related diversification in a franchised service business

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USASBE_2012_Proceedings-Page0199 REFERENCES Pfeifer, P. E. (2005). The optimal ratio of acquisition and retention costs. Journal of Targeting, Measurement and Analysis for Marketing, 13 (2), 179-188. Shane, Shankar, & Aravindakshan. (2006). The effects of new franchisor partnering strategies on franchise system size. Management Science, v52 i5 p773. Introduction TEACHING NOTE This case describes a real company facing a real dilemma during the fourth year of its existence. The names of the company and its founders have not been changed. College Hunks Hauling Junk, LLC is a franchised company that provides one service: hauling away unwanted junk from homes and businesses. Throughout the system, franchisees have not usually been able to earn the revenue that they hoped when the bought into the franchise. The primary reason is that they have discovered that almost none of their customers are repeat buyers. In most cases, people require junk removal services only once every few years. The dilemma facing the founders (Nick Friedman and Omar Soliman) is whether to roll out additional services for their franchisees to provide. Courses Previous versions of the case have been class-tested in undergraduate strategy and undergraduate entrepreneurship courses. It appeals to these students because 1) they can relate to two guys who started a business during college and 2) CHHJ is a pretty simple business that has been successful so far. While moving junk from an attic to a truck is a simple job, designing a strategy for related diversification is not simple. In our experience, a common weakness in the recommendations that undergraduates devise relates to feasibility. Their ideas are often creative and ambitious, but they are often unrealistic too. We have not tested the case with MBA students, but believe they might create a better balance of feasibility with their ideas for related diversification. Role of the Authors One of the authors is on the company’s board of advisors and has invited the founders to speak in class on several occasions. The case study has developed over two years as the founders have made presentations to the students at the university.
USASBE_2012_Proceedings-Page0200 Discussion and Analysis The decision issue is pretty clear in this case: how can the franchisor (CHHJ) help its franchisees increase their revenue? 1. What are the options for College Hunks Hauling Junk to generate more revenue? In layman’s terms, CHHJ could 1) sell more services to its existing customers & markets 2) sell its services to new customers & markets 3) create new services for its existing customers and markets, and 4) create new services for new customers and markets. We recommend lingering on this part of the question so that students can come up with the four options. Ideally, some students will see that CHHJ has been emphasizing options 1 and 2 exclusively. But because of the nature of the service, recurring revenue has been very difficult to establish. This is a good time to emphasize to students that CHHJ is at a real inflection point in its strategy. There almost certainly must be a big strategic change or the franchisees will not ever earn the returns that they were hoping for. If the students remember their Principles of Marketing course, they might be familiar with the Ansoff Matrix shown below in Figure 1. Figure 1: The Ansoff Matrix This is a good tool for illustrating four distinct methods of growth. For the first several years, CHHJ pursued only the strategies in the left column of the matrix. Market Penetration offers only limited growth potential because most customers will need junk removal services only once every few years. Market Penetration is effective, especially when a franchisee is able to get sales leads and referrals from satisfied customers. However, there is intense competition from 1-800- GOT-JUNK in most markets. Furthermore, there are very powerful substitute products in most cities also. Depending on how much time you have for this case, there is an important diversion that you might want to take during the discussion. You can start with a question such as “Why is the threat of substitute services such a powerful force in this industry?” The answer, of course, is
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