Impact Of Franchising On Franchisee Business Performance Business Essay

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In this paper betrays put most aspects of the privileges and form of the relationship between the franchisor and the franchisee business and contractual relationships between the franchisor and the franchisee and how the performance of this business, marketed and sold.

There is a significant character in the field of research on small business, and there are several concession arrangements illustrate this phenomenon, and these arrangements significant levels of cooperation between the franchisor and franchisees which enables the protection of privilege of market forces. Although the assessment of the competitive advantage in small businesses is one of the important issues, there has been no adequate research in this area.

This article is based on research that applies the concept of competitive advantage as a Determinant of small businesses that would be a good candidate to give the concession. It was also an opportunity for more complete understanding of the causes of performance required to achieve better business performance.

There is an important subject in research on business strategy based on the understanding of the foundations of sustainable competitive advantage for these businesses.

Chapter Four: Contractual Issues and Commitment in Franchising

commitment in franchising:

franchisee commitment:

Commitment represents a serious dependent variable in B to B and interpersonal exchange relationship research. Commitment define as "a stabilizing or helpful force that gives direction to behavior" by preventing freedom or binding the person to a way of action (Meyer & Herscovitch, 2001).

Individuals and firms vary in defining their reasons for committing to an exchange relationship. Three scopes of commitment affective, normative, and continuance were developed in respect of this concept. At first it focused on the individual, these three scopes have been extended to the solid level of analysis. Each scope develops in a different fashion, resulting in different motivations and behaviors (Gundlach, Achrol, & Mentzer, 1995).

Each scope of commitment represents a variable reason why a franchisee might be pay attention to the franchisor. Affective commitment represents an affecting part to the relationship. Franchisees have strong affective commitment have established some sort of emotional link to the franchise organization and like being in the relationship. Normative commitment, is the second concept, represents a mindset of responsibility to remain in the exchange relationship. Franchisees with high levels of normative commitment feel a strong tend of obligation to the relationship. Continuance commitment or calculative commitment in the marketing channels and is the third dimension and reflects credit of switching costs associated with exit (Meyer & Herscovitch, 2001).

Franchisees with high levels of continuance commitment view relationship switching costs as expensive to leave their franchisor. Social exchange theory suggests that franchisors who want to grow in addition to maintain their current bases of franchisees need to inspect each dimension of commitment to understand what holds their franchisees to the relationship (Meek, Davis-Sramek, Baucus, & Germain, 2011).

tendency to leave:

Tendency to leave constitutes the supposed probability that a partner will terminate the relationship in the near future. The relationship between tendency to leave and actual turnover is constantly strong and positive. Additionally, tendency to leave represents a key attitudinal result that can provide approach about the quality of the relationship between the franchisee and the franchisor (Griffeth & Hom, 1988).

collaborative communication:

Communication may be considered the most important element in successful between the firms exchange relationships (Bleeke & Ernst, 1993).

Communication from customers or business partners, even in the form of a grievance, supports organizations with intelligence, earlier warning, and a greater alertness of the company or competitive environment (Rice, 2008).

Communication considered a serious feedback mechanism in regards to performance and the direction of future relationships, and it builds trust in the continuity of the relationship (Anderson & Weitz, 1989).

Communication represents a key element in developing and maintaining good channel relationships in a semi integrated channels such as franchising Communication represents an excessively wide fact (Anderson & Narus, 1990).

Communication frequency, defined as the extent of contact between franchisees and franchisors, represents an important part in social exchange because the most carefully designed relationship will fall down without good and recurrent communication (Bleeke & Ernst, 1993).

Frequent communication represents a close, committed ties, and reduces operating costs, decreases organizational disagreement, and increases steadiness among teams. Mutual feedback refers to communications where franchisees and franchisors talk with as opposed to talk past one another, assuring the importance of two way talk. Feedback reduces uncertainty and ambiguity and positively influences financial performance (Joshi, 2009).

Communication formality refers to the degree to which contacts between franchisors and franchisees are bureaucratic, planned, or structured as opposed to unplanned, short-lived, or ad hoc. The formality of communication often provides an evaluation of the basic bureaucratic and structure of communication. In dissimilar, formal communication is more direct and seeks to change behaviors by including or requesting specific actions. It also absolutely affects exchange relationships from both the buyer's and seller's point of views (Peters & Fletcher, 2004).

Communication rationality is defined as a situation where the franchisor displays reasons together with its supportive information for the franchisee to fulfill with a request. Information persuasion influence strategy, rationality represents a no forced influence strategy that assures a complete dispute structure consisting of the three structural elements of a claim, data and warrant. Thus, communication rationality probable positively affects social exchange relationships (Payan & McFarland, 2005).

contractual design:

Franchise contracts in general include a set of constraints. These constraints can be defined as contractual provisions enforced by a producer to constrain the act of one or several retailers.

