Making Franchising Work: A Research Summary
This post summarizes the research findings found in Making Franchising Work: A Framework Based on a Systematic Review.
Introduction
The research team from the Institute of Health Policy and Management, Erasmus University Rotterdam, included Karlijn J. Nijmeijer, Isabelle N. Fabbricotti1 and Robbert Huijsman. The team reviewed a large selection of franchise research:
There is a large and fragmented literature that examines the nature of franchising. This paper aims to collect all the empirical evidence on the factors that make franchising work and to integrate this evidence in a framework.
Franchising: Definition and background
Franchising consists of a contractual arrangement between two firms: the franchisor and the franchisee. In this arrangement, the franchisee buys the right to market goods or services under the franchisor’s brand name.
Franchise failure rates are high: 50-85%
There is significant variation in the strategic and operational success of franchises.
At least some of the variations result from factors within franchise systems.
Research goal
This paper has a double aim:
Collect all the empirical evidence on the structural and process-related factors that influence the outcomes achieved within franchise systems for franchisors, franchisees and customers, and second, to
Bring this evidence together in an integrative framework. To this end, we have conducted a systematic review, which gives practitioners an integrative insight into why some franchises succeed, while others are less successful.
Research methods
The studies included investigated the relationship between the outcomes of franchising and franchise design or processes.
Data collection
Outcomes are defined as the results of an activity, plan or process within franchise systems. All types of outcomes were included, for example financial performance, survival, growth and satisfaction.
Design comprises all the structural and procedural aspects of the franchise arrangement.
Processes refer to actors’ behavior and interaction with each other.
Data analysis
First, we analyzed each study on the investigated design or process factors, operationalization of each factor, types of outcomes, operationalization of each outcome, theoretical perspective, country, industry, methodology and actor perspective (franchisor, franchisee and customer).
As a second step, we clustered the factors that referred to similar design or process elements. To accomplish this clustering, we relied on the definition of franchising as described in the introduction. This approach resulted in two major factor clusters: ‘contract’ and ‘business format’.
We also determined clusters by searching in studies for aspects that are central in major franchise disciplines. From an economic/organizational perspective, the major factor ‘ownership structure’ was established.
From a social perspective, the focus of studies is on the individual behavior of the franchisor and franchisee and on their interaction (relationship).
This perspective led us to establish the fourth major cluster, ‘behavior and interaction’.
The last cluster of factors, ‘age and size’, was determined by themati- cally analyzing the common themes of all factors that could not be grouped within one of the other four clusters.
The state of empirical research
A small majority of the studies investigated outcomes at the franchisee level (n = 74).
Outcomes at the customer level were rarely investigated (n = 2).
Outcomes at the franchisee level were the dominant focus in studies on the business format (35 of 49 studies) and behavioral and inter- action aspects (47 of 58 studies), whereas outcomes at the franchisor level received the most attention in studies of ownership structure (28 of 34 studies).
Financial performance (n = 21), survival (n = 20) and growth (n = 12) were the most frequently investigated outcome types at the franchisor level.
Satisfaction (n = 43) and financial performance (n = 27) were most frequently considered in studies that investigated outcomes for franchisees.
Results: a framework of factors related to outcomes of franchising
The analysis uncovered five areas that positively or negatively affecting franchising success:
Ownership structure
Business format
Contract design
Behavior and interaction
Size and age
A: The influence of ownership structure
Outcomes are related to four choices regarding ownership structure (see Block A in Figure 2):
Whether both the franchisor and franchisees or only the franchisees own units (plural form vs pure franchise)
The proportion of units owned by franchisees
Whether each franchisee owns one or more units (single-unit vs multi-unit ownership);
Whether the responsibility for the daily operations of the unit is delegated to a unit manager or not (passive vs active ownership)
Plural forms are more managerially effective because innovation, uniformity and economic efficiency are more attainable.
Company-owned units facilitate the dissemination of innovation and help to increase uniformity, because they can be used as pilot sites that persuade franchisees to adopt new practices and as training sites for new franchisees.
Plural form outperforms pure franchise with regard to franchisor survival.
