Agency and institutional influences on franchising decisions

While the franchising literature has typically relied on agency theory, efficiency considerations may not fully explain decisions to expand through franchising or company ownership. In this study, I re-examine franchising decisions using insights from institutional theory. The key tenet of institutional theory is that decisions are influenced by isomorphic pressures arising from the environment. Economic rationales such as the achievement of efficiency are thought of as less pervasive concerns. I begin by investigating whether institutional theory explains variance in franchising decisions beyond what is explained by agency theory. Then, I explore the extent to which institutional considerations moderate the relationships between agency considerations and franchising decisions. Hypotheses are tested on a unique database of 132 French franchise chains. Empirical results suggest that successful competitors' use of franchising explains variance in the focal chain's use of franchising beyond what is explained by the importance of local managerial inputs and the threat of franchisee opportunism. In addition, the threat of franchise opportunism is less strongly related to the focal chain's use of franchising when successful competitors have a high proportion of franchised outlets. Overall, findings from this study suggest that researchers should supplement agency theory with institutional theory to adequately explain franchising decisions.     

The choice of master international franchising – A modified transaction cost model

This study develops and tests a novel transaction cost model of master international franchising. Based on data from international franchise firms headquartered in six countries, we show that master international franchising is the franchisor’s preferred governance mode under the following conditions: large bilateral franchisor’s and franchisees’ transaction-specific investments, high institutional uncertainty and high behavioral uncertainty. Our model extends the literature by presenting a modified transaction cost model of master international franchising that investigates the bonding effect of bilateral transaction-specific investments and environmental uncertainty as determinants of the franchisor’s choice of international governance mode. In addition, by using primary data from international franchise companies, our study contributes to the transaction cost literature in international business and international franchising that is mainly based on secondary data.     

An organizational capability perspective on multi-unit franchising

Previous research on multi-unit franchising (MUF) has primarily focused on agency and transaction cost perspectives. The present study develops and tests an organizational capability (OC) model of the franchisor’s choice of MUF. According to the OC view, the franchisor gains a competitive advantage by exploration and exploitation of firm-specific resources and capabilities. We hypothesize that, if the franchisor expects to obtain a competitive advantage resulting from higher exploration and exploitation capabilities when using MUF as opposed to single-unit franchising, the franchisor will more likely choose MUF as a governance mode of the franchise system. Based on empirical data from the German and Swiss franchise sectors, the results of the regression analysis support these hypotheses. Our main contribution to the franchise literature is the development of an OC model of the franchisor’s choice of MUF that complements the existing organizational economics ?explanation of MUF.     

Trust and the tendency towards multi-unit franchising: A relational governance view

Previous research mainly focused on the agency-theoretical explanation of multi-unit franchising (MUF). The aim of this study is to develop a relational governance perspective of MUF by investigating the role of knowledge-based trust and general trust in franchisor's choice between multi-unit and single-unit franchising. Our data from the German franchise sector indicate that knowledge-based trust positively influences and general trust negatively influences the franchisor's tendency towards multi-unit franchising.     

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.     

Does franchising pay? Evidence from the restaurant industry

Franchising has taken a prominent position in service industries for several decades, but little is known about how franchising affects financial performance. Thus, we addressed the question of whether chains that franchise to some extent outperform those that are wholly owned. Then, among chains that franchise, we also addressed the question of whether more franchising is better – that is, whether the proportion of a chain's units that are franchised is associated with superior financial performance. To answer these questions, our study first compares the risk-adjusted performance of franchising vs. non-franchising restaurant firms. Second, it investigates the relationship between franchising propensity and firm financial performance. We considered five different measures of firm financial performance: the Sharpe ratio, the Treynor ratio, the Jensen index, the Sortino ratio, and the upside potential ratio. On comparison of franchising and wholly owned firms, all five measures indicated that franchising firms outperformed their non-franchising counterparts. When we focussed on just the franchising firms, however, the results were less clear. Among firms that franchise, the franchising–performance relationship was positive and significant only with respect to the Jensen index. Thus, we provide very robust evidence that franchising pays – that is, that some franchising is good – but among firms that franchise, it is unclear whether more franchising is better.     

International franchise expansion of service chains: insights from the Spanish market

This paper attempts to identify the effects of several variables on the international expansion pursued by Spanish service franchise chains. These include: management and franchising experience, brand awareness, the international franchise ratio, and a franchisor's size. Specifically, the study looks at 125 franchisors doing business in 44 foreign countries in late 2009. Findings allow us to conclude that management and franchising experience, together with brand awareness, the international franchise ratio and company size are significantly associated with (i) the number of countries where the chain has a presence; (ii) the number of operational outlets the franchisor has abroad, and (iii) the number of years the chain has been operating overseas.     

Latin American franchise internationalization: The impact of institutional environment

We analyze the internationalization of Brazilian franchise chains in Latin America. A total of 119 observations verify international commitment in each country in relation to institutional environment factors and how they are moderated by chain size and industry. The results show that despite all institutional aspects having a significant effect, their explanatory power depends on chain size. Larger franchise chains usually choose countries with better institutional aspects in terms of contract compliance and business freedom, even if the efficiency of business conditions in these countries are not the best in Latin America. In this study, were used public data from international organizations that report on the ease of doing business, level of corruption, political risk, and legal regulations. Specifically, it contributes by using institutional theory in franchising in order to understand the process of chain internationalization originating from emerging markets. Our results, in part, contradict the idea that the origin disadvantage is always an advantage of internationalization.     

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.     

