Crossing mother: Entrepreneur-franchisees' attempts to reduce franchisor influence

Phillip H. Phan, John E. Butler, Soo H. Lee

Research output: Contribution to journalArticlepeer-review

Abstract

Contracrual terms guide many entrepreneur-franchisees' actions with the franchisor. However, it is impossible for franchisors to completely specify all future actions. They compensate by continually attempting to influence franchisees, using what franchisees perceive as suasion in their ongoing interactions. We develop a theoretical framework for understanding the informal interaction dynamics between franchisors and franchisees. Most franchise arrangements include the payment of royalties based on sales. This encourages a growth-oriented strategy, usually appropriate for the franchisees during the initial stages of their operations. Whereas a franchising strategy can reduce entreprenerial risk for franchisees, it does not eliminate it. Thus, as sales of the franchisees increase, profit-oriented strategies will be favored because they represent the payoffs that accrue to continuing entrepreneurial effort and risk-taking. These strategies may be in opposition to franchisors ' sales orientation when market conditions do not allow continual growth without margin penalties. A research model is developed, depicting the relationship between franchisees' strategies and performance, and the moderating effect that contractual goals and franchisees' perception of franchisors' attempts at suasion have on this relationship. A set of research hypotheses was then empirically tested using a large sample of franchisees from the commercial truck retailing industry. The results indicate that sales-growth and profit-growth goals are not always congruent. Balancing the goals of the franchisor and franchisee did not appear to be a popular option; either one or the other was emphasized. More importantly, the results indicate that when franchisees perceive attempts by franchisors to use suasion, lower levels of profits result, but there is no corresponding increase in the level of sales. In the long-term, franchisors are likely to determine that current contractual arrangements are not protecting their longer term interests. Thus, they will be expected to attempt to modify franchise contracts in ways that force franchisees to implement sales-gain strategies. This will require that entrepreneur-franchisees anticipate future events more carefully at the time they are examining the original franchise contract. Because most entrepreneurs are concerned with immediate survival at the start-up stage, this makes examination of the contract less likely to happen; the franchise option is attractive because it reduces such risks. We recommend that entrepreneurs write ex ante contingent claims contracts that ensure a gradual reduction of franchisor influence. Although this would assume a power or knowledge balance that favors the franchisees, which is unlikely during the start-up phase, it will change over time as franchisees gain a better understanding of the local competitive dynamics. Thus, it may well serve the franchisees to take a defensive posture or push a royalty arrangement that decreases the emphasis on sales over time. This is most likely to be effective where the entrepreneur is considering several competing franchises at the time of the signing of the contract. Finally, we recommend that entrepreneur-franchisees should not assume that the expert advice offered by their franchisor is always in their best interests. Although technical advice is more likely to be unbiased and should be fully exploited, as this is what makes the franchise valuable, strategic advice, or that which relates to goal setting may well be colored by the financial interests of the franchisor. Franchisors are unlikely to consider the possibility that franchisees would be better served by formulating their own strategies, nor are they likely to consider that the franchise network would be better off, in the longer term, by the collective impact associated with numerous franchisees independently formulating their own strategies. In short, although we do not suggest that franchisees should always assume that "crossing mother" is the best response to all perceived franchisor-suasion efforts, they should carefully examine all strategic advice.

Original languageEnglish (US)
Pages (from-to)379-402
Number of pages24
JournalJournal of Business Venturing
Volume11
Issue number5
DOIs
StatePublished - Sep 1996
Externally publishedYes

ASJC Scopus subject areas

  • Business and International Management
  • Management of Technology and Innovation

Fingerprint Dive into the research topics of 'Crossing mother: Entrepreneur-franchisees' attempts to reduce franchisor influence'. Together they form a unique fingerprint.

Cite this