This is represented by many ways as they are processed in Europe and the US, and by making the shifts of policy standards towards these constraints over time.

Investigate franchising relationships as a major topic of debate, comparing the extensive native franchise view with the economic one.

The structure of contracts is mainly determined by franchisor influence (Brickley, Misra, & Van Horn, 2006).

tying agreements in franchising:

In the last years, the franchise system of distribution has been submerged with legislation and litigation. Franchisee versus franchisor litigation has increased to the extent that some legal experts consider the legal problems facing the franchise industry to be of disaster extent.

Many of the famous franchising companies have found themselves taken to court as a result of disillusioned franchisees. These companies include Shakey's, Midas Muffler, Mister Donut of America, H&R Block, , The Southland Corporation (7- leven Stores), Chicken Delight, Schwinn, Chick N'Joy, Full Q'Nuts, Chock, Mr. Steak, Electric Computer Programming Institute, A&W, and Network Cinema Corporation (Jerry Lewis). The current legal disputes facing franchising fall into three main areas: misrepresentations by franchisors to franchisees about the operation of the franchise (disclosure problem), limitations by franchisors on the source of supplies or services bought by their franchisees (tying agreement problem), and heavy termination provisions agreed in the franchise agreement (the unpredictable termination problem).

The above mentioned problems are getting the attention of trade associations of the franchising industry, state legislatures, the Congress and the Federal Trade Commission (FTC), The two major franchising trade associations, (The International Franchise Association and the National Association of Franchise Companies), are concerned entities about the legal problems facing their members and have tried to establish its self regulation through certain rules and ethics.

Considering the case of franchising, the tying product is the franchise and the tied products are the supplies the franchisee must purchase to operate his business.

Tying agreements may happen out of a franchisor's effort to put control over both the quality and the uniformity of his trademarked products or services. And this kind of control can happen both legally and commercially. The federal law, according to the Lanham Act, provides that "a brand owner must insure that the products or services identified by the brand meet all the owner quality standards or risk cancellation or abandonment of his trademark rights." The Lanham Act, on the other hand, particularly provides that an antitrust violation is not condoned by trademark law.

Tying provisions in franchise agreements have to date expressed as both a trade regulation problem under Section 5 of the Federal Trade Commission Act and an antitrust problem under Section 1 of the Sherman Act and Section 3 of the Clayton Act.

The Franchisors should be awake of the conditions under which tying agreements are considered illegal (Hunt & Nevin, 1975).

Conditions for effective disclosure in the regulation of franchising:

evaluating disclosure as a principal regulatory tool against conditions for effective disclosure:

Disclosure is a form of informational regulation used to control the stream of information in a market (Ogus, 1994).

Disclosure is a popular regulatory strategy in the USA from the time when was its introduction in securities regulation in the 1930s (Case, 2001).

The purpose of information rules indicate the securities rules have been used to disclose risks to investors. Informational regulation is now used to protect investors, and consumers; famous examples are for both insurance and home mortgage products. It also applied in environmental regulation to provide the public with the required information about the recent activities of companies and their probable risks to local communities (Ripken, 2006).

A benefit for disclosure is to eliminate costs to the regulator in both monitoring and enforcement. And another benefit of using of a self regulatory quality of disclosure is decrease of estimations and mistakes by the regulator.

In general, disclosure works when allowing the receiver of the disclosed information to negotiate and/or to find out other alternatives in the market. Informational regulation facilitates private bargaining due to better transparency and efficiency of markets. By reducing redundant information and with them the transaction costs which obstruct successful bargaining disclosure increases justice and reduces market instability And by providing market participants equal chances to access to information, disclosed information helps receiver to take better choices among the different alternatives in the market.

Disclosure can promote trust and increase assurance in the market information (Ripken, 2006).

passive restrictions and franchisee failure:

Shirking is considered a significant problem in the management of retail outlets. If the owners of the firm cannot easily differentiate the effect of manager behavior on outlet performance from the effect of external factors then outlet managers will have an incentive to shirk (Rubin, 1978).

The provision of remaining leniency on the profits of a retail outlet that results from franchising provides a strong motivation for agents not to engage in shirking and therefore enhances the performance of the whole retail distribution systems (Rubin, 1978).

On the other hand, this argument of franchising provides a higher incentive to the fixed wage employment considers that the franchised outlets are run by owner operators. Consequently, if the franchised outlet is run by a inactive owner which hires a manager to run the outlet, then the useful effects of franchising on shirking are lost.

