Abstract
Franchising is regarded as one of the easiest forms of business deals that an entrepreneur can take advantage of. The requirements of such a venture are not very straining provided one secures a franchisor. A franchisor is an organization that lets another business entity utilize its intellectual property and transact on its behalf.
The arrangement is based on a consideration, which is paid in terms of royalties or fees. On the other hand, a franchisee is an entrepreneur who establishes a business relationship with a franchisor. The two entrepreneurs seek to exploit opportunities and receive incentives from franchising.
Franchising is common all over the world. It has become difficult for clients to differentiate between an outlet owned by the company and a franchise shop. The major advantage of such a deal is the creation of numerous job opportunities.
At the same time, the arrangement expands the outreach of the brand in the market. Franchising makes it possible for consumers to access high quality products. As a result of franchising, the quality of products has improved because of stiff competition.
The franchising industry has faced its fair share of challenges. Franchisors seek to improve productivity, performance, and quality of goods and services delivered by the franchisee. But this has not always been the case due to weaknesses exhibited by the franchisee.
In order to combat such weaknesses, franchisors adopt various leadership strategies. The change in leadership style gives rise to conflicts with the franchisee or a corresponding change of behavior on the part of the franchisee. The effects of the various leadership strategies are evaluated in this research paper.
Introduction to the Franchising Business
Franchising has enabled many multinationals to grow their products and brands in the global market. Franchising has enabled consumers in the international market to enjoy products and services that are of the same quality as those produced by the company in the mother country (Rothernberg, 2008).
In a nutshell, franchising is a form of business practice that enables the holder of production rights, trademarks, patent rights, and brands to enter into an agreement with another party. The second party is granted the rights to produce or utilize the trademark on behalf of the first party (Gappa, 2012).
After agreeing on the terms and conditions of such a business transaction, the franchisor issues the franchisee with a license to operate under those terms at a stipulated fee. The practice of franchising has enabled numerous multinationals to grow their brands and products throughout the world (Shane, 2008).
Such multinationals include, among others, Coca Cola Enterprises, KFC, Pepsi Corporation, and McDonalds. The multinationals find it cheaper to franchise than to open branches in other parts of the world. The franchisor takes advantage of the franchisee’s distribution network and experience in the local market.
The business giants mentioned above view franchising as one of the most affordable ways of establishing their products in new markets. As already indicated, setting up branches in the respective markets is viewed as an extremely expensive venture.
Their argument is that setting up a branch in a new market is capital intensive, increasing the expenses of the company (Combs & Ketchen, 2003). In addition, there are challenges associated with setting up new branches, which encourage multinationals to seek out franchising arrangements.
Such challenges include complicated legal requirements, which are usually compounded by problems associated with human resource in the new market (Mellewigt, Ehrmann & Decker, 2010).
By opting for a franchising arrangement, the franchisor is assured of reduced exposure to risks associated with venturing into a new market. In addition, the franchisor is assured of a fixed rate of return as per the provisions of the franchising license issued to the franchisee (Yin & Zajac, 2004).
The benefits of a franchising arrangement are not limited to the franchisor. It is noted that the franchisee benefits from financial and managerial skills provided by the franchisor (Zand, 1999).
When the franchisor carries out a worldwide advertisement or promotional campaign (Ducket, 2008), the franchisee stands to benefit. The latter’s expenses on advertising are reduced. Other economic gains associated with a franchising deal include creation of jobs in the local market (Carney & Gedajloviv, 1991).
In addition, there is economic growth in the region where the new franchise is located (Hoffman & Preble, 2004). As a result, it is argued that franchising spurs the growth of economies around the world (Perrigot, 2006).
However, just like any other economic venture, franchising has various shortcomings. One of the main weaknesses associated with the arrangement is that all major decisions are made by the franchisor.
What this means is that the ability of the franchisee to control the business is very limited. The franchisor takes full control of the franchise.
