Predicting organizational form choice from pre-entry characteristics of franchisees

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Australasian Marketing Journal j o u r n a l h o m e p a g e : w w w. e l s e v i e r. c o m / l o c a t e / a m j

Predicting organizational form choice from pre-entry characteristics of franchisees Scott Weaven a, Brent L. Baker b, Chase Edwards b,*, Lorelle Frazer a, Debra Grace a a

Department of Marketing, Griffith Business School, Griffith University, Gold Coast, Queensland, Australia Department of Marketing, Hospitality, & Legal Studies, B.I. Moody, III College of Business Administration, University of Louisiana at Lafayette, 214 Hebrard Boulevard, Moody Hall, Lafayette, LA 70503 b

A R T I C L E

I N F O

Article history: Received 1 March 2017 Revised 23 September 2017 Accepted 6 October 2017 Available online Keywords: Franchising Business survival Prediction Organizational form choice

A B S T R A C T

To the best of our knowledge, the research reported here represents the first attempt to analyze how beliefs and attitudes toward one’s own abilities influence business form choice. We present a set of five hypotheses associated with an individual’s perception of their own business acumen, business purchase determination, self-efficacy, self-regulatory focus and attitude toward customers that serve to predict an individual’s choice of either franchising or independent business ownership. We also examine how these pre-entry orientations may or may not predict survival or failure across the two business models. The analysis of data gathered from 1186 Australian business operators reveals that the variables of interest do, in fact, predict business model choice but results also suggest that other factors are more predictive of survival or failure. We conclude that the key to marketing channel efficacy resides within the complementarity, or “fit”, between human form and structural form. Crown Copyright © 2017 Published by Elsevier Ltd on behalf of Australian and New Zealand Marketing Academy. All rights reserved.

1. Introduction Franchising offers an alluring self-employment option for wouldbe entrepreneurs (Harmon and Griffiths, 2008). Systemic advantages (association with a recognised brand name, access to a proven business model and the provision of initial and ongoing training and support) are touted as critical benefits that promote a greater likelihood of business success and survival (Dant et al., 2011). Indeed, franchisors routinely recruit individuals with limited or no prior business or industry experience as they are confident in the ability of their business model to compensate for this lack of experience (Frazer, 2001; Michael, 2000). The paucity of research on organizational form choice is mixed, inconclusive and incomplete however. The ability to clearly define the characteristics that make the ideal franchisee or independent owner has remained elusive. Thus, the primary goal of this paper is to challenge the assumption that entrepreneurs that enter franchising are typically inexperienced in comparison to their independent counterparts (see Harmon and Griffiths, 2008). The results will help fill this gap in the literature by providing more insight into the types of people who choose one form of entrepreneurship over another. We accomplish this goal by theoretically developing a set of hypotheses that relate perceptions about one’s

* Corresponding author. E-mail address: [email protected] (C. Edwards).

own business acumen, self-efficacy, regulatory focus, and other factors to the entrepreneur’s organizational form choice. Many, if not all, of these hypotheses will be in direct contrast to established assumptions pertaining to entrepreneurs and organizational form choice. Although initially counterintuitive, we argue that with deeper, more detailed consideration the logic for why entrepreneurs with more business experience and knowledge (or at least a belief in these things) will choose franchising over independent ownership will become clear. The complexity of the franchise contract may appear cumbersome, complicated and, thus seemingly beyond the abilities of the business novice though manageable for the more experienced and business educated. We recognize that this stands in stark contrast to the stream of literature which describes the franchising option as a safe and supportive environment where the novice entrepreneur can acquire such things as business acumen through initiation into the franchise system (Dant et al. 2013; Harmon and Griffiths, 2008; Kaufmann, 1999). However, our use of human capital theory provides a strong theoretical foundation to support our contrarian argument that the belief in one’s ability to run a business is more consistent with the franchising option. 2. Human capital theory Human capital encapsulates an individual’s skills and knowledge that is acquired through ‘investments in schooling, on the job training and other types of experiences’ (Becker, 1964; Watson et al.,

https://doi.org/10.1016/j.ausmj.2017.10.001 1441-3582/Crown Copyright © 2017 Published by Elsevier Ltd on behalf of Australian and New Zealand Marketing Academy. All rights reserved.

