Franchisees Activities As Entrepreneurship Commerce Essay


Franchising has turned into one of the fast-growing business forms from last decades and due to creating job opportunities, downsizing and economic development have received a lot of attention (Dada, Watson, & Kirby, 2010; Fable, Dandrdge, & Kumar, 1999). Franchising, also has been considered as one of the fast growing business form [4,2] for increasing prevalence of multiunit development (Kaufmann and Dant 1996) and international expansion (Hoffman and Preble 1993; Shane 1996a).[1,15]

Franchising is a contract between two legal firms in which one part (franchisee) receive the right to use the trademark or the entire business format of another part (franchisor) by paying an entry fee and royalties. (Grünhagen, DiPietro, Stassen, & Frazer, 2008). In this relationship franchisor is responsible to provide initial and ongoing services such as initial training, providing the raw material, management consultant ; and franchisee must develop franchisor's product and services in new geographical market and avoid to jeopardize brand equity. …..( References)

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More than 50 percent of retail sale result from the franchised business (p1:14) There were more than 158,625 franchises with approximately $ 209 billion turn over in the service industry in the United States in 2004. Franchising also has created about 4,145,613 jobs in the United States (Ramı´rez-Hurtado, et al. 2011a)

According to Michael(1996) considerable parts of the sale in services industry such as restaurants (46%of sales), tax preparation (67% of sales), specialty food retailing (55%), printing and copying (71%), and lodging (39%) are in result of franchising. Although franchising because of increasing impacts on business studies has been subjects of the wide variety of several disciplines (Dant & Kaufmann, 2003) include: economic, strategic, marketing, entrepreneurship and law; but there is limit attention to franchising from entrepreneurship perspective (P1:16) . In entrepreneurship perspective , franchising is a way for run a new business (Combs, Michael, & Castrogiovanni, 2004)or as an entrepreneurial growth strategy .

Previous studies emphasize on necessity of innovation and entrepreneurial activities in high competitive environment (p1:12). Business format franchising , as well is included the wide criteria of entrepreneurship definition such as new venture creation, and driven by opportunity recognition (p1:9). Nevertheless, in domain of entrepreneurship, franchising has been viewed skeptically by many scholars [2,39].

There is consensus that the majority of franchisors activities are considered as entrepreneurship , but this notion is disputed with regard to franchisees (p1:10) [12,23] . Franchisors, the owners and often the creators of a franchise concept, are widely accepted as entrepreneurs (Falbe et al., 1998), consistent with the risk-taking (Scase, 1997) and innovative profile (Filion, 1998) associated with individual entrepreneurs. [15,3]. Franchisors explore a opportunity for run a new business, expand their business and also new ideas for value creation -p2,6- "In sum, franchisors are more likely to be viewed as entrepreneurs" -p2,12-

Paradox in entrepreneurial activities of franchisee has made a doubt in considering franchisees' activities as entrepreneurship [4,6] . In one hand, in franchisee context , some believe opportunity is always identified and also franchisor help them in exploitation [2,22] . According to Shane (1996) franchisor protect franchisee from new venture creation risk(p1:11). In this view some authors believed franchisees, converse a franchisor , have been characterized as the antithesis of entrepreneurs. First, it is perceived that franchisees play little or no role in the creation or innovation process of the business [15,4] . Second, franchise agreements, crafted by franchisors, contain both prescriptive and restrictive provisions, leaving little or no room for entrepreneurial creativity by franchisees (Clarkin, 2002) [15,5] . third, replication and standardization are the hallmarks of success within a given franchise system, in stark contrast to the creativity normally associated with entrepreneurship. Innovation and adaptation, typically initiated by franchisors, is directed to franchisees for implementation in their respective market [15,6] . In another hand opposing view about considering a franchisee as an entrepreneur focus on opportunity, risk and innovation [2,23]. Ignoring the franchisees' capabilities and abilities in innovation and introducing new products can prevent a franchise system in take advantage of environmental change [5,5] Franchisees by develop new offerings, modify existing ones, and find solutions to franchise system problems can drive changes in maturing system. [5,4] In this view franchisees act as entrepreneurs owning for-profit business ventures, innovating to create new local organizations, and seeking growth in financial performance and via additional franchise units. [3,7]

