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Geographical Pressures to Deviate from Franchise Formats Proposal

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Updated: Jun 19th, 2019

Introduction

Background to the study

Cox and Masson (2007, p.1054) define franchising as ‘contractual business relationships involving the franchisor and the franchisee, which operate as legally independent business entities’. Through such relationships, franchisees have the legal right to use the franchisors’ business name, products and services, blueprint, or specialised aspects in their trading process.

Cox and Masson (2007, p.1055) add that the ‘franchisor offers the franchisee the necessary support systems necessary to establish the business’. By 2010, the presence of franchises was evident in approximately 75% of all countries in the world (Truitt 2006).

Subsequently, franchises have significantly contributed to the economic growth of the global economy by stimulating the retail sector, creation of employment, and contribution to country’s Gross Domestic Product (GDP) (Stanworth, Stanworth, Watson, Purdy, & Heleas 2004).

Therefore, franchising is a proven business concept. Many investors are of the opinion that adopting the franchise format can improve the effectiveness with which an organisation maximises its profit as opposed to independent start-ups. The concept of franchising business has experienced significant challenges in different parts of the world.

For example, the number of franchises declined from 1100 to 1025 during the period ranging between 2008 and 2010 (Buchan 2013). Despite this aspect, a report by the Franchise Council of Australia indicates that the franchise format has played a remarkable role in the growth of small businesses in the country (Buchan 2013).

Problem statement

Despite the contribution of franchising in promoting businesses’ capability to achieve high profitability, this business format has come under intense criticism due to its standardisation concept. Previous franchising literature has cited the level of autonomy and independence associated with franchising as major concerns.

Tuunanen and Hyrsky (2001) argue that standardisation is one of the key components of franchising. This assertion means that business format franchising is based on the model of ‘cloning’, whereby a business deals with standardised products and services. Therefore, the products are sold under similar trademark or trade name.

Under the concept of standardisation, the franchisee is required to adhere to the operational parameters set by the franchisor (Hoy & Stanworth 2014). Some of the standards include trademark, suppliers of inputs, promotion methods, the nature of the product, and the trademarks to be adopted.

Consequently, according to Fock (2001, p.173), the ‘franchisees are not given the opportunity to incorporate their own initiative in the operation of the franchise’. For example, the franchisor cannot make decision on diverse operating procedures such as operating hours, pricing, hiring of employees, and business location.

Failure to comply with the contractual agreement is a major source of conflict between the franchisee and the franchisor. For example, the contract may require the franchisee to pay the franchisor based on sales revenue. This aspect might pose a challenge to the franchisees in their quest to maximise their profits, especially if the geographical area in which they operate is characterised by minimal growth.

Such geographical limitations may pressurize franchisee to diverge from the set operational standards. Cox and Masson (2007, p.1054) assert that geographical dispersion ‘exposes the chain to varied local market conditions that require adaptation to maximise performance’.

Adopting uniform operating procedures and standards such as franchising is an ineffective strategy in some geographical locations in businesses’ effort to maximise their sales revenue and net income.

Subsequently, franchising is experiencing a challenge arising from the franchisors’ demand to comply with the concept of standardisation and the franchisees need to adapt their business operations in accordance with the geographical market needs (Levy & Weitz 2007).

Rationale of the study

Franchising has gained significance in the global business environment. Subsequently, most entrepreneurs and practising managers are inclining towards integrating the concept of franchising in their strategic management processes. The prominence of the franchising business format has arisen from the recognition of its role in stimulating business growth.

However, entrepreneurs and business managers have an obligation to ensure that firms achieve their profit maximisation. This goal can only be achieved if the most effective business format is adopted. However, the concept of franchising has some gaps emanating from its overemphasis of the concept of standardisation as its cornerstone.

Research aims and objectives

The study aims at developing a comprehensive understanding on the importance of understanding the standardisation and adaptation concepts of franchising. In a bid to achieve this aim, the researcher will follow a number of objectives, which include

  1. To assess how geographical factors affect the implementation of franchising business format.
  2. To analyse the extent to which franchisors allow franchisees to adapt to the prevailing environmental conditions.
  3. To evaluate the franchisees integrate the concept of adaptation in their effort to carry out the franchising system.

Research questions

A number of research questions based on the research objectives will guide the study. The research questions are outlined below.

  1. What is the impact of geographical factors affecting the implementation of franchising business format?
  2. To what degree do franchisors allow franchisees to adapt their businesses to the prevailing environmental conditions?
  3. How does a franchisee integrate the concept of adaptation in their effort to establish the franchising system?

Significance of the study

This study will be of great significance to practising managers and academicians. For example, the study will provide business managers and entrepreneurs with insight on the challenges associated with the standardisation concept of franchising especially in business operating in diverse geographical areas.

