Toward a theory of conflict in the franchise system

A focused review of the literature is presented in support of a definition of franchising as an interorganizational form examined from the entrepreneurship perspective. Then, microeconomic and relational exchange theories provide guidance within a transaction-cost economics theoretical framework to begin the formulation of a theory of conflict in franchising. The analysis provided in this article involves business format franchising.We submit that the essential core and uniqueness of business format franchising is the relationship between the franchisee and franchisor. Our definition of franchising requires a review of individual franchisee and franchisor organizational structures. Therefore, our theoretical analysis begins with a fundamental look at the economic structural differences of the average franchisor and franchisee firms, using microeconomic theory. This review points to the potential for conflict in profit-maximizing behavior between franchisee and franchisor. The likelihood is that the differences in behavior will manifest in pricing, promotion, and new store development.Next, because most business format franchising is contractually based and long-term, we investigate the theoretical support for establishing and continuing a relationship with fundamental areas of conflict. Relational exchange theory is used for this analysis.Transaction-cost economics provides a perspective on the governance of the interorganizational form and guides us in the investigation of the ongoing state of the relationship. A key to transaction-cost analysis is shared assets in the relationship and the degree of transferability of those assets. Therefore, building and maintaining the franchise trademark becomes the theoretical focus for governance of the relationship. We propose that franchisor-provided services is the principal method of franchisor contract fulfillment and is the framework for informal governance of the relationship. The importance and adequacy of the transactions between the franchisee and franchisor affect the perceived value of the trademark and are key to continuing the franchise relationship.Finally, the conflict literature is briefly reviewed to provide a context for the discussion of conflict in franchising and to illustrate that conflict can have a positive or negative effect on the relationship.     

企业间销售线索分享是多多益善吗?——基于特许经营渠道关系的实证研究

现有的企业间营销渠道信息分享研究主要关注宽泛层面的信息分享,很少关注越来越普遍的销售线索分享及其独特性。基于汽车特许经营渠道中300家4S店的实地调研数据,从特定类型的信息分享视角实证分析,发现仅仅增加特许人分享的销售线索数量会降低受许人对销售线索的使用效果;特许人分享的销售线索丰富度(拉力)可以扭转特许人分享的销售线索数量对销售线索使用效果的负面效应,而特许人的监控(推力)却不能弱化其负面效应;通过强化受许人对销售线索的跟进,特许人分享的销售线索丰富度提升了受许人对销售线索的使用效果。上述结论有助于未来研究细分企业间信息分享的类型,为有效提升信息分享效果提供更为深刻的洞察;通过将销售线索区分为两个维度(信息数量和丰富度),识别出不同维度信息量作用的差异,有助于推进渠道企业间信息分享研究。     

Identity in Franchise Systems: The Role of Franchisee Associations

Utilizing theories of identity this article presents findings from a qualitative study regarding the significant role independent franchisee associations play within franchise systems. The data reveal that successful franchisee associations help manage the inherent tension that exists between cooperation and conflict in franchise relationships. A distinctive adaptive organizational identity provides an association the capability necessary to reframe its relationship with the franchisor as either combative or cooperative in response to changes in a franchisor's identity. Challenging the views of both franchisor stability and the dyadic form that franchisee–franchisor relationships assume, behavioral insight is provided into the actual functioning of franchise systems and new avenues are suggested for theory building in franchising.     

The Effects of Standardization and Trust on Franchisee's Performance and Satisfaction: A Study on Franchise Systems in the Growth Stage

Franchise systems aim to capitalize on both economies of scale and the benefits derived from localized operations. Although franchisees can be considered small businesses with some independence and local knowledge, compliance with system standardization may be critical to achieving scale benefits, as well as realizing and then maintaining the desired image during the growth stage of the franchise life cycle. However, standardization requirements from the franchisor demand that franchisees make specific investments in the system, which make franchisees more vulnerable to the franchisor. Therefore, whether a franchisee can trust the franchisor becomes an important factor that facilitates the relationship between standardization requirements and franchisees' overall sales and service performance in the market. This research focuses on franchisees in a growing franchise system and examines how the standardization requirements, trust in the franchisor, and the interaction term affect the sales and service performance of a franchisee and ultimately the franchisee's satisfaction. The findings support the hypotheses that, first, the standardization requirements positively affect both sales and service performance. Second, trust not only has main effects on satisfaction and performance constructs but also moderates positively the relationships between standardization requirements and sales/service performance.     