The franchisor works very hard to enhance the survival and prosperity of the brand they have entrusted to the local company (Alov & Jesper, 2001). Their main interest is to make profits from such a venture.
To this end, the franchisor has to ensure that the appropriate leadership structure is adopted by the franchisee (Micheal, 2009). The interests of the franchisor have forced them to insist on strict terms that are binding to the franchisee.
Most franchise agreement contracts are a reflection of the interests and aspirations of the franchisor. The terms contained in the franchise agreement touch on, among others, the need to have an external reporting agent in the franchise (Sine & Shane, 2011).
In addition, the terms place an emphasis on the need for a quarterly inspection report and auditing of the books of accounts (Schreuder, Krige & Parker, 2000). The need for annual market research reports is also addressed in the franchise contract (Spinelli & Birley, 1998).
Finally, the franchise contract addresses the issue of regular training programs for the management team and the employees (Wood & Kiecker, 2010). Such arrangements enhance the success of the franchise venture.
According to Sine & Shane (2011), external reporting agents are regular employees from the franchising organization. They are sent to monitor the progress made by the franchise. The reporting agents are supposed to communicate with the mother company on a regular basis.
They are expected to give a true and fair account of the progress made by the franchise. Sen (2008) calls them ‘ground soldiers’ working for the franchisor. A franchise is expected to generate profits for the franchisor and the franchisee (Alon & Banai, 2000).
The expectation is based on the fact that the franchise is dealing with an established brand or product, which is associated with the mother company. As a result of this, all the franchisee has to do is run a public awareness campaign, informing the consumer of the presence of the brand in the market (Kalnins, 2004).
Finally, the regular training programs for the management team and employees are meant to make sure that the franchise stays on the right track. They are meant to ensure that the franchise meets the obligations set out in the franchise agreement (Floriani & Lindsey, 2001).
The regular trainings have posed many challenges to the operations of the franchisor. One such challenge is the high cost of training managers and employees. Many analysts have questioned the effectiveness of the training programs.
They argue that the time and resources spent on training do not necessarily benefit the franchise. In addition, it gives the franchisor the opportunity to exercise direct control over the franchise, as it involves sending facilitators over from the mother company (Lafontine, 2005).
The scenario above illustrates one of the forms of leadership techniques adopted by the franchisor. Analysts have criticized this form of leadership. Among others, it forces the franchisee to change the operations of the local company to meet the terms and regulations set by the franchisor (Schreuder et al., 2000).
The Purpose of the Study
The current research seeks to analyze how the leadership style adopted by the franchisor affects the behavior of the franchisee in the process of executing the agreement contained in the franchise contract (Rothernberg, 2008).
As already indicated, one of the effects of franchisor’s leadership style involves the change of behavior on the part of the franchisee.
The main reasons behind the change of behavior touch on the pertinent issues affecting the operations of both the franchisor and the franchisee. At times, the franchisor may end up disagreeing with the franchisee over the management policies adopted to run the franchise (Sine & Shane, 2011).
It is important for the franchisee to understand the different leadership styles adopted by the franchisor under different circumstances (Plave & Miller, 2001; Mellewigt et al., 2010). It is important to understand this given that the different leadership styles have different effects on the franchise under different circumstances.
Furthermore, the leadership style adopted may contravene the agreement between the two parties with regard to management techniques.
In addition, the control mechanism adopted by the franchisor to oversee the conduct of the main actors in the franchise system gives rise to different levels of satisfaction (Storholm & Scheuing 1994).
For example, a franchisee in one region may derive satisfaction from the leadership style adopted by the franchisor, while another franchisee from a different region is highly dissatisfied with the same leadership style.
Research Questions
Analysts have posed several questions with regard to the importance of adopting the best leadership technique for a given franchising venture. Some of these questions are adopted in this thesis. They include the following:
- Which is the best leadership technique that should be adopted by a franchisor to minimize interferences with the behavior of the franchise’s management team?
