Geographical_Pressures_to_deviate_from_franchise_formats-some_evidence_from_the_UK.doc

Geographical_Pressures_to_deviate_from_franchise_formats-some_evidence_from_the_UK.doc

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Unformatted text preview: Geographical Pressures To Deviate From Franchise Formats: Some Evidence From The UK JULIET COX* and COLIN MASON** Abstract. There is a tension in business format franchising between, on the one hand, standardisation and uniformity and, on the other hand, geographical variations in market conditions and resource availability. Previous research has demonstrated in the case of independent small firms that local geographical conditions influence business strategy. This paper examines whether variations in the local geographical environment, notably in terms of demand and supply side conditions, affect format implementation and whether franchisors permit franchisees to make local adaptations of the format in response to local environmental conditions. The study is based on interviews with 40 UK-based franchisors, all of whom were at the later stages of rollout or in the consolidation stage of network development. Local variations in the business environment do create a conflict with the need to maintain the uniformity of the franchise format. Adaptation was restricted to peripheral format components. No changes were made to the core format components. Most franchisors recognise that their franchisees are an important source of new innovation. However, implementation of franchisee ideas across the system is found in only a minority of cases. Key words: franchising, geography, adaptation, standardisation Please direct correspondence about this paper to Colin Mason * Dr Juliet Cox is a Research Officer in Entrepreneurship in the School of Management, University of Surrey, Guildford, Surrey, GU2 7XH, UK. Tel: +44 1483 686329. Fax: +44 1483 686301. E-mail: [email protected] Her research interests are knowledge-based businesses, incubators, hatcheries, regional economic development and franchising. ** Dr Colin Mason is Professor of Entrepreneurship in the Hunter Centre for Entrepreneurship, University of Strathclyde, Level 14, Livingstone Tower, Richmond Street, Glasgow G1 1XH, UK. Tel: +44 141 548 4259. Fax: +44 141 552 7601. E-mail: [email protected] His research interests are in business angels and early stage venture capital and entrepreneurship and regional development. He is founder and co-editor of Venture Capital: An International Journal of Entrepreneurial Finance (Routledge) which commenced publication in 1999. 1 1. Introduction Business format franchising operates on the principle of ‘cloning’ a standardised tried and tested business format based around a trade name or trademark product or service, in different locations (Julian and Castrogiovanni, 1995; Kaufmann and Rangan, 1990; Stanworth et al, 1996). Although there are several definitions of franchising, Curran and Stanworth’s (1983: 11) definition achieves broad agreement: “a business form essentially consisting of an organisation (the franchisor) with a market-tested business package centred on a product or service, entering into a continuing contractual relationship with franchisees, typically self-financed and independently owner-managed small firms, operating under the franchisor’s trade name to produce and/or market foods or services according to a format specified by the franchisor.” Franchising is therefore based on combining the economies of scale associated with the franchise system with the benefits derived from small-scale, local operations. Standardisation and uniformity are cornerstones of franchising. This arises for two reasons (Kaufmann and Eroglu, 1999). First, standardisation is a means of achieving cost minimisation for both the franchisor and franchisee, notably in terms of purchasing (as a result of scale economies), marketing and implementation. In addition, it reduces the franchisor’s costs of monitoring its franchisees. Second, standardisation enables the concept to be communicated consistently across space in order to build and maintain a distinct image amongst customers. This uniform image leads customers to “expect the same product or service at every location” (Falbe and Dandridge, 1992: 48). This will attract customers who “seek the common consumption experience that the trademark represents” (Michael, 2002: 328). System 2 uniformity and consistency are therefore imperative to attract and retain customers and maintain the integrity of the brand (Dandridge and Falbe, 1994; Michael, 1996; Price, 1997). Because customers will “transfer goodwill they associate with the quality of one outlet to others operating under the same trademark” (Michael, 2002: 320) this creates an inter-dependence between units in the franchise system. Building and maintaining a uniform image of their concept across the system is therefore critical because each franchisee has a potential impact on other franchisees in the system (Kaufmann and Dant, 1999). However, if franchisees