Franchisee Selection for Social Franchising Success

Franchisee selection is a major input for franchising success. In this article, we argue that franchisee selection criteria do not differ between social and commercial franchising. They may be even more relevant for obtaining social franchising success. We discuss criteria for franchisee selection and present details of our multiple case study research to support the argument. Our study finds that evolved social franchisors do adopt similar selection criteria as commercial franchisees. In addition, constraints faced with franchisee selection among commercial franchisors are reflected also among social franchisors. We contribute to franchising literature by extending commercial franchisee selection criteria to social franchisee selection. A major managerial implication of this research is that existing franchising professionals could easily assist new social franchisors in developing their social franchisees. Future research could be study criteria weights and methodology adopted for making final selection. A new research direction could involve studying if selection criteria would differ based on (a) social cause and (b) franchisee location.     

Strategies for Business Format Franchisors to Expand into Global Markets

Abstract

Franchising is emerging as a highly effective strategy for growth, job creation, and economic development and is spreading rapidly around the globe. However, the pursuit of global markets by franchisors has traditionally relied on employing just three generic franchising options (i.e., direct franchising, master franchising, area development). This paper presents a more expansive view of strategic choice for franchisors by presenting first-mover, platform, and conversion strategies as additional strategic approaches that may be utilized to meet the challenge of expanding into international markets. Propositions are advanced to first suggest which strategic approaches aremost appropriate under varied foreign market conditions and then how these approaches should be linked to the three generic licensing options to create combination strategies based on franchisor experience/capabilities and similar/dissimilar markets. A contingency model of global franchising is presented, which depicts the above relationships and provides an overall framework that can assist franchisors in solving the foreign expansion and distribution question. Managerial and research implications are then provided.     

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.     

“Conflict-performance assumption” or “performance-conflict assumption”: Insights from franchising

Franchising is an organizational governance form where relational and formal contracts complement each other and where franchisor and franchisees together may obtain better performance than working alone. Although relational contracts may adapt to changing environments, they are not as efficient in ambiguous settings. In franchised stores, liability for low performance is not always clear. Indeed, franchisor and franchisees work in close collaboration, and, therefore, this ambiguity on causes of low performance may lead to conflicts. The franchising literature, as far as we know, has addressed practitioners' concerns regarding performance on one side, and conflicts on the other side, but no study has exclusively focused on low performance and the emergence of conflicts. Our research contributes to the franchising literature by filling this relative gap and, contrary to “conflict-performance assumption” (Pearson, 1973; Duarte and Davies, 2003) held in the broader context of distribution channels, we consider low performance to be a cause, rather than a consequence, of franchisor/franchisee conflicts. This empirical study deals with franchising in France, the leading market in franchising in Europe and the third largest in the world. We used a qualitative approach based on 44 in-depth interviews with 27 franchisors and executives/high-level managers of franchise chains, as well as 17 franchisees from various industries to get a dual, and so more complete, assessment of franchising practitioners' views of performance-related conflicts. Our research findings show that franchisees, as independent small business owners, give priority to financial results compared to other goals and they are driven to continuously improve the performance of their store(s). When expectations are not met, franchisees sometimes blame franchisors because they are interdependent in their success and liability is not straightforward. As a collaborative team, franchisors and franchisees may benefit from minimizing conflicts and preventing them with the careful selection and management of franchisees that share franchisor's values and have internal locus of control.     