Subsequently, business managers will be in a position to make a decision on whether to adopt standardisation or adaptation in their effort to achieve profit maximisation. Furthermore, the study will enable academicians to appreciate the gap associated with the concept of franchising in their review of the subject.

Research hypothesis

This study will aim at verifying the null hypothesis (H0) or refuting the alternate (H1) hypothesis, which include

  1. Null hypothesis H0 – Geographical pressures have a significant impact on franchisees decision to deviate from the standardisation concept of franchising and adapt to the prevailing environmental conditions.
  2. Alternate hypothesis H1 – Geographical pressures do not have an impact on franchisees decision to deviate from standardisation and adapting to the prevailing environmental conditions.

Literature review

Franchising

Entrepreneurs must make a decision on the legal structure that they will adopt in the course of establishing their business. Truitt (2006) argues that the format selected has significant tax, regulatory, legal, and business consequences. The choice of business format is determined by different factors such as capital requirements, liability risk involved, tax, and marketing requirements (Sorenson & Sorensen 2001).

Some business structures are characterised by high capital requirements, liability risk, and marketing requirements (Croonen & Brand 2012). The main types of business format in much legislation include partnerships, sole proprietorships, limited liability companies, and franchises. Buchan (2013, p.3) emphasises that franchising ‘has become a significant part of the global commercial landscape’.

Components of franchising formats

Dada (2013) asserts that the franchise business format is comprised of four main components, which include the nature of the product or service, format facilitators, system identifiers, and benefit communicators. Franchises specialise in offering customers unique products or service, which acts as its competitive niche.

On the other hand, benefit communicators refer to the intangible benefits associated with the product or service being offered. Examples of such benefits include high level of professionalism in the service delivery process and reliability.

Format facilitators refer to the procedures and policies that should be followed by the franchisee, while system identifiers refer to the visual elements that associate a firm or product to a particular chain, for example trademarks, uniforms and architectural features (Yudoko 2012).

Franchising; standardisation versus adaptation

Cox (2002) argues that standardisation is the foundation of franchising due to its contribution in the franchisees and franchisors’ efforts to achieve its cost minimisation objective. For example, standardisation minimises the cost incurred in monitoring the franchisee. Moreover, standardisation allows businesses to develop and maintain a unique brand image amongst its customers (Michael 2002).

Subsequently, an organisation nurtures a high degree of customer loyalty arising from trusting in the uniformity of the product’s quality across outlets in different locations. Therefore, standardisation in franchising enables entrepreneurs to sustain the unique customer experience.

Longenecker (2012) asserts that the franchisees’ efforts to deviate from the set standards by adapting their own operational procedures may lead to erosion of the benefits associated with franchising, for example due to a decline in product quality and loss of the brand image (Rundh 2003). Furthermore, critics argue that adaptation in franchising format may influence the franchisees’ ability to innovate adversely (Chary 2009).

This assertion arises from the view that the franchisee might not have sufficient knowledge to innovate the product or service offered in order to fit the geographical needs (Stanworth, Healeas & Purdy 2002). Cox and Masson (2007, p.1056) argue that adapting ‘to local conditions reduces the potential for cross-fertilisation of ideas for identifying and implementing new offerings’.

Despite the significance of standardisation, Megan (2010) argues that franchises operate in diverse geographical areas, which are characterised by different factors such as intensity of competition, customer tastes, and preferences. Therefore, the effectiveness of standardisation amongst franchisees operating in geographically diverse area is limited.

Michael (2000) argues that franchisees have substantial knowledge of their local geographical market compared to the franchisor. Consequently, the likelihood of succeeding in their innovation effort is high (Michael 2003).

Despite their commitment to standardisation, franchisors depend on the market knowledge and information gathered by franchisees in undertaking product or system innovation (Ryans, Grittith & While 2003). However, the need to maintain a strong brand image restricts franchisees from adapting their operations to the local market situation (Pizanti & Lerner 2003).

From the above review, a significant gap needs to be addressed on whether franchisors should give franchisees the opportunity to deviate from the set operational standards and procedures and adapting their operations to the prevailing market situations. Through adaptation, there is a high probability of franchising business formats gaining better significance compared to the prevailing situation.

Methodology

Research design

The purpose of this study is to explore the decision of franchisees to incorporate the standardisation versus the adaptation strategies in their operation. The study will adopt qualitative research design. The decision to adopt this research design is informed by the exploratory nature of the study.

Moreover, qualitative research design will provide the researcher with an opportunity to gather substantial amount of data to aid in making extensive and conclusive research findings. Maxwell (2005) further asserts that qualitative research design is a multi-method research strategy, which is interpretive in nature. Subsequently, the study will be of great significance to the target audience.

