Franchise unit success factors. Daryll Scott, Lorelle Frazer & Scott Weaven, Griffith University. Abstract. Background

Transcription

1 Franchise unit success factors Daryll Scott, Lorelle Frazer & Scott Weaven, Griffith University Abstract The economic importance of franchising in service provision, job creation and self employment opportunities is widely reported. However the factors influencing franchise unit success has received little academic attention. This represents an important gap in the literature. Previous research has tended to focus upon system-level operations and recently upon the reasons for franchisor discontinuance and failure. This research extends the organisational management literature through investigating factors influencing the success of individual franchised units. Convergent interviews with the franchisor and four franchisees within one service, and one retail franchise system were conducted. Findings suggest that franchisee entrepreneurship and franchisee selection criteria were the most important determinants of a franchise unit s success. Keywords: franchise, success, entrepreneurship, selection criteria Background Franchising is an efficient method for the distribution of goods and services (Justis and Judd, 2003). Franchisors provide professional business services to their franchisees, who in turn facilitate customer service delivery at the unit level. While there has been extensive research into franchising operations over the last four decades, most studies have investigated the reasons for franchisor success or failure, the reasons for franchise system success or failure, and, to a limited extent, the failure rates of franchisees (for example: Caves and Murphy II, 1976; Frazer and Winzar, 2005; McCosker, 2000; Oxenfeldt and Thompson, 1968/69). Although business format franchising has achieved significant success in Australia (Frazer and Weaven, 2004), there is a concern with the disparity in the reporting rates of failures of franchised units (Frazer and Winzar, 2003; Pilling, 1991) due to what is considered to be an unwillingness of franchisors to disclose information of a negative nature (Castrogiovanni and Justis, 1993). As a consequence, the reasons for failure, and therefore the rates of success, are not known with any certainty (Frazer and Winzar, 2003). Several issues have been identified as relating to franchise system successes and failures. The main factors include franchisee satisfaction (Johns, Paswan and Strutton, 2004; Morrison, 1997),

2 franchisor power (Dahlstrom and Nygaard, 1999; Lim and Frazer, 2004), the franchisor/ franchisee relationship (Clarkin and Swavely, 2003; Nathan, 1996), communication (Anderson and Narus, 1990; Frazer, 2004), franchisor support (Frazer, 2001; Pilling, 1991), franchisee entrepreneurial ability (Dandridge and Falbe, 1994; Frazer, 2004), and franchisee selection criteria (Jambulingam and Nevin, 1997; McCosker, 2000). This research examines these issues in relation to franchise unit success. A greater understanding and appreciation of the issues involved may result in a better utilisation of the scarce resources of franchisors and franchisees and allow for the development of processes which will result in improving the likelihood of success of individual franchise units. Consequences of this are the positive effects on local, state, and national economies not only through the creation of wealth for franchisors and franchisees but also by decreasing the negative affects of business (franchise unit) failure on franchise systems, franchisees, and the community in general. The factors impacting on franchise unit success are explored below. Franchise unit success factors The success of franchising as an organisational form and its positive contribution to the small business base in Australia demonstrates its importance, both economically and socially, as a method of distributing products and services (Chow and Frazer, 2003). Much of the emphasis in the literature has been on comparing the failure or success rates for various franchised and non franchised organisations; mostly researching from a franchisor or franchised system perspective, with some research concentrating on the causes of franchisee failure (for example, Frazer and Winzar, 2005). In particular, most research has focused on various operational elements of franchise organisations including franchisee selection, communication, relationships and power, entrepreneurship, level of franchisor support, and levels of franchisee satisfaction. Of these operational elements, two stand out as having a significant impact on the success of franchise systems: franchisee selection criteria and franchisee entrepreneurial ability. The selection of franchisees has been determined to be the franchisor s most pervasive operating problem (Wattel, 1968/69). By controlling the quality of franchisees through the application of thorough selection criteria, franchisee performance should be enhanced and long-term monitoring costs should be reduced (Jambulingam and Nevin, 1997). However, while prior research has determined that the franchisee selection process is critical to the long term success of the franchise system (for example, Frazer and Perry, 1998; Gauzente, 2002; Lim and Frazer, 2004), there neither appears to be uniformity in the selection processes of franchisors nor little which has related this process to the subsequent success of an individual franchise unit (McCosker, 2000). In addition, the entrepreneurial ability of a franchisee is also a significant issue relating to franchise system success (Spinelli, Rosenberg and Birley, 2004). A franchisor needs to have the characteristics of an entrepreneur to survive in a business environment which is generally highly competitive and experiencing rapid ongoing change (Dandridge and Falbe, 1994). In such circumstances, the activities of a franchisee are seen as limited, leading to the perception that they cannot be entrepreneurial without conflicting with the franchisor s goals (Dandridge and Falbe, 1994). However, this may (generally) not be the case. Most franchisees have a significant personal investment in their franchise unit(s) and tend to display entrepreneurial characteristics in the developing of their local market and in influencing the larger organisation of which they are a part (Kaufmann and Dant, 1998). In essence, while

