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THE GOLD IN THE MINE

by Leith Oliver,
last updated 23/07/2009

Manage your knowledge and be more competitive. Leith Oliver suggests some tools to help you make the most of this most vital of assets

Case Study - Robert Harris Coffee Shops

At the very heart of any franchise system is the knowledge that franchisor and franchisees have built up over the years. Knowledge is the 'gold in the mine' of a franchise, and a new wave of competitive advantage is developing for franchise businesses that mine that gold well.

Franchising has been recognised as offering significant advantages in three of the major areas identified by management gurus and future-watchers over the past twenty years.

The first of these is reduced management structures. A franchise organisation is, by its very nature, almost as flat as it is possible to be. The 'branches' are self-contained business units to the extent that the franchisee reports to no-one save himself - not even the managing director of the franchisor company. There may be a field support person who is responsible for contact with the franchisee, but that person does not control them.

The second area in which franchising is well-placed is in being suited to what are now becoming known as 'knowledge-based businesses'. Franchising is a way of capitalising upon both intellectual property - brands, trademarks and proprietary products or services - and upon other assets such as business systems, methods and practices, and even experience.

The third area in which franchising is ahead of the trend is in the development of what the researchers are now calling 'Spider's Web' or 'Lattice' Organisations - dynamic networks of geographically-dispersed teams held together by common goals and operating systems.

It's as if the business gurus have just discovered something that franchising people have known all along.

The ability to franchise knowledge and manage its world-wide application offers enormous attractions to New Zealand companies, for whom geographical isolation need no longer be a barrier to successful exporting. The next KFC or Burger King could be created, grown and remain based in New Zealand just as easily as it could from the US (give or take some enthusiastic travelling).

However, in order to franchise knowledge effectively and continually, the franchisor must have a way of managing the company's knowledge base.

The Importance Of Knowledge

The term 'knowledge management' applies to the way a company's knowledge is collected, stored, communicated, and then used to create competitive power in the market place.

Franchisors are familiar with the concept of the value embodied in a business system, for this is essentially what they sell to franchisees - their knowledge of how to operate a business unit within the franchise group. That knowledge is typically packaged in a set of operational manuals that are part of the system that the franchisee buys.

The question for franchisors and franchisees is: 'What happens after that?' Strong franchises are living, evolving, organic systems that provide rich breeding grounds for new knowledge, new value, and new competitive advantages. The total knowledge of the system cannot be limited only to the original wisdom captured in the operations manuals.

The fast growth of franchising combined with the youth of the sector (80% of NZ systems started in the 90's) means that successful franchise companies must concentrate on developing four new knowledge-specific skills.

  • Retaining the knowledge learned by the 'older' heads
  • Getting new franchisees up to speed quickly
  • Discovering and standardising things that work (products, markets, procedures and processes)
  • Learning to do new things quicker than anyone else (eg, new product/service development, new location set-ups, adopting new technologies)

Managing The Knowledge

So how should a franchise system go about managing its knowledge? Let's start by identifying the main types of knowledge assets that the franchise is likely to have available. The opportunities and challenges in creating a 'knowledge-based' franchise advantage lie in leveraging at least three areas of knowledge 'capital':

  • Human Knowledge
  • Infrastructural or System Knowledge
  • Customer Knowledge

Human Knowledge Capital

People are often identified as a company's most valuable asset - but they are also the most mobile, and the most difficult to manage from a knowledge point of view.

The problem is twofold. First, people carry with them a vast resource of knowledge that resembles an iceberg - you only ever see a small part of it displayed in the normal course of events. The bulk of learning and experience lies buried within the individual and is not randomly accessible to all other members of the franchise. It may only show through at some moment of creative problem solving or other pressure point, and even then it will be offered at the discretion of the holder rather than being automatically available.

Secondly, when members of the franchise (employees or franchisees) leave the group their knowledge leaves with them and is lost forever by the franchise. The key challenge here is: how do you get people to contribute their knowledge to the franchise in a tangible, storable and ongoing manner so that the knowledge of the individual is collected and held in the system?

The introduction of an intranet (see page 9) is one move towards a solution, in that it enables people to respond to the specific questions of others in the system using their own experience. Such wisdom is not only shared with the enquirer and with other members of the group, but is done so in a form that is easily captured for future reference.

Infrastructural/System Knowledge Capital

This knowledge asset is contained in the processes and procedures that develop and evolve during the life of a franchise.

The details of the original business system should be captured in the operations or procedure manuals. If the franchise adopts the powerful concept of continuous improvement, these procedures should be constantly updated with new and improved ways of doing business. The system capital applies to the design and management of internal operations (addressing quality, cost and time); the design and management of supply and distribution relationships; and design and management of the performance measurement and management information systems.

The key practice in this case is to document every new idea or discovery, and to capture and evaluate all evolving practices used by the group so that the knowledge base of 'the best practice' is revisited and updated regularly, and then communicated to everybody in the group. In this way maximum leverage is gained from improved processes and procedures.