- Does the adoption of the traditional leadership style associated with an international brand matter when it comes to the leadership techniques preferred for a single unit of a franchise?
- How can a franchisor operate a franchising unit without altering its leadership structure and behavior?
- What are some of the challenges faced by a franchisor and a franchisee when it comes to the implementation of the agreements captured in the franchise disclosure document, especially with regard to leadership?
Importance of the Study
The current research seeks to solve some of the most salient problems associated with franchising ventures (Sen, 2008). Leading a franchise is usually characterized a bitter contest between the franchisor and the franchisee. To address this problem, the appropriate leadership techniques should be devised for the venture.
The techniques are aimed at reducing the friction between the two parties. In spite of the wide range of research addressing franchising, scholars have found it hard to recommend one leadership style that should be adopted in managing a franchising venture (Scott, 1995).
The current research seeks to address this problem. The researcher will propose leadership techniques that should be adopted by the franchisor to minimize interferences with the behavior of the franchisee (Combs & Ketchen, 2003).
In addition to this, the paper will recommend the appropriate knowledge or information exchange programs that will not interfere with the behavior of the franchisee or with the culture of the community within which the franchise is located (Cappelli & Hamori, 2008).
Moreover, the findings of this research paper will guide the operations of the franchisor’s ‘ground soldiers’, who are sent to oversee the management of the franchise (Zand, 1999). Finally, the paper will recommend the appropriate perceptions and attitudes that should be adopted by the overseers when controversies arise.
Literature Review
Franchisor-Franchisee Relationship
The success of a business deal is largely determined by the nature of the relationship between the two parties (Yin & Zajac, 2004). The same applies in the case of a business deal between a franchisor and a franchisee.
To execute or enter into such a deal, there are various legal requirements that have to be met. The requirements vary from one entity to the other, especially depending on the location of the franchise (Plave & Miller, 2001).
At this juncture, the author will take a look at the general requirements revolving around a normal business deal. Specifically, the author will address the requirements for establishing a relationship between a franchisor and a franchisee.
Types of Franchises
According to Coffey (2012), there are five main types of franchises. The five are manufacture franchise structure, product franchise structure, single unit franchise ownership, multi- unit and area development franchise ownership, and master franchising.
The manufacture franchise structure is the form of a business arrangement where the franchisor establishes a franchise in a location where it is cheap to manufacture their products. The aim here is to reduce the costs associated with the manufacture of the products (Alov & Jesper, 2001).
In such a case, the franchisor permits the franchisee to use their intellectual property rights, such as patents, to manufacture the goods on their behalf (Hoffman & Preble, 2004).
The other type of franchise involves product franchising (Jimr, 2008). In such a case, the franchisor grants the franchisee the rights to purchase and sell their products (Lafontine, 2005). In a product franchising deal, the franchisee has the right to transact on behalf of the franchisor (Nault, 2007).
In such a case, the franchisee buys goods from the franchisor at a discount, and then sells them at the normal market price. The difference between the cost and sell price translates to profit for the franchisee (Perrigot, 2006). Product franchising is very common in the global market.
On the contrary, manufacturing franchise only targets areas where raw material is available and the process of manufacturing is cheaper compared to other areas.
A single unit franchise ownership deal can either be under product or manufacturing franchise deal. However, the number of operational units is taken into account in the case of a single unit franchise ownership deal (Bergkevist & Rossiter, 2007).
A single unit franchise means that the franchise deal caters for the operations of a franchisee in one location only. It contrasts with the multi-unit and area development franchising deal, where the franchisee is responsible for operations in multiple franchise locations.
In addition, the region within which the franchisee is allowed to operate in a multi-unit and area deal is larger than that of a single unit franchising deal (Spinelli & Birley, 1998). In such instances, the franchisor sends an employee from the main company to manage the franchise.
The aim here is to protect the interests of the franchisor. Multi-unit and area development franchising arrangements are very common, especially in trading blocs or vast regions with high growth potential (Menard, 2002).