Entrepreneurship as a multidiscipline phenomenon has received contradictory set of definitions [3,4] and this diversity of conceptualizations of entrepreneurship used by various scholars. Identification of unique aspects of entrepreneurship research is more better than unique definition of entrepreneurship [3,1]All scholars who have studied entrepreneurship believe there is a "thing as entrepreneurial process" [8,15]..Study of process has pivotal role in the nature of entrepreneurship [8,9] .Study of entrepreneurial process well suited for both theoretical examination and for practical application [8,16]

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Although, some authors studied entrepreneurship in franchise context, but most of them examine the franchising in entrepreneurship domain only based on entrepreneurship definition. Beside, most of the articles in franchise studies focused more on franchisor point of view and franchisee point of view has receive very limited attention amongst scholars. So this research is going to examine whether according to entrepreneurial process, franchisees' activities can be considered as entrepreneurship

There for in this study, first we studied the literature of entrepreneurial process then examine the franchisee's activities in entrepreneurship context.

Theoretical background

Entrepreneurial process

Entrepreneurship and entrepreneurial activites have crucial role in solving economical problem of countries. (p1:7) Economical inefficiencies can be discovered and eliminated through entrepreneurship [10,15] Entrepreneurial driven innovation is a critical engine which driving change [10,16]

franchising systems as well need entrepreneurial activities to not only survive in high competitive environment also take advantage of it to have better performance than their rivals. (p1:49)

There is no singular embracing and general theory to explain the entrepreneurship [8,33]

Most of the researchers limit definition of entrepreneurship to who a entrepreneur is and what she or he does? [10,2]

"we define the field of entrepreneurship as the scholarly examination of how, by whom, and with what effects opportunities to create future goods and services are discovered, evaluated, and exploited (Venkataraman, 1997)" [10,5]

For example, Shane and Cable (1997) define entrepreneurs as "individuals who receive their compensation in the form of residual claimancy on the proceeds of a firm and who also have operating control of an organization".[3,6]

Entrepreneurship process

Study of process has pivotal role in the nature of entrepreneurship [8,9] Explaining the process of firm creation is important in entrepreneurship [10.12]

Entrepreneurial process is ""all the functions, activities, and actions associated with perceiving opportunities and creating organizations to pursue them" (Bygrave, 2004, p. 7).[8,26]

There are specific concepts in entrepreneurial process like social networks; the concept of opportunity ; the cognitive processes and routines of successful entrepreneurs; and the study of environmental or contextual factors which facilitate or restrict entrepreneurial process by entrepreneurs [8.14]

"Often, process models of entrepreneurship appear without explicit reference to their theoretical underpinning (Ucbasaran et al., 2001)" [8,13]

Examination of entrepreneurial process in four dimensions 1- distinctness 2- generally 3- accuracy and 4- simplicity [8,34]

"Of the 32 models, 20 were conceptual constructs and 12 were based on empirical evidence" [8,42]

Stage Model: divide into a priori stages major tasks or phases; One major weakness is that they tend to narrow the scope of investigation and that temporal orders of events do not fit the proposed stages and/or often overlap.

Static Framework: characterizes the overall process of venture creation without examining the sequence of activities, consists of a limited set of variables connected by speculative causal links (e.g., Gartner, 1985); process oriented but do not capture sequence of dynamics.

Process Dynamics: employs qualitative methods to examine how and why variations in context and process shape outcomes; often interpretive, temporal, and change oriented.

