The Concept Of Franchise

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Franchising is a type of business organisation which takes the form of a legal contract between the owner of a trademark (the franchisor) and independent business owners (franchisees) to operate under the owner's trademark to sell products or services in accordance with the owner's 'blueprint'. It is most common in sectors where there is a significant service component that must be performed near the customer and therefore requires outlets to be replicated and dispersed geographically (Combs et al, 2004).

The word "Franchise" in the commercial sector was originated in the US (Altinay, 2007). Franchise refers to right which includes granting of exclusive rights by a government authority via competitive bidding (Elango and Fried, 1997), granting of rights to distribute a manufacturer's product in a specified territory or location (Holmberg and Morgan, 2003) and granting of rights by a company (franchisor) for a third party (franchisee) to operate their business system using a common brand and format in promoting, managing and administering business (Elango and Fried, 1997). The development of the franchise business in the commercial sector has motivated researchers to research on franchise and its related issues and led to the emergence of franchise literature.

Most study has been done in the area of the Franchise business take the approach that the franchisee is a form of organisation aimed toward maximizing profit. These studies may include related question about the optimum proportion of franchise business and the appropriate mixture of outlets in the franchise system. Foil and lyles (1985) discovered that the ability of franchise business provide more opportunity for learning than the unitary organisation provide should be taken in account.

Solis-Rodriguez and Gonzalez-Diaz (2007, p.2) noted that the reasons to do franchise is because "..converting the manager of an establishment into an 'entrepreneur' who is paid with residual rent, they are better aligning the managers' interests with those of the chain, thus avoiding the problems of control and incentives that often arise in working relationships". This notation provides some indication that franchisees would be consistently assisted by franchisors in handling and managing the business and therefore, improves the alignment of goals between the franchisors and franchisees. Entrepreneurship is the capacity of an economy for innovation, investment, and expansion in new markets, products, and techniques. Entrepreneurship is not only application to business enterprises. It can also be done in hospitals schools and other social service industry. It has special or extraordinary features, such as creation of something new or something different. (Dr. Jesse D., Cyril M- 2005). As McDonald, provide the entrepreneurial environment to franchise owners. This helps them to take decision and run the franchise.

Studies in the franchise literature have also examined the success ability of doing franchise business (Frazer, 2001; Holmberg and Morgan, 2003). Frazer (2001) found that most franchisees decided to discontinue their franchise due to reasons such as human capital factors such as personalities, motivation, shirking, disputes, and industry experience as well as economic factors such as retail trade downturn. Frazer's findings indicated that the success ability of a franchise business might be impaired due to reasons, which may not be expected by the potential franchisees. However, one limitation of the existing franchise literature is the lack of research on the perceived prospect and success ability in franchising. McDonald provides the ongoing support to their franchisees, which is helpful for them. As mentioned in research analysis Edward, (franchise owner) comments that he was bankrupt after franchise establishment than the field service manager help him to establish success in his franchise.

Franchising has received significant attention in the empirical literature on contracting. The majority of empirical studies concerning franchising have focused on the determinants of contractual provisions, especially royalty rates (Lafontaine 1992, Lafontaine and Shaw 1999, Bercovitz 2000, Scott 1995). A puzzling empirical regularity, mentioned in all these studies, is the coexistence of franchised and company-owned units within chains (sometimes defined as "plural form", or "dual distribution"). However, most of the literature deals with dual distribution as a transitory phenomenon or a side issue.

By studying the evolution and determinants of dual distribution in North America, Lafontaine and Shaw (2001) have certainly provided important empirical insights on this issue. They found that the proportion of company stores tends to decrease in the first years of franchise and then stabilizes. This stability is interpreted as evidence that chains target a given proportion of company and franchised stores, referred to as the managerial control target. Moreover, this target is rather specific to each chain, even if it is influenced by the activity sector and the experience acquired before franchising. Lafontaine and Shaw also showed that the value of a brand name increases the proportion of company owned units in chains. They interpreted it as a way to protect the brand name value from franchisees' opportunistic behaviour. By limiting the number of franchised stores, a chain can enhance its brand name value. (Penard T; Raynaud E; Saussier S. 2002) A brand is not a name. A brand is not a positioning statement. It is not a marketing message. It is a promise made by a company to its customers and supported by that company (Sterne, 1999). Online branding is discussed in nearly every book on e-marketing or e-business. Some argue that in a world of information overload, brands become ever more important, because they save the customer time, by reducing their search costs. (Ward and Lee, 2000).

