Crossing mother: Entrepreneur-franchisees' attempts to reduce franchisor influence

Contractual terms guide many entrepreneur-franchisees' actions with the franchisor. However, it is impossible for franchisors to completely specify all future actions. They compensate by continually attempting to influence franchisees, using what franchisees perceive as suasion in their ongoing interactions. We develop a theoretical framework for understanding the informal interaction dynamics between franchisors and franchisees.Most franchise arrangements include the payment of royalties based on sales. This encourages a growth-oriented strategy, usually appropriate for the franchisees during the initial stages of their operations. Whereas a franchising strategy can reduce entreprenerial risk for franchisees, it does not eliminate it. Thus, as sales of the franchisees increase, profit-oriented strategies will be favored because they represent the payoffs that accrue to continuing entrepreneurial effort and risk-taking. These strategies may be in opposition to franchisors' sales orientation when market conditions do not allow continual growth without margin penalties. A research model is developed, depicting the relationship between franchisees' strategies and performance, and the moderating effect that contractual goals and franchisees' perception of franchisors' attempts at suasion have on this relationship. A set of research hypotheses was then empirically tested using a large sample of franchisees from the commercial truck retailing industry.The results indicate that sales-growth and profit-growth goals are not always congruent. Balancing the goals of the franchisor and franchisee did not appear to be a popular option; either one or the other was emphasized. More importantly, the results indicate that when franchisees perceive attempts by franchisors to use suasion, lower levels of profits result, but there is no corresponding increase in the level of sales.In the long-term, franchisors are likely to determine that current contractual arrangements are not protecting their longer term interests. Thus, they will be expected to attempt to modify franchise contracts in ways that force franchisees to implement sales-gain strategies. This will require that entrepreneur-franchisees anticipate future events more carefully at the time they are examining the original franchise contract. Because most entrepreneurs are concerned with immediate survival at the start-up stage, this makes examination of the contract less likely to happen; the franchise option is attractive because it reduces such risks.We recommend that entrepreneurs write ex ante contingent claims contracts that ensure a gradual reduction of franchisor influence. Although this would assume a power or knowledge balance that favors the franchisees, which is unlikely during the start-up phase, it will change over time as franchisees gain a better understanding of the local competitive dynamics. Thus, it may well serve the franchisees to take a defensive posture or push a royalty arrangement that decreases the emphasis on sales over time. This is most likely to be effective where the entrepreneur is considering several competing franchises at the time of the signing of the contract.Finally, we recommend that entrepreneur-franchisees should not assume that the expert advice offered by their franchisor is always in their best interests. Although technical advice is more likely to be unbiased and should be fully exploited, as this is what makes the franchise valuable, strategic advice, or that which relates to goal setting may well be colored by the financial interests of the franchisor. Franchisors are unlikely to consider the possibility that franchisees would be better served by formulating their own strategies, nor are they likely to consider that the franchise network would be better off, in the longer term, by the collective impact associated with numerous franchisees independently formulating their own strategies. In short, although we do not suggest that franchisees should always assume that “crossing mother” is the best response to all perceived franchisor-suasion efforts, they should carefully examine all strategic advice.     

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.     

Trust and Fairness During Strategic Change Processes in Franchise Systems

A very important challenge for franchisors is adapting the strategies of their franchise systems to new threats and opportunities. During such strategic change processes (SCPs) franchisees are often required to make major financial investments and/or adjustments in their trade practices without any guarantee of positive benefits. It is, therefore, important that franchisees trust their franchisors during such change processes and that they perceive the change process as fair. This article aims to generate theory on franchisees?? perceptions of trust and fairness during SCPs. On the basis of case studies regarding eight change processes in four Dutch drugstore franchise systems, this article distinguishes different levels of franchisee trust and discusses five instruments that franchisors can ??institutionalize?? in their franchise systems to influence their franchisees?? trust and fairness perceptions.     

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.     

Contractual Discrimination in Franchise Relationships

Franchisors often modify the contract terms offered to prospective (new) franchisees – to incentivize growth in the number of franchisees, to access capital, or to improve their financial performance. We argue that changes in contract terms offered to new franchisees (contractual discrimination across franchisees) can alter existing franchisees’ perceived equity in their relationship with the franchisor, and affect their freeriding. Specifically, we hypothesize, and show, that positive (negative) discrimination towards new franchisees reduces (maintains) existing franchisees’ perceived equity in their relationship with the franchisor, motivating existing franchisees to increase (eschew) freeriding – with impact on franchisors’ performance. To do so, we first take advantage of an exogenous event (the great recession of 2007-09) to study how 120 restaurant franchisors changed their contract terms to new franchisees and how that affected their post-recession net income (Study 1). We show that changes in contracts for new franchisees impact franchisors’ post-crisis performance, as a function of the number of existing franchisees. Second, with two experiments (Studies 2 and 3) with entrepreneurs and franchisees, we document that the observed changes in performance occur because contractual discrimination affects existing franchisees’ perceived equity and their intentions to free-ride. Thus, we contribute to the literature on equity in franchising relationships, on contract evolution in franchising, and its impact on financial performance.     