deviate from the system’s standard model in pursuit of their own self-interest this will lead to trademark erosion and a deterioration in brand quality. The fundamental challenge for the franchisor is therefore to achieve ‘controlled predictability’ – assuring the quality of the consumption experience represented by the trademark that is owned by the franchisor and used by the franchisee, with quality defined not just as product quality but also conformance to the franchisor’s operating instructions for both production and delivery of the standardised product (Michael, 2000). Franchisors seek to enforce standardisation and conformity by means of an operating manual and through the training, inspection and monitoring of their franchisees. However, in practice franchisees are likely to enjoy considerable de facto operational independence (Dant and Gundlach, 1999).1 The central role of standardisation creates a tension for business format franchising. This tension arises for two main reasons. The first is due to the entrepreneurial behaviour of franchisees. Independence is a major appeal of franchising. Indeed, it is 1 There are several reasons for this: contracts can never anticipate all future contingencies; the infeasibility of perfect behaviour control by monitoring due to the costs and effort of implementation and human imperfections in monitoring; the legal impossibility of total ex ante control; the unwillingness of franchisees to engage in certain activities; and the need to cultivate and maintain a climate of civility, goodwill and trust with franchisees (Dant and Gundlach, 1999). 3 promoted as a means of ‘being your own boss’ (Dant and Gundlach, 1999). However, the reality is that franchisors are unlikely to tolerate departures from the standard franchise contract. Thus, franchisees are “not given much room to develop their own initiative” (Michael, 1996: 173). Their autonomy is limited to decisions regarding local operating policies such as location, pricing, hours of service and the hiring of labour. The franchisor, in contrast, makes decisions concerning the system’s trademarks, its operating procedures, the product, suppliers of inputs (other than labour) and advertising and promotion material (Michael, 1996). While some franchisees will be happy to conform to the franchisor’s stipulations, others view their ownership of a franchise unit “as giving them the right to exercise entrepreneurial initiative” (Baucus et al, 1996). Deviation may also occur as a result of franchisee opportunism to pursue different goals to those of the franchisor. For example, if the franchise fee paid by the franchisee to the franchisor is based on sales then the franchisor will want franchisees to pursue revenue maximisation. However, because the consequence of following this strategy may be to depress their profits (Phan et al, 1996) franchisees may prefer to seek other goals, such as cost minimisation. The second source of tension, and the focus of this paper, arises from the geographically differentiated nature of markets – both for inputs and outputs. Most franchise units are territorially based and therefore operate in a range of diverse geographical environments with different market and resource conditions. Places differ from one another in terms of income levels, consumer tastes and preferences, and the level of competition. There are also geographical variations in the availability, cost and quality of factors of production, notably labour and premises. In the wider small firms literature there is clear evidence that small and medium sized enterprises 4 (SMEs) develop geographically-specific strategies in order to adapt to their local business environments. For example, North and Smallbone (1995) noted that because of differences in local labour market conditions small firms in Inner London were more likely than their counterparts in remote rural areas to minimise the amount of direct labour that they use, preferring instead to invest in capital equipment and to outsource. Local and regional environmental conditions “may [also] have implications not just for the way in which products are produced and sold but also for the precise nature of firms’ activities” (Smallbone and North, 1993: 127). In similar vein, Vaessen and Keeble (1995: 503) observe that “many SMEs do not remain passive towards external pressures and constraints imposed by their regional environment. Instead [they] … work to develop strategies to overcome these constraints.” However, if franchisees are forced by their franchise agreement to maintain system standards this will force them to operate in such a way that they may be unable to fully exploit local market opportunities. Franchisees are likely to be more familiar with local market conditions than the franchisor. As Stanworth et al (2002: 1526) note: “franchisees are the system’s eyes and ears in local markets where the franchisees may have deep social and domestic roots but which remain little understood territory to the franchisor.” Indeed, franchisors depend