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2003). It incorporates general and specific elements. General human capital is not directly related to a specific occupation, but represents an amalgam of a person’s past educational and working experiences (Kaasa, 2009), while specific human capital is derived from actual business operations (i.e. industry experience) and is more difficult to transfer to other contexts (Unger et al., 2011). Given that we examine the full gamut of what franchisees and independent business operators ‘bring to the table’ prior to entering the business, we consider both general and specific elements of human capital (Becker, 1993). Human capital investments are an important source of knowledge, skills, problem solving abilities, discipline and selfconfidence in an individual’s ability to complete tasks effectively (Cooper et al., 1994; Florin et al., 2003). However, to date, the role of human capital in franchising has received limited attention in the marketing channels literature. A basic assumption of human capital theory is that people will strive to receive appropriate levels of compensation for their investments in human capital (Cassar, 2006). From a pre-entry business context, this means that individuals will choose to enter business arrangements that will maximize their human capital investments over the life of the enterprise. Generally, we can assume that those individuals possessing higher levels (or higher quality) of human capital will choose a business vehicle that promises higher rates of growth and profits (Gimeno et al., 1997; Unger et al., 2011). In this way, human capital is inextricably linked to venture success (Unger et al., 2011) in that it facilitates opportunity recognition and exploitation, planning and strategic thinking, external capital acquisition and the ongoing accumulation of new knowledge, business skills and self-confidence (Brush et al., 2001; Chandler and Hanks, 1998; Cooper et al., 1994; Parker and Van Praag, 2006; Shane and Venkataraman, 2000; Shane, 2000). Individuals with high human capital assets are likely to seek ventures that will accommodate high demands for compensation, and choose to terminate business operations if this goal is not realised, (Cooper et al., 1994; Rauch and Rijsdijk, 2011). Moreover, human capital enables better opportunity recognition and exploitation, thus reducing the risk of business failure (Shane and Venkataraman, 2000). The research on franchisees and their level of human capital prior to franchise entry is mixed. Some research suggests that franchisees possess lower levels of human capital than their independent counterparts. Franchisees have been described as less self-reliant and less motivated (Knight, 1984). Similarly, they are often portrayed as less skilled (Williams, 1999), less familiar with business operations (Kaufmann, 1999), and less entrepreneurially-minded (Seawright et al., 2011) than independent owners. However, the results of other research support the notion that franchisees actually possess more human capital than independent owners. Williams (1999) found that the more financial capital available at the time of start-up, the more likely the entrepreneur will franchise. This means that, if more money becomes available to the entrepreneur they will utilize the extra funds to meet the extra resource demands of the franchise enterprise. These results should be put in context. This same study also found that the more managerial experience and education the entrepreneur had, the more likely they are to franchise. In this study, possession of both knowledge-based resources (i.e. education and managerial experience) and tangible resources (financial capital) were predictive of higher incidents of franchising (Williams, 1998). It may be that, although franchising offers certain levels of training and support, these levels are not enough to alleviate the perceived risk of franchising to the low human capital entrepreneur. However, the added support and training may be perceived as favourable and maybe even necessary to the entrepreneur capable of acquiring and then managing the financial and knowledge-based capital needed to successfully navigate the added complexities of the franchise arrangement. Bastie et al. (2016)

support this contention in their findings that higher levels of both human and social capital, as measured by levels of education and familiarity with franchisees, are significant determinants of franchising. Our hypotheses are developed from this latter perspective. Recall that human capital fosters better decision-making through associated learning and knowledge outcomes that should have longterm ramifications for business growth and survival (Ackerman and Humphreys, 1990). It is generally accepted in the literature that the quality of managerial decision-making is largely dependent upon an individual’s business acumen, defined as an individual’s skill in acquiring and managing human, physical, technological and informational resources so as to maximise the realisation of organizational goals (De Cleyn et al., 2014; Schultz, 1961; Unger et al., 2011). Often viewed as a critical component of business leadership, entrepreneurial intentions and ultimately venture performance (Evans and Jovanovic 1989), business acumen incorporates the gathering of management intelligence, intuitive decision-making and the leveraging of acquired (tacit) knowledge resources (McGregor, 1967). As tacit knowledge is an entrepreneurial skill (Horgan and Simeon, 1990), business acumen may represent an entrepreneurial ability (Lucas, 1978) which is closely tied to both the traits of the individual (Bates, 1998) and prior business and/or industry experience (Bates, 1995a, 1995b; Lucas, 1978). Thus, business acumen is seen here as a component or contributor to human capital. Based on the logic presented above, we believe that entrepreneurs with more business acumen will choose franchising over independent ownership more often than their lower business acumen counterparts. Stated more formerly: H1. Entrepreneurs who choose franchising as their organizational form will have significantly higher business acumen scores than those who choose independent ownership. In addition to a willingness to accept risk, entrepreneurial behaviour (e.g. entering self-employment) is influenced by an individual’s self-confidence. Self-confidence or self-efficacy refers to perceptions of one’s willingness to try new things, and incorporates expectations regarding the likely (future) success in a given venture (Baron, 2012; Bird, 1989) and in the managerial sense, can be considered a form of human capital. It is based on past experience and attainment (Bandura, 1994; Wood and Bandura, 1989), and is a strong determinant of task choice (Betz and Hackett, 1981). Prior research attests that higher levels of self-efficacy exist within entrepreneurial rather than non-entrepreneurial cohorts (Chen et al., 1998; Macko and Tyszka, 2009). Thus, it appears that individuals possessing higher levels of human capital are more likely to have higher levels of self-confidence (Ucbasaran et al. 2008). Self-efficacy differs from business acumen in that business acumen is a recognition of one’s perceived business understanding and know-how. Self-efficacy is a belief in one’s ability to successfully use that know-how. Just as we expect those with more perceived business acumen to gravitate toward franchising, we also expect the same for those with greater perceived self-efficacy. This argument is likewise rooted in the assumption that the complexities of the franchise arrangement make it tenable to only those most confident in their abilities. Thus we propose the following: H2. Entrepreneurs who choose franchising as their organizational form will have significantly higher self-efficacy scores than those who choose independent ownership Another factor influencing an entrepreneur’s choice of business model centres on why they initially chose to enter selfemployment. In general, research examining why individuals choose to enter entrepreneurship has typically identified needs centring upon personal wealth creation, increased levels of independence, personal development and the need for external approval (Carter

Please cite this article in press as: Scott Weaven, Brent L. Baker, Chase Edwards, Lorelle Frazer, Debra Grace, Predicting organizational form choice from pre-entry characteristics of franchisees, Australasian Marketing Journal (2017), doi: 10.1016/j.ausmj.2017.10.001

