An Analysis of Advertising Payments in Franchise Contracts

ABSTRACT

National advertising is an important ongoing marketing activity in a franchise arrangement. A majority of franchisors require franchisees to pay an advertising royalty as a percentage of gross revenues while some require franchisees to pay a fixed advertising fee. These payments are earmarked for national advertising. We investigate the relationship between the franchisor's profits and the different types of advertising payments in franchise contracts. Our model incorporates the idea that the franchisor and franchisee are in an ongoing relationship where there is demand uncertainty. We show that specification of an advertising payment in the form of a fixed fee or a royalty is better than no specification since it commits the franchisor to invest the payments in advertising. We demonstrate that the advertising royalty specification is more flexible since it permits the advertising expenditure to be adjusted based on information that is not available at the time the contract is written.     

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.     

But you promised! Managing consumers’ psychological contracts

In management literature, a psychological contract generally refers to an employee's beliefs about the reciprocal obligations that exist between him or her and an organization. Legal contracts, on the other hand, are agreements that create obligations between the parties that are enforceable by law. Psychological contracts are different from legal contracts in that they are characterized by the belief that both parties have entered into a set of mutual obligations. While marketing scholars and practitioners have largely overlooked the notion of psychological contracts, this article argues that a firm's customers might view the promises they believe a firm has made to them as psychological contracts. Psychological contracts are as relevant to marketing as they are to management. This article expands the notion of psychological contracts to marketing relationships and outlines internal and external strategies firms can employ to manage psychological contracts more effectively.     

Setting Boundaries Rather than Imposing Bans: Is it Possible to Regulate Consumer Arbitration Clauses to Achieve Fairness for Consumers?

The benefits of arbitration as a form of alternative dispute resolution in business to business disputes, particularly international business to business disputes, are well recognized and will be discussed in this article. Concerns arise, however, where arbitration is sought to be imposed as a method of dispute resolution upon consumers, through the inclusion of arbitration clauses in consumer contracts. Whilst there is a body of literature which argues strongly against the enforceability of arbitration clauses in consumer contracts, there is little consideration in the literature as to the possible benefits of consumer arbitration which might warrant enforceability within particular regulatory boundaries. To date, the pro-arbitration stance taken by some commentators and courts is premised on freedom of contract arguments rather than consumer benefit. This article will explore whether it is possible to overcome a number of the current concerns regarding the use and enforcement of consumer arbitration clauses through constructing a regulatory framework which will give rise to a fair alternative dispute resolution mechanism for consumers. The article will begin by exploring the current context which includes limitations upon the arbitrability of consumer disputes in a number of jurisdictions. It will then go on to consider what might be the benefits of facilitating consumer arbitration as a mechanism for alternative dispute resolution, particularly in the context of international consumer disputes. The article will then outline a range of concerns regarding the perceived unfairness of consumer arbitration and will draw upon current and potential regulatory models to consider ways of addressing those concerns. The article will conclude with recommendations for a regulatory model designed to facilitate fair consumer arbitration.     

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.     

A perspective on franchising: The design of an effective relationship

Franchise relationships are based on the potential for greater gains through groin membership; the very nature of this relationship raises questions concerning latitude for independent action and constraints on decision authority. Key issues concern the degree of autonomy the franchisee should have, the nature of the franchise contract, and the management of conflict. The authors conclude that there is little or no virtue in a high degree of franchisee autonomy; that the inherent dangers of power concentration can be minimized via appropriate contract design; and that one critical aspect of the channel administrator's task is intelligent handling of conflict, particularly situations that can impair efficiency.     

论特许经营的收费结构

用资产所有权的观点来分析特许经营关系中加盟费和特许使用费的收费结构,认为加盟费和特许权使用费的收费结构取决于特许者和被特许者之间的无形资产的分配。与行销理论相反,资产所有权观点提出了加盟费和特许权使用费之间的一种正比关系。我们收集了上海地区特许经营部门的有关数据对该假设进行验证。     

Ties that Unwind: Dynamism in Integrative Social Contracts Theory1

Social contract theory offers a powerful method and metaphor for the study of organizational ethics. This paper considers the variant of the social contract that has arguably gained the most attention among business ethicists: integrative social contracts theory or ISCT [Donaldson and Dunfee: 1999, Ties That Bind (Harvard Business School Press, Boston)]. A core precept of ISCT – that consent to membership in an organization entails obligations to follow the norms of that organization, subject to the moral minimums of basic human rights – is a reasonable and appealing notion. One potential challenge for those attempting to apply this idea, however, lies in the dynamic nature of social norms. Organizational norms evolve, often through the conscious efforts of community members and leaders. As currently formulated, ISCT offers a framework that under-appreciates the evolving nature of moral norms. In this paper, we extend ISCT by considering the circumstances under which the terms of and parties to social contracts change. We also consider a number of principles that should be considered as the terms and parties to organizational social contracts change.     

