Literature Review on "Theoretical Aspects of Franchising"

Literature Review 7 pages (1914 words) Sources: 20

[EXCERPT] . . . .

Franchising

Extant literature has been dedicated to the concept of franchising. In regard to the historical developments of franchising Ojo and Irefin (2011,p.321) pointed out that the concept of franchising can be traced to the 1850s when an individual by the name Isaac Singer, an individual who made great improvements to the current sewing machine model wanted to significantly increase the level of distribution of his products (sewing machines). His efforts were the very first ones in regard to franchising in the United States. Later on, Coca Cola's John Pemberton successfully employed franchising. The telegraph system was also franchised and was therefore operated by several railroad companies. The telegraph system was however under the control of the Western Union. An exclusive agreement that existed between operators of local dealerships and automobile manufacturers also marked some earlier forms of franchising. Ojo and Irefin (2011,p.321) indicated in their work that the modern face of The trend began in 1919 when quick service restaurants like A&W Root Beer began employing it. The very first modern franchise was established by Howard Deering Johnson and Reginald Sprague. The main ideas was to allow independent operators to employ the same name, products, supplies as well as logo. The building design was also to be used at a fee. The concept of franchising gained momentum in the 1930s when establishments such as Howard Johnson began franchising their motels. In the 1950s, the franchising business boomed in the United States as a consequence of the development of the interstate system. The result was an explosion of fast food restaurants as well as motel chains. In the contemporary world, McDonald's is noted to be the most successful franchise business on a global scale with more than 80% of its restaurants being owned as well as operated by franchises as pointed out by Andrew (1994) (Cited in Joshi and Mahei,2011,p.4).

Trends in Franchising

The franchise systems have been indicated by Lafontaine and Kaufmann (1999,p.97) to be evolutionary in regard to ownership patterns. A seminal article by Oxenfeldt and Kelly (1969) suggested that the franchise system just like any other organizations undergo through life cycle that are integral for the prediction of their processes as well as structures. Masurel (1997) through an unpublished text conducted a study on the predictability of various trends in the context of franchising. He pointed out that this is important in the development of competition as well as the determination of growth potential for the franchisees.

There are several trends in the field of franchising. Tomar (2009,p.397) discussed the trends in the transfer if rights in regards to franchising and trade licensing.

Dant and Paswan (1995,p.45) discussed the concept of ownership redirection trend in regard to franchising via across sectoral investigation. According to them, the concept of franchising has for a long time been observed as an avenue into small business. For other howver, it presents an opportunity for the growth of large franchise systems by the cloning of the small business successes in exchange for some royalty. The franchise concept is yet again observed by others as a self-employment opportunity.

Multi-unit franchising

In the earlier days, franchising was done by single-unit owners who were their own bosses and use the opportunity to make some modest income for themselves and their families. However, the current trend of multi-unit franchising involves the running of multi-nit by various operators in order to increase their revenue. The operators in this case don't work in their stores but rather they employ people to work for them in a company. They employ professional staff to run their company while shifting their focus on growth and strategy. Weaven and Frazer (2007,p107) indicated that most mature franchise systems employ multiple unit franchising in order to leverage the learning economies as well as sustain a system wide growth.

Multi-brand franchising

The other trend in franchising is multi-brand franchising which involves dealing in many brands. This is considered an avenue of growth as it is very lucrative. The space is dominated by restaurants, real-estate, financial, automotive as well as hospitality industry players.

This trend is employed since investment diversification which forms its basis is one of the ways by which a given franchisee may broaden their brand portfolio. The uncertain economy means that franchises may find it worthwhile to operate brands in various different market segments in order to help in balancing their income when one segment is non-performing. The complimentary brands have been noted to offer some synergies such as referrals, co-brand marketing as well as shared services.

The franchisors have also been noted to considerably benefit from the relationship of the multi-brand franchise system. This is because the franchisees are generally individuals who have successfully operated franchises in various sectors and are therefore having the necessary specific experience. The advantages of the multi-brand franchise system include the following;

Centralized support

The multi-brand franchising system has been noted to offer a centralized support by virtue of the already existing infrastructure that can effectively be utilized in the running of the other franchise brand units.

The infrastructure includes accounting function, human resources as well as general operations.

Balancing of the economic cycles

The dealing in multiple brands can effectively help in the smoothening up of the uncertainties of the economic cycles.

Balancing of the cash flow;

The cash flow from one market can effectively be used in offsetting of a slow market in the other

Co-branding;

This is especially useful for brands which have synergetic value to one another in regard to an aspects like target market. Funds can therefore be saved through advertising, referrals, marketing as well as shared real estate.

Theoretical explanation of Franchising

Resource scarcity.

Combs et al. (2010,p.103) indicated that the resource scarcity theory of franchises is purely unique to the franchising research. The resource-scarcity theory is based on the premise that the rather rapid growth aids a nascent firm in the building of a brand since it helps in the creation of economies of scale in regard to purchasing and advertising as pointed out by Oxenfeldt & Kelly (1969). As a result of this, the initial predictions of the theory is that the entrepreneurs would become franchisees in order to effectively build the outlets as well as supply the required managerial expertise coupled with the knowledge of the local market.

The prediction proceeds to suggest that the concept of franchising is method of overcoming problems associated with internal growth like the amount of time that it takes to effectively train employees as well as build the necessary organizational routines as indicated in the work of Shane (1996). The other prediction of this theory is that once there is an attainment of the economies of scale, then the franchisor would maintain the ownership of all of the new outlets and therefore manage to repurchase all of the profitable franchises; a phenomenon that is referred to as ownership redirection by Dant, Paswan, & Kaufmann (1996).

Combs et al. (2010,p103) pointed out that prior literature like Lafontaine & Slade (1997) and Combs, Michael, et al., (2004) as well as a meta-analysis study by Dant et al., (1996) indicated no evidence at all that franchising process follows the above described pattern of resource-scarcity. This led Combs, Michael, et al., (2004) to postulate that the theory affects just the initial decision to franchise but never the resulting operation of the franchised outlets.

Agency-theory

The agency theory of franchising on the other hand is an alternative theory to the resource scarcity theory of explaining the concept of franchising (Combs et al. (2010,p.104). The agency theory is used in the explanation of the contractual arrangement that would be suitable for use by the principal in the delegation of authority to the agent. This is under the common assumption that the agents are entirely self-interested and have personal interests that are a divergence from the interests of the principal. The principal's challenge is therefore to effectively identify the contractual agreement with the lowest cost (Eisenhardt, 1989). The implication of this for firms with an expansion strategy is that they have to make a choice between taking on the acquired franchises or hiring a manager to help the in running of the company-operated outlet.

3, Antecedents to Franchising.

Several studies have in the past been dedicated towards finding out why firms franchise out instead of owning outlets and why franchisees select franchising. Combs and Castrogiovanni (1994,p.37) pointed out that several franchising researchers have dedicated their time to find out why there are hybrid forms of franchise businesses and also why franchisors may decide to franchise some of their businesses while maintain the ownership of the rest.

Combs et at (2011,p.102) indicated that recent studies indicates that most of the literature is centered on the franchisors more that on the franchisees. In regard to the antecedents of franchising, literature indicates that certain people prefer to franchise as opposed to starting of independent businesses as well as corporate employment (Peterson & Dant, 1990; Kaufmann, 1999). A study by Bennett,… READ MORE

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