Franchisors have higher financial outcomes and survival rates if they increase their franchise proportion:
(1) if their units are widely dis- persed in different geographical markets (Hsu and Jang 2009; Sorenson and Sørensen 2001; Vazquez 2007),
(2) if they have started their operations in a strict legal environment (Shane and Foo 1999), or
(3) if they were one of the first entering franchise firms on their market and are currently relatively mature
Franchisors perform better financially if they align their franchise proportion with their financial and marketing strategies (Srinivasan 2006) and do not use franchising as a strategy to gather resources.
If franchisors have highly valuable resources (Barthelemy 2008; Vazquez 2007) or tacit business practices that cannot be specified in the operations manual (Barthelemy 2008), they obtain better financial and survival outcomes if they reduce their franchise pro- portion.
Franchisors should increase the proportion if local knowledge is important in applying the busi- ness format on unit level
Single-unit vs multi-unit ownership
For franchisees, owning multiple units is more advantageous than owning only one. This results in better survival rates (Bates 1998) and lower production costs because production experience is more easily transferred between units belonging to the same owner (Darr et al. 1995).
For franchisors, the results of multi-unit franchising are more equivocal. It lowers the chances of survival for new franchisors (Shane 1998), but increases them for larger franchisors (Shane 2001).
multi-unit franchisees make the system more effective by facilitating system-wide adaptation because franchisors have to persuade fewer franchisees to implement changes. However, these franchisees are slightly less effective in terms of local responsiveness (Bradach 1995).
Passive vs active ownership
For franchisees in older and larger US restaurant chains, passive ownership is disadvantageous for their survival chances (Michael and Combs 2008).
Shane (1998) found lower survival in systems that adopt passive ownership, Vazquez (2009) showed that such ownership is only negative in systems in which the operations manual is not specific and local knowledge is highly important.
B: The influence of the business format
Besides ownership structure, the business format appears the second influencing factor.
Studies show that the outcomes of franchises are determined by:
the brand name,
the format facilitators directed at support, and
the format facilitators directed at control.
Brand name
All studies on the brand name (n = 10) reported the positive effects of a strong recognizable brand name,
For franchisors, the brand name is positively related to profits, sales, growth and sur- vival (Gillis and Combs 2009; Inma and Debowski 2006; Shane and Spell 1998). For franchisees, it has a positive impact on satisfaction, success and survival.
Support
The studies on the influence of the support provided to franchisees (n = 49) considered the role of the provision and the extent of the support, the type of support, and the quality and importance of the support.
Studies always show positive effects on franchisee satisfaction, financial performance and survival
However, franchisees’ valuation of the support provision generally decreases over time (Grünhagen and Dorsch 2003; Tuunanen and Hyrsky 2001).
The extent of the support provided also contributes to positive outcomes for franchisees.
Franchisees are more satisfied and perform better financially if they are offered a large amount of support
In contrast, offering extensive support is not directly beneficial for the franchisor.
The type of support provided to franchisees matters more for franchisors than for franchisees.
All studies on franchisee satisfaction found positive effects, irrespective of the type of support studied. Training (Hunt 1973; Lusch 1977; Merrilees and Frazer 2006). All the following support types improved satisfaction:
Franchisor representatives (Lusch 1977)
Assistance in seeking suitable locations
Product development
A ready-made concept
Marketing and brand support were also found to have a positive effect on satisfaction in various industries (Hing 1996; Lusch 1977; Merrilees and Frazer 2006), although high- performing franchisees value these support types more than lower performers.
Financial assistance was found to have no impact on financial performance (Churchill and Hunt 1973), whereas training was found to have a positive effect on both financial performance (Michael and Combs 2008; Minguela-Rata et al. 2010) and survival.
Studies on the franchisor level show more mixed results
Shane (2001) found positive effects of training, communication services and assistance to franchisees in seeking suitable locations. However, Grünhagen et al. (2008), who studied the relation- ship between multiple support types and the closing or conversion of outlets, found no effect of any support type in the US
The influence of instrumental support on satisfaction is stronger if the quality of that support is high (Yavas and Habib 1987). Interestingly, different franchisees within the same system can attach differ- ent quality and importance levels to the same support, resulting in different satisfaction levels
Control
Fifteen studies considered the influence of format facilitators directed at control. These studies considered the role of initial control, standardized operating instructions and (de)centralized decision-making.
Six studies indicated that the use of disclosure information and assessment methods to initially select franchisees with the right attitudes and expec- tations ultimately leads to greater franchisee satisfac- tion but not to more system growth.