Quantification Sequences: is a historical sequence based approach of the new venture creation process; this approach does not allow researchers to understand the dynamics of how antecedent conditions shape the present and the emergent future within the process; Carter, Gartner, and Reynolds (1996) identified three broad activity profiles: up and running, still trying and given up.

Other: any models that do not fit within the definitional parameters of the above four models.

Only 4 of the 32 process models, works by Gartner (1985), Bruyat and Julien (2000), Sarasvathy (2006), and Shane (2003) and were considered as converging on conceptualizing the entrepreneurial process by what was simultaneously generic and distinct about the process. [8,44]

Shane's (2003) model of entrepreneurial process

As an attempt to mend this division, Shane sets out some necessary conditions for a framework that he believes has potential for unifying the field: (1) the existence of profit based (objective) opportunities that may be exploited through the application of new means end relationships, (2) a variation among people in their willingness and ability to act, (3) a need to embrace uncertainty/risk bearing, (4) a requirement for purposive organizing, and (5) a requirement for some form of innovation. [8,64]

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Entrepreneurship involves the nexus of two phenomena: the presence of lucrative opportunities and the presence of enterprising individuals (Venkataraman, 1997) [10,3]

Therefore according to Shane's model of entrepreneurial process, in this article we focus on three dimension on entrepreneurship: (1) focus on the existence, discovery, and exploitation of opportunities; (2) the influence of individuals in risk taking and uncertainty and (3) focus on some form of innovation.

The Existence of Entrepreneurial Opportunities

Entrepreneurial opportunities are requisite element of entrepreneurship [10,17] Opportunity Central aspect of entrepreneurship

"Entrepreneurial opportunities are those situations in which new goods, services, raw materials, and organizing methods can be introduced and sold at greater than their cost of production (Casson, 1982)" [10,18]

Different types opportunities can influence on different strategies for exploiting the opportunities.

"entrepreneurial opportunity is a situation in which a person can create a new means-ends framework for recombining resources that the entrepreneur believes will yield a profit. The main difference between an entrepreneurial opportunity and many other situations in which people seek profit is that an entrepreneurial opportunity requires the creation of a new means-ends framework rather than just optimizing within an old framework." [shane , p18]

He goes onto to clarify by contrasting new means-ends frameworks against simply optimizing within an old framework. In this way Shane implicitly aligns his conceptualization of entrepreneurship with innovation.[8,65]

Characteristics of an opportunity influence the entrepreneurial process.

An entrepreneurial opportunity, therefore, consists of a set of ideas, beliefs and actions that enable the creation of future goods and services in the absence of current markets for them (Venkataraman, 1997) [three view]

Entrepreneurial opportunities can be divided into two categories. Some opportunities might arise as a result of the innovative activity of the potential entrepreneur, making the innovator the only one who is in a position to observe the existence of the opportunity. Other opportunities arise because people see that the market offers an entrepreneurial opportunity, perhaps as simple as buying something cheaply in one location and selling for more elsewhere, or perhaps as complex as buying inputs, combining them in a new manufacturing process, and selling a new product for a profit.

Schumpeterian opportunities are innovative and break away from existing knowledge, while Kirznerian opportunities are not very innovative and replicate existing organizational forms.[shane,21]

The first type of opportunity is open only to the innovator, because nobody else is in a position to observe the innovation, whereas the second type of opportunity is open to anyone, because it relies only on seeing an unexploited market using generally available information.[origin of ]

Kirzner's emphasis on the equilibrating function of entrepreneurship [ origin of]

Entrepreneurship, as described by Kirzner (1973) is more in the spirit of the second type of activity. [ origin] For it to take place, however, there must be a market in which the profit opportunity can be realized.