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et al., 2003; Cassar, 2007; Gatewood et al., 1995; Tyszka et al., 2011). In addition, the motivational literature has identified positive and negative entrepreneurial motivations (i.e. individuals are ‘pushed’ or ‘pulled’ into self-employment) (Dawson and Henley, 2012). A distinguishing element of push and pull motivations relates to the ‘voluntary’ nature of entrepreneurial intentions with individuals entering self-employment out of necessity (i.e. push) or to exploit a recognised venture opportunity (i.e. pull) (Amit and Muller, 1995; Hessels et al., 2008). Since franchising provides existing brand equity, established (and proven) operational processes and access to clientele, it might be a more attractive business proposition to those individuals who are determined to rapidly enter selfemployment. Indeed franchisors often offer ‘turnkey’ training and support, which would appeal to those entrepreneurs who wish to become self-employed to satisfy the need to generate income (e.g. following redundancy) and work independently (i.e. need for autonomy). However, should the entrepreneur’s motivations be driven by external opportunity recognition, so as to improve their quality of life and/or creative opportunities, then one would assume that fullyindependent business operations would be more appealing (Dawson and Henley, 2012; Shane et al., 2003). In this way, these entrepreneurs will not have the same restrictions that exist within the franchising business model. They will be able to perform typical entrepreneurial activities (e.g. innovation etc) and enjoy advantages associated with self-employment (e.g. decision-making autonomy). While a majority of prior research investigating why individuals choose self-employment have determined that ‘pull’ motives dominate self-employment choice (e.g. Gilad and Levine, 1986; Segal et al., 2005), the unique characteristics of franchising may appeal to individuals possessing a high level of purchase determination. The basic argument here is that franchising offers those wanting to skip the initial development stages of their entrepreneurial endeavour a quicker route toward established, and thus efficient and comparatively safe, operations. This of course means sacrificing some of the autonomy associated with independent ownership. We argue that those who possess business related human capital will not see this sacrifice as being large enough to counterbalance the benefits associated with the rapid establishment of their operation. Thus, the knowledgeable entrepreneur, possessing higher rates of knowledge-based human capital, will find the franchising operation attractive (Hodge et al., 2013). This is due to its ability to circumvent the slow, resource scarce and arguably more risky developmental process that accompanies independent ownership. Hence, we propose the following: H3. Entrepreneurs who choose franchising as their organizational form will have significantly higher purchase determination scores than those who choose independent ownership. Another critical dimension of an individual’s judgement and decision-making rests with their self-regulatory focus. Individuals tend to regulate their behaviour in accordance with goals that are grounded in their need for nurturance or security (Galinsky et al., 2005). From a regulatory focus perspective, individuals are said to possess two coexisting self-regulatory systems (i.e. prevention or promotion foci) (Higgins, 1997). These systems are aligned with distinct sets of motivations, goals, emotions and behavioural tendencies (Greifeneder and Keller, 2012; Higgins, 1998). While each independent self-regulation tendency may be active at the same time (Molden et al., 2008), individual foci may be habitually or chronically dominant or may be more pronounced than another in response to certain signals or stimuli (Higgins et al. 2001). Promotionfocused individuals are motivated by their ideals and perceived resultant rewards (positive or negative), while those that are prevention-focused are motivated by their thoughts, fears and by

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their level of sensitivity to the presence or absence of negative outcomes (Das and Kumar, 2011). Overall, promotion-focused individuals are more creative, and tend to focus on accomplishments (Förster et al., 2004). Alternatively, prevention-focused orientations are driven by the duty, obligation and security so as to protect the individual against psychological harm (Carver and Sheier, 2011). In this instance, the focus is not on how much human capital but what kind of human capital the individual possesses. Both prevention and promotion foci represent differing forms of human capital and, in significant amounts, may contribute to an individual’s organization form decision. Given that franchising and fully independent ventures represent distinct business models with associated advantages that may not be available in each business context, we would expect that franchisees and independent business owners would possess different self-regulatory orientations. Individuals choose career roles that match their needs and values (Carter et al., 2003). Since franchising is a more supportive alterative to fully independent selfemployment, it is likely to have greater appeal to preventionfocused individuals. Moreover, the operational nature of franchising obligates franchisees to follow established routines and processes to ensure system uniformity, thus restricting autonomy, freedom, and individual creativity (Kaufmann and Eroglu, 1999). When presented with new opportunities, prevention-focused individuals tend to follow the status quo while promotion-focused individuals will tend to be more entrepreneurial and seize recognised opportunities (Greifeneder and Keller, 2012; Liberman and Trope, 1998). Based on the preceding discussion, we argue: H4. Entrepreneurs who choose franchising as their organizational form will have significantly higher prevention focus scores; while those who choose independent ownership will have significantly higher promotion focus scores.

2.1. Attitude toward customers Commitment to building relationships with the customer is a central element in building lasting and valuable customer relationships, which are necessary for firm growth and survival (Cardwell, 1994; Jones and Rowley, 2011). Importantly, the ability to assess customer needs is dependent upon the individual’s human capital as this will inform opportunity recognition, strategy formulation and exploitation (Ucbasaran et al. 2008). Also, as a form of human capital, the ability to begin and develop lasting and profitable relationships may influence an entrepreneur’s organizational form choice. We contend that the entrepreneur who recognizes and values their ability to connect directly with customers, all else being equal, will prefer the independent ownership route as opposed to franchising. This is because, within the franchising context, success is equated with conformance to set standards and operating procedures in support of the system brand rather than attending to the individual needs of customers. In this way, franchisees emphasize the development of their relationship with their parent franchisor, which may take precedence over developing close relationships with their customers. This is not to say that franchisees are apathetic toward their customers, only that the effort put forth to build relationships is secondary to adherence to franchise rules and norms. Indeed, franchisees typically seek to leverage the experience and expertise of their franchisor, and it is plausible that franchisees will emphasise their relationship with that franchisor more than with their customers. In support of this contention, franchisors will often provide customer lists to their franchisees and actively engage in recruiting customers for franchisees. That is, customer acquisition and (to some extent) retention is reliant upon the actions of the franchisor. With the franchisor developing and managing customer