3 franchising does not necessarily provide a franchisee with a high degree of control or independence (Jambulingam and Nevin, 1997), some level of entrepreneurial activity is desirable particularly at the local market level (Guiltinan, Rejab and Rodgers, 1980). Methodology and analysis Methodology and data collection Due to the paucity of prior research in this area a qualitative study utilising an ethnographic approach involving non participant observation and convergent interviewing was adopted. Previous research suggests that this dialectic process is particularly useful in qualitative research on topics that lack an established theoretical base or methodology (Dick, 1990). Open-ended, reflexive style questions were utilised enabling the researcher to identify convergent themes on the most important issues within the area under investigation (Yin, 2003). In addition, non participant observation and recording of participants behaviour during the interview process provided a context of the meaning and purpose of the recorded data (Goulding, 2002). The study involved interviewing a franchisor and four franchisees from each of two franchise systems, System X and System Y. System X provides services within the financial services market while System Y is in the household furnishing industry. The organisations ranged in size from nine to 30 units and have been operating for 4 and 5 years respectively. Respondents were questioned regarding their opinions of franchise unit success and the factors that impacted on this success. With the permission of the interviewees, each interview was taped and transcribed the following day. In addition, summary notes relating to interviewees actions and demeanor during the interviews were taken in order to ensure that the data was transcribed retaining the context in which it was given by each respondent. A single researcher with significant franchise sector experience as a multi unit operator conducted the interviews, providing a consistency in the questions asked as well as a thorough understanding of the problems faced by members of the sector. The success factors previously identified as impacting on the success of franchise systems and/or franchisors were used as foci for the convergent interviewing. The findings of the qualitative stage of this research are discussed in the next section. Findings At the outset of the interviews the majority of franchisees believed that unit profitability was the only effective measurement of success. The following statement is typical of most franchisee responses, Profitability absolutely overrides everything. Just ask those that do not have it. However, additional factors were identified during the course of the interviews (detailed below). Franchisee satisfaction did not rate highly in comparison with other factors. While franchisors believed that satisfaction related to the level of support provided to franchisees, franchisees indicated a willingness to disregard levels of dissatisfaction if there was a possibility that preoccupation with this aspect of franchising would have a negative impact on the success of their franchise unit. In comparison, passion, of the franchisee with regard to all aspects of his or her business, was an emergent issue resulting from the interviews conducted with the franchisors. However, little attention was given to this issue by the franchisee respondents during the interviews. This mixed response from franchisors and franchisees regarding passion as a success factor was an indication that further exploration of this issue is warranted

