Franchising

An International Perspective

Frank Hoy, John Stanworth

• Publisher: Routledge
• Year: 2014
• eBook ISBN: 9781136482557
• Topic: Business
• Subtopic: Business General
• Index: Business

Franchising is a unique collection of articles that offers a handpicked selection of the main outstanding 'classic' texts in franchising knowledge. Researchers, students, professional advisors and anyone with a serious interest in the development of this extremely topical subject can now have, at their fingertips, the key articles and papers that have contributed to the philosophy of cloning business success. Many researchers in the field have only heard of the names, 'Brickley and Dark', 'Rubin', 'Hunt' or 'Oxenfeldt and Kelly', but may never have seen their seminal works through the difficulty in locating the material. Their original articles are reproduced in full here, complete with supporting analysis from the editors.

SECTION TWO

Franchising as an organizational form

STRUCTURING FIRMS AND NETWORKS

THIS SECTION INTRODUCES us to the concept of a franchise network as an organization. Is there anything that makes franchising unusual or unique as an organizational form? Is franchising merely a label that is used to describe an exchange arrangement between and among businesses? Is it a variation on a distribution channel? Is it a legal term used to describe a contractual relationship?

The authors of the papers apply various theories, particularly drawn from economics, to explain the nature of franchising and to determine where or whether distinctions arise between franchisor and franchisee. In so doing, they begin to examine sources of conflict and cooperation between the parties.

The two articles that begin this section present the arguments that represent the classic positions on why franchise organizations form and expand. There is a general impression among laypeople that franchising is primarily a means by which a retail or service organization can obtain financing to increase market penetration and geographic coverage. Franchisors typically counter with the contention that it is the franchisees' ownership that ensures a commitment to achieving success through the operation of their own enterprises. The choice of a theoretical model can result in support for or refutation of either proposition.

The articles selected here have become seminal to the research streams that are concerned with franchise formation, survival and success. Subsequent literature citations suggest that they define critical issues in franchisor–franchisee relationships that influence both efficiency and effectiveness in achieving desired outcomes.

It is interesting to note that research drivers such as these do not provide definitive answers. The authors proposed to us that selected well-established theoretical models could have explanatory power when applied to the franchise phenomenon. In some cases, franchising was simply a useful example by which to understand presumably larger issues, such as capital markets, contractual relationships, channels of distribution, etc. The continuing evolution of franchising as an organizational form and transaction exchange process, however, has led subsequent researchers to reexamine the issues in light of changes in technology, market conditions, and strategy development.

The articles written in the 1970s also can be viewed in a historic context as somewhat provincial. They fail to take into account the rapid globalization that has occurred, and not just with US-based firms. Globalization of franchising has multiple implications for research studies. It means alternative legal models make alternative organizational forms and legal relationships possible. It tests traditional applications of capital market theory, agency theory and others. It raises questions about justifications for the franchise model that extend beyond the American form of free enterprise. Having raised this specter, however, a review of papers presented at recent annual meetings of the International Society of Franchising finds these articles cited by European and Australian scholars with approximately the same frequency as American authors.

Technology is known to run ahead of both corporate strategy and the legal/ regulatory environment. Available modes of communication among business partners have exploded and become more cost effective. Electronic media are also presenting both franchisors and franchisees with new mechanisms for reaching customers and suppliers. Advances in technology may expedite, reshape or jeopardize the future of franchising. Faster and cheaper communication technologies have the potential of reducing the geographic dispersion problem of franchisors, enabling them to control their networks more effectively, and increasing centralization. Alternatively, the ability to share and access information by franchisees may encourage more local decision-making. Either way holds the possibility of altering or even disrupting current relationships. Further, the advent of electronic commerce opens a new distribution channel for both parties. Will these technologies lead to a reduction in franchising activity due to the franchisor moving toward more unit ownership, and the franchisee determining that knowledge is power and independence from the franchise network provides more profitable options? Or will mechanisms be found that result in greater cooperation through information sharing, and thus foster franchise expansion?

Selecting only two environmental variables, globalization and technology, is sufficient to display sets of questions about how well the theories and models contained in this section continue to be useful in our comprehension and prediction of franchise network formation and evolution. The strength of the articles in this section resides in the fact that they cover organizational and network issues that are likely to require further investigation for years to come. We will continue to be concerned about the uniqueness of the franchise concept, the independence of the franchisee from the franchisor, the rationale underlying the formation of a franchise network or for becoming a franchisee, the satisfaction of the parties in the contractual relationship and their willingness to cooperate, and the exercise of power in the relationship.

Chapter 3

Paul H. Rubin

University of Georgia

THE THEORY OF THE FIRM AND THE STRUCTURE OF THE FRANCHISE CONTRACT

From Journal of Law and Economics, 1978, 21 (April): 223–233

---

According to our calculations, Paul Rubin's 1978 application of the Theory of the Firm to franchising is the single most frequently cited article in the franchise literature. He presented a counter-intuitive rationale for franchisee investment and the growth of a franchise network. Prior to Rubin's thesis, it was generally accepted that companies engaged in franchising outlets as a means to access capital when traditional markets might not be readily available or might be cost prohibitive.

Rubin looked beyond theory application and into the practicality of implementing the franchise contract. In doing this, he moves from analyzing via a predictive model to observation of behavioral phenomena. He introduces a number of inducements contributing to the decision to enter into a franchise contract and implies potential sources of conflict that might be anticipated to arise from the interactions of the parties.

Thus, Rubin provides the underpinnings of a sound theoretical argument for franchise formation and growth while simultaneously raising is...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Acknowledgements
• Introduction and Background
• Section One Franchising: a conceptual overview
• Section Two Franchising as an organizational form
• Section Three Survival and growth rates in franchising
• Section Four The franchise system ownership-redirection debate
• Index