A large proportion of new businesses and new products fail due to the costs of the research and development needed to develop their product or service. Ray Kroc's (a Chicago based salesman with a flair for marketing) insistence that all McDonald's outlets sell the same food items and achieve the same quality has led to a standardisation of the procedures and great attention to detail with a great level of success. The cooking stages in McDonald's restaurants are broken down into small, repetitive tasks, enabling the staff to become highly efficient and adept. (

For example, some authors defend the idea that franchising is more profitable than company ownership. At the beginning of their business, firms could operate some units directly either to signal their type to potential franchisees (Gallini and Lutz 1992, Lafontaine 1993) or to credibly commit to protecting the value of their brand name (Scott 1995). One of the consequences is that the extent of company ownership should decrease with chain maturity.

On the other hand, other authors assert that the reasons for franchising are transitory (Oxenfeldt and Kelly 1969) and should disappear with chain maturity. Franchising only gives rise to temporary access to certain scarce resources, either capital (Caves and Murphy 1976), managerial talent (Norton 1988), or local information (Minkler 1990) that eases their expansion. A testable implication is that as they become established firms, this should reduce their reliance on franchising.

Actually all this links are valued of the franchise trademark. This value does not positively influence the royalties but also the ownership of Non-franchise Company. In this paper, researcher try to find out the difference between the franchise and non-franchise business and case study for franchise business is McDonald, which is well, know franchise restaurant in the world. In summary, studies in the franchise literature provided three main motivations for the franchisees to purchase and do franchising. However, these studies did not provide in-depth attributes of such motivations. Examining this limitation could provide further understanding on the franchise business particularly in UK.

This article provides an overview of the recent management literature on franchising, with special attention to its management control aspects. Franchising plays a prominent role in business life today. This form of entrepreneurship is increasingly being adopted in a variety of sectors, especially by retailing and service companies such as McDonald's, Holiday Inn, Body Shop, and Benetton. According to the Deontological European Code of Honour (2004), franchising is a system for the sale of commodities, services and/or the application of technology. It is based on a close and continuing cooperation between juridical independent and financially autonomous companies, namely the franchisor and his individual franchisees.

Hereby, the franchisor grants his franchisees the right and he puts them under the obligation to exploit a business in accordance with the business concept. Therefore, the franchisee pays the franchisor an initial franchising fee, periodical royalties and/or advertising fees. In return, the franchisee is granted the right to make use of the brand name, the trademark, to know how, the commercial and technical methods, the operating procedures, and other industrial or intellectual property rights. Moreover, the franchisee is supported by the enduring commercial and technical assistance from the part of the franchisor. This all happens during the term of a written franchising contract that is concluded for this purpose between the two parties. (Verbieren S., el at. 2008)

A franchise is not solely composed of the franchisor and his individual franchisees. Figure 1 depicts the complete franchising system, including the franchisor, the single-unit Franchisees, the multi-unit franchisees with their outlet managers, the master franchisees with their sub-franchisees and the managers of company-owned outlets. Most franchising chains adopt a dual distribution strategy, also referred to as the plural form, meaning that the chain is made up of both franchised and company-owned units (Srinivasan (2006)). Among the franchisees, a distinction can be made between single-unit and multi-unit franchisees. Multiunit franchisees own more than one unit and only franchisees that excel in their activities are granted the possibility of unit growth (Bradach (1997)). Other possible members of the bounded franchising network are the master franchisees. When franchisors expand their business in other countries, they can assign a master franchisee who signs franchise agreements on their behalf with sub-franchisees in a specified territory. Master franchisees receive the responsibility to select other franchisees, to offer training, to coordinate activities with local franchisees, to monitor performance and to implement the franchisor's strategies (Shane (1998b)). As mentioned by Foil and lyles McDonald provide training and education to their employers and franchisors. For the education purpose McDonald charge £5,000 which pay back after complete training. This training and support program takes 11-12 months where franchisee learn how to establish and run the franchise.