A model of trust and compliance in franchise relationships

Despite the danger of franchisee non-compliance as a severe impediment to overall franchise operation and performance, there is currently minimal understanding of the key factors that lead to these behaviors. Using a foundation of relational exchange theory, we construct and test a model that demonstrates how two distinct forms of trust, based upon perceptions of franchisor integrity and franchisor competence, are critical to explaining the roles that relational conflict and satisfaction play in influencing franchisee compliance. Implications of these findings are then demonstrated to have compelling relevance to the effective management of franchise systems.     

When the Music Stops Playing: Post-litigation Relationship Dissolution in Franchising

Franchise relationships engender franchisor–franchisee conflicts and are prone to premature dissolution. Building on agency theory and institutional theory, this study examines what specific reasons – from both franchisors’ and franchisees’ perspectives – may cause post-litigation relationship dissolution (PLRD) and how franchise regulations moderate these relationships. We argue that both franchisor and franchisee may misrepresent themselves before their relationship begins (adverse selection) and behave opportunistically after the contract is signed (moral hazard), that is, ‘dual agency’. Based on 20-year archival records of franchisor–franchisee relationship histories gleaned from multiple data sources, we found that PLRD is likely to be caused by franchisors’ passive moral hazard and by franchisees’ active moral hazard. In addition, franchisor adverse selection has a greater impact on PLRD than franchisee adverse selection. With regards to regulatory influences, the presence of relationship law weakens the impact of franchisees’ passive moral hazard, but not their active moral hazard, on PLRD. Contrary to what we hypothesize, the presence of registration law amplifies the impact of franchisee adverse selection on PLRD. Ultimately, this study creates a better understanding of the antecedents and curbing mechanisms of PLRD in franchising.     

Antecedents of early terminations in franchising: franchisor versus franchisee cancelations

Franchisors capitalize on franchisee entrepreneurial capacity to grow. However, enabling franchisees to develop their ventures may damage system consistency. This dilemma makes conflict particularly prevalent in the field of franchising. Nevertheless, prior research has reported an incomplete picture of factors leading to serious disagreement and premature termination in franchise partnerships. We address this gap, first, by adding the entrepreneurial autonomy of franchisees as a relevant but underexplored source of conflict and, second, by providing a more fine-grained analysis of franchisors’ versus franchisees’ drivers of termination. Specifically, we focus on the controversial issues of pricing and local advertising policies and analyze how expanding franchisees’ entrepreneurial autonomy in these decision areas is related to contract terminations depending on who ended the relationship (the franchisor or a franchisee). The study also highlights less controversial requirements and conditions (e.g., upfront investments, franchisor experience …) that may reduce early terminations. Our empirical objectives are met by using survey data from a sample of franchisor companies. The results show how the performance outcomes of entrepreneurial autonomy differ depending on the decision area in which it is exercised. Results also throw light on the consequences of various critical franchise policies that may be masked if both types of termination (franchisors vs. franchisees) are considered together.     

An Empirical Analysis of Franchisee Value-in-Use, Investment Risk and Relational Satisfaction

An exchange perspective of franchising recognizes the important role that both the franchisor and franchisee assume in developing and maintaining sustainable relationships. However, should franchisees not perceive value in the quality of provided products or services, some incentive misalignment between agent and principal is likely (e.g. free riding, non-compliance with system standards), potentially resulting in greater perceptions of financial risk, diminished levels of franchisee satisfaction, reduced unit performance and conflict ( [Harmon and Griffiths, 2008] and [Kaufmann and Dant, 1998] ). A greater understanding of franchisee perceptions of value is very important if ongoing satisfaction in the franchising relationship is the goal. This paper, therefore, makes a significant contribution to such an understanding by empirically testing the dimensions of value that influence franchisee perceptions of risk and relationship satisfaction. Moreover, we make important comparisons across gender, the results of which provide rich information. In theoretical terms, we advance the literature in the context of value and franchising and, in practical terms, the results, by managing for performance (financial risk and relationship quality), assist franchisors in developing, delivering and managing what is of value to their franchisees. Furthermore, the findings of this study provide a solid platform for future research in this area.     

