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Franchising: A gateway to cooperative entrepreneurship
ELSEVIER
INTRODUCTION
FRANCHISING: A G A T E W A Y TO COOPERATIVE ENTREPRENEURSHIP SCOTT A. SHANE Massachusetts Institute of Technology
FRANK H O Y University of Texas-E1 Paso
Entrepreneurship scholars have traditionally focused the majority of their attention on independent entrepreneurship rather than on cooperative entrepreneurship. Although this research focus has greatly expanded our understanding of the field, it has left aside exploration of a major portion of entrepreneurial activity. One of the major, unexplored areas of cooperative entrepreneurship is franchising. Franchising is a contractual form of business under which one firm purchases the right to use a brand name and operating system of another. The lack of research attention paid to this form of business is problematic, given the relative economic importance of franchising. In 1995, franchising accounted for 33% of U.S. retail sales and 10% of U.S. gross domestic product. Moreover, franchising is a unique form of entrepreneurship because it depends upon two entrepreneurs--the franchisor and the franchisee--to be successful. Given its cooperative nature, franchising sheds light on dimensions of entrepreneurship, which have often been ignored by entrepreneurship scholars. The relative lack of research on franchising within the field of entrepreneurship led us to host a conference on franchising, at the Georgia Institute of Technology on January 19-21, 1996. The conference was designed to encourage franchising researchers to evaluate the state of the field and to present their research. With the support of the Journal of Business Venturing, which agreed to publish a special issue composed of papers presented at the conference, we are able to bring together the six best papers from this conference. The papers included
A d d r e s s c o r r e s p o n d e n c e to F r a n k H o y , University of Texas at El Paso, El Paso, T X 79968-0545.
Journal of Business Venturing 11, 325-327 © 1996 Elsevier Science Inc. 655 Avenue of the Americas, New York, NY 10010
0883-9026/96/$15.00 PII S0883-9026(96)00059-6
326
S.A. SHANE AND F. HOY
in this issue examine franchising from different theoretical perspectives, employ different methodologies, and focus on different units of analysis. However, all of the articles investigate the franchisor-franchisee relationship. "A Theory of Conflict in the Franchise System" by Spinelli and Birley provides a conceptual framework for examining the franchisor-franchisee relationship. This article builds upon transaction cost economics and relational exchange theory to explain how franchisors and franchisees can best manage the potential for conflict inherent in their relationship. Spinelli and Birley argue that the level of conflict in a franchise system depends on the franchisee's perception of the value of the trademark relative to his or her perception of the cost of exiting the system. "~Multi-Unit Franchising: Growth and Management Issues" by Kaufmann and Dant examines how multi-unit franchising affects franchisor growth. The authors generate hypotheses from agency theory and resource constraint theory about the effect of multi-unit franchising on system growth and test them by use of a mail survey of franchisors. Kaufmann and Dant find that the relationship between multi-unit franchising and system growth does not support agency theory explanations for franchising. "Consensus in Franchise Organizations: A Cooperative Arrangement Among Entrepreneurs" by Baucus, Baucus, and Human examines how franchisors and franchisees perceive the franchise system's competitive strategy. Surveying franchisees from 19 different fast food franchisors, the authors find that franchisors and franchisees often disagree about the system's competitive strategy even though agreement on strategy enhances both satisfaction and performance. Franchisors and franchisees also experience a conflict between the franchisor's preference for enhancing outlet sales and the franchisee's preference for enhancing outlet profit. "Crossing Mother: Entrepreneur-Franchisees' Attempts to Reduce Franchisor Influence" by Phan, Butler, and Lee examines how franchisors in the trucking industry persuade franchisees to enhance sales at the expense of profits. "The Organization of Relational Contracts: The Allocation of Rights in Franchising," by Leblebici and Shalley discusses the allocation of rights and responsibilities in franchise contracts. The study finds that franchise system performance depends on how rights and responsibilities are allocated between franchisors and franchisees. "Franchising and Control in the International Context" by Fladmoe-Lindquist examines the capabilities that enhance the international expansion of franchisors. Drawing on agency and risk management theories~ the paper also provides a theoretical framework for integrating franchising and international business research. As these papers show, franchising raises important research questions for entrepreneurship scholars. Franchising is an organizational form which requires one set of entrepreneurs to cooperate with another set of entrepreneurs who purchase the former's organizational routines. Entrepreneurship scholars currently know relatively little about how entrepreneurs successfully manage cooperative relationships which involve organizational routines central to the firm. Moreover, the high rate of litigation in franchising and the low survival rates of franchise systems indicate that franchising practitioners might not know the answer themselves. However, the process of creating successful cooperative organizational relationships is central to entrepreneurship; and these articles explore the process of building and maintaining these relationships. Despite the contribution that these articles make to understanding cooperative entrepreneurship, they are merely a first step. Throughout the world economy, franchising is growing in importance as an organizational form. Whether it be the expansion of a fast food
FRANCHISING AND ENTREPRENEURSHIP 327 franchisor to Asia or the establishment of a new real estate franchise in the United States, franchising is becoming an increasingly popular organizational form. We hope that the papers contained in this special issue will spur scholars to further explore both franchising in specific and cooperative entrepreneurial activity in general.