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relationships, the prioritisation of the relationship building with franchisor over the customer becomes a more obvious trade-off. This perception of roles and responsibilities within the franchise framework motivates the franchisee to put forth more effort toward adhering to franchise system rules and norms and less effort toward customer relationship maintenance since the belief is that the franchisor is managing that responsibility. However, since the franchisee is customer-facing, this alignment of priorities may not appear as beneficial to the customers who are most directly affected. Recent work by Jeon et al. (2014) lends support to this assessment in finding that customers believed that independent brands signal higher service reliability and security than franchise brands. Importantly, customers apportioned more risk to franchise brands, possibly because of experiencing less than optimal service experiences with national franchise brands. This may be a reflection of a standardized or ‘cookie cutter’ approach to service delivery, which may undermine or constrain the ability to customize service outcomes. Moreover, franchisees may engage in ‘free-riding’ behaviours in which savings are accrued through minimizing service outcomes, relying on the assumptions that the franchisor has secured these relationships and that sales are maintained through existing franchise brand equity across the system (Mignonac et al., 2013; Samaha et al., 2011). Thus, we suggest that: H5. Entrepreneurs who choose franchising as their organizational form will have significantly lower scores in the measurement of their attitude toward the customer than those who choose independent ownership.

3. Research design The research design for this study was quantitative in nature using a national on-line survey as the data collection mechanism. The sample frame of interest was all individuals who currently own or have owned a small business during the last five years.

3.1. Survey development Scale items for self-efficacy (SELFEF) and self-regulatory focus (PROM and PREV) were drawn from the literature since scale measures are well developed in these areas. Self-efficacy was measured via the 10-item scale of Schwarzer and Jerusalem (1995) and self-regulatory focus via 8 items from Kruglanski et al. (2000). To measure business acumen (BUSAC), purchase determination (PURDETER) and attitude towards customers (ATT), scale items were developed for this study. This involved a process of providing four experts in the field with a list of survey measures along with their respective definitions to determine if the items were “not at all representative”, “moderately representative” or “highly representative” of the construct definition (Hardesty and Bearden, 2004). This process resulted in 3 items for business acumen, 4 items for purchase determination and 5 items for attitude towards customers being considered representative of the construct definitions. The response format chosen for all survey items was a 6-pt Likert scale ranging from (1) “Strongly Disagree” to (6) “Strongly Agree”. Finally, to test for evidence of common method variance (CMV) in the analysis phase, a marker variable (Lindell and Whitney, 2001) was also added to the survey (i.e. “purchasing a foreign made good is unpatriotic”). A pilot test of 63 small business owners verified the strong psychometric properties of all scale items prior to the main data collection. All survey measures and their respective construct definitions appear in Table 2, along with the preliminary analyses statistics.

3.2. Data collection Data collection involved the administration of an online survey. A reputable market research firm was used to access a database of past and present small business owners. A random sample of 5000 small business owners from Australia was drawn from the database and an email providing the survey link was sent to this group on two separate occasions, two weeks apart. This process resulted in 1205 surveys being completed online, representing a response rate of 24%. Initial screening of the survey data resulted in 1186 surveys being considered complete and appropriate for the ensuing analysis. The 19 surveys that were discarded were due to flat lining responses. A visual inspection of the data for skew and kurtosis was also done, and neither of these issues were found. The anonymous nature of the survey prohibited non-respondents from being identified. Therefore, to test for non-response bias, we employed an accepted proxy method of comparing the late responses resulting from the second email (n = 231) with early responses resulting from the first email (n = 955) (Armstrong and Overton, 1977). A comparison of means (on all measured constructs) across both samples revealed no evidence to suggest that the early respondents were any different to late respondents. Therefore, non-response bias was deemed to be non-problematic. 3.3. Sample characteristics Data collection resulted in 401 complete responses from franchisees (213 surviving and 188 failed) and 785 complete responses from independent small business owners (550 surviving and 235 failed). Table 1 outlines the sample characteristics in terms of age, gender, education, years of business experience, start-up costs and percentage of start-up borrowing. 3.3.1. Comparing franchisee and independent groups Overall, the franchisee samples comprised respondents that were, on average, 10 years younger than the independent groups. In line with this younger age group, franchisees also had fewer years of experience in business than the independents. In fact, franchisees had an average of 5 fewer years of business experience than the independents. However, the franchisee groups did exhibit higher levels of tertiary education than the independents. Furthermore, the gender split was more uneven for the franchisee groups, in which approximately 70% of respondents were male. In

Table 1 Sample compositions.