Combined effects of franchise management strategies and employee service performance on customer loyalty: a multilevel perspective

Although franchisee performance is likely to be influenced by franchisors’ management strategies, little is known about whether and how franchisors’ strategies affect franchisee employees’ performance. This study examines the combined effects of three franchisor management strategies, namely innovative culture, support services and autonomy on service performance of the franchisee store employees and the loyalty of their customers. Data were collected from a total of 38 employees and 679 customers of 25 franchisee stores. The study employs multilevel analysis on a nested data-set created by matching customer data with employee data for each store. The results reveal that customer loyalty of a franchisee store is positively influenced by the service performance of its employees and the support services received by the employees of the store from its franchisor. On the other hand, it has been found that franchisor management strategy such as innovative culture and autonomy negatively influence customer loyalty of the franchisee store. The paper discusses relevant theoretical and managerial implications of the findings.     

Antecedents leading to perceived franchise support

Abstract

Franchising is an important part of the U.S. economy. According to the International Franchise Association (IFA), franchising provides 9.0 million jobs and pays out 351 billion dollars in wages and benefits annually (2016). This study examines franchise relationships in the context of building franchisees’ perceptions of support from the franchisor. The literature was examined to determine if and what support provided by the franchisor has a positive impact on the franchisee. We examine four dimensions of organizational climate (i.e., initiating structure, leadership consideration, autonomy, and reward orientation), brand value/recognition and franchisee’s perception of the quality of the franchisor’s advertising as predictors of perceived franchise support. This study indicates there is a positive and significant impact between three types of organizational climate (i.e., leadership consideration, autonomy, and reward orientation). In addition, a positive impact to brand value recognition on perceived franchise support and a negative effect on initiating structure.     

NAFTA and franchising: A comparison of franchisor perceptions of characteristics associated with franchisee success and failure in Canada,Mexico, and the United States

Business-format franchising, which includes the product or service, the brand name or trademark, and the operating system developed by a franchisor, has experienced significant growth over the past few decades. International franchising also is growing at a rapid pace, in part, because of market opportunities that include new trade agreements. The debate over North American Free Trade Agreement (NAFTA) increased the focus on North American franchising. In spite of this attention, there are few, if any, comparative studies of franchising in Canada, Mexico, and the U.S.At the same time that international franchising growth is extolled, there is an argument over the extent to which franchising increases business success. A number of studies support the success thesis, however, recently critics claim that franchising does not significantly increase survival rates of franchisee-owned units.The objectives of this study are, first, to extend the study of franchisee success and failure by analyzing franchise executives' perceptions of the importance of a number of characteristics associated with franchisee success and failure, and second, to examine differences among the executives' perceptions of these characteristics based on the location of the franchisor—Canada, Mexico, or the United States. We also analyze the effects of franchise strategy, type of franchise business, and size of the franchise on executive perceptions of the characteristics associated with franchisee success and failure.Franchisor executives rated the relative importance of 39 statements, taken from previous research, that are associated with perceptions of success. Results from a factor analysis indicate that 30 of the variables load on 5 significant factors. Examination of the content of the factors indicates that the first factor (system quality), and the second factor (brand name) consist of variables that directly relate to the core of business-format franchising, the quality of the operating system and the brand name of the franchise. The third factor (local environment) consists of statements that represent general characteristics of the local franchise environment. The fourth factor (communication) consists of variables that link the franchisee with the franchisor and other franchisees. The fifth factor (franchise activities) consists of variables that represent idiosyncratic characteristics or activities of a franchisee. Franchise executives also rated the relative importance of 16 statements associated with franchisee failure. Of these, 6 statements, associated with franchisor activities, are combined to form a scale of franchisor failure, and 10 statements, associated with franchisee activities, are combined to form a scale of franchisee failure.The findings indicate that there are significant differences in most of the scales of success and failure among franchisor executives' perceptions based on country location. In addition, there is also a significant effect of franchise strategy on perceptions. There are no significant differences by type of franchise business or size of the franchisor.This research contributes to two important areas of research in franchising; the study of perceptions of the characteristics associated with franchisee success and failure, and international franchising research. The study also has practical applications. Knowledge about country differences in perceived characteristics of success and failure will help franchisors to identify aspects of the business system that require increased monitoring and investment. Awareness of country differences will also influence the selection of relevant training and development. Finally, knowledge of differences in perceptions may assist franchisors in adapting systems and policies that are likely to increase the success of their international sites.     