Convert to Compete: Competitive Advantage through Conversion Franchising

This paper offers an in–depth treatment of conversion franchising, where new franchisees are added to a franchised system by recruiting existing independent entrepreneurs or competitors' franchisees. The first part of the paper examines conversion franchising as a source of competitive advantage. This discussion leads to the articulation of four propositions. The second part of the paper looks at the empirical results of our study of 72 North American franchisors. Seventy–two percent of these firms use conversion franchising in their domestic markets, and 26 percent use conversions in international locales. The propositions relating to a franchisor's decision to use conversions based on increased levels of experience, economic resources, and to a lesser extent skills/knowledge, all were supported. These results lend support to the literature indicating that resources and skills serve as sources of competitive advantage. Implications for research and practice are discussed.     

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.     

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.     

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.     

How Does the Franchisor's Choice of Different Control Mechanisms Affect Franchisees’ and Employee-Managers’ Satisfaction?

Satisfaction of franchisees and employee-managers affects the overall performance of a franchise system. We argue that different actors in the same franchise system need to be treated in different ways. The franchisor's choice of control mechanisms affects the satisfaction of franchisees and employee-managers differently. To our knowledge this is the first study that gathers primary data from franchisees and employee-managers in the same franchise system at the store level with almost identical questionnaires. We show based on data from the largest German franchise system that outcome control leads to higher satisfaction among franchisees and employee-managers, while behavior control enhances employee-managers’ satisfaction. Thereby, outcome control leads to higher satisfaction among more experienced franchisees, while behavior control enhances both highly and lowly experienced employee-managers’ satisfaction. Our results suggest that franchisors face a dilemma: On the one hand, behavior control is associated with high costs and has no impact on franchisees’ satisfaction at all. On the other hand, it might still be necessary to prevent franchisees from behaving opportunistically.     

The Effective Delivery of Franchisor Services: A Comparison of U.S. and German Support Practices for Franchisees

ABSTRACT

Conventional wisdom suggests that more services offered by franchisors should lead to fewer complaints from franchisees, and that franchisees ought to be better off with additional support provided. We set out to differentiate those services that are truly effective and are perceived as beneficial by franchisees from those that may have little effect or may even be perceived as counterproductive. Our survey targeted franchisors in the U.S. and in Germany, comparing the most mature franchise market globally to one that is relatively young. System disruption was found to be dependent on the maturity of the market, as little differentiation is provided in the very mature U.S. market, but considerable differentiation exists in the younger German market. Also, the size of the system matters, as bigger systems typically provide more services. Finally, different types of services have varying levels of effectiveness in the less mature franchise market of Germany.     

Conflict management capabilities in franchising

Conflicts are common in franchising, however, they become dysfunctional above a certain threshold. Our aim is to understand how conflict management processes and, in particular, problem solving, persuasion, bargaining and politics, are developed and implemented within franchise chains and how they contribute to franchisors’ organizational capabilities. We do so through a qualitative study based on 44 in-depth interviews with franchisors and franchisees operating in France. Our main findings show that the implementation of these conflict management processes over time and with various franchisees nurture conflict management capabilities of franchisors.     

Market orientation in franchise networks: a contrast analysis of franchisors and franchisees views

Market orientation is considered as key to organizational survival and performance. In inter-firm settings, previous research indicates that it contributes to the overall performance of marketing channels. This research note investigates the perception of market orientation in franchise networks. Based on a dyadic multi-sectorial sample of 27 franchisors and 720 of their franchisees, the study examines how franchisors and franchisees perceive market orientation and to what extent their perceptions are concordant views. The underlying hypothesis is that a common view of the network orientation facilitates co-ordination and eventually performance. Results indicate that although the spirit of market orientation may be partially shared within the franchise channel, its consequences in terms of performance are not uniform.     

Developing brand champions: A franchisee perspective

Abstract

The establishment of a compelling brand lies at the heart of a franchise network’s success. To maintain brand integrity, franchisors rely on franchisees to deliver the brand promise consistently. However, franchisee behaviour is sometimes difficult to manage, impacting negatively on the franchise brand. In adopting an internal brand management theoretical lens, this study provides new insight into the development of franchisees as brand champions. This is achieved through the empirical validation of a model, which encapsulates the dynamics of important antecedent variables (i.e. information generation, knowledge dissemination, the ‘H’ factor, role clarity, franchisee satisfaction, and brand commitment) in creating franchise brand champions. The findings provide significant theoretical and practical implications and lay the foundation for future research in this important research domain.     

Conceptualizing the Franchise System Quality (FSQ) Matrix

Abstract

This empirical study provides some exploratory evidence to the proposed Franchise System Quality (FSQ) Matrix. This is the first study to investigate how franchisees perceive the importance and adequacy of the franchisor-provided services within a franchise system. Using these two dimensions as anchors, the FSQ matrix is conceptualized with four distinct profiles. The analysis of survey responses of 185 Taiwanese franchisees strongly confirms the validity of the four-cell matrix indicating significant differences between them. The results also yield a highly significant comparison between system quality permutations with franchisee performance variables and behavioral perceptions. These results show that franchisees with better performances are worthy of more support and assistance from franchisors. Those franchisees that are identified with highperceived importance of the FSQ matrix have a stronger desire for autonomy.     