Passive ownership has received little attention to date in the franchising literature.

Though, inactive ownership is familiar in franchise relations (Shane, 1998).

And the final conclusions were first, it appears that the acceptance of inactive ownership limitations does not significantly affect the performance outcome. Second, it was found that movement away from the best decisions on inactive ownership positively affects the rate of franchisee failure in such systems (Vazquez, 2009).

Chapter Five: Business Performance

Optimizing franchisee sales and business performance:

franchise administration:

Franchising has successfully applied by multinational retails chains as an expansion instrument in overseas markets after investigating its advantages. The return of franchising includes allowing the firm to overcome resource constraints of inadequate capital and reduce the ranks of experienced managers.

Happening in the Franchising an exchange and transfer of excellence for complex tasks performed by the franchisees more efficient, bringing the cost curve in a way that is relatively quick. There is no need for monitoring its related costs because the franchisees are investing their own capital and is motivated to work hard for profitability (Preble & Hoffman, 2006) .

The franchise contract determine franchise partner selection, the franchise relationship, the use of master area of franchising and the supporting mechanisms, and this found to be the key methods by which international retail franchisors put forth control over their franchise networks.

The compulsory and non compulsory sources of power are determined in the franchise contract form and support mechanisms (Doherty & Alexander, 2006).

Franchisors value the useful concept of the mixed types of ownership and they try to maintain that mix over time, but still some evidence of a larger tendency to convert existing franchised outlets on a permanent base to a company owned outlets and gain higher access to resources.

A substantial efficiency is offered in franchising offers in promotion and advertising by increasing the value of a trademark and brand image.

In addition, it helps in managing each one of them risks, since franchisors can convert profitable franchise locations to a company owned operations, although this strategy raises ethical concerns.

Globalization has moved the concepts of co-branding and multi brand in franchising as a strategy to inspire and refresh growth in a in the prime retail food franchising sector. Because of the sector's requires finding out new means of expansion beyond the standard model of franchising a development trends such as several unit franchising, mobile franchising and co-branding happens (Dant & Kuafmann, 2003).

franchising and customer value:

Franchisees regularly do not be aware of the reason behind what is affects customer satisfaction is not the same reason what causes loyalty to the store, and as a result do not locate limited resources systematically among strategy plan affecting one or the other. Except if they are aware to the changing consumer behavior patterns, the elements of the retail mix cannot be isolated from strategy that could insulate loyal customers from attracted to competitors special offers (Miranda, Konya, & Havira, 2005).

A major difference exists in consumer perceptions of enjoyable shopping value along various retail brands. Consequently, customers seem that they can identify the exceptionality through the inside store experience that retailers are hardly working to achieve. So getting this value looks to be an effective source of differentiation. Retailers who are using the strategy of 'store as the brand' should go on to invest in creating a specific and a unique shopping experience to be available for their target customers., on the other hand, retailers should always be aware that although the enthusiasm and fun offered in the shopping experience, consumers come into view to be expecting value together with the right merchandise, at the right time, in the right place and at the right price (Carpenter, Moore, & Fairhurst, 2005).

The franchising growth is expected having a considerable impact on the development of retailing. Shopping performance at franchisee outlets indicates a serial relationship among tourists leading to get shopping satisfaction throughout the expected values on leisure attractions and store loyalty. Therefore, managers believe in major franchisee expansion on a demographic and territorial basis to increase the loyalty in customer shopping behavior.

In a sub-urban marketplace franchising is in some way is a recent phenomenon which requires adding of a new recreational facilities and retail infrastructures to attract leisure shopping.

One of the measures of retailing performance is the customer satisfaction. Buying souvenirs and leisure eating activities in fashion products, restaurants and, and expensive products point to the retailing strategy is becoming more customer oriented at franchisee outlets (Rajagopal, 2006).

performance measures in franchising:

The compensation arrangements are a success factors affecting franchise relationship. The franchisors provide a value of services to franchisees which strongly impacts the studied compensation arrangements; therefore the capital goal of these arrangements is to recover back the franchisors offered costs of the services. Adding to this, two extents of transactional quality are recognized from the franchisee viewpoint which includes contents and assistance. Conversely, these extents of transactional quality from the franchisor's opinion Aims at formality and determine of business opportunities while the relationship quality indicates variables such as trust between partners, mutual commitment and relational understanding (Monroy & Alzola, 2005).

Franchise branding:

the role of franchise branding in attracting franchisees:

Due to the spreading of franchises in the United States and internationally, a lot of franchisees have a wide range of franchising opportunities from which to select (Michael S. C., 2003).