4 Franchisor power was perceived as instrumental in influencing the relationship between franchisor and franchisee. However, while franchisees preferred that the franchisor use its power as a last resort to resolve issues, this was perceived as impacting on the franchisor/franchisee relationship. In particular, most franchisees were not of the opinion that the use or misuse of such power had a significant impact on the success of their franchise units. The franchisor/franchisee relationship was not viewed by a majority of respondents as affecting the success of a franchise unit but rather as a measure of the success or otherwise of each franchised unit. Contrary to previous research no respondents perceived the franchising relationship as similar to one of a marriage with each partner having expectations of trust, honesty and commitment from the other (Nathan, 1996) but as a function of the distribution of power (Clarkin and Swavely, 2003). In addition, a majority of interviewees perceived communication as related more to the franchisor/franchisee relationship and not directly associated with franchise unit success. While the majority of respondents expressed a desire to see improvements in the communication levels and, hence, relationship issues between franchisor and franchisee, the issue of franchisor support attracted more attention. Franchisor support was seen as having an inverse relationship with franchisee experience levels, with the impact of franchisor support diminishing as franchisee experience levels increased. Franchisor support was accepted as a significant element during the transition period when a franchisee moves to his or her newly adopted franchise system. That is, it was seen as a bridging mechanism. This viewpoint was evident in a franchisee s response when he commented that, I still think of it as being my own business. I know the franchisor has a large component of support (in place) but that is not going to determine if I am highly successful or just successful. That is up to me. Thus, franchisor support was not found to have majority support One factor which was viewed as important by the majority of interviewees was a franchisee s entrepreneurial ability. While franchisors acknowledged that it was necessary for franchisees to act within the parameters imposed by the franchise system, both franchisors and franchisees believed that there was a significant link between the entrepreneurial ability of the franchisee and the success of his or her franchise unit. While most franchisee respondents suggested that the franchise model and basic support provided by the franchisor provided assistance in the initial stages of their business start-up, their own entrepreneurial efforts were perceived as instrumental in reaching desired levels of success. For example, one franchisee respondent suggested that Even though all the systems are in place and the support is there you re more likely to succeed if you have got the entrepreneurial background Similarly, one franchisor respondent commented that, I can attribute all of our (sales) declines in any of our stores back to the (lack of) entrepreneurial skill. Despite this level of consensus on franchisee entrepreneurship, the factor which most respondents agreed had the most impact on unit success was franchisee selection criteria. Both franchisor respondents indicated that they believed the selection of franchisees was a critical step in achieving success, on a system-wide and unit basis. However, while they acknowledged the importance of detailed selection criteria, both respondents indicated that growth pressures had resulted in the application of inappropriate selection criteria which had introduced significant problems within their respective systems. In addition, the growing professionalism of franchising

5 was recognized by one of the franchisors who commented: Originally we believed we could take a mum and dad and turn them into franchisees. We (now) believe that this is not the case in today s franchising environment. Franchising has become very sophisticated. We would not look at anyone who has not been in business before. One franchisee was quite perplexed as to why a franchisor would want to jeopardize the success of the franchise system by not administering the strictest selection criteria. The franchisee likened the selection of franchisees to a team leader selecting for a sports team, querying If they (franchisors) were selecting for their own football team, would they compromise on quality? Discussion and managerial issues This research has implications for franchisees and franchisors relating to the increased likelihood of achieving individual franchise unit success. Franchisees. Prospective franchisees need to be made aware that the degree of success of their franchise unit will, to a certain extent, depend on their entrepreneurial ability in relation to marketing their product or service within their local community. Consequently, they need to selfassess their abilities as entrepreneurs during the process of deciding to become franchisees. Advice regarding the entrepreneurial aspect of franchise unit operations should be included in marketing literature provided by franchisors to prospective franchisee candidates. Franchisors. The findings of the study have implications for franchisors. Firstly, franchisors should not ignore the connection between communication, their relationship with franchisees, and the satisfaction levels of those franchisees. An integral aspect of developing this relationship is being able to align the support requirements of franchisees with their experience level within the system s industry, noting that there is an inverse relationship between the two. Furthermore, franchisors need to be aware of franchisees expectations relating to the development of a partnership as franchisees become more experienced within the system. Being proactive in maintaining effective communication channels with franchisees should reduce the instances of conflict and enhance the development of this partnership. This will ensure franchisees have the opportunity to focus scarce resources on the operations of their franchise units, thus promoting the likelihood of unit success, rather than on conflict and/or communication management issues. Secondly, franchisors need to be proactive in the support of franchisees that are desirous of developing their units by utilizing entrepreneurial skills. The development of local marketing manuals and appropriate training packages will assist in promoting entrepreneurial activities by franchisees which, in turn, will improve the likelihood of franchise unit success thus benefiting the franchise system as a whole. Finally, despite the pressures for system growth and the acquisition of market share, franchisors should develop and strictly apply appropriate franchisee selection criteria. Selecting the right franchisee for the system will significantly enhance the prospect of franchise unit success which, in turn, will benefit the franchisor, the franchise system and the existing franchisees that are relying on brand strength and brand integrity (Jambulingam and Nevin, 1997)