Elango and Fried (1997) review the franchising literature published before 1997 and distinguish three broad streams: franchising and society, the creation of the franchising relationship and the operation of a franchising system. One of their observations is the lack of attention to the manner in which franchising systems actually work to create value. They therefore call for research focusing on implementation issues, including the study of management control systems. Combs et al. (2004) review the empirical literature based on three key franchising constructs - franchise initiation, the subsequent propensity to franchise and franchise performance - from the perspectives of the resource scarcity theory and agency theory. Again, this paper hardly pays attention to the actual management of the relationships within a franchising chain. Although management control of inter-organisational relationships is extremely important, it has not yet been examined systematically in the franchising context (see Van der Meer - Kooistra and Vosselman (2006)).

Franchise Initiation:

Table 1 provides an overview of the literature on the decision to franchise. Panel A deals with the determinants of the extent of franchising. Five articles examine the franchisor's decision to franchise. Based on Michael (1996), Alon (2001) and Combs and Ketchen (2003), we know that high levels of business risk, human capital, firm growth rate and investment level have a negative impact on the share of sales through franchising and that size (outlet and system size), geographical scope, local managerial expertise and franchisor inputs have a positive impact. The importance of gender issues (see Dant et al. (1996)) and the type of franchising (social venture versus business format franchising) (see Tracey and Jarvis (2007)) have been studied more sporadically. The franchisee's decision to franchise has gained far less attention in the recent franchising literature. Factors having a positive impact on the franchisee's decision to franchise include industry risk, financial capital available at start-up, education level, salaried work experience (see Williams (1998)), perceived benefits of self employment, importance attached to the financial and business benefits of franchising and greater choice of sectors (see Kaufmann (1999)). Prior experience as a business owner is found to have a negative impact on the decision to become a franchisee (see Williams (1998)). Finally, Stanworth and Curran (1999) use a sociological approach for developing a theoretical model of franchising. Propositions are formulated with regard to franchising at a societal, organisational, and individual level, containing factors that influence the franchisor and franchisee's decisions to franchise.

From Panel B, we learn that the factors influencing franchisors to enter into multi-unit franchising include system growth rate (see Kaufmann and Dant (1996)), agency cost minimization, system-wide uniformity, brand value, system reward strategies that involve the granting of additional units, subsystem unit proximity and intra-system competition (see Weaven and Frazer (2007)). Moreover, multi-unit franchising can have an interesting control function for the franchisor. Kalnins and Lafontaine (2004) find that chain incentives and efficiency issues drive the ownership allocation decisions in these chains: franchisors allow their multi-unit franchisees to own units that are close to one another and they favour franchisees with relevant experience in markets with similar demographic characteristics to become multi-unit owners. Finally, Grünhagen and Mittelstaedt (2005) investigate the motivation to enter multi-unit franchising from the perspective of different types of franchisees. They find that multi-unit franchisees operating as area developers and sequential multi-unit operators are equally investment-oriented but that the sequential multi-unit operators are more likely to seek fulfilment of entrepreneurial goals.

From Panel C we terminate that all papers on the plural form are written from the perspective of the franchisor in addition to that agency theory and resource scarcity theory are the dominant theories used in illuminating the plural form. Agency theory emphasizes that managers of company-owned outlets tend to shirk because their income is fixed (see Brickley and Dark (1987)), while franchisees possess high-powered incentives as their variable income depends on their unit's performance (see Bürkle and Posselt (2008)). Consequently, the agency view assumes that the costs of risk and controlling franchised units explain the varying fraction of franchised and company-owned outlets (see Bürkle and Posselt (2008)). The resource scarcity view assumes that small chains adopt franchising to gain quick access to resources in order to grow fast. However, once the franchisor has acquired sufficient resources over time, he will take over his franchisees' units to obtain tight control (see Carney and Gedajlovic (1991)). This reasoning leads to the ownership redirection hypothesis, which states that a franchising chain will ultimately become 100% company-owned, because the more powerful franchisor will convert previously franchisee-owned outlets to non-franchise outlets over time, after his resource constraints disappear (see Oxenfeldt and Kelly (1968)). Empirical studies of the ownership redirection hypothesis, however, come to inconsistent conclusions. The diverging operationalization of the possession redirection concept is indicated as the major cause for the discrepancies (see Dant et al. (1996)).