Age (Mean) Gender: Male Female Education Level: High School TAFE/Diploma University Degree (UG) University Degree (PG) Years Business Experience (Mean) Total Start-Up Costs (Mean) % Start-Up Costs Borrowed (Mean)

FRANCHISEES (n = 401)

INDEPENDENTS (n = 785)

Current (n = 213)

Failed (n = 188)

Current (n = 550)

36

38

48

50

67% 33%

72% 28%

57% 43%

57% 43%

14% 20% 40% 26% 6.3

16% 27% 36% 21% 6.7

18% 39% 25% 18% 11.8

27% 41% 20% 12% 11.5

$251,496 44%

$326,231 50%

$91,106 19%

Failed (n = 235)

$65,824 25%

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relation to start-up costs, franchisees paid roughly three times more to get into business than the independents. This resulted in them carrying much higher debt levels (47% of start-up costs).

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all constructs were uni-dimensional, producing strong factor loadings (ranging from .71 to .91), which is in excess of the recommended level of .50 (Shi and Wright, 2001) and all Cronbach’s alphas were acceptable, ranging from .74 to .96 (Massey and Kyriazis, 2007).

4. Analyses and results Data were analysed via three stages. Firstly, preliminary analysis involved the examination of the psychometric properties of the scale items prior to computing composite variables and testing for convergent, discriminant validity and common method variance (CMV). Secondly, testing of group differences was conducted via MANCOVA. Finally, logit regression analysis was used to describe and predict group membership, thus addressing the hypotheses and research questions of this study. 4.1. Preliminary analyses The data was initially inspected for normality through visually inspecting histograms and computing skew and kurtosis indices. As the absolute values were no greater than three (for skewness) and four (for kurtosis) there was no evidence of non-normality (Kline, 1998). Next, we examined of the factor structures, reliability and validity of the measured constructs. Principal components factor analysis (with varimax rotation) was conducted on each of the constructs of interest individually. The results revealed that

4.1.1. Validity checks As shown in Table 2, convergent validity was established through the significance and strength of the factor loadings and the AVEs being greater than .50 (Carr, 2002). Upon computing composite variables (refer to Table 3 for the construct means and standard deviations), discriminant validity was tested using a procedure recommended by Fornell and Larcker (1981) whereby the shared variance (squared correlation) between construct pairs was compared to the average variance extracted (AVE) for each of the constructs. For discriminant validity to be established, all AVE estimates must be greater than the shared variance between constructs (Fornell and Larcker, 1981). Table 3 shows that all AVEs are greater than all the shared variances. Therefore, discriminant validity was clearly established. Finally, CMV was tested using the marker variable technique promoted by Lindell and Whitney (2001). Correlating the marker variable with all composite variables produced no significant correlations (i.e. highest correlation was not significant at .04). Therefore, CMV was not evident in the data.

Table 2 Preliminary analysis.

Business Acumen (BUSAC): The degree to which the individual perceives they have business, industry and franchising experience. BUSAC1 Prior to buying my franchise/business, I had a lot of experience in conducting a business. BUSAC2 Prior to buying my franchise/business, I had a lot of experience in the industry. BUSAC3 Prior to buying my franchise/business, I had a lot of experience in franchising.

Loading

AVE

Alpha

.88 .88 .84

.76

.84

Purchase Determination (PURDETER): The degree to which the individual felt desperate/determined or forced (due to economic reasons) to buy a business/franchise. PURDETER1 Prior to buying my franchise/business, I was determined to buy a business, regardless of advice from other people. PURDETER2 I was forced to buy a business, so I could generate some income. .71 PURDETER3 I bought a franchise/business because I was desperate to by my own boss. .71 PURDETER4 I didn’t care what franchise/business I bought into, I just wanted to buy a franchise/business. .78 .77 .56 .74 Self-Efficacy (SELFEF): An individual’s belief about his/her own ability to do something or achieve something. SELFEF1 I can always manage to solve difficult problems if I try hard enough. .81 SELFEF2 If someone opposes me, I can find the means and ways to get what I want. .76 SELFEF3 It is easy for me to stick to my aims and accomplish my goals. .84 SELFEF4 I am confident that I could deal efficiently with unexpected events. .90 SELFEF5 Thanks to my resourcefulness, I know how to handle unforeseen situations. .90 SELFEF6 I can solve most problems if I invest the necessary effort. .90 SELFEF7 I can remain calm when facing difficulties because I can rely on my coping abilities. .85 SELFEF8 When I am confronted with a problem, I can usually find several solutions. .87 SELFEF9 If I am in trouble, I can usually think of a solution. .89 SELFEF10 I can usually handle whatever comes my way. .88 .74 .96 Self-Regulatory Focus – Promotion (PROM) The degree to which the individual makes decisions and behaves with the goal of achieving positive outcomes. PROM1 I don’t mind doing things even if they involve extra effort. .88 PROM2 I feel excited just before I am about to reach a goal. .87 PROM3 I enjoy actively doing things, more than just watching and observing. .91 PROM4 I am a “doer.” .85 .77

.90

Self-Regulatory Focus – Prevention (PREV) The degree to which the individual makes decisions and behaves in order to avoid negative outcomes. PREV1 I spend a great deal of time taking inventory of my positive and negative characteristics. .84 PREV2 I like evaluating other people’s plans. .82 PREV3 I often compare myself with other people. .80 PREV4 I often critique work done by myself and others. .78

.66

.82

Attitude towards customers (ATT): The degree to which the individual has empathy towards and values customers. ATT1 Overall I like to make friends with my customers. ATT2 I am very empathetic towards my customers. ATT3 I really value my customers. ATT4 I go out of my way to ensure my customers are happy. ATT5 I enjoy problem solving with customers.