An Incomplete Contracting Model of Dual Distribution in Franchising

Dual distribution in franchising is addressed from an incomplete contracting perspective. We explicitly model cooperative (dual distribution) franchising as an organizational form, next to wholly-owned, wholly-franchised, and dual distribution franchise systems. Key conclusions of the model are: (1) dual distribution as an efficient governance mechanism does not depend on heterogeneous downstream outlets, and (2) whether dual distribution or some other organizational form is efficient depends on the size of the benefits to dual distribution relative to the parties’ costs of investing.     

Retailer use of a professional social media network: Insights from franchising

The adoption and use of a professional social media network by franchise chains is the focus of this paper. We draw on resource-based theory, institutional economic theories of incentives and externalities and multidisciplinary literatures on franchising, innovation adoption and interorganizational communication to link (i) franchisor characteristics and partnering strategies to the adoption and use of a professional social media network and (ii) the extent of use of this network by a franchisor to the number of followers of its network page. Hypotheses are empirically assessed using data on 500 US franchise chains from Entrepreneur’s Annual Franchise 500 for 2011, content analysis of LinkedIn pages for 317 franchise chains in 2011 and number of followers in 2015. One key finding is that franchisor adoption of LinkedIn is positively influenced by franchise chain size, franchising fees and franchisor marketing communications and negatively affected by franchise concept complexity. A second important finding is that, among franchisors who adopt LinkedIn, the extent of use of LinkedIn is positively impacted by franchise chain size, franchising fees and negatively affected by franchise chain age. A third notable finding is that the number of followers of a franchisor’s LinkedIn page in the short term is positively impacted by the extent of information about franchise chain and recruitment. A fourth key finding is that the number of followers in the longer term (2015) is positively impacted by whether the franchisor had a presence on LinkedIn in 2011 and, for these franchisors, by the number of followers in 2011.     

“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.     

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.     

Deconstructing the Franchise as a Legal Entity: Practice and Research in International Franchise Law

This article canvasses practice and research in international franchising law. The franchisor law's key concepts are introduced. I then identify aspects of franchising practice that are poorly accommodated by the law. These aspects offer opportunities for productive research. I identify these aspects as follows: franchising law's reliance on contracts to regulate the relationship through all its phases, the risk that a “franchisee” is an employee, good faith, governance, and insolvency. I continue with suggestions as to why these challenges exist. The article concludes with emerging themes in franchise practice and research: e-commerce, natural disasters, sustainability, micro-franchising, and social franchising.     

International Franchising Decision-Making: A Model for Country Choice

The present study examines how a number of market conditions may drive diffusion of franchising. It considers a sample of 63 Spanish franchisors operating through 2321 franchisee outlets across 20 different Latin American countries: Argentina, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Puerto Rico, Uruguay, and Venezuela in January 2011. Results conclude that geographical and cultural distance between the host and home country, as well as the level of the host country's uncertainty avoidance, individualism, political stability, unemployment rate, market potential, and efficiency of contract enforcement, may drive the spread of international franchising. Results reinforce previous research on country choice as to the association between international franchising and the host country's unemployment rate and cultural distance, but also identify differences from other regions in some issues such as political stability. Moreover, new insights relative to the effect of market potential, individualism, uncertainty avoidance, and the efficiency of contract enforcement on international franchise diffusion are also shown.     

Franchising in the Balkans: History,status, and challenges

Abstract

Since the Balkans have not been covered with regards to franchising in any comprehensive fashion in the past, this study represents a first look at the topic in this part of the world and contributes to the literature on franchising in emerging economies. This research contrasts the development of franchising in the ten Balkan countries of Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Macedonia, Montenegro, Romania, Serbia, and Slovenia. A comprehensive overview of the franchise industry and its history is created for each country, integrating economic and franchise infrastructure development. The study reveals severe deficiencies in the region with regards to the availability of official data and a lack of specific legislation with regards to franchising and disclosure mandates, as well as education about franchising and a reliable legal environment. Implications for researchers and policy makers conclude the study.     

Case Study

ABSTRACT

This is a case study of one of the highest growth restaurant chains in overall system wide sales and unit growth in restaurant industry history as reported by The Nation's Restaurant News(2001). The inception of a small fledgling restaurant chain in Atlanta, Georgia to a multi-billion dollar company has changed the shape of restaurant industry growth and development. The practices of franchise growth and market penetration have allowed Applebee's International to record double digit profits over the last ten years. Future growth patterns, market saturation, and changing consumer preferences will be challenges that Applebee's will face in the future. This case study will outline Applebee's history and competitive strategies that have made the company successful. Further along in the case study an analysis of franchising in the restaurant industry and the franchising strategies Applebee's has produced over the years. This study will conclude by uncovering future issues that Applebee's may face and pose future questions to ponder about the company.     

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.     

Good Morning,Vietnam! Opportunities and Challenges in a Developing Franchise Sector

Until recently the development of franchising in Vietnam was hampered by a regulatory framework that did not recognize franchising as a discrete business relationship. The introduction of Vietnam's Franchise Law in 2005 provided, for the first time, a legal foundation for franchising, which was a necessary prerequisite for sector development. Although there are currently few business format franchise systems operating in Vietnam, there is an increasing presence of established international franchise systems and increasing numbers of local systems albeit at an early “product distribution” evolutionary stage. Moreover, the commercial environment for franchising is increasingly favorable: Vietnam is the fastest growing Asian economy after China and India and is experiencing strong gross domestic product growth and annual retail growth. This article addresses the development of franchising, and the challenges and opportunities for franchisers in Vietnam.