Factors found to have a negative impact on the degree of franchised units include franchisor size (see Castrogiovanni et al. (2006a), Dant et al. (2008)), royalty rates (see Shane (1998a)), access to resources (see Dant and Kaufmann (2003)), specific knowledge of the firm (see Combs and Ketchen (1999)) and contractibility of local assets (see Windsperger and Dant (2006)). Incidence of internationalization, cash liquidity requirements imposed by the system on the franchisees, capital scarcity, and asset specificity are found to have a positive impact on the proportion of franchised units (see Combs and Ketchen (1999), Dant et al. (2008)). With respect to the level of initial investment and age of the chain, we find some inconsistent conclusions across the different studies. According to Shane (1998a), the initial investment necessary to open an outlet has a negative impact on the proportion franchised, while Dant et al. (2008) find a positive effect. Similarly, some papers (see Castrogiovanni et al. (2006a and 2006b)) find a positive effect of firm age, while others (see Dant and Kaufmann (2003), Dant et al. (2008)) find a negative impact of firm age on the degree of franchised units within a chain. In addition, Shane (1998a) provides evidence that the effects of system size, system rate of growth and geographic dispersion on the proportion of outlets franchised are rounded, which may settle some of the conflicting findings on the direction of these variables. Examining other non-linear relationships appears to be an important direction to advance the research on the plural form in franchising.

Panel D provides an overview of papers that deal with the franchisor's decision to franchise in the context of an internationalization strategy. Two papers examine the capabilities of international franchisors. International franchisors appear to have developed a greater capability to bond against and to monitor potential franchisee opportunism (see Shane (1996b)). However, the ability to develop the specific set of required capabilities of international franchisors appears to shift both back and forward over time in a dynamic process (see Fladmoe-Lindquist (1996)). Three papers deal with the choice of organisational mode for international interfirm collaborations (i.e. franchising versus other modes such as equity joint ventures and management service contracts). Factors influencing this choice include host country environment, firm strategy (see Contractor and Kundu (1998), Dunning et al. (2007)), the availability of a support infrastructure and the possibility to imitate capabilities (see Erramilli et al. (2002)). Finally, Welsh et al. (2006) provide an overview of the extant literature on international retail franchising and a conceptual model of the stakeholders of international retail franchising.


In table 2 we divide the extant research on franchise performance into three sub-themes, namely 'growth and survival', 'learning and entrepreneurship', and 'fit with strategy and effect on performance'.

More than half of the papers on performance deal with growth and survival (Panel A). Shane (1996a) argues that franchising, as compared to other hybrid organisational forms, has a positive effect on network growth and survival since it overcomes managerial limits to firm growth. However, Lafontaine and Shaw (1998) conclude that the growth rate of business format franchising is at best commensurate with the growth rate of the economy as a whole.

Factors with a positive impact on franchise system growth include franchisor growth orientation, franchisee start-up costs (see Castrogiovanni and Justis (2002)), multi-partner franchise system start-ups, franchise system piloting, prior franchising experience of the franchisor (see Stanworth et al. (2004)), lowering of royalty rates as the system ages, low upfront franchise fees rising over time, low initial investment, financing of franchisees (see Shane et al. (2006)) and close adherence to the original franchise practice (see Szulanski and Jensen (2006)). Industry growth, franchisor age (see Castrogiovanni and Justis (2002)) and adaptation by the subsidiary that removes the diagnostic value of the original franchising practice (see Szulanski and Jensen (2006)) produce a negative effect for network growth. Grünhagen and Dorsch (2003) investigate how franchisees' perceptions about their franchisor's value are related to the franchisees' decision to expand their franchise operations. The results show that franchisees recalling an earlier expansion decision have stronger positive perceptions about their franchisor's value than franchisees contemplating an expansion of their operations.