.76

.92

.81 .89 .90 .90 .86

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Table 3 Discriminant validity test results. Mean (St. Dev)

BUSAC 3.77(1.48)

PURDETER 3.45(1.25)

SELFEF 4.81(0.80)

PROM 5.05(0.90)

PREV 4.27(1.09)

ATT 5.16(0.86)

BUSAC PURDETER SELFEF PROM PREV ATT

.76 .11 .08 .05 .06 .03

.56 .02 .01 .08 .01

.74 .42 .18 .39

.77 .18 .39

.66 .12

.76

Diagonal = Average Variance Extracted (AVE) for each construct. Columns = Shared Variance (i.e. square of correlation).

4.2. Hypotheses testing 4.2.1. Covariates Prior to testing for group differences (i.e. franchisees or independent owners) and group membership prediction, it was important to acknowledge possible covariates. Sample comparisons (see Table 1) revealed that the franchisee and independent samples differed in terms of age, gender, business experience, total start-up costs, percentage of borrowing and education. The three key variables considered to have a possible confounding effect on the results were age, gender and education. Therefore, these were included as covariates in the ensuing analysis. Business experience was not included due to its close relationship with one of the criterion variables (i.e. business acumen). In other words, we were testing for this effect anyway. Total start-up costs and percentage of borrowing were also not considered possible covariates due to their strong link with business model type (i.e. franchise versus independent business) which was the key variable (i.e. fixed factor) in the multivariate linear model. 4.2.2. Testing group differences Prior to testing for group membership prediction between “Franchisees” and “Independent Business Owners”, the data was first examined for significant group differences (Wang et al., 2001). Given the identification of age, gender and education as covariates in the model, testing for group differences was undertaken via a twostep process involving MANOVA and MANCOVA as recommended by Lumpkin and Dunn (1990). MANOVA was used to establish a baseline model of group differences prior to including the covariates in the model. The MANOVA results indicated that significant group differences were evident (i.e. Wilks Lambda = .71 (F (df = 9, 1012) = 47.94; p < .01)). Furthermore, all criterion variables were significantly different with p < .05 in all cases. We then ran a MANCOVA, including the covariates (i.e. age, gender1 and education), and the testing for group differences was undertaken on the adjusted means for the criterion variables (Lumpkin and Dunn, 1990). The MANCOVA produced significant results for GENDER, AGE and FRANINDEP (franchisees or independent owners). This was evidenced by Wilks Lambda of .97 (F = (df = 6, 1012)4.39; p < .01) for GENDER, Wilks Lambda of .88 (F = (df = 9, 1012) 22.41; p < .01) for AGE; and Wilks Lambda of .97 (F = (df = 9, 1012) 4.81 p < .01) and Wilks Lambda of .93 (F = (df = 9, 1012) 15.05; p < .01) for FRANINDEP. A comparison of the baseline model and the adjusted model (with covariates) showed that FRANINDEP was significant in both cases, indicating that the covariates do not negate the effect of the criterion variables in terms of group differences (Darden and Rao, 1979). To further determine the suitability of the criterion variables in discriminating between groups, the estimated marginal means (adjusted

1 Since gender was a categorical variable, it was dummy coded using a procedure recommended by Blalock (1960).

Table 4 MANCOVA: marginal mean group differences (accounting for age and gender). Variable

Mean Franchisees

Mean Independents

F

Significance

BUSAC PURDETER SELFEF PROM PREV ATT

4.15 3.88 4.83 5.01 4.55 5.09

3.57 3.36 4.84 5.14 4.19 5.24

25.78 41.28 0.04 3.99 16.71 4.70

.001 .001 .910* .041 .001 .030

* Not significant; p > .05.

for covariate effects) were examined for significant differences between groups. The results appear in Table 4, showing that all mean differences were significant, except in the case of SELFEF. Therefore, five out of six hypotheses were supported. The sixth, H2, was not supported and SELFEF was therefore excluded from the subsequent logit regression analysis. 4.2.3. Logit regression analysis In order to ascertain the strength of the criterion variables in predicting group membership across franchisees and independent small business owners, a binary logit analysis was conducted. Prior to conducting the logit analysis, the total sample (n = 1186) was randomly split into an analysis sample (50%, n = 604) and a hold-out sample (50%, n = 582). The purpose of this exercise was to make comparisons between the analysis and the hold-out samples to determine predictive accuracy (Hair et al., 2010). Since the total sample was composed of 34% “franchisees” and 66% “independents”, random allocation for the analysis and hold out samples was done individually on each group to ensure that a similar split of “franchisees” and “independents” was present in each group. This resulted in the analysis sample being composed of 207 “franchisees” and 376 “independents”, and the hold-out sample comprising 183 “franchisees” and 377 “independents” after removing the cases with missing values. The results of the logit regression appear in Table 5 and show that the Model statistics for both the analysis and hold out samples support their significant predictive capabilities. The Omnibus test of model coefficients (i.e. chi-square) was significant for both models, indicating that this logit model has at least some predictive capabilities. The predictor or criterion variables are all significant predictors of organizational form for both the analysis and hold out samples (p < .05). The predictive accuracy of the logit model was then assessed by examining the hit ratios of the analysis sample and the hold-out sample in relation to the null model with no predictors included. The predictive accuracy for the null models was 65% for the analysis sample and 67% for this hold out sample. These models were essentially predicting that 100% of the sample are independent business owners but were only 65% and 67% correct since these

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Table 5 Results of logit regression analysis; prediction of franchisees vs. independent ownership. Criterion Variables

B

Acumen Analysis Sample Hold Out Sample Purchase Determination Analysis Sample Hold Out Sample Promotion Focus Analysis Sample Hold Out Sample Prevention Focus Analysis Sample Hold Out Sample Attitude Toward the Customer Analysis Sample Hold Out Sample

Wald Test Statistic

Sig.