Why franchise companies expand overseas

Business format franchising is becoming an increasingly international activity. From 1971 to 1985, U.S. franchisors added foreign outlets at a rate of 17% per year, almost twice as fast as they added domestic outlets (Aydin and Kacker 1990). As a result, by 1990 more than 350 U.S. companies had more than 32,000 franchised outlets overseas. By 2000, 60% of all franchisors in the United States are expected to have outlets overseas (Hoffman and Preble 1993).This study examines the 815 largest U.S. franchisors to understand what capabilities encourage them to expand overseas. It finds that the key capability that predicts the intent to expand overseas is superior capability to reduce franchisee opportunism. Franchisors who seek foreign franchisees have developed a greater capability to bond against and monitor potential franchisee opportunism. The data show that these differences are consistent across all industries in which franchising takes place.The results of this study indicate that foreign entrepreneurs can identify the American franchisors most likely to expand overseas by looking at their pricing structure and their monitoring capabilities. The easy identification of characteristics from which to find American franchisors will help to reduce the search costs of potential foreign franchisees. This reduction in search costs will make the establishment of international franchise relationships less expensive.This study also provides guidance to franchisors interested in expanding overseas. The results show how franchisors can structure their franchise relationships to reduce potential franchisee opportunism. This ability to reduce franchisee opportunism will make it easier for franchisors to enter high-growth foreign markets using the franchising business mode.This study also has implications for researchers. It suggests that international business research examine further the mechanisms by which firms make contractual modes of international business work. Whereas many firms may internalize international market transactions under conditions likely to lead to market failure, the large number of franchisors who use franchising as an international expansion mode despite conditions of market failure suggests that more attention be paid to mechanisms that companies can use to reduce the probability of failure of international contractual transactions. By helping to explain how franchisors monitor foreign franchisees or bond them against opportunistic behavior, this study suggests that the international business literature develop a more complex understanding of the workings of international business transactions than the simple choice of internalization or contractual entry modes.     

Brand equity heterogeneity among strategic groups in service franchising

Independent franchisees work cooperatively with service franchisors to strengthen the franchisor's brand name. However, agency theory predicts that franchisor inputs such as brand names and operational routines might be harmed by franchisees' free riding. In addition, previous literature has addressed the issues of strategic group emergence and performance differences between groups in recent decades. Thus, this study builds upon an emerging symbiotic view of franchising behind agency theory and incorporates a strategic groups level of analysis to investigate whether franchisees have strong incentives to maintain standards as franchisor seeking market penetration. By investigating potential brand equity differences among service franchisors for Taiwanese telecommunications service chains, this study found that different strategic groups exist in service franchising chains. From replication testing, the current results demonstrate that service franchising brand equity heterogeneities exist among franchisors within and across strategic groups. Therefore, this study broadens agency theory's explanation of service franchising.     

Resource Scarcity and Agency Theory Predictions Concerning the Continued Use of Franchising in Multi-outlet Networks

A study of 439 franchisors was conducted to identify factors influencing changes in their propensity to franchise. Consistent with agency theory, franchisors with wide multinational scope were increasing their proportion of franchised outlets whereas franchisors with large outlets were emphasizing firm ownership. As predicted by resource scarcity theory, franchisors were decreasing their proportion franchised as they grew in size, although most of the decrease occurred while firms were relatively small. In contrast to resource scarcity theory, franchisors increased their proportion franchised over time. Key implications are that both agency and resource scarcity theories are needed to explain franchising, but perhaps future research should look beyond resource scarcities toward resource-based capabilities to better explain franchising decisions.     

Corporate Social Responsibility in franchise chains: Specificities,insights from French franchise chains’ CSD,and avenues for future research

Although franchise chains are increasingly committed to environmental, social, and societal transitions, only a few researchers have focused on Corporate Social Responsibility (CSR) in the specific case of franchising. The aim of our paper is to discuss the specificities and challenges of CSR in franchising, explore how franchisors report on their sustainable practices, and emphasize subsequent directions for future research. In order to do so, we focus on the Corporate Social Disclosure (CSD) practices of twenty-two retail and service franchisors operating in the French market where regulations of non-financial information disclosures exist for large companies. Our findings show that these franchisors disclose rich and diversified information about their CSR activities. However, franchisors’ disclosures can vary significantly, especially depending on their chain size and whether they are subject to reporting regulations. Our research contributes to the literature on CSR in franchise chains, as well as the practice.     

Foreign ownership strategies of UK and US international franchisors: An exploratory application of Dunning's envelope paradigm

In industries dominated by franchising as the dominant mode of entry there is a tendency that franchisors pursue different ownership strategies. We test ownership strategies of international franchisors using Dunning's ‘envelope’ Ownership, Location and Internalization (OLI) paradigm. The ownership choices of international franchisors’ foreign market entry based on the strategic intent of exploitation and exploration are well explained by Dunning's ‘envelope’ OLI paradigm. Our results show that the dynamic L advantages (perceiving foreign locations as a source of learning), the static O advantages (nationality of the firm) and static L advantages (the role of foreign applicants) have a significant influence on the selection of foreign entry strategy by international franchisors.     