Antecedents and effects of free riding in the franchisor–franchisee relationship

This field study investigated contextual antecedents of free riding by franchisees on franchisor brand reputation and effects of free riding on performance in a multinational corporation's franchising network. Structural elements (increased formalization, decentralized decision-making), interactions between franchisor representatives and franchisee dealers, and market-related factors (external competition) were associated with lower levels of franchisee free riding. The findings also indicated that free riding has deleterious effects on franchisee performance. The results support theoretical arguments that both economic and social exchange perspectives are valuable in examining free riding and provide important practical guidance in designing and managing franchise systems.     

Franchisee Associations: Strategic Focus or Response to Franchisor Opportunism

This article examines some of the antecedents, processes, and effects of independent franchisee associations (IndFAs) and the reactions of franchisors to their organization. Specifically, we draw on various literatures to pose propositions relating to the following research questions: (a) Are there fundamental differences between associations whose focus is based on disagreements relating to strategic actions of the franchisor and those whose focus is perceived opportunistic behavior on the part of the franchisor? (b) Does the way these IndFAs are treated by the franchisor—after inception—affect members' identification with the group and/or franchisor? (c) Does the existence of a franchisee advisory council influence the willingness of a franchisor to legitimize an IndFA? (d) How does the size of the IndFA influence identification? We then present a conceptual model and use two illustrative examples from the business literature to explore our propositions.     

The effect of organizational context on entrepreneurial strategies in franchising

Franchising systems play a vital role in the creation of new jobs and economic development. Although the role of the franchisor as entrepreneur is generally assumed, there has been limited research on the conduct of entrepreneurial activities in the franchising system as a whole. In particular, researchers and practitioners need to better understand the influences of organizational context on entrepreneurial activities system-wide.The research reported in this article examines the influences of the organizational context of the franchisor on the entrepreneurial strategies of franchisors, their innovation efforts, and franchisor support of entrepreneurial activities by franchisees. Specifically, this study examines how the organizational context variables of size, age of the franchise, its growth rate (both absolute and relative), and time in franchising affect franchisee perceptions of entrepreneurial strategies of their parent franchisor, their innovation efforts, and franchisor managerial support for entrepreneurial activity and innovation by the franchisee.Franchisee perceptions of their parent franchisors’ entrepreneurial strategies were assessed with respect to four dimensions identified in previous research as central to an entrepreneurial orientation: low concern for stability, willingness to take risks, aggressiveness in competition, and proactiveness (in seeking new opportunities). Innovation by franchisors was measured with respect to introduction of new products and techniques.Drawing on research that emphasizes the importance of instituting special organizational devices and rewards and recognition systems for promoting entrepreneurial activity, franchisor support for franchisee entrepreneurial activity and innovation (e.g., the development of new products and services, new techniques to improve customer service) was measured by the importance franchisees assigned to the use of a franchise council, the recognition of new ideas at the annual meeting of the franchise system, and the presence at franchisor headquarters of a champion for innovation.Consistent with other studies examining the influence of organizational context, it was hypothesized that organizational size and age would be negatively related to franchisee assessments of entrepreneurial strategies, the introduction of new products and techniques, and franchisor managerial support for franchisee entrepreneurial activity and innovation. In contrast, rapid growth was hypothesized to be positively associated with entrepreneurial strategies and support for franchisee innovation. No hypotheses were proposed with respect to time in franchising.Results of the study showed, as hypothesized, that franchisor size was associated with a concern for stability and strategies that were risk averse, cooperative, and reactive rather than proactive. However, size was positively associated with the frequent introduction of new products and also positively related to franchisor support for franchisee innovation. Contrary to expectations, age was positively associated with entrepreneurial strategies including a low concern for stability and an aggressive style of competition. In addition, age was positively associated with the introduction of both new products and new techniques. Relative growth, rather than an absolute rate of growth, was associated with all of the entrepreneurial strategies except risk-taking as well as with the frequent introduction of new products. Although no hypotheses were proposed for time in franchising, the findings show that it is associated with a greater concern for stability as well as the infrequent introduction of new products and techniques.The findings from this study suggest that franchisors need to institute measures to counteract the potentially deleterious influences of franchise system size on the entrepreneurial orientation within their franchising systems. It also suggests the resources of a large organization need to be combined with the flexibility of smaller units for competitive advantage. Entrepreneurial activity by franchisors and franchisees implies a partnership in adapting to the environment and can provide a competitive advantage. The challenge for franchisors will be managing new ideas from the field and adapting to a competitive environment while at the same time preserving the integrity of the franchising system.     