Franchisors must compete in between by marketing their chance to franchisees To assist franchise growth. Accordingly, the franchisor should develop a "franchise brand" with which to differentiate their opportunity, and by this means of attracting franchisees.

The American Marketing Association describes a brand as "A name, term, design, symbol, or any other feature that identifies one seller's good or service as distinct from those of other sellers" (Association, American Marketing, 2010).

A detailed case of a franchisor marketing its franchising chance as a brand is franchise branding. Meanwhile it's theoretically similar to corporate branding and product or service branding (Aaker, Building strong brands, 1996).

Corporate branding takes place when a company creates organizational associations with the company's identity, reinforcing in a broad range of stakeholders' minds that the company will stand behind its products and services (Aaker, 2004).

Franchise branding considered different in quite a few key ways. First, the franchisor is specially marketing an opportunity intentionally to "sell" the possible franchisees a contract. And other, franchise branding concentrate on a target audience of possible franchisees while corporate branding is wider in its range of target audience (including potential franchisees).

In spite of being having different concept, a franchise brand should be similar to a corporate brand in many ways. One of the ways is that the franchise brand includes aspects of the organization's characteristics, for example, its core values and activities (Argenti & Druckenmiller, 2004).

In conclusion, the franchisor's corporate branding before signing a franchising contract aims to the franchisee which the franchisor will continue to invest in brand development (Mathewson & Winter, 1985).

market orientation and organizational identity:

The firm large generation, distribution, and sensitivity to market information is the characteristics of the market orientation (Kohli & Jaworski, 1990).

Executed best by the firms that observe the collecting and sharing of market information as extending beyond the area of the marketing department, focusing on the MKTOR conceptualization of market orientation as it is considered the most widespread and inclusive definition of the market orientation. MKTOR is consists of five dimensions: competitor orientation, customer orientation, long-term focus, inter-functional coordination, and profitability. Theoretically, market orientation is viewed as a one-dimensional construct due to the close relationships between the dimensions (Narver & Slater, 1990).

Inside the framework of market orientation, a customer orientation is the level to which a firm supports and understands a customer's entire value chain. Likewise, a competitor orientation is the level a firm understands and overcome competitors by considering both current and future ways and through it customer value will be created and maximized.

The direction of a firm toward long term targets is the long term focus with regarding of all dimensions of market orientation. Profitability considered as an intention and component of market orientation (Kumar, Subramanian, & Yauger, 1998).

entrepreneurial orientation and organizational identity:

An entrepreneurial orientation is described as the practices and processes which are characteristic of entrepreneurial companies. A firm have an entrepreneurial orientation is expected to display a combination of five characteristics: competitive, independence, innovativeness, aggressiveness, risk taking and pro activeness, these characteristics are expected to influence firm performance (Rauch, Wiklund, Lumpkin, & Frese, 2009).

Independence indicates the actions of persons or teams to face and track opportunities till completion. Whereas franchisors normally desire to standardize processes such that franchisees can deal with most issues by using of the operations guide, but not all of the matters can be addressed in this way, franchisees are considered a main support of funds and growth for franchisors (Lumpkin & Dess, 1996).


growth of franchising:

Franchising developed in two ways over the last 35 years, directions that are closely similar but not the same: domestic (Inside US), and the other is internationally.

Franchising started continued to grow, expand and change inside the U.S.A.

Even if the public perception of franchising is tied to fast food well-known brands, franchising includes more than 60 business sectors, from health to automotive services and education systems to home care and business services.

Franchising systems, usually opened one by one, constructed units all through the local market and then a state or a region till finally, a national chain, today expand both more quickly and in a variety of ways (Raab & Matusky, 1987).

Today numerous markets are flooded, because franchise companies are seeking places and locations they had before bypassed or overlooked (reducing sometimes the standard unit to make use of these opportunities) searching for more diffident urban or inner city locations, the use of drive-through or drive-ins, military bases, smaller strip malls, hospital food services and school. Franchisor may expand a hundred of chain or more units at one time by the purchase and exchange of some or all of the units of a less successful system.