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.     

Changing barriers to the internationalization of franchising operations: Perceptions of domestic and international franchisors

This study examines factors that inhibit the internationalization of franchising operations. The factors are classified along the dimensions of importance and difficulty. The perceptions of domestic franchisors and international franchisors are compared. The results indicate that different factors inhibit internationalization of franchising efforts depending upon the stage of the franchising process. Comparisons of the results with previous studies indicate that significant changes have occurred in the perceived importance, changes which are understandable in light of changes in franchising practices as well as changes in the international environment. © 1995 John Wiley & Sons, Inc.     

Examining strategic and economic development implications of globalising through franchising

This paper addresses the strategic and policy implications of franchise system expansion overseas. The study is based on survey data of 76 Mexican buyers of US franchise systems and information provided by seven directors of national franchise associations from both industrialised and developing countries. Globalisation, economic liberalisation and advances in communications provide strong incentives for franchising firms to seek access to foreign markets. This work delineates the conditions that favour, and that work against, international expansion of franchise networks from the perspective of franchisors, local franchise buyers and policy makers. The study questions the commonly held notion that franchising is consistent with successful firm strategies and the economic development goals of governments.     

Barriers to Franchising in Saudi Arabia

Franchising has rapidly grown in Saudi Arabia since 2005, yet a small number of the large companies dominate the market with mostly foreign brands. Therefore, the aim of this study is to investigate the barriers that Saudi small and medium enterprises and startups face when striving to become franchisors or franchisees. These barriers are investigated through the use of semi-structured interviews with people who belong to the franchise community either as administrators, franchise committee members, franchise developers, franchisees–franchisors, or prospective franchisees and franchisors. The results of this study show that there are several barriers standing against using franchising as a mode of expansion and investment by small and medium enterprises and startups, such as lack of legal, financial, institutional, marketing, development, and educational services support, and other key factors related to international franchisors' preferences and domestic franchising.     

Franchising choice in retail networks: a multi-level institutional framework

Franchising is one of the most dynamic forms of organization for retail networks. Conceptualized as a hybrid form by transaction cost theory, franchising outlets are supposed, in the long run, to be bought by franchisors in order to capture residual rents. However, franchising persists a long time and still represents one of the favorite means to cover territories. This article suggests that this persistence of franchising in the organization of retail networks can be explained by institutional theory. The article also argues that institutional forces exert their influence at multiple levels. Based on this, a set of seven research propositions are developed, setting out a research agenda in this area.     

Can franchising be an economic development strategy? An empirical investigation

Prior research has examined why franchisors expand abroad, but no paper has empirically examined the role of franchising in the macroeconomy of developing nations. In this paper, the pattern of franchising development is statistically analyzed within the context of the general economic development of Latin America. It is found that franchising leads, rather than follows, economic development. Implications for theory and policy are considered.     

Criteria used in the selection of franchisees: an application in the service industry

The service industry is one of the greatest driving forces behind the growth of franchising in many countries. The aims of this study are to identify the characteristics of the franchisee profile preferred by franchisors in the service industry and to show how the simulation of franchisees with conjoint analysis constitutes a powerful tool for the correct selection of franchisees by franchisors. Criteria that franchisors in the service industry look for in franchisee candidates are ranked by importance using conjoint analysis; a decomposition methodology that is rarely used in this field. The value of the paper is significant as it provides a practical framework for franchisors for the selection process of franchisees when choosing from a group of potential franchisees.     

Franchise management capabilities and franchisor performance under alternative franchise ownership strategies

Franchising is a key entrepreneurial growth strategy, but a well-known downside is franchisee free-riding. Drawing upon alliance capabilities research, we describe franchise management capabilities and suggest that they are one way franchisors reduce free-riding and thus enhance performance. We also submit that these capabilities are especially helpful for “plural form” franchisors who own outlets in parallel with franchisees. Using a sample of 229 franchisors, we show that franchise management capabilities relate positively to franchisor performance among plural form franchisors. For “turnkey” franchisors who franchise all, or almost all, outlets these capabilities relate indirectly to performance through lower opportunism and improved brand reputation. Franchise management capability is therefore an important new theoretical construct linking franchising to franchisor performance.     