Four papers in Panel A deal with survival of the franchise system as a whole. Passive ownership by the franchisee, franchisee cash investment, franchisee experience, geographic concentration of the system (see Shane (1998b)), legitimacy of the franchise system (i.e the degree to which an organisation's activities are taken for granted and/or the extent to which a new form conforms to recognized principles or accepted rules and standards), efficiency of the franchise system (see Shane and Foo (1999)), contracting efficiency and adoption of exclusive territories by new franchise chains (see Azoulay and Shane (2001)) have positive effects on the survival of new franchising chains, whereas complexity of the franchise system and master franchising (see Shane (1998b)) have negative effects. Shane (2001) finds that large firms that adopt policies which screen agents, signal quality and control agent's free riding behaviour are more likely to survive and that changes in system size require changes in franchisor policies to ensure survival.

Finally, the rest of the papers in Panel A look at survival and failure of business units in a franchising chain. Bates (1998) examines the survival patterns among franchise and non-franchise small firms and concludes that the purchase of a franchise by a newcomer is unlikely to reduce the risks facing a new business start-up. One of the main reasons is that newcomers have to compete with many newly-opened units in mature franchising niches owned by multi-unit franchisees with greater experience and resources. Kalnins and Mayer (2004) provide an overview of the importance of local and distant experience of the franchisor and the owner at the time of the unit's founding on the unit's survival. Falbe and Welsh (1998) analyse franchise executives' perceptions of the importance of a number of characteristics associated with franchisee success and failure and find significant differences in the perceptions based on the country location of the franchisor and on the percentage of franchisee-owned units in the chain.

Panel B provides an overview of franchising papers on learning and entrepreneurship. Two papers deal with learning. Ingram and Baum (1997) find evidence that franchisors are superior learners and that franchisees do not enjoy a benefit from their experience with franchised units. Sorenson and Sørensen (2001) conclude that company-owned and franchised units complement each other because they provide different types of organisational learning: managers of company-owned outlets exploit more, while franchisees explore more. The other three papers in Panel B deal with entrepreneurship. Kaufmann and Dant (1998) provide a theoretical model on entrepreneurship in franchising and conclude that franchising provides a unique and fertile setting for research in entrepreneurship. Since then only two empirical papers have been published on this topic. Falbe et al. (1998) find that franchisor size, franchisor age, franchisor growth and time in franchising (i.e. the time between the establishment of the company and the establishment of a franchising system) have an impact on the entrepreneurial strategies and innovation efforts of franchisors and their support of entrepreneurial activities by franchisees. Clarkin and Rosa (2005) conclude that cooperative and adaptable relationships between franchisors and franchisees allow room for entrepreneurial activity by franchisees with a positive effect on performance, but that restrictive systems are likely to perform less well.

Panel C contains nine papers that explore the fit with strategy and the subsequent effect on performance. Four papers deal with performance effects of franchisors' strategies. Hoffman and Preble (2003) investigate franchisors' inclination to follow a conversion franchising strategy, which is a strategy where new franchisees are added to a franchised system by recruiting existing independent entrepreneurs or competitors' franchisees. They conclude that

conversion franchising may offer economic resources and skills, which may serve as sources of competitive advantage. A franchising strategy may also lead to a first-mover advantage through the pre-emption of valuable real estate and desirable mind space of customers (see Michael (2003)). Combs et al. (2004) identify different types of franchisors and conclude that the group that has the strategy to franchise because of resource scarcity exhibits poorer performance than other types of franchisors. Srinivasan (2006) investigates the effect of a dual distribution strategy on intangible firm value and finds that this effect can be positive or negative depending on combinations of several firm characteristics such as age, scope of vertical integration, advertising, financial leverage and financial liquidity.

Four papers research the link between franchisees' strategies and performance. Litz and Stewart (1998) compare small businesses' strategy to compete as a franchisee or as an independent retailer. They conclude that franchising adds value to a small business and that the performance impact may not be due to cost advantages, but rather comes from the use of the trade name as a market signal to potential customers. Michael (1999a) concludes that franchising also provides an instrument for product differentiation for entrepreneur franchisees and Achrol and Etzel (2003) find evidence that franchisees in different types of markets should adapt their goals in order to gain a better performance. Finally, Yin and Zajac (2004) find that franchised stores with their more decentralized structures are more likely to pursue strategies that emphasize flexibility, whereas company-owned stores tend to emphasize predictability. Furthermore, they show that this strategy-structure fit leads to better performance. The last paper in Panel C, Baucus et al. (1996), analyses how consensus between franchisors and franchisees on means for product and brand development relates positively to the franchise system's competitive advantage. They conclude that consensus on the means of pursuing efficiency exhibits a positive relationship with business performance and franchisees' satisfaction.