Are Franchisors with International Operations Different from Those Who Are Domestic Market Oriented?*

This study compares franchisors with international operations with franchisors who are domestic market oriented. Using the existing literature, the author develops various hypotheses and tests them on a sample of 420 franchisors. Findings indicate that franchisors seek international markets after they have saturated domestic markets. Monitoring experience of a franchisor is positively related to the likelihood that a franchisor operates internationally. No differences in franchisee fee were found between franchisors who operate in domestic markets exclusively and those with international operations. Franchisors with international operations have lower royalty rates compared with those that do not.     

Does the Franchisor Provide Value to Franchisees? Past,Current, and Future Value Assessments of Two Franchisee Types

The degree to which a franchise system penetrates a target market over time often is influenced by the rate to which its individual franchisees expand. Yet a franchisee's decision to expand the business operation depends, in part, on the perception of value that the franchisee expects to receive from the franchisor in return for a variety of fees (for example, entry fee, advertising fees, royalties). Moreover, the franchisee's experience with its franchisor may strengthen or weaken his or her perception of franchisor value. The change in perception of franchisor value can influence franchisees' decisions to expand their franchise operations. To date, scant research exists on factors influencing a franchisee's decision to expand. In the reported study, a four-stage analysis was conducted to examine empirically whether franchisees' opinions about the value of their franchisors changes over time. The study findings reveal that franchisees had the strongest, positive opinions when asked to recall an earlier decision to expand their franchise operations. These opinions weakened when franchisees contemplating expansion of their operations were asked for their current and anticipated future opinions of franchisor value. Overall, franchisees were undecided when asked about their perceptions of current franchisor value and anticipated future franchisor value. Implications of these findings for theory and practice of franchising are discussed.     

Strategic Debt in Vertical Relations: Evidence from Franchising

In this paper, we examine the strategic use of debt in franchise organizations. We focus on both the franchisee's and the franchisor's capital structures. The primary goal of this study is to examine whether franchisors impose limits on franchisees’ debt levels to be able to increase their own leverage. We find that the franchisor's leverage is significantly related to the maximum leverage allowed for the franchisee. As the franchisor sets an upper limit on the franchisee's debt ratio, the franchisor can raise more debt and therefore seizes tax benefits, since interest payments are tax deductible. We find that this effect is stronger in chains with larger fractions of franchised outlets.     

Human resource management standardisation and adaptation in franchises

Franchising is synonymous with standardisation and control, to achieve system-wide efficiencies and consistency in the brand image. Scholarly literature on human resource management (HRM) in this context has, to date, been relatively one-dimensional, discussing standardisation of HRM from the franchisor’s perspective with insufficient consideration of the role and experiences of franchisees. This article seeks to extend the concept of core and peripheral franchising components to HRM activities, presenting findings from a three-case study of Australian coffee franchises. The findings suggest reframing HRM in franchises as two separate but potentially overlapping systems managed by franchisor and franchisee, with core and peripheral elements that may or may not align. Subsequent outcomes of misalignment for the franchise relationship are considered, and resulting franchisee HRM behaviours are illustrated in a Franchisee HRM Response Matrix.     

Franchising and the domain of entrepreneurship research

In this essay, we explore the relationship between franchising and entrepreneurship in general, and their research domains in particular. We begin by categorizing the focus of various representative definitions of entrepreneurship as: (1) traits, (2) processes, or (3) activities, and adopt the view that identifying the unique research domain of entrepreneurship is a more worthwhile endeavor than attempting to reach definitional consensus. We subsequently discuss the differences between entrepreneurship in the manufacturing and retailing contexts, and the particular features of franchising as it relates to the study of retailing entrepreneurship. Specifically, four areas are examined: the franchisor’s role in creating an innovative concept, the franchisee’s role in bringing the franchisor’s concept to new markets, the franchisee’s acceptance of risk, and the special issues surrounding the pervasive practice of multi-unit franchising. We conclude with a brief discussion of the reasons for including the study of franchising, franchisors, and franchisees as integral areas within the distinctive domain of entrepreneurship research, and similarly exhort franchising researchers to explore the implications of their work for the study of entrepreneurship.     

Franchisor-franchisee relationships in quick-service-restaurant systems

A franchisor has considerable power over its franchisees. The manner in which that power is wielded affects both franchisee satisfaction and financial results.