6 In summary, this study used in-depth interviews with franchisors and franchisees to investigate factors influencing franchise success at the unit level. The findings suggest that franchisors need to be proactive in the development of effective communication channels with their franchisees thus assisting in the development of a positive franchisor/franchisee relationship. Franchisors should also encourage the use of franchisees entrepreneurial skills through, if necessary, the development of appropriate operational manuals and training packages. Finally, appropriate franchisee selection criteria should be developed and strictly applied, for the benefit of the franchisor, the system and existing and prospective franchisees. This rich and penetrating data provides a unique perspective on assessing franchise unit success prior to embarking on a future empirical analysis. Thus, it is envisaged that this paper will form the basis of a large scale quantitative study using a sample of franchisors/franchisees across a variety of industries in the Australian franchising sector References Anderson, J.C., Narus, J.A., A model of distributor firm and manufacturer firm working partnerships. Journal of Marketing 54 (1), Castrogiovanni, G.J., Justis, R.T., Franchise failure rates: an assessment of magnitude and influencing factors. Journal of Small Business Management 31 (2), Caves, R.E., Murphy II, W.F., Franchising: firms, markets, and intangible assets. Southern Economic Journal 42 (4), 572. Chow, L., Frazer, L., Servicing customers directly: mobile franchising arrangements in Australia. European Journal of Marketing 37 (3-4), Clarkin, J.E., Swavely, S.M., How franchisors choose franchisees: a comparison of prospective franchisee evaluation criteria. Proceedings of the International Society of Franchising 17th Annual Conference. San Antonio, Texas. Dahlstrom, R., Nygaard, A., Ownership decisions in plural contractual systems. European Journal of Marketing 33 (1-2), Dandridge, T.C., Falbe, C.M., The influence of franchisees beyond their local domain. International Small Business Journal 12 (2), Frazer, L., Causes of disruption to franchise operations. Journal of Business Research 54 (3), Frazer, L., Are franchisees potential competitors? A study of franchisees who exit the system but continue operating. Proceedings of the International Society of Franchising18th Annual Conference. Las Vegas, Nevada. Frazer, L., Perry, C., Innovative fee structures by Australian franchisors. Small Enterprise Research: The Journal of SEAANZ 6 (1),

7 Frazer, L., and Winzar, H., Causes of franchisee failure: an analysis of franchisor and franchisee perspectives. Proceedings of the World Marketing Congress. Perth, West Australia. Frazer, L., Weaven, S., Franchising Australia 2004 Survey. Australian Trade Commission/Franchise Council of Australia. Frazer, L., Winzar, H., Exits and expectations: why disappointed franchisees leave. Journal of Business Research 58 (11), Gauzente, C., Using qualitative methods in franchise research - an application in understanding the franchised entrepreneurs' motivations. Viewed 27 September < Goulding, C., Grounded theory: a practical guide for management, business and market researchers, Sage Publications Ltd, London. Guiltinan, J.P., Rejab, I.B., Rodgers, W.C., Factors influencing coordination in a franchise channel. Journal of Retailing 56 (3), 41. Jambulingam, T., and Nevin, J.R., Influence of franchisee selection criteria on franchisee performance. Proceedings of the International Society of Franchising 11th Annual Conference. Orlando, Florida. Johns, R., Paswan, A.K., Strutton, D., Franchise selection processes: a preliminary investigation of the decisional criteria used by franchisees. Proceedings of the International Society of Franchising 18th Annual Conference. Las Vegas, Nevada. Justis, R.T., Judd, R.J., Franchising, 3rd edn, Thomson Custom Publishing, Mason, Ohio. Kaufmann, P.J., Dant, R.P., Franchising and the domain of entrepreneurship research. Journal of Business Venturing 14 (1), Lim, J., and Frazer, L., Matching franchisor-franchisee roles and competencies. Proceedings of the International Society of Franchising 18th Annual Conference. Las Vegas, Nevada. McCosker, C., The quest for quality franchises: an exploration of franchisors' performance. Proceedings of the International Society of Franchising 14th Annual Conference. San Diego, California. Morrison, K.A., How franchise job satisfaction and personality affects performance and organizational commitment. Journal of Small Business Management 35 (3), 39. Nathan, G., The O factor in managing the franchisor/franchisee relationship, 2nd edn, FAANZ, Parramatta, New South Wales. Oxenfeldt, A.R., Thompson, D.N., 1968/69. Franchising in perspective. Journal of Retailing 44 (4),