Data collection

The researcher will source data from secondary sources. The researcher will review previous studies and literature on standardisation and adaptation amongst franchises. Some of the main secondary sources of data that the researcher will consider include reports peer-reviewed journals and other literature. Numerous studies on franchising have been conducted previously.

Therefore, the use of secondary sources will provide the researcher with an opportunity to gather substantial data. However, the researcher will ensure that the secondary data selected is from credible sources. This move will improve the reliability of the data collected.

Data analysis and presentation

The data gathered will be analysed using Microsoft Excel, which will enable the researcher to condense the voluminous data collected. Creswell (2003) asserts that qualitative research design enables a researcher to gather diverse data. Evaluating the data collected can overwhelm the researcher if it is not condensed effectively.

By using Microsoft Excel, the researcher will be in a position to condense the data successfully by incorporating tables, graphs, range, and graphs. Subsequently, the researcher will assess different aspects associated with the subject under investigation.

Furthermore, using Microsoft Excel will provide the researcher with an opportunity to present the data effectively using graphs. Subsequently, the target audience will be in a position to understand the research findings easily.

Reference List

Buchan, J 2013, Franchisees as consumers; benchmarks, perspectives and consequences, Springer, New York.

Chary, S 2009, Production and operations management, Tata McGraw, New Delhi.

Cox, J 2002, Geographical dimensions of business format franchising, University of Southampton, Southampton.

Cox, J & Masson, C 2007, ‘Standardisation versus adaptation; geographical pressures to deviate from franchise formats’, The Service Industries Journal, vol. 27 no. 8, pp. 1053-1072.

Creswell, J 2003, Research design: qualitative, quantitative and mixed method Approaches, Sage Publications, New York.

Croonen, E & Brand, M 2012, ‘Antecedents of franchisee responses to franchisor initiated strategic change’, International Small Business Journal, vol. 69 no. 172, pp.114-126.

Dada, O 2013, ‘Entrepreneurial organisation and the franchise system; Organisational antecedents and performance outcomes’, European Journal of Marketing, vol. 47 no. 5, pp. 790-812.

Fock, H 2001, ‘Retail outlet location decision-maker: franchisor or franchisee’, Marketing Intelligence and Planning, vol. 19 no. 3, pp. 171-178.

Hoy, F & Stanworth, J 2014, Franchising; an international perspective, Routledge, New York.

Levy, M & Weitz, B 2007, Retailing management, McGraw-Hill, New York. Longenecker, J 2012, Small business management; launching and growing entrepreneurial ventures, Cengage Learning, Mason.

Maxwell, J 2005, Qualitative research design: an interactive approach, Sage Publication, New Jersey.

Megan, T 2010, ‘A framework for implementing retail franchises internationally’, Marketing Intelligence & Planning, vol. 28 no. 6, pp. 689-705.

Michael, S 2000, ‘Investments to create bargaining power: the case of franchising’, Strategic Management Journal, vol.21, pp. 497-514.

Michael, S 2002, ‘Can a franchise chain coordinate’, Journal of Business Venturing, vol. 17, pp. 325-341.

Michael, S 2003, ‘First mover advantage through franchising’, Journal of Business Venturing, vol.18, pp. 61-80.

Pizanti, I & Lerner, M 2003, ‘Examining control and autonomy in the franchisor franchisee relationship’, International Small Business Journal, vol. 21 no. 2, pp.131- 38.

Rundh, B 2003, ‘Rethinking the international marketing strategy; new dimensions in a competitive market,’ Marketing Intelligence & Planning, vol. 21 no. 4, pp. 249-257.

Ryans, J, Grittith, D & While, D 2003, ‘Standardisation versus adaptation of International marketing strategy; necessary conditions for advancements’, International Marketing Review, vol. 20 no. 6, pp. 588-603.

Sorenson, O & Sorensen, J 2001, ‘Finding the right mix: franchising, organisational learning and chain performance’, Strategic Management Journal, vol. 22 no.16, pp. 713-724.

Stanworth, J, Healeas, S & Purdy, D 2002, ‘Intellectual capital acquisition and knowledge management – new perspectives on franchising as a small business growth strategy’, ISBA National Small Firms Policy and Research Conference Proceedings, vol. 2 no.5, pp. 1507-1534.

Stanworth, J, Stanworth, C, Watson, A, Purdy, D & Heleas, S 2004, ‘Franchising as a small business growth strategy: a resource-based view of organisational development’, International Small Business Journal, vol. 22 no.3, pp. 539-559.

Truitt, W 2006, The corporation, Greenwood Press, Westport.

Tuunanen, M & Hyrsky, K 2001, ‘Entrepreneurial paradoxes in business format franchising: an empirical survey of Finnish franchisees’, International Small Business Journal, vol. 19 no. 4, pp. 47-62.

Yudoko, G 2012, Sustainable operations strategy; a conceptual framework, ICTOM, Bandung.

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