on this local knowledge of their franchisees to promote local sales (Kaufmann and Dant, 1999). However, for the reasons noted earlier, individual franchisees are expected to follow standardised business formats which make no allowance for adaptation to local circumstances. This creates a constant tension in business format franchising: 5 “The franchisor desires market standardisation for consistent corporate operations and economies of scale. On the other hand, the franchisee demands adaptation for sub-optimal market satisfaction” (Fock, 2001: 173). The challenge for franchise management therefore “involves the accommodation of the franchisor’s desire for standardisation, consistency, quality control, and the presentation of its goodwill and brand equity, and the franchisee’s quest for autonomy” (Dant and Gundlach, 1999: 36). The implication is that “to succeed in its role as creator, builder and guardian of its business format … the [franchisor] must resolve the constant, yet evolving, tension between the two strategic imperatives of standardisation and adaptation” (Kaufmann and Eroglu, 1999: 70). Too much standardisation and control by the franchisor is costly, creates post-contractual agency problems and precipitates motivational and moral problems amongst franchisees. However, if franchisees have too much autonomy to adapt to local conditions this will result in the loss of corporate identity and brand equity (Dant and Gundlach, 1999). A further potential effect of excessive standardisation is that it may discourage experimentation and innovation by franchisees. Through their local adaptation efforts franchisees are frequently the source of innovations (e.g. developing new offerings, modifying existing ones and finding solutions to system wide problems). As Stanworth et al (2002: 1520) note, “some of the most cited examples of franchisee-led innovation result from experimentation by franchisees that was not only not sanctioned by franchisors but was, on occasion, actually discouraged.” However, some forms of innovation may damage the overall system. In particular, if franchisees adapt to local conditions they decrease the similarity of operating routines 6 across the system, which reduces the potential for cross-fertilisation of ideas for identifying and implementing new offerings (Kaufmann and Eroglu, 1999: Sorenson and Sørensen, 2001). It is also important to note that The the nature of the tension between standardisation and adaptation varies according to the maturity of the franchise system. The circumstances which prompt adaptations to the format are most likely to occur amongst franchisors in their initial roll-out stage of development where the features of the system may not have been clearly defined yet and there may be uncertainty over what elements are sacrosanct. In addition, formats in their early roll-out will incur few costs in deviating from uniformity because they will not be well-known, so changes to are likely to have minimal impact on demand because there is little or no customer expectation of the product/service (Bradach, 1998). Furthermore, as Stanworth et al (2002: 1522) suggest, the benefits of franchise experimentation and innovation are greatest when franchise systems are in their earlier stages of development. This is because “so many franchise systems, far from being ‘tried and tested’ in their early years, still have much to learn, and the role of franchisees can be crucial.” However, Kaufmann and Eroglu (1999) argue that standardisation is critical in the early stages in order to project a relatively large set of common elements in the format that are distinctive of the system as a whole rather than specific outlets. Their reasoning is that even relatively minor differences may interfere with the ability of consumers to generalise from outlet to system. In mature franchise systems the pressure to deviate from the format will arise from the growing self-confidence of the franchisees in their own abilities. This is likely to 7 result in a growing frustration over the constraints on their freedom of action, an increasing resistance to standardisation and an increased desire for independence (Oxenfeldt and Kelly, 1968-69).2 Indeed, Tuunanen and Hyrsky (2001) report evidence of increasing franchisee dissatisfaction over time, while Floyd and Fenwick (1999) note that franchisees demand greater autonomy as systems mature. Franchisees also become increasingly knowledgeable about the specific local markets that they serve and develop an expertise in assessing and responding to the idiosyncratic needs of their customers. 