Franchise vs. Non-franchise

Consumers buying grocery and other everyday products can select from different brands and own brands within the same product type and choose to shop for the same products in different types of retail outlet. Similar products often sell at very different prices across the market. The main aim in this report is to explain why. Potential answers may be found in real differences in product quality, in differences in the cost structures of the companies in the different value systems, or in their interface costs, or that the customer is willing to pay a premium for brand imagery. (G. Davies, E Brito 2004)

Most evidence on franchise survival rates in forthcoming from journalistic sources. A recent ad in Business Week, for example, claimed that. "A franchisee has four times greater chance to succeed than as entrepreneur who launches a new independent business." Factual underpinning for this claims were not apparent. At the other end of the journalistic spectrum, the February 1994 issue of McCall's magazine claims that 50.7% of Decorating Den's franchisees terminated operations during the three year period ending in December 1992, Decorating Den franchisor that grew spectacularly during the 1980s, its franchisees invest between $17,000 and $50,000 to launch their forms.

Individual franchisors and the international franchise association disseminate business failure rate. Suggest that 92% of franchise business start-ups are still in business at the end of five years, versus only 23% of the Non-franchise business. (Bates T. 1995) Even my research claims that franchise start-ups have vastly higher survival rates than Non-franchise (independence business) cannot supportive.

McDonald (a Franchise)

McDonald's is not just a very large MNC; it could be argued that the company is a phenomenon in its own right. One recent article described the company in terms of globalizing culture and belief systems (Appleyard, B.,1994). George Ritzer has gone a stage further and sees societies across the world going through a process of "McDonaldization". (Ritzer, G.,1993)

The business started by the McDonald brothers in 1937 began franchising in 1955. Today the company has well over 13,000 outlets in 53 countries (Frantz, J.,1993) . The company has reported a profit increase every year since 1960. In 1990 the company reported turnover of $6.8 billion and profits of $800 million. By 1993 turnover had reached $24 billion. McDonald's International is now the fastest growing segment of the McDonald's Corporation (Appleyard, B., 1994, Levine, S., 1991)

In 1975 the company had already opened stores in Europe, Asia and the Americas but at that time only 8 per cent of sales came from outside the USA. Ten years later this figure had increased to 20 per cent. McDonald's International was now generating $2.1 billion in food sales outside the USA (Love, J.F., 1986). By the mid-1990s it is expected that 50 per cent of McDonald's profits will come from outlets outside the USA (Shapiro, E,1992). Statistics abound: many billions of burgers have been sold; the Moscow McDonald's for example sells on average 30,000 hamburgers everyday with an average turnover of $1.5 million per month (Frantz, J.,1993.)

In 2009, McDonald's is a constant presence on the high street, no matter what the economic conditions. And that dependability is something the community values in difficult times when money is short. It's a great feeling to be able to help out the local people you rely on. And it's one of the most rewarding aspects of being a McDonald's franchisee. (

"McDonald's is Japanese," retorted Ed Lee, a resident of Japan, about the international franchise. For many, McDonald's has become a local part of their culture and no longer looked upon as "American." For others, it screams "American" as McDonald's capitalizes on its high productivity, fast service, low cost, and abundance of restaurants. In today's competitive marketplace, numerous American restaurant chains are attempting to enter international markets. As McDonald's faces stiff competition in the United States, it looks outside its borders for the majority of its profits. (Schnaubelt c., 2002)

Paul Crocker had run a number of successful petrol station businesses before taking on a McDonald's franchise in 1995. He now operates five restaurants in Kent, "The secret," says Paul, "is a combination of fine tuning operational performance and enticing new customers into the restaurant." He does this by getting out into the community, and seizing every opportunity there is to sponsor events and distribute vouchers so that people have an incentive to visit.

"McDonald's is great if you're competitive," Paul adds. "There are lots of measures to show you how you're performing regionally and nationally - as well as your own figures for last week and last year. I just like to beat targets. It gives me a buzz." (Crocker P., 2007)

[McDonald's profit]

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