January 20, 2009
Matt MosleySuh-hee Choi
HTM 681First Topic
Franchising
Department of Hospitality and Tourism ManagementPurdue University
Franchise—Definition
A method of distribution A type of strategic alliance Agents involved in a franchise system1. The franchisor -- lends his trademark or trade name
and a business system2. The franchisee -- pays a royalty (+ an initial fee) for
the right to do business under the franchisor's name and system
the contract (technical meaning) the business that franchise operates (actual meaning)
http://www.franchise.org/faq.aspx
Franchise—Definition(from the Code of Federal Regulations) Any continuing commercial relationship or arrangement
in which the terms of the offer or contract specify, or the franchise seller promises or represents that:
(1)The franchisee will obtain the right to operate a business that is identified or associated with the franchisor's trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor's trademark;
(2)The franchisor will exert a significant degree of control over the franchisee's method of operation, or provide significant assistance in the franchisee's method of operation; and
(3) As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment to the franchisor or its affiliate.
http://www.franchise.org/uploadedFiles/Franchise_Industry/Resources/Education_Foundation/FW%20Dec07%20p42-44.pdf
Benefits
Barbara Beshel, 2001, An Introduction to Franchising, IFA Educational Foundation
Disadvantages
Restrictions (product, pricing, site)Ongoing royalties and advertising fees.Bad reputation caused by
poor performance of other franchisees unforeseen problems of the franchisor free-riders
Limited duration of a franchise agreement
Barbara Beshel, 2001, An Introduction to Franchising, IFA Educational Foundation
Franchise Industries
Types of franchising
Single-unit franchise Multi-unit franchise
An area development franchise A master franchise
Theories
Resource Scarcity Financial + Intellectual Limitations: growth and survival doesn’t guarantee profitability.
Agency Theory Less monitoring costs Assumption: economic, rational actors, homogeneity of perception / action Costs of local monitoring Vs. Risks of free-riding Moral hazard issues
Combs, Michael, & Castrogiovanni, 2004Agency Theory : Lafontaine, 1992
Theories (suggested by Combs et al., 2004)
Upper echelons theory Emphasizes managers’ characteristics (previous experiences, age, etc.)
Resource-based theory Points out biased distribution / trade of resources Increase of conflict management capabilities Increase of competitive advantages Increase of franchising
Institutional theory Articulates the importance of social, environmental, institutional, legal factors Organizational behavior (propensity for predictability / stability)
Previous Research
What Motivates Franchising? • Comparing franchised / independent restaurants • Resource Scarcity ( The effect of resource scarcity on the proportion of franchised outlets)
Which industries are more franchised? Which regions are more franchised?
Control system Moral issues
Previous Research (cont.)
From the franchisors’ perspectives geographic expansion intellectual scarcity (Oxenfeldt and Kelly, 1969)financial scarcity (Oxenfeldt and Kelly, 1969)economies of scale (Oxenfeldt and Kelly, 1969)innovation (Bradach, 1997)survival and growth (Bates, 1995)
What Motivates Franchising?(Benefits of Franchising)
Previous Research (cont.)
Consumers’ perceptionHigher degrees of satisfaction (Young et al., 2008 – restaurant) Brand recognition
What Motivates Franchising?(Benefits of Franchising)
Site selection (Park & Khan, 2005) Fast Food and Restaurants (IFA, 2006)
Which industries are more franchised? Which regions are more franchised?
Previous Research (cont.)
e.g. Agency Theory perspectives Vertical problems – appropriating royalties, not adhering to standards, etc. Horizontal problems – free ride
Control Systems (Vazquez, 2008) Geographic issues (e.g. International franchising) Standardization Vs. Adaptation
Moral issues & Control systems
Previous Research (cont.)
Does franchising really work? What types of franchise perform well?
Financial Optimal franchise fee, royalty rate
Optimal franchising outlet % (e.g. Hsu & Jang, In Press)
Previous Research (cont.)
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