A longitudinal study of franchisor failure according to Altman’s Z model

Purpose: The foremost objective of this study is to obtain segments/clusters of franchisors that are more likely to fail. A second aim is to evaluate the influence of the usual variables of the franchise contract on the solvency of franchises.

Design/methodology/approach: This study set up a database with information collected from several Spanish franchising yearbooks and franchisors’ websites to establish the census of Spanish franchisors. This article worked with a census of the franchises operating in Spain from 2001 to 2011. Latent class regression analysis is used.

Findings: This research found four segments or classes of franchisors with regard to their failure pattern. In addition, this article defined the most influential variables in the franchisors’ risk of failure. The relationships between the variables that define a franchise contract and the Z scores of Altman’s model have been extracted. The dependent variable has been the Altman’s Z model and the independent variables are those that define the franchise contract.

Research implications: This methodology offers potential franchisees a new criterion for assessing the franchise chains they are investigating, taking into account their risk of failure. This allows franchisees to better highlight those franchisors that have a lower crash risk and avoid the damage incurred by the closure of the chain. The information provided for franchisees should be accessible, usable, and suitable to help franchisees to choose the best franchise systems in which to invest. This methodology is of course very useful for franchisors, because they can comprehend their financial situation and how they could manage the franchising variables in order to improve their solvency.

Practical implications: All the segments are solvent, except Segment 3. The distinguishing feature of this segment is that over 64 percent of the firms are retailer chains. In addition, more than 20 percent of the franchises from our database are in financial danger, and this is the group where the number of service companies is lower.

Originality/value: This research is unique in two ways. First, this study presents a new methodology in this field that allows researchers to use the historical-financial data of franchisors, and the information of the franchise contract to predict franchisor failure. Second, this article helps franchisees to make their own decisions on the basis of the franchisors’ level of risk of failure. Third, this research offer a theoretical contribution about franchisor failure, this topic is scarcely treated by academic literature.     

“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.     

Franchising growth and franchisor entry and exit in the U.S. market: Myth and reality

Franchising has been and continues to be a very popular way to do business for a number of retailers and service businesses. However, the type of franchising that has been growing the most, namely business-format franchising, has not grown at the kind of phenomenal rates that the trade press often suggests. Since the Department of Commerce (DOC) canceled its publication Franchising in the Economy, we no longer have access to census-type data on franchising in the U.S. However, looking at the period during which the DOC did publish these data, one finds that the number of business-format franchisors is highly correlated with the number of units in these chains. Thus, we use data from recent issues of various franchisor directories to assess the number of franchisors in the U.S., and infer from this how business-format franchising has grown in the U.S. We find that business-format franchising has been growing over the last decade at a rate that is, at best, commensurate with the growth of the economy as a whole.We believe that the confusion about the extent of growth in franchising arises, in part, from the fact that many new firms enter into franchising each year, leading to the notion that this way of doing business is growing tremendously. However, we show that many firms also exit from franchising each year, for a net growth rate much below the entry rate.This paper shows that franchising is not a panacea for entrepreneurs, whether franchisor or franchisee. From the franchisor's viewpoint, the high rate of exits suggests that many firms fail despite franchising, and many others choose to stop franchising after trying it for a few years. Clearly, these firms have found that franchising is not right for them. Furthermore, the results show that the characteristics of the chain at the time it becomes involved in franchising, as described in the main franchisor directories—such as the royalty rate, the advertising fee, the franchise fee, the amount of capital required, and the sector of operation—have little capacity to explain “survival.” The main variable that affects “survival” among those that are typically reported in franchisor listings is the number of years that the franchisor has been in business before starting to franchise. Hence our results suggest this is one dimension in which franchisors can make decisions that affect the probability that they will be successful in franchising. Although we are unable to explain most of the variance in outcome, the results mostly imply that other, less easily observed or quantified characteristics of the chain and the franchisor, such as maybe the “innovativeness” of the product, the amount of support provided to franchisees, the financial backing of the franchisor, etc., likely influence “success” the most, and thus, are worth investigating further.From the perspective of franchisees, the amount of exit found here suggests that in the majority of systems, franchisees cannot expect that their franchisor will be around for the whole duration of their contract—which averages about 15 years according to the Department of Commerce. This does not mean that the majority of franchised businesses will find themselves in an “exiting” system—a small minority of very well-established franchisors accounts for the majority of franchised businesses, and these are likely to remain successful for years to come. But entrepreneurs buying franchises from less established systems are likely to face franchisor exit, either failure or departure. This paper confirms that franchisees should thoroughly investigate the franchise system they want to invest in, going beyond the information about royalty rates, advertising rates, rankings, etc., found in franchisor directories, and toward more product, market, and other less easily accessible information about the chain.