A mutuality perspective of psychological contracts regarding career development and job security

Psychological contracts are more likely to be fulfilled when the parties to the contract develop mutuality (agreement) concerning the expectations and obligations of both parties. This study explores the impact of psychological contract mutuality about career development responsibility and job security on the in-role and organizational citizenship behavior (OCB) performance of employees. These relationships are also tested to see if they vary by the managerial vs. non-managerial job level of the employee.     

论近代藏边民族纠纷解决中的自力救济方式——以拉卜楞寺与周边土司纠纷解决为例

近代藏边民族纠纷解决中的方式很多,与外界参与解决相对应的即是通过纠纷方自身努力而解决的方式,这种方式称之为自力救济方式。拉卜楞寺与周边土司经常产生各种纠纷,如拉卜楞与墨颡土官和卓尼杨土司产生纠纷后,政府或其他民间力量也参与了解决的过程,但主要的方式是通过纠纷主体的自力救济的方式解决的。用自力救济的方式解决社会纠纷表现出宗教性、非暴力性的特点。     

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.     

Evidence-Based Electronic Contract Performance Monitoring

One aspect of the development of e-market services for the facilitation of business-to-business electronic commerce concerns the provision of automated support for contract performance assessment. Assessing the parties' performance of an agreement, once it comes into force, requires reasoning with the contract terms (obligations, rights, powers and other legal relations that obtain between parties) as parties go about conducting their business exchange, sometimes complying and sometimes deviating from their pre-agreed prescribed behaviour. Compliance with prescribed behaviour is typically evaluated individually by each partner to an agreement and where parties' views differ, disputes arise that require some form of resolution.In this paper we present a simple architecture for an e-market, where an artificial (controller) agent undertakes such resolution. The controller's decision-making is informed by the agreement and each party's view of whether its own and the counter-party's behaviour comply with it. Thus, the controller forms an opinion on the basis of such evidence (and possible additional recommendations from agents representing the parties), in similar spirit to a (human) judge's process of reasoning in arriving at his ruling. We consider this as a belief formation problem and explore the potential of using subjective reasoning to represent an individual's (possibly partial) views and to reason about their joint conflict and consensus formation. We comment on the relation of such belief formation on the establishment of trust between partners to an agreement and between the latter and the controller of an e-market.     

Entrepreneurial networking: a blessing or a curse? Differential effects for low,medium and high performing franchisees

Recent studies have called for a better understanding of the link between networking and entrepreneurial performance. We provide such understanding in three ways: by focusing on a specific entrepreneurial context (franchise systems), by developing a multi-faceted theoretical framework and by highlighting a contingency that may affect the networking-performance link. We combine knowledge and learning perspectives with a networking perspective to develop and test a multi-faceted framework on the effects of franchisee networking with peers within a franchise system (‘peer networking’) on franchisee unit performance. In particular, we argue that the performance benefits that franchisees draw from networking with their peers vary between low, medium and high performing franchisees. We use ordinary least squares (OLS) and Quantile Regression analyses to test our hypotheses with empirical data from a Dutch franchise system. Our results confirm that structural, resource and relational facets of franchisee peer networking affect unit performance, and that they benefit and harm low, medium, and high performing franchisees differently.     

Survival patterns among newcomers to franchising

This study examines survival patterns among franchisee and nonfranchise small firms and establishments that entered business during 1986 and 1987. Aspiring entrepreneurs purchasing franchises choose this path to small business entry, in part, because they expect to improve their chances of survival during the turbulent early years of operation. Evidence to date has been mixed: some studies conclude that franchising is a low-risk route to small business ownership, while others suggest that independent start-ups are more likely to remain in operation than franchises.This study utilizes two distinct methodological approaches to investigate franchisee survival patterns. The first approach demonstrates that franchise units have better survival prospects than independents, and the second approach demonstrates that young firms formed without the benefit of a franchisor parent are more likely to remain in operation than franchised start-ups. Reconciliation of these seemingly inconsistent findings is explored.Survival measurement is heavily influenced by the unit of analysis in franchising. Firm-specific data show different patterns than establishment-specific data when young franchise units are tracked through time. Analysis of establishments owned by corporations is undertaken for restaurants opened nationwide in 1986 and 1987. Using Census Bureau data describing corporate-owned restaurant establishments that reported payroll to the IRS in 1987, 52,088 young establishments were identified; 22.5% were franchises. Comparison of the franchisee and independent restaurant units indicated that independents were more likely to cease operations by 1988 than franchises.The fact that franchisee establishments had a better survival track record than independent restaurants does not, however, demonstrate that aspiring entrepreneurs improve their survival prospects by purchasing a franchise. In fact, 84% of the new franchise establishments under consideration were units of multi-establishment corporations, and few of these corporate parents were new businesses. Envision a corporation in operation for 15 years that owns 20 McDonalds restaurants; in 1987 they opened their twenty-first unit. The findings of this study indicate that this twenty-first unit has excellent survival prospects, more so than either an independent start-up or a franchisee opening a restaurant for the first time. New franchised restaurant units, overall, may be a safe investment, although simultaneously, the newcomer opening a franchise may face a high-risk situation.The analysis then shifts from establishments owned by franchisees to young firms (not establishments) started in 1986 and 1987 as proprietorships, partnerships, or S-corporations. Among these young firms, franchisees are found to have lower survival rates than independent start-ups, and these differences persist when various firm and owner traits are controlled for statistically. Retailing is found to be a particularly difficult field for young franchised firms: risk of firm closure is high and mean profits are negative. The most common route into retailing entailed purchasing an operating franchise unit from its previous owner, that is, an ongoing franchise. Over 53% of the young franchised retailing firms started in 1986 and 1987 were ongoing operations. By 1991, only 52.4% of these firms were still operating with the owner of record present in 1987.The findings of this study indicate, on balance, that purchase of a franchise is unlikely to reduce the risks facing a new business start-up. This does not imply that the multi-establishment franchisee adding another new franchise unit to its existing chain of operations faces a high-risk situation. Rather, the high risk facing the franchisee newcomer is partially rooted in the fact that so many of the newly-opened units in mature franchising niches are owned by multi-unit franchisees that have greater experience and resources than newcomers who are attempting to enter the industry.     