Franchisor strategy and firm performance: Making the most of strategic resource investments

A key decision for entrepreneurs in many retail and service firms is whether, and how much, to use franchising. If the decision is made to franchise, the actor may assume one of two “identities” or tactics: (1) the “chain builder,” who uses a blend of company and franchised outlets, and (2) the “turnkey,” who sells business opportunities but does not own any outlets. To benefit from their chosen strategy, franchisors must put resources in place to support it. We argue that franchisors use the chain building strategy to strike a balance between standardization and innovation by building resources that foster trust and encourage knowledge sharing with franchisees. In contrast, for turnkeys, a valuable set of operational routines is the critical strategic resource. To better appreciate how franchisors choose between the chain builder and turnkey strategies, we gathered survey information from 263 franchisors. Via this data, and as described herein, we learned that franchisors perform better when they invest in resources that best support their selected strategy.     

Multi-unit franchising: Growth and management issues

Entrepreneurs in a number of retailing sectors have eschewed the creation of company-owned chains and have embraced franchising as a preferred method for growing their businesses. There have been two leading reasons proposed for this preference. First, that franchisees provide the financial capital necessary for expansion, and second that franchisees manage the outlets better than company employees would if the unit were company owned. Interestingly, although many entrepreneur/franchisors confirm the relevance of the capital acquisition argument in their decision-making, theoretical analysis has discounted its importance. Instead, researchers have focused on the incentives of employee store-managers to misrepresent their ability and their effort as the dominant impetus behind franchising. Misrepresentation by employees as to ability and effort imposes costs and inefficiencies on the entrepreneur's chain. Arguing that franchising solves these problems by having the stores managed by persons with claims to the profits, these researchers have, by and large, rejected the capital acquisition argument for franchising in favor of this incentive-based rationale.Within this view, multi-unit franchising presents a curious anomaly. Multi-unit franchising, either through the incremental expansion by the franchisee one unit at a time or through the rights to open multiple units contained in an area development agreement, creates a collection of mini-chains within the franchise system. These mini-chains are operated by employee store-managers. Of course, they are employees of the franchisee, but they are employees nonetheless, and as franchise researchers have traditionally argued regarding the entrepreneur's employees, they will have incentives to misrepresent their ability and effort. Moreover, multi-unit franchising is ubiquitous.If multi-unit franchising is at odds with the incentive rationale for franchising, and it has a positive association with the growth of franchise systems, it must be providing the entrepreneur with some other benefit. In this study, we argue that the benefit it provides is access to capital. Through a study of fast-food franchise systems, we demonstrate that the more a chain engages in multi-unit franchising (i.e., the greater the proportion of multi-unit franchisees it has), the faster it grows, even faster than franchise systems generally. Moreover, we show that the level of commitment franchisors feel toward continuing to franchise is negatively related to the average number of units per franchisee and negatively related to their ability to obtain financial capital elsewhere. In other words, although multi-unit franchising helps an entrepreneur grow his or her business by providing increased access to capital, store level incentive problems get increasingly troublesome as franchisees get more and more units. It would appear, therefore, that capital acquisition is a relevant reason for engaging in franchising after all.     

Franchising versus corporate ownership: The effect on price dispersion

This paper uses data on the prices charged at fast-food restaurants in the metropolitan Pittsburgh and Detroit areas to assess the effect of franchising on price dispersion within chains in fairly narrowly defined geographical areas. A review of reasons why firms may face more price dispersion under franchising guides the empirical analyses. Results indicate that 1) franchisors do not aim for fully uniform prices even on the corporate side of their chains, 2) the degree of price dispersion is highest for firms with both franchised and company-owned units, as predicted by models implying a systematic price differential between units operated under these different contracting mechanisms, and 3) price dispersion for fully franchised chains is greater than for fully corporate chains. These last two results, combined with evidence from court cases that franchisors sometimes try to control franchisee prices directly, suggest that franchisors indeed lose some amount of control over prices charged to customers when they use franchising as opposed to corporate ownership. Finally, I find a positive effect of the royalty rate on price dispersion. This suggests that double marginalization is behind at least some of the higher prices found in franchised units in the existing literature.