3 Their local market knowledge may exceed that of the franchisor. Franchisors may have enough confidence in the abilities of particular franchisees to permit some local adaptations. As the franchise system matures, and the business environment becomes more competitive, so the need for entrepreneurial activity amongst franchisees in the form of experimentation and innovation increases dramatically to keep the system competitive (Tuunanen and Hyrsky, 2001). Appropriate strategies may require market segmentation and differentiation involving increased adaptation at the expense of standardisation. A mature system is likely to be more resilient to potential brand image distortion that arises from local deviations. Changes to format standardisation have been examined in studies of international franchising. These studies note that adaptation does occur in response to local (i.e. national) conditions.4 However, our concern in this paper – a case study of the United 2 This leads Oxenfelt and Kelly (1968-69) to argue that franchising is a transitional form of business organisation to mobilise financial capital, local geographical knowledge and local entrepreneurs, and to secure first mover advantage (see Michael, 2003). Thus, over time local franchised units might be expected to be re-acquired and converted to company-owned outlets. However, Michael (2002) suggests that franchise chains may have strategic or competitive advantages which offset this disadvantage. 3 Kaufmann and Eroglu (1999: 80) make this point as follows: “As their experience grows … the same franchisees who sought the security of the franchise system as a method of going into business increasingly become experts (perceptually or actually) with respect to their local markets and the operation of the business. This leads to a growing temptation to forego standardisation and search for the optimal fit even though they had agreed to forego that privilege.” 4 For example, McDonalds introduced a special Philippines-style ‘McDough’ burger in its Manila location to compete with the local Jollibee chain (Ryans et al, 1997). Hoy et al (1998) attributed the 8 Kingdom - is with adaptation within individual countries to differences in local geographical conditions which has attracted little previous attention. Kaufmann and Eroglu (1999) provide a valuable conceptual review of standardisation and adaptation in business format franchising. The only empirical evidence is provided by Bradach (1998), in a study of US fast-food systems, who suggests that the local geographical environment does affect format implementation, with franchisees seeking local responses. This paper seeks to address two related questions: Do variations in local geographical conditions affect format implementation? Do franchisors permit local adaptations in response to local environmental conditions? Its contribution is to engage with Kaufmann and Eroglu’s conceptual paper by offering some empirical insights on the questions they raise concerning “what are the appropriate limits of uniformity” in business format franchising (Kaufmann and Eroglu, 1999: 69)? It is important to note that our concern here is only with local geographical pressures on franchisees to deviate from standardisation. There is a larger literature which looks more generally at the role of the franchisee in contributing to format variation (see Bradach, 1998; Dandridge and Falbe, 1992; 1994; English and Hoy, 1995; Kaufmann and Eroglu, 1999; Michael 1996; Price, 1997; Rosenbloom, 1995). We also exclude deviations that are imposed by outsiders such as planning authorities. The sample contained ten cases where planning authorities required changes in signage, colour or décor (or all three) because the premises were located in conservation areas. demise of a Mexican franchisor who expanded into the USA to its failure to take account of US tastes and preferences. 9 2. Data Sources The qualitative nature of the information required to address this issue indicated a survey methodology. The paper is based on face-to-face interviews with 40 UK-based franchisors (which includes the UK master franchisees for some international franchise systems). The selection of franchisors was dictated by two considerations. First, because the focus of the wider study (Cox, 2002), of which this paper forms part, was on the spatial expansion and rationalisation of franchise systems the selection of the sample was deliberately restricted to established franchisors who would, by definition, have experience of expanding, operating and, in some cases, restructuring franchise systems. Accordingly, franchisors had to have at least 10 franchise units in order to be considered for inclusion. Stanworth et al (2004) note that this is likely to be the minimum number of outlets necessary to achieve break-even. Second, in order to reflect the diversity of franchising activity, the sample comprised approximately equal numbers of firms across six sectors: retail; fast food; personal services; distribution; business-to-business; and industrial and commercial. In most cases firms were identified from the UK Franchise Directory. A handful were approached on the basis of recommendation or pre-existing contacts. A total of 80 franchisors were approached: non-responses were related to difficulties in making contact with the Managing Director or Franchise Director and the general ‘interview fatigue’ amongst the bigger franchis...
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