive. Chain can be divided into three types, which are the regular chain, franchise string and free chain. In the developed countries, each of the three types of franchise has relatively successful examples. Furthermore, most franchises are regular string in China. How exactly to improve the situation of franchise in China is a question for all your chain companies. The ultimate way to solve this is by using brand strategy to be able to improve the competition ability. Chain retail companies should pay more attention to the consumers, understand the unique advantages of consumer demand and actively develop its brand product design to be able to lessen costs and also to improve the capability to compete against retailers.

The string companies have low standardization and backward in general management. Inside the embodiment of modern method of chain companies, nearly all domestic enterprises are still in a comparatively primitive (Alon & Welsh, 2001). The state of hawaii, transport, marketing communications, financial settlement deal and other means are very original. So the chain companies must understand that improves the inner management system is the only path to make long-lasting business. Improve the management system for long-term steady development of string enterprises is the preconditions of promoting the healthy and immediate development of franchise.


Transaction cost theory promises that the franchise through centralized, unified and professional management can lessen the costs. The facts proven that successful franchises could reduce the procurement cost, save transport and storage costs, advertising and decoration costs and management cost. Franchise can be the trend of most procedure types. However, with the cost-effective globalization, the intensification of market competition and development of it, franchise businesses will face many problems and opportunities. To further enhance the degree of chain will help reduce business transaction costs.

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