商业合同附随义务根本违约之判断标准

当事人在商业合同中构成附随义务根本违约的判断标准包括:当事人之间须存在有效的合同关系,当事人一方或双方实施了违反附随义务的行为以及违约后果严重致使非违约方合同目的落空。但是,不是只要一方当事人的违约致使他方合同目的落空就必然构成根本违约,基础目的、单方目的、直接目的、初始目的、单一目的的落空必然构成根本违约;而效果目的、嗣后目的的违反不能构成根本违约;间接目的、双方目的和混合目的的违反只有危及合同的根基时才能构成根本违约。     

Franchisors' disclosure duty: market transparency and franchisee protection

The franchisee is usually the most vulnerable part of the franchise relationship, and should therefore receive greater protection from the legal framework. In this regard, the franchisor's pre-contractual disclosure duty has evolved in its legal status. Whereas its original purpose was to ensure transparency in the market, it now serves to protect the franchisee. In this paper, we compare the franchisor's obligations established by the legal framework in Spain with those set out in the Model Law drawn up by The International Institute for the Unification of Private Law.     

Contractibility and ownership redirection in franchising: A property rights view

This paper offers a property rights theoretical interpretation of the ownership redirection hypothesis advanced by Oxenfeldt and Kelly [Oxenfeldt, Alfred R. and Kelly, Anthony O. (1968). “Will Successful Franchise Systems Ultimately Become Wholly-owned Chains?”, Journal of Retailing, 44, 69-83]. In a nutshell, couched in resource dependence theory, the ownership redirection hypothesis argues that successful franchise systems will eventually become corporate owned systems because of the reacquisition of franchisee units by the more powerful, and resource-flush franchisors. We argue that the structure and dynamics of ownership patterns in franchising networks depends on the contractibility of the franchisor's system-specific assets and the contractibility of the franchisee's local market assets. Under the property rights view, ownership redirection will result from an increase in the contractibility of the franchisee's local market assets (local market information, financial resources, and managerial capabilities) and the resultant increase of the franchisor's bargaining power during the contract period. We extend the franchise literature by arguing that informational, financial and managerial resource constraints are only relevant for the change of ownership structure if they are noncontractible. This hypothesis is evaluated using data collected from the Austrian franchise sector. The empirical results are largely supportive of the hypothesis.     

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 Franchise Dilemma: Entrepreneurial Characteristics,Relational Contracting,and Opportunism in Hybrid Governance

Using franchise data, we identify that entrepreneurial characteristics of franchisees partially impact on their opportunistic tendencies. Further, relational contracting increases franchisee opportunism by strengthening the opportunism‐enhancing impact of entrepreneurial characteristics. These findings point to a key dilemma franchisors need to be aware of: Entrepreneurially minded franchisees who might be better at exploiting market opportunities for their units may also behave more opportunistically, if given the chance through a more relational contracting regime. At the same time, if they perceive the contractual framework as being too rigid, they may be less able to leverage their capabilities, become dissatisfied, and exit the system.     

The Baltic Model for the Settlement of Individual Consumer Disputes

The aim of this study is to assess the possibilities consumers in the Baltic countries have to fulfil their rights in individual consumer disputes by using different forms of alternative dispute resolution. Special attention will be paid to the relation between the existing alternative dispute resolution (ADR) systems and the European Commission's Recommendation 1998 on ADR. The main finding is that in all three countries individual disputes are settled by the same consumer authorities which are also protecting consumers' collective interests. The system resembles in many respects the Nordic model but there are some significant differences. These differences give good reason to speak about the "Baltic model," which differs from all systems existing in the EC Member States. The most remarkable difference is the right to impose administrative sanctions if a trader refuses to comply with a decision which a consumer authority has made with respect to an individual consumer dispute. The basic structure of the Baltic model does not clash with the principles of the EC Recommendation on ADR adopted in 1998. On the contrary, in practice the Baltic model gives better guarantees for consumer access to justice in individual disputes than many systems used in the Member States.