The last form of franchising arrangement is referred to as the master franchising. Here, the franchisor contracts a franchisee, but not with the intention of transferring their intellectual property rights (Rao & Frazer, 2006).
On the contrary, the franchisor gives the franchisee the power to re-franchise (Zhou, Li, Zhou & Su, 2008). It means that the franchisor cedes the powers to enter into binding deals and agreements to franchise other business entities to a second party (Micheal, 2009).
Franchising: Terms and Conditions
The terms and conditions are contained in the contract that formalizes the deal (Storholm & Scheuing, 1994). The terms of the contract include the amount of fees to be paid by the franchisee to the franchisor for using their intellectual property (Combs & Ketchen, 2003).
In addition, the mode of payment, either through royalty or reimbursement, is specified in the contract (Zhou et al., 2008). The duration of the franchising arrangement is also captured in the contract. In most cases, the duration varies from 5 years to 30 years, depending on the nature of the business.
Finally, the terms of engagement between the two parties are highlighted in the contract. The terms of engagement are exclusive, non-exclusive, or sole exclusive (Wood & Kiecker, 2010).
Various conditions are spelt out in the contract. They include, among others, regulation of sources of products and services, as well as the franchisor’s assistance in terms of advertising, training, and computer systems.
Other conditions include the territory the franchisor expects the franchisee to cover, the renewal of license, termination, transfer of rights, and mechanisms to resolve disputes. In addition, the conditions restrict the products and services distributed by the franchisee on behalf of the franchisor (Goldberg, 2012).
The information touching on how the franchise will be financed and the expected financial performance should be disclosed (Sine & Shane, 2011). In addition, the obligations of each party in the running the new entity are highlighted.
The obligations are categorized into franchisor’s obligations and franchisee’s obligations (Goldberg, 2012). The full details of the patents, copyrights, and proprietary rights are disclosed, which helps in averting future law suits as a result of infringing on such provisions (Schreuder et al., 2000).
The franchisor should clearly state the number of outlets and company- owned units that operate within the area (Kalnins, 2004).
Franchising Arrangement: Consultations
Since most of the franchising deals are binding contracts, franchisees are expected to seek both legal and professional help before signing the deal. In most cases, franchise attorneys are consulted with regard to the contract.
Mellewigt et al. (2010) identifies the contract as the major source of leadership conflicts between the franchisor and the franchisee. Business professionals are normally consulted to highlight the admissibility of the terms and conditions established in the contract.
The consultations are carried out in light of financial performance and franchisor’s role in the operation of the franchise (Ducket, 2008).
The consultations are aimed at averting unexpected conflicts in the future, which may lead to the termination of the contract. Goldberg (2012) advises franchisees not to rely solely on the information provided by the franchisor.
On the contrary, they should conduct their own independent investigations within the franchise disclosure document’s window period. The independent investigations will help the franchisee or the franchisor to detect possible cases of fraud and make the right decisions with regard to the deal.
Leadership Techniques Adopted by the Franchisor
The interests of the franchisor are usually different from those of the franchisee. As a result, most franchisors fear that the franchisee may end up controlling the franchise or bringing down the business. To avert this, most franchisors have adopted leadership styles that suit their demands.
In so doing, they have drastically changed the behavior of the franchisee. In the section below, the author will address some of the leadership techniques adopted by the franchisor and their effects on the behavior of the franchisee.
Autocratic Leadership versus Authoritarian Leadership
According to Judge, Bono, Ilies & Gerhardt (2002), the form of leadership adopted by the organization affects the performance of the entity in the market. In addition, it affects the operations of the employees.
Numerous franchisors have adopted the autocratic leadership style, which have improved their relationship with the franchisee (Zand, 1999).
Other researchers have noted that the adoption of authoritarian leadership style leads to the termination of contracts by the franchisee. Most franchisees are of the view that authoritarian leadership is not effective (Judge et al., 2002).