8 Pilling, B.K., Assessing competitive advantage in small business: an application to franchising. Journal of Small Business Management 29 (4), Spinelli, S., Rosenberg, R.M., Birley, S., Franchising: pathway to wealth creation, Prentice Hall, Saddle River, New Jersey. Wattel, H., 1968/69. Are franchisors realistic and successful in their selection of franchisees? Journal of Retailing 44 (4), 54. Yin, R., Case study research: design and methods, 3rd edn, Sage Publications, Inc, Thousand Oaks, California ANZMAC Conference Paper 268 Franchise unit success factors Reviewer comment Your findings imply that a franchisee s entrepreneurial ability should be part of the franchisee selection criterion. These two things are not separate issues as depicted in your discussions. We thank and agree with the reviewer for the comment that a franchisee s entrepreneurial ability and the franchisee selection criteria are not separate issues. However, what the paper addresses is the paradox resulting from opposing viewpoints. This paper clarifies this issue by finding that an entrepreneurial ability is a highly desirable trait in a franchisee and should be encouraged by the franchisor. The paper extends the existing literature on entrepreneurial behaviour within franchise networks which, although extensive, lacks consensus as to the level of acceptance by franchisors regarding franchisee entrepreneurial behaviour within a franchise network. For instance, while some researchers suggest that the entrepreneurial activities of a franchisee are limited, leading to the perception that they cannot be entrepreneurial without conflicting with the franchisor s goals (for example, Dandridge & Falbe 1994), others suggest that most franchisees have a significant personal investment in their franchise unit(s) and tend to display entrepreneurial characteristics in the developing of their local market and in influencing the larger organisation of which they are a part (for example, Kaufmann & Dant 1998). You have not specified what selection criteria should be applied, other than the obvious ability to invest. The aim of the paper was to identify factors that impact on the success of a franchise unit. As previously suggested, one of these factors was the entrepreneurial ability of a prospective franchisee which, it was implied, should be included as a selection criterion. However, due to the diversity of industries represented in the franchising sector, specifying what other selection criteria should be applied was determined to be outside the scope of the paper. For example, the criteria for selecting a franchisee in a lawn mowing franchise would be different to that for a bakery franchise which would be different to that for a dog washing franchise. Later stages of this research will investigate differing industry requirements which will include franchisee selection

9 I disagree with your statement that qualitative research had to be used as the topic lacked an established theoretical base. The channels, b2b, relationship marketing and leadership literature provides adequate sources for relevant theories that can be applied to franchise context. The paper indicated that due to the paucity of research in the area of franchise unit success factors, a qualitative study was adopted. We stand by the statement that there is a paucity of research in the area of franchise unit success factors. However, rather than indicating that a qualitative study had to be used, a qualitative study was adopted based on Dick s (1990) observations that a dialectic process utilizing qualitative research is particularly useful when the topic lacks an established theoretical base or methodology. Further, whilst we agree that there is significant non-franchise research which can be applied to various topics within a franchise context, the topic of franchise unit success factors is franchise, rather than business, specific. You suggest that an ethnographic approach was used yet you only report on the findings derived from the interviews. No findings drawn from participant behaviour are reported. We thank the reviewer for this comment. The paper submitted to ANZMAC was extracted from a dissertation on the same topic. While the dissertation itself commented on participant behaviour during convergent interviewing, the word limitation imposed on the ANZMAC submission precluded this particular issue from inclusion. A future journal submission will certainly incorporate the observation evidence, as noted by the reviewer. Please provide respondent profile such as experience level, gender, age. As part of the ethical requirements of the research, an undertaking was given to respondents that they would not be identifiable in the dissertation or any other papers published as a result of the research. Because the respondents were from two relatively small franchise systems, the details sought by the reviewer could result in their identification and are therefore deemed to be in breach of this undertaking. The sample is biased in presenting franchisee views given the 2:8 ratio. Given that in any franchise system there will be only one franchisor and any number of franchisees, there may always be a perception of bias. However, a similar bias could be perceived in research conducted in any organisation where there is one owner/manager and more than one employee. Your findings identify passion as an important factor for success as viewed by franchisor. However, you do not make it clear as to the object of the passion. A paragraph discussing passion has now been amended to read Passion, of the franchisee with regard to all aspects of his or her business, Given that the implied objective of the paper was to determine perceived success factors, why discuss franchisor power?