Five studies showed that greater use of standard- ized operating instructions for franchisees has no negative effects on franchisee outcomes but has mixed effects on franchisor outcomes.
franchisor requirements regarding the use of specific practices and procedures positively contribute to financial performance.
Kidwell et al. (2007) found that this positive effect occurred because the use of instructions curbed free-riding behavior among franchisees. Free-riding means ‘cutting costs by lowering product or service quality’ while profiting from the brand reputation of the franchisor
Significant investment in developing standardized operating routines enhanced performance in pure franchises, but reduced performance in plural form chain.s
Five studies considered the impact of the extent of decentralized decision-making. At the franchisor level, centralized services decreased the exit chances of large systems: the larger the system, the larger the effect (Shane 2001). However, at the franchisee level, decentralization of decision-making yields better outcomes. Irrespective of operationalization, indus- try and country, it is related to more perceived com- petitive advantage (Baucus et al. 1996), satisfaction (Baucus et al. 1996; Schul et al. 1985; Tuunanen and Hyrsky 2001), and a better financial performance as a result of less free-riding behavior
C: The influence of contract design
The design of the contract is the third factor that influences outcomes. Besides provisions about format facilitators, six other contract elements were investigated: initial payments, ongoing payments, contract length, exclusive territories, tying and fairness.
Level of initial payments.
At the franchisee level, three studies found the level of initial payments to be positively related to income (Churchill and Hunt 1973) and survival (Bates 1995b; Frazer and Winzar 2005). Other studies reported negative and neutral relationships
Higher levels of cash investment are positively related to the survival of new and large franchisors (Shane 1998, 2001), whereas most studies found that the level of total investment/start-up costs had no effect
Initial payments also seem to have mixed effects on growth, as negative, neutral and positive relationships were identified in various studies
Level of ongoing payments
Higher levels of ongoing payments rarely have a positive effect at the franchisee level. On the contrary, predominantly negative relationships have been found with survival (Michael and Combs 2008), financial performance (Frew and Jud 1986) and satisfaction if the franchisees perceive the pay- ments as too high
At the franchisor level, the majority of studies showed that the magnitude of ongoing payments has no effect on survival chances
Length, tying, exclusive territories and fairness of contract
Contract length appears to be unimportant to achieving positive outcomes.
D: The influence of behavior and interaction
Several studies showed the importance of a good working relationship by investigating the following relationship characteristics: closeness of the relationship, commitment, trust, communication/ information exchange, dependence, conflict and opportunistic behavior
Franchisor–franchisee relationships with higher levels of trust predominantly yield superior performance.
From the franchisee perspective, a high level of trust only has a significant positive effect at the beginning of the relationship, and not in the long term (Bordonaba-Juste and Polo-Redondo 2008a). At the franchisor level, trust only has a posi- tive effect on financial performance in plural form chains, and not in pure franchises
high-quality, frequent communication and information exchange between franchisors and franchisees reduce the probability of negative franchisee exit (Frazer and Winzar 2005).
Moreover, it has a positive effect on franchisee satisfaction, intention to remain, success and perceived competitive position across countries and industries and regardless of the methodology used
these relationship characteristics are closely related, which suggests that the development of one characteristic can be stimulated by another.
E: The influence of size and age
The size of an existing chain when it starts franchising affects neither franchisor survival nor growth
The size of franchisee firms also appears to be relevant, at least to their survival and financial per- formance. Their survival chances are higher if they own a larger number of outlets
Age of system and franchisee firm. No harmful effect was found for franchisors if they waited longer before starting franchising in an existing chain.
As systems age, the outcomes for franchisors are affected, but it is not exactly clear how. None of the outcomes becomes unequivocally more positive.
Discussion and conclusion
Franchisors and franchisees should work on the development of a recognizable brand name and a high-quality working relationship
Franchisors should:
provide site selection assistance and exclusive territories to franchisees, but they should not tie supplies.
offer high-quality instrumental support, use substantial tools to select potential franchisees
decentralize decision-making
provide fair and clear contracts
use support services and communication rather than contractual threats to influence franchisee behavior.
The provision of a large number of support services also benefits franchisees. However, this does not benefit franchisors.
Outcomes in franchising are dependent on the compatibility and cohesion of different system design elements, the behavior of and relationship between actors in the system, and the context
The diversity and complexity of the franchising literature make it difficult to develop a single, overarching framework of the success factors involved.