The use of autocratic leadership styles helps the franchisee to evaluate the impacts of the franchisor on the franchise. The provisions of such an arrangement are stated in the contract, meaning that the franchisor cannot infringe on the rights of the franchisee (Rao & Frazer, 2006).
Authoritarian leadership enables the franchisee to remain consistent in the decision making process. It translates to independence from the franchisor given that the routine inspections are minimized.
Participative Leadership
Participative form of leadership is evidenced when the franchisor allows the franchisee to make major decisions after consulting the mother company (Judge et al., 2002). In such cases, employees posted by the franchisor are consulted in the process of making decisions.
Participative leadership style has enabled the franchise to save time spent in making decisions because of reduced consultations (Floriani & Lindsey, 2001). In addition, the owners of the franchise have realized the importance of involving their employees in the decision making process.
In doing this, they realize that the employees do not have the final say with regard to the matter in question (International Franchise Association Education Foundation, 2012).
It is important to note that the nature of the relationship between the franchisor and the franchisee largely depends on the type of leadership style adopted by the franchisor. If the franchisee is controlled using ‘…an iron hand’ (Micheal, 2009, p.34), then the relationship between the two parties is affected negatively.
In addition, this form of leadership may negatively affect the relationship between the owner of the franchise and the employees.
According to Kothandaraman & Wilsons (2001), the opposite of this is true. The scholars insist that a healthy relationship between the two parties improves the relationship between the owner of the franchise and the employees.
H1: The leadership technique adopted by a franchisor percolates down the franchising line and affects employees of the franchise.
Leadership Tradition: How to Maintain It
The success of a franchising venture is determined to some extent by the traditions practiced in the firm (Lafontine, 2005). Such traditions have seen the creation of strong brands associated with multinationals around the world. It has helped MNCs to survive in new markets.
The success of such brands is the legacy that the mother company seeks to expand through franchising. To promote the success of the brand, the franchisor initiates training programs for the benefit of the franchise (Carney & Gedajloviv, 1991).
The training programs are usually tailored to highlight the importance of the brand’s success. To this end, the owner of the franchise is equipped with skills that enable them to propagate the success of the brand (Yorke, 2003).
The training sessions help the franchisee to get accustomed to some of the traditions associated with the franchising organization (Jimr, 2008). At the end of the training sessions, the owner of the franchise is helped to adopt behaviors and practices that the franchisors would want them to use in managing the franchise.
H2: Training assists the franchisees to learn and familiarize themselves with the leadership styles adopted by the franchisor.
Leadership in a Franchise: Partial Leadership
As mentioned earlier, company ‘placements’ are a common feature in the franchising world. They illustrate a form of partial leadership adopted by the franchisor (Dant & Berger, 2006).
In most cases, placements are reported when the franchisor insists on maintaining the status quo in the franchise, especially after maturity of the venture (Alon & Banai, 2000). Normally, the franchisor comes to an agreement with the franchisee on this issue.
In most cases, the placements are individuals loyal to the company. They include those employees who have served the company for a long period, in most cases for more than 8 years (Rothernberg, 2008).
They are placed in the top management team of the franchise. It is hard to edge them out of the company considering that they are employees of the franchisor.
The main duty of the placements is to ensure that the provisions of the contract establishing the franchise are followed to the letter for the benefit of the franchisor.
They ensure that contingencies do not hinder the achievement of the franchise’s main objectives, especially if such contingencies were not factored in during the creation of the franchise.
Another salient function of the placements is to ensure that the franchise adheres to the traditions of the franchisor (Cappelli & Hamori, 2008). Their presence in an established franchise is significant given their unmatched experience in dealing with the brand associated with the franchisor.
They are loyal to the franchisor and the franchisee. As a result, they promote the adoption of the leadership structure preferred by the mother company in the franchise.
H3: Placements have positively affected the leadership behavior of both the franchisor and the franchisee.