EXP(B)

0.25 0.17

10.14 4.61

0.00 0.03

1.27 1.18

0.38 0.34

18.31 13.07

0.00 0.00

1.46 1.40

−0.60 −0.65

11.60 13.40

0.00 0.00

0.55 0.52

0.78 0.72

31.34 31.41

0.00 0.00

2.18 2.05

−0.68 −0.40

14.69 5.97

0.00 0.02

0.51 0.67

Classification Accuracies

Analysis Sample

Hold Out Sample

Null Model Criterion Model Franchisees Independents

65% 77% 61% 85%

67% 76% 50% 76%

Model Summaries

Analysis Sample

Hold Out Sample

Chi-Square −2 Log Likelihood Nagelkerke R Square Hosmer and Lemeshow Chi-Square

156.44a 602.07 0.32 12.68b

107.02a 600.67 0.24 21.45c

a b c

Significant at the p < 0.001 level. Non-significant p > 0.05. Significant at the p < 0.01 level.

figures represent the true percentage of independent owners in each sample. When the criterion variables are entered into the model, the predictive accuracy of both models increases substantially. The increase of 12% for the analysis sample and 9% for the hold out sample, yielding predictive accuracy for each model at the 77% and 76% levels respectfully. This means that approximately three out of four times, the variables included in the logit model will accurately predict whether an entrepreneur will choose franchising or independent ownership. This result, when considered with the significant differences in mean scores for the criterion variables between franchisees and independent owners, provides further support for the hypotheses tested in this section of our analysis. The results of this study overwhelmingly confirm that those individuals who are attracted to the franchising business model can be distinguished from independent business operators on the basis on their pre-business orientations (i.e. perceived experience, motivations and attitudes). Using the results from the analyses of these data, we can state that H1, H3, H4 and H5 are supported. We further discuss the results of this study below. 5. Discussion When we examine the results of each construct in this study individually, the implications of the study as a whole becomes apparent. Specifically, business acumen (H1) was found to be a discriminating variable in the prediction of business ownership model (i.e. franchising versus independent ownership). This result supports our notion that those who perceive in themselves a significant amount of business experience and knowledge will gravitate toward the franchising option. The managerial implications of this result are significant because it is antithetical to the well-established assumption that franchising

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is more attractive to the inexperienced and unknowledgeable entrepreneur precisely for its ability to shield the uninitiated from the hazards of modern commercial exchange (e.g. Harmon and Griffiths, 2008). This result suggests that such protections may not be necessary. If the pool of potential franchisees is better versed than previously believed, there are significant implications for recruiting and training. The mere acknowledgment of the existence of higher levels of business acumen than previously assumed will lead to better relationships between the franchise parties. Consequently, systemwide performance should improve (Palmatier et al., 2006). Better franchisee-franchisor relationships would result from franchisees feeling as if their business experience is both valued and trusted. Franchisors could demonstrate their faith in their franchisees’ acumen by opening the channels of communication wider and allowing for more franchisee autonomy as it pertains to the management of their individual units. For these reasons, the franchisor should feel encouraged to leverage their franchisees’ belief in their business experience and knowledge (assuming the franchisor can verify and find justification for these perceptions). Assuming they can, recognizing the strength in franchisee beliefs should provide the franchise system with a previously unrecognized source of knowledge-based resources (Jeon et al., 2016) which may provide a competitive advantage for the franchise system. In relation to self-efficacy (H2), we hypothesized that this variable would be a significant discriminator between organizational form choice, with franchisees expected to score significantly higher is this respect. The findings did not support either of these notions, with both groups having almost identical means (see Table 4). We suggest our findings may indicate one of two things. Firstly, when looking at the individual items used to measure self-efficacy we note that they cover broad issues such as the ability to solve problems, achieve goals and cope with unexpected events. Franchisee respondents may have felt that they do have the ability to achieve all of these things and this is reflected in their choice to enter franchising. In other words, they entered franchising as a means of solving problems, dealing with unexpected events and, ultimately, achieving their goal of being in business. Although this may explain why franchisees scored high on self-efficacy, as we expected, it does not explain why the independent business owners did as well, especially when considering their lack of perceived business acumen. The means of both groups (see Table 4) are above the midpoint of our scale. We contend that this can be attributed to the inherent faith that all entrepreneurs must have in themselves to even consider going into business for themselves. The managerial relevance of this result is that, regardless of experience or business knowledge, the pool from which franchisors will pull from will have a significant amount of belief in their ability to manage complicated and difficult tasks. When combined with what has been learned about the relationship between business acumen and organizational form choice, franchisors should be sure to recruit, train and engage their franchisees at a fairly significant level of business sophistication. This will help promote confidence and assurance in the franchisees as well as allow them to operate at a level that is more consistent with their confidence, ability and knowledge base. This is contrary to assumption that the franchising model is used as a crutch to compensate for an individual’s lack of ability (Frazier 2001; Michael, 2000). Purchase determination (H3) was a significant predictor of organizational form choice (i.e. franchisee versus independent). The strong desire to produce an income whilst, at the same time, having some degree of independence, may have contributed to the decision to purchase a franchise instead of trying to develop one’s own idea. The fact that franchisees have significantly higher purchase determination than their independent counterparts also suggests a