It is also important that this process is extended beyond operational procedures to all other areas of management, marketing and service. Too many franchise systems set up an 'operations manual' and leave it at that - losing all the other knowledge which they are constantly acquiring.

Customer Knowledge Capital

What's in a name? Shakespeare suggested "that which we call a rose, by any other name would smell as sweet." But brand marketers would disagree strongly and point to the power that brand recognition, trust and loyalty has in attracting and retaining customers.

The brand image is a set of perceptions that consumers have about a particular brand. It is the management of this perception through relationships with customers and knowledge about customers (documented and stored) that makes up the customer capital of the franchise. The aim is to develop a large database of known customers, and then to work that database to build loyalty to your brand and generate repeat business.

Consider the pizza delivery company whose phone system is linked to its database in such a way that when a customer rings, the system automatically recognises the number and brings up the correct customer record before the operator even says 'Hello'. If the voice on the end of the phone asks the customer 'Extra olives on that as usual, Mrs Smith,' what do you think that does for Mrs Smith's brand loyalty?

Intellectual Property

The discussion of knowledge capital would be incomplete without some reference to intellectual property assets such as patents, registered trademarks, copyright and registered designs. These assets usually have a recognisable value and therefore need protection. Knowledge management in this area means having policies and practices in place to organise that protection properly through the use of professional patent attorneys.

The Role of IT

All business initiatives must be measured in terms of added value, and knowledge management is no exception. Business researchers Debra Amidon and David Skyrme have identified a series of five activities that make up a value-adding process of knowledge management, and these are the activities that franchise companies must excel at to create superior value for their customers.

1. Identify and locate Existing Knowledge - identifying and mapping locations of important knowledge that is available in the franchise

2. Promote actions that Create New Knowledge - innovation and creativity, brainstorming and problem solving

3. Collect, Classify and Code resources of franchise knowledge

4. Develop Databases of the franchise knowledge

5. Analyse, Communicate and Use the knowledge to create new competitive advantage

While knowledge management is more about practice and culture than about technology, it is true that information technology (IT) is a huge enabler and enhancer of effective knowledge management. The five-step process is shown in the above table alongside the types of IT that support each activity.

Case Study Robert Harris Coffee Shops Moving towards integrated knowledge systems

David Goodstone, Franchise Operations Manager for Robert Harris Coffee Shops, wanted to take advantage of information technology to improve the knowledge collection and analysis for the group.

The Robert Harris franchise, like many others, has a standard requirement for franchisees to provide sales and financial data to the franchisor on a regular basis. However, the reported sales figures are product group totals with no detail, and the financial accounts for each year are collected so long after the event that they can be used only to substantiate the reported sales. The opportunity to collect valuable franchise knowledge is lost in the lag.

Together with NCR as project managers and the services of a performance measurement consultant he designed an integrated IT solution to the problem. The concept was simple:

1. Collect the product sales data at the point of sale (POS)

2. At the end-of-day POS procedures, transfer that data into a back-office accounting package running a live general ledger (GL)

3. Use automated overnight modem access to pull the GL data back to a central processing point

4. Use automated analysis and report writing software to translate the data into useable knowledge

5. Communicate and distribute the knowledge to head office and franchisees

Robert Harris Franchise Manager Wayne Horo sees the immediate benefits in terms of value to the franchise. 'At the end of the day the value of the franchise is not in the physical assets that are easily duplicated by competitors. The real value is in the unique knowledge that the system collects and uses to achieve superior results.'

Under David Goodstone's direction the system has been set up in a pilot at their new café in Newmarket, Auckland. 'The benefits were significant,' he says. 'We got immediate and detailed product sales and product profit information, and immediate financial reports for the business. The combination of these two groups of source data enabled us to make quick decisions that led to a major rise in gross margin at Newmarket.'

This example describes the role IT can play in developing a knowledge-based franchise. It is only the beginning. True knowledge management requires a change in culture to one of habitual contribution and sharing of knowledge to get the synergy of collective wisdom and experience.

The project is still in pilot stage and care is taken to document the process. Learning and knowledge about the retail coffee business is being added to the Robert Harris franchise, but more importantly, knowledge about installing integrated information and knowledge systems will give the Robert Harris franchise sustainable value and competitive advantage into the future.

Change Your Perceptions

As a closing comment, I think that franchise companies need to change the perceived value of their intangible knowledge asset. It is precious above all other assets, and yet undervalued and under-used more than any other.

We are familiar with intellectual capital such as patents, trademarks and registered designs. But what about the value of the business system as it operates? The internal working knowledge that gives competency above the norm? The trading connections and relationships that allow superior supply and service levels? The documented procedures that give assurance in terms of consistent quality and shorter cycle times with less waste? The customer loyalty to a brand? And the integration and analysis of financial, marketing and operations data?

Franchising has always based its value on the knowledge contained in the business system, and as such franchised companies stand or fall by the quality of that system. Are you valuing and managing this precious resource in a way that produces superior value for customers and higher business returns for both franchisor and franchisees?

If you are overlooking the power of knowledge in your franchise, not only will you fail to catch the competitive wave that it offers - you may find your competitors have got way ahead of you.

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