INTRODUCTION
FRANCHISING: A G A T E W A Y TO COOPERATIVE ENTREPRENEURSHIP SCOTT A. SHANE Massachusetts Institute of Technology
FRANK H O Y University of Texas-E1 Paso
Entrepreneurship scholars have traditionally focused the majority of their attention on independent entrepreneurship rather than on cooperative entrepreneurship. Although this research focus has greatly expanded our understanding of the field, it has left aside exploration of a major portion of entrepreneurial activity. One of the major, unexplored areas of cooperative entrepreneurship is franchising. Franchising is a contractual form of business under which one firm purchases the right to use a brand name and operating system of another. The lack of research attention paid to this form of business is problematic, given the relative economic importance of franchising. In 1995, franchising accounted for 33% of U.S. retail sales and 10% of U.S. gross domestic product. Moreover, franchising is a unique form of entrepreneurship because it depends upon two entrepreneurs--the franchisor and the franchisee--to be successful. Given its cooperative nature, franchising sheds light on dimensions of entrepreneurship, which have often been ignored by entrepreneurship scholars. The relative lack of research on franchising within the field of entrepreneurship led us to host a conference on franchising, at the Georgia Institute of Technology on January 19-21, 1996. The conference was designed to encourage franchising researchers to evaluate the state of the field and to present their research. With the support of the Journal of Business Venturing, which agreed to publish a special issue composed of papers presented at the conference, we are able to bring together the six best papers from this conference. The papers included
A d d r e s s c o r r e s p o n d e n c e to F r a n k H o y , University of Texas at El Paso, El Paso, T X 79968-0545.
Journal of Business Venturing 11, 325-327 © 1996 Elsevier Science Inc. 655 Avenue of the Americas, New York, NY 10010
0883-9026/96/$15.00 PII S0883-9026(96)00059-6
326
S.A. SHANE AND F. HOY
in this issue examine franchising from different theoretical perspectives, employ different methodologies, and focus on different units of analysis. However, all of the articles investigate the franchisor-franchisee relationship. "A Theory of Conflict in the Franchise System" by Spinelli and Birley provides a conceptual framework for examining the franchisor-franchisee relationship. This article builds upon transaction cost economics and relational exchange theory to explain how franchisors and franchisees can best manage the potential for conflict inherent in their relationship. Spinelli and Birley argue that the level of conflict in a franchise system depends on the franchisee's perception of the value of the trademark relative to his or her perception of the cost of exiting the system. "~Multi-Unit Franchising: Growth and Management Issues" by Kaufmann and Dant examines how multi-unit franchising affects franchisor growth. The authors generate hypotheses from agency theory and resource constraint theory about the effect of multi-unit franchising on system growth and test them by use of a mail survey of franchisors. Kaufmann and Dant find that the relationship between multi-unit franchising and system growth does not support agency theory explanations for franchising. "Consensus in Franchise Organizations: A Cooperative Arrangement Among Entrepreneurs" by Baucus, Baucus, and Human examines how franchisors and franchisees perceive the franchise system's competitive strategy. Surveying franchisees from 19 different fast food franchisors, the authors find that franchisors and franchisees often disagree about the system's competitive strategy even though agreement on strategy enhances both satisfaction and performance. Franchisors and franchisees also experience a conflict between the franchisor's preference for enhancing outlet sales and the franchisee's preference for enhancing outlet profit. "Crossing Mother: Entrepreneur-Franchisees' Attempts to Reduce Franchisor Influence" by Phan, Butler, and Lee examines how franchisors in the trucking industry persuade franchisees to enhance sales at the expense of profits. "The Organization of Relational Contracts: The Allocation of Rights in Franchising," by Leblebici and Shalley discusses the allocation of rights and responsibilities in franchise contracts. The study finds that franchise system performance depends on how rights and responsibilities are allocated between franchisors and franchisees. "Franchising and Control in the International Context" by Fladmoe-Lindquist examines the capabilities that enhance the international expansion of franchisors. Drawing on agency and risk management theories~ the paper also provides a theoretical framework for integrating franchising and international business research. As these papers show, franchising raises important research questions for entrepreneurship scholars. Franchising is an organizational form which requires one set of entrepreneurs to cooperate with another set of entrepreneurs who purchase the former's organizational routines. Entrepreneurship scholars currently know relatively little about how entrepreneurs successfully manage cooperative relationships which involve organizational routines central to the firm. Moreover, the high rate of litigation in franchising and the low survival rates of franchise systems indicate that franchising practitioners might not know the answer themselves. However, the process of creating successful cooperative organizational relationships is central to entrepreneurship; and these articles explore the process of building and maintaining these relationships. Despite the contribution that these articles make to understanding cooperative entrepreneurship, they are merely a first step. Throughout the world economy, franchising is growing in importance as an organizational form. Whether it be the expansion of a fast food
FRANCHISING AND ENTREPRENEURSHIP 327 franchisor to Asia or the establishment of a new real estate franchise in the United States, franchising is becoming an increasingly popular organizational form. We hope that the papers contained in this special issue will spur scholars to further explore both franchising in specific and cooperative entrepreneurial activity in general.