A new type of franchisee is often a successful and experienced businessperson, who is quickly replacing the original "Mom 'n' Pop" investors. Maybe the most visible and noticed change is the growth of international franchising (Hoffman & Preble, 1991).

financing a franchise operation:

Past business success with record franchisors, or even newly started franchises with an appropriate business plan, obtain leasing arrangements, debt capital, and credit lines, for priority if such arrangements be present. Specialized financing programmes can be available in some countries within their banking system for established franchises with a personal resources and proper credit history to cover as loan security. Governments can help entrepreneurs; contribution pools of venture capital can be established to support them, private sector risk capital is also needed. Prime chosen locations in central positions or large shopping centers are easily available to known brand names, without detailed proof of their financial condition in developed countries such as Canada (Zeidman, 1993).

start-up franchisees are in a worse position, even in developed countries:

Franchisees have to confirm their actual net value and access to free cash reserves simply to start negotiations and may establish credit relations with a franchisor in terms of delayed payments of royalties and other franchising fees. This is vital in the set up periods where a detailed financial plan should help in integrating with initial financial burdens. Similar arrangements are being used in the reforming economies of developing and post-socialist countries. Three sources of a franchisor's earnings can be defined initial franchise fee, constant royalty or service fee, supplies and products and sale of equipment.

There is pressure on franchisors' profit margins from other franchisors competing to acquire franchisees in a competitive environment. The competition is on their offer for initial and ongoing franchise fees, sale of supplies of products and equipments. There are another conditions obtained that not directly affect the financial condition of the franchisee for example free provision of total training package at the franchisor headquarters and, elsewhere, deferred payments of the initial fee and the absence of incurred specific advertisement costs. In developed countries banks do not hesitate to finance franchisees on enhanced conditions than for other forms of SMEs (Hoffman & Preble, 1991).

Chapter Six: Conclusion & Recommendations


Franchising is now being used as a specialized marketing device to introduce new products and services to the public. And there are other developments.

Many American products are difficult to introduce into the Common-Market nations of Europe. Yet more American franchisors need to enter this market, so that their products can be sold directly to the franchised outlets and thus bypass the distribution channels through which the European countries could control the prices of American products in their respective countries. Also, large beverage firms are negotiating to establish franchises in the Iron Curtain countries.

Another future trend has to do with data processing. It would be most difficult to watch and control numerous franchised retail outlets without the use of processing.

In this context, the franchisor has invested the necessary resources to create and supply the franchise network (e.g. know-how transmission, training investments, and finance resources) and the franchisee has also made specific investments (e.g. initial investment, royalties) in the relationship. These specific investments act as an exit barrier when dissolving the franchise relationship. Therefore, franchisor and franchisee will only recover or increase the value of their investment if the relationship continues over time.

As well as specific investments, commitment also includes an affective facet reflecting both parties' positive attitude towards maintaining the relationship in the long term.

It appears that whilst some people enter franchising with good intentions and optimism for their future success in the system, others may use franchising as a means of entering the industry as independent operators.

Franchising is an inherently geographical business model. It involves creating territories or market areas which individual franchisees will be given trading rights to serve on either an exclusive or a non-exclusive basis.

Relying on franchised outlets for decision-making can bring about important efficiency gains by enhancing system-wide adaptability and franchisees 'satisfaction.

Regulators rely on disclosure in franchising, as they do in other contexts, largely because of its self-regulatory qualities. It allows the people who are in many ways best suited to the task, the parties themselves, to play a role in their own regulation. Though it is believed to be efficient as a regulatory tool, however, there is no evidence that disclosure makes a significant difference in consumer or market behavior in the franchising sector.

The performance of franchisee outlets depends on in-store attractions, supply and manufacturing management, quality, price and promotional strategies.


The future of franchising research is grown with opportunity to examine the franchisor franchisee relationship by grounding it in theoretical frameworks offered in both marketing and organizational behavior. Because of the importance of franchising in the domestic economy, and certainly given the recent hardships suffered by so many small businesses, examining the franchising business model, and specifically relationship and performance drivers, will become more critical. We have taken a small step to advance the field in this direction. Going forward, we urge researchers to tease out the relationship shadows, paying particular attention to relational variables that will create more insight about the potential benefits gained from stronger relationships and/or the pitfalls to avoid in the franchising context.

The widespread practice of tying agreements has harmful effects on the franchise system of distribution.

Franchisors obviously have a vested interest in the health of the franchise system and, therefore, should reconsider their policies of using tying agreements to surreptitiously generate revenue from their franchisees. Franchisors that are currently using tying agreements to generate the revenue needed to maintain their franchise programs should consider offering their franchisees new agreements with provisions that reflect an adequate royalty and a less restrictive supply program. With respect to franchisees that reject the new contract, franchisors legally may be able to continue to impose the purchase requirements.

Several franchisors have successfully converted the majority of their franchisees to royalty contracts, and these companies do continue to collect income from non royalty franchisees in the form of surcharges on certain supplies.

Efforts by franchisors to correct the problems associated with tying arrangements in franchising may forestall onerous, restrictive legislation and regulation, slow down the flood of litigation, and strengthen the franchising system of distribution.