Therefore, Kirznerian opportunities reinforce established ways of doing things, whereas Schumpeterian opportunities disrupt the existing system.[shane, p20]

Taxonomy of Opportunity Generation Processes

By now we have identified two axes describing the heterogeneity of opportunity generation processes: the active-passive axis and the subjective-objective axis. The combination of these two axes makes it possible to separate between four broad categories of processes (Figure 1): opportunity discovery (passive-objective), opportunity search (active-objective), opportunity creation (active -subjective) and opportunity occurrence (passive -subjective). Opportunity discovery takes place when the opportunity objectively exists, and it can be recognized by the entrepreneur even though (s)he is not actively searching. Opportunity search supposes for more active search for finding a business opportunity, considering that the opportunity can be objectively recognized. Opportunity creation and opportunity occurrence on the other hand are the opportunity generation processes in which the entrepreneur's (subjective) abilities, experiences, prior knowledge and actions make the opportunities to come into existence. The opportunities are therefore formed rather than recognized. The difference between these two categories lies in the extent of active search. Opportunity creation takes place when the entrepreneur actively searches for a business opportunity and uses her subjective capacity and resources to create the opportunity. In some cases the opportunity can occur due to entrepreneur's special skills and resources, even though (s)he is not actively looking for (this particular) opportunity, i.e. opportunity occurrence.[alsos& kaikonen]


Schumpeter identifies following five types of innovations that define the entrepreneurial act (note: the bold heading is mine).

(1) The introduction of a new good - that is one with which consumers are not yet familiar - or of a new quality of a good.

(2) The introduction of a new method of production, that is one not yet tested by experience in the branch of manufacture David Riesman's distinction between internally and externally guided people is somewhat similar to Schumpeter's concerned, which need by no means be founded upon a discovery scientifically new, and can also exist in a new way of handling a commodity commercially.

(3) The opening of a new market, that is a market into which the particular branch of manufacture of the country in question has not previously entered, whether or not this market has existed before.

(4) The conquest of a new source of supply of raw materials or half-manufactured goods, again irrespective of whether this source already exists or whether it has first to be created.

(5) The carrying out of the new organisation of any industry, like the creation of a monopoly position (for example through trustification) or the breaking up of a monopoly position. (Schumpeter, 1934, p. 66).


Risk-taking refers to a people's willingness to seize a venture opportunity even though it does not know whether the venture will be successful and to act boldly without knowing the consequences. [11,53]

In some ways, all of the approaches to internal development that we have discussed are potentially risky [11,54]

Three types of risk that organizations and their executives face are business risk, financial risk, and personal risk:

"• Business risk-taking which associated with entering untested markets or committing to unproven technologies."

• Financial risk-taking requires that a company borrow heavily or commit a large portion of its resources in order to grow. Risk is used in this context to refer to the risk/return tradeoff that is common in financial analysis.

• Personal risk-taking refers to the risks that an executive assumes in taking a stand in favor of a strategic course of action. Executives who take such risks stand to influence the course of their whole company and their decisions can also have significant implications for their careers.

Entrepreneurship from agency and resource allocation theory

According to the franchising literature there are two main theories which explain the existence of franchising. Resource acquisition model in which franchisee is considered as a source for expending the business [ reference]. According to this theory franchisee are more familiar with local market knowledge [3,19] and Franchisor uses the franchisees local knowledge in entrepreneurial way to develop their business to local market. [6,15]

Second theory is agency theory in which franchisor solve the shirking and monitoring problem through the franchisee and franchisee are expected to seek local market opportunities proactively while franchise manager could not take advantage of local market due to hierarchy and constraints [3,20]

Therefore in this article we are going to examine whether franchisee's activity , according to three major dimension of entrepreneurship include opportunity , risk taking and innovation , in running a franchised outlet is viewed as entrepreneurship.