Leadership in a Franchise: Performance Agreement
Before finalizing a franchising deal, the franchisor normally requests for a business plan. In most cases, the business plan contains an article touching on the expected performance of the franchisor. In such instances, the franchisee is obliged to give a quarterly business performance report.
The report is used to assess the efficiency of the franchisee in terms of managing and leading the franchise. In so doing, the franchisor can assess the performance of the leadership structure adopted.
When the performance reflected in the quarterly returns is consistently poor, most franchisors formulate a motivation plan to ensure that the product does not fail in the new market. Such motivation plans include, among others, official visits by the franchisor.
The motivational sessions are part and parcel of the customs and traditions in the mother company. Strategies are usually formulated during such visits (Desai, 2007).
H4: Performance agreement improves the quality of leadership adopted by the franchisor, enhancing the experience of the franchisor and the franchisee.
Effects of the Performance Agreement
Most researchers and scholars agree that performance agreements are beneficial to both parties. They argue that the agreement ensures the leadership of the franchise remains active (Dant & Gundlach, 2008). It promotes efforts geared towards the achievement of the goals and objectives of the franchise.
In addition, the scholars argue that regular visits from the franchisor help in boosting the morale of the employees. The arrangement has solved problems faced by the franchise in the past (Watson & Kirby, 2004).
The agreement is a priority to most franchises in the global market. Scott (1995) notes that franchises streamline their daily activities to help them achieve the objectives set out in the performance agreement. They do this to avert the cancellation or termination of their operating license.
In addition, franchisees take precautions to ensure that their underperformance does not lead to a premature termination of the contract.
H5: A performance agreement helps in establishing a positive leadership behavior for the benefit of the franchise.
Research Methodology
In chapter three, the researcher explains the various strategies adopted in carrying out the current study. In this chapter, the researcher will highlight the research instruments, research design, research location, data collection, and data analysis (Blumberg, Donald, Cooper & Schindler, 2008).
One of the research methodologies adopted in this thesis is meta-analysis (Combs & Ketchen, 2003).
Research Instruments
A survey questionnaire was used to collect data for the research. The researcher devised a questionnaire composed of four major sections.
The four sections include leadership techniques used in running a franchise, the traditions of a franchise, the impacts of partial leadership on the franchise, and performance agreements in the context of a franchise.
All of the attributes were measured using a five-point Likert scale, ranging from one (poor leadership behavior) to five (best leadership behavior) (Menard, 2002; Blumberg et al., 2008).
In addition, the researchers used secondary data for the study. The secondary data involved analyzing journal articles and books to assess the opinions of other scholars with regard to the topic in question.
Sample Population and Data Collection
A sample population was compiled for the purposes of this research. The questionnaire was designed to measure the effects of franchisor’s leadership techniques on the running of a franchise.
The respondents used in the study were composed of a sample of 200 franchisors and franchisees. The sample was randomly selected from a population of franchises located in the vast Texas region.
Data Analysis
To analyze the relationship existing between the franchise and the franchisee, and to estimate the influence of leadership techniques on the business, simple correlation analysis and t-test were used.
Regression analysis was used to examine the influence of the franchisors’ leadership techniques on the behavior of the franchisee.
Finally, ANOVA and t-tests were used to compare the ‘calculated factor means using financial characteristics’. The characteristics included total income, financial statements, market share, and competition (Kothandaraman & Wilsons, 2001).
A number of journals were used in compiling this thesis paper.
They included Marketing Science, Industrial Marketing Management, Journal of Retail and Distribution Management, International Journal of Franchising and Distribution Law, The Journal of the Operational Research Society, Strategic Management Journal, Journal of Marketing, Journal of Theoretical and Applied Electronic Commerce Research, Journal of Small Business and Enterprise Development, British Journal of Management, and Journal of Applied Psychology.
In addition, the researcher used information from the proceedings of the 14th Annual International Society of Franchising Conference held in San Diego, California.
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