10 In the background section of the paper (paragraph 2, page 1), several issues were identified as relating to franchise system successes and failures. One of these issues was franchisor power. These issues, including franchisor power, were used as foci in examining the topic of franchise unit success. There may be a lack of clarity in the paper regarding this as the paper states This research examines the issues relating to franchise unit success. The sentence has now been amended to read This research examines these issues in relation to franchise unit success. Power, relationships, communication and franchisor support were not identified as factors of franchise unit success, yet these were discussed with the majority/all of respondents? Further, your discussion and quote concerning a lack of selection criteria does not appear to have been spontaneous. It is as though respondents were led to discuss these topics through interviewer questioning. Why? The background section of the paper (paragraph 2, page 1) identifies a several factors relating to franchise system success. These factors, including power, relationships, communication and franchisor support were used as foci during the convergent interviewing of respondents. Franchisor selection criteria was also a factor of franchise system success which was used as a focus point during the convergent interviewing. As mentioned above, the paper submitted to ANZMAC was extracted from a dissertation on the topic of franchise unit success factors. Included within the dissertation was a detailed description of the convergent interviewing process. This process utilizes open-ended, reflexive style questions which allows for the interviewer to converge on issues deemed important. It is hard to argue against a perceived lack of spontaneity in the questioning process, in this instance in relation to franchisee selection process. However, every successful franchisee appeared to be mindful of the effects that an unsuccessful franchise unit could have on the success of the franchise system as a whole and on their own unit s success. It did not take long during the course of a one hour interview for the issue of franchisee selection criteria to be raised either by the respondent or by the interviewer as a result of the convergent process. It is important in the methodology to outline the nature of the questions asked in the interview. An example of interview questions was included as an Appendix to the dissertation from which the ANZMAC paper was extracted. However, inclusion of this appendix or any other detail in relation to the interview questions would have resulted in the paper surpassing the imposed word limitation. Consequently, such detail was excluded from necessity. I suggest that you restructure your results section by presenting success factors from the franchisee perspective and comparing and contrasting these with those gained from a franchisor perspective. We thank the reviewer for this suggestion. Although the paper presented limited opportunity to reflect the full findings of the research as depicted in the final dissertation, it did include observations from both franchisors and franchisees, particularly when such perspectives contrasted. For example, under the heading Findings, at paragraph 2, the observation was made that: passion, of the franchisee with regard to all aspects of his or her business, was an emergent issue resulting from the interviews conducted with the franchisors. However,

11 little attention was given to this issue by the franchisee respondents during the interviews. This mixed response from franchisors and franchisees regarding passion as a success factor was an indication that further exploration With regards to your discussion and managerial issues I suggest that it is somewhat premature to make recommendations without a follow-up quantitative study using a large random sample of franchisor/franchisee. This paper used pilot study data collected as a prelude to the primary author s PhD research. Although the methodology to be used for the thesis is yet to be finalized, it is envisaged that both quantitative and qualitative approaches will be used, utilizing convergent interviewing as well as wide scale surveying. Notwithstanding this, the dissertation was conducted on two franchise systems and, albeit a small study in the overall scheme of things, the findings resulting from the research were accurately depicted in the conclusions and recommendations of the dissertation in the ANZMAC paper. However, in order to clarify that the paper represents a preliminary study undertaken, the final paragraph of the paper has been amended to include: This rich and penetrating data provides a unique perspective on assessing franchise unit success prior to embarking on a future empirical analysis. Thus, it is envisaged that this paper will form the basis of a large scale quantitative study using a sample of franchisors/franchisees across a variety of industries in the Australian franchising sector