Qualitative studies are more likely to be better when greater depth in a wider variety of situations happened. (Cope, 2005) Strategy of inquiry in this research is the case study. Case study approach can convey an alternative to quantitative franchising research (Dada, Watson, & Kirby, 2010) , which make it difficult to study it in detail.(Saraogi, 2009). According to Yin (2003) when we want to investigate a contemporary phenomenon in real-life context and there are no clear boundaries between phenomenon and context a case study will be used. (Yin , 2003, p 13). Case study produces "contextdependent knowledge" for developing a phenomenon(Gauzente & Dumoulin, 2012) In case of new phenomena like franchising, case research conveys better methodology for research(Perrigot, Kacker, Basset, & Cliquet, 2012). According to previous literature more qualitative methods are needed in franchising studies (Elango and Fried, 1997; Gauzente, 2002, Dada, 2010).

According to Eisenhardt (1989), although it is impossible to know how many cases are sufficient in a qualitative study, selecting between 4 and 10 cases usually works well (Eisenhardt, 1989). According to this, authors in franchising studies have followed this recommendation for case selection (for example, Dada et al, 2011; Choo et all, 2007; and Merrilees and Frazer, 2006).There for in regard to the replication approach (Yin, 2003; Eisenhardt, 1989) , six franchisee from two different franchise system in Iran were purposely selected(Patton, 2002) in this study.

According to Yin (2003), a case study includes both single and multiple case studies; and in order to provide richer qualitative date, multiple case studies are preferred. According to the replication logic (Yin, 2003) and to provide better understanding of considering franchisee's activities , six cases from two franchise system in Iran were purposely selected. Several data collection methods have been done in this research. For gathering data, semi-structured interviews and observations were used to be able to provide more elaborated and detailed data. According to(Dada, Watson, & Kirby, 2010) at least two respondents from each firm in the franchise agreement were interviewed (1999) First, to get familiarity with the cases; within-case analysis was made (Eisenhardt, 1989; Yin, 2003) then the cross cases' analysis has been made (Yin,2003). Collected data was grouped in codes, (according to both predominant coding based on literature and also emerging coding) (Creswell, 2009), and after that became related to each other in similar themes.

Cases description

Shila restaurant chain Shila is a franchise in restaurant industry in Iran that is established in 2001. It has 18 franchised out. Four major services are offered in Shila's chains include Hotdog, Berger and Sandwich, Pizza and Appetizer, also soft drinking. Parent company in Shila's chain has set some standards in location design, supplying the product, pricing, customer services, quality and health, and human capital. According to organizational value in Shila, they committed their outlets committed to clients' rights, high quality in their product and services, healthy cooking methods, qualified staff knowledge and behavior. High quality of raw material, cooking the food in healthy way and without oil, use to fresh vegetable and use of food grade for packaging the product are distinctive offered services in Shila's chain. Provided services by parent company to outlets include: doing business under the Shila brand and trade mark, helping in location design according to standards, initial training, helping in planning and local advertisement, offering the operational manual, supplying the raw material and equipment, continues quality control, customer relation services and getting the feedback for continues improvement, annual seminar and sharing the best practices' experiments. In this research, three more successful franchisees were selected for interview and more studying.

Icepack Iranian

Icepack Iranian as the first proven and well established franchise in food industry in Iran is found in 2001 after its founder introduces a new product of ice cream, which is named Icepack with copyright for the company. Icepack spread more than 100 outlets less than six months after the running. At the moment, it has 280 franchised outlets in Iran and other countries. Although, main product of this chain is a special kind of ice cream with several tastes, some other products such as milkshake, fruit juice, coffee, donate and popcorn, also, is offered in Icepack outlets. Parent company in Icepack chains is responsible for provide all raw materials include ice cream, glass, pipe and package; brand promotion, supplying the equipments, initial training, helping in planning and local advertisement, offering the operational manual, concentrate accounting, quality control and customer relation management. All raw materials in Icepack are made by companies, which are working under the control of the parent company. Icepack as an ice cream has a copyright for its formula, and no other companies are allowed to copy and produce it, in fact, Icepack has been established as a unique product different from other kinds of ice creams. Three successful franchised outlet form Icepack Iranian were selected to have more elaborated view.