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desire or willingness to skip or forego the developmental stage of one’s own enterprise. That is to say, part of the allure of franchising may be that it provides a quicker path to a safe and lasting entrepreneurial enterprise. The human capital argument for this assumption is that those who are familiar with the difficulty of developing a new product or brand to the point of relative safety will appreciate the ability to bypass this process. We also assume their entrepreneurial leanings are based more on the autonomy of ownership and not the passion connected to the development of their concept, which is almost certainly the case for independent owners. Managerially speaking, this result is most relevant during recruiting. We suggest that franchisor recruiting efforts focus heavily on the relative safety that franchising provides compared to the incredibly insecure approach of new business formation. This particular result reinforces the need for franchisors to have a thorough and accurate understanding of the people they are recruiting to run and own their franchised units. The desire to be your own boss and own your own business, while often touted as a benefit of franchise ownership, may not be quite as important to would-be franchise owners who may be more interested in the relative security that the franchise brand and system provides. Ensuring that recruiting materials, strategies and efforts are designed to address this apparent need for security, alongside the traditional pitch of autonomy, would be an effective strategy to develop a larger pool of high-quality franchisee candidates. In comparing franchisees and independents, as it pertains to their self-regulatory focus, franchisees were significantly more preventionfocused individuals (H4) and significantly lower promotionfocused individuals) than their independent owner counterparts. This means that franchisees have a tendency to make decisions and take action in order to avoid negative outcomes, as opposed to actively pursuing positive outcomes, as independents do. The desire of franchisees to bypass the developmental stage of their enterprise may be one reason why the prevention focus for franchisees is so much higher than for independent owners. The franchise arrangement provides not only training and certain forms of support (Nyadzayo et al., 2015), it provides instant equity in the brand. This equity certainly holds intrinsic value and provides some insulation from the issues independent owners have to deal with as they build their brand. The combined results supporting both H3 and H4 lead us to expect prevention-focused entrepreneurs to choose the franchising option at a much higher rate than their promotionfocused counterparts. These results have implications for the quality of the relationship between the franchisor and its franchisees. Specifically, we suggest that the franchisor take time to emphasize how joining the franchise system provides security through the strength of the brand, reduced risk, and reduced obstacles associated with brand building from scratch. Reaffirming the soundness of the decision to franchise with prevention-focused entrepreneurs may go a long way in solidifying franchise commitment, which contributes heavily to relationship quality (Palmatier et al., 2006). Similarly, recruiting efforts that highlight how the franchise system is consistent with the prevention focus aspects of an entrepreneur’s personality may help recruit those entrepreneurs that represent the best fit for the franchise system. Attitude toward the customer (H5) was another predictor of business organization choice (i.e. franchisee versus independent). From the outset, franchisees may not have been involved in the gathering of market intelligence and, therefore, may not have a solid understanding of their customers’ needs and wants. Furthermore, franchisees may possess a ‘cookie-cutter’ mentality in which they expect customers to come to their stores (as arranged by the franchisor) and accept the established routines, products and services. Alternatively, franchisees may be less responsive and innovative with

customers because they feel constrained to “follow the script” and not deviate from training manuals and franchisor directives that they contractually agreed to follow. On the other hand, franchisees may simply be content with satisfying their customers by offering minimum levels of service because they perceive their customer base to be transient (i.e. moving across many outlets of the same brand), rather than being loyal to any one outlet. However, regardless of the reason, this is an important finding with significant practical implications. The fact that 57% of the franchisees were determined to become franchisees before they determined which system they wanted to invest in supports our claim. The results supporting H3 and H4 also provide insight that may help explain these results. By in large, it looks as if franchising is attractive to people who care more about relative safety in their occupational choice coupled with as much autonomy as possible. This contrasts with the independent owner who may be motivated more by their desire to develop their own concept from the ground up. Finding the market that will enable success in that endeavour demands more contact and more interaction with other marketplace players compared to franchisees. When franchisees buy into the system they are essentially buying into an established clientele that was developed by others involved in the founding and growth of the franchise system. It certainly makes sense that those who lack a passion for the development of their concept and clientele will place a higher value on the safety net that franchising provides and will be less sensitive to their market. Independent owners, on the other hand, will likely feel a great deal more indebted, grateful and connected to a market that helps them build their concept from the ground up and thus we expect franchisees to be less positive toward their clientele than independent owners. Franchisors should, therefore, require training on the importance of good customer relationships in both their initial and recurring training regimens. Frequent customer satisfaction surveys, harsh consequences, attractive rewards and other incentives are available to the franchisor to help train their franchisees on the heightened importance of the customer and the need to act in ways that are consistent with this understanding. 6. Limitations and future research The use of survey measures comes with some limitations. However, we believe the problems associated with capturing data that accurately represents respondents’ attitudes, feelings and behaviours were minimized through the use of multiple-item measures that were drawn from pre-existing scales that have been validated repeatedly in peer-reviewed scholarship. Furthermore, the stringent reliability and validity checks reported herein substantiate the integrity of the data upon which our research conclusions were made. On this basis, we suggest that the data collected was an accurate reflection of the individuals’ intended responses. However, recall our findings in relation to business acumen and selfefficacy where franchisees assessed themselves quite positively in this respect. This finding could have been the result of franchisees overestimating their knowledge and capabilities, and further research needs to be conducted in this area. One way of overcoming this potential self-assessment bias would be to measure objective knowledge, rather that subjective knowledge (i.e. measure what individuals actually know as opposed to what they think they know) the latter of which was measured in this study. Secondly, the advantages of conducting quantitative research involving large sample sizes typically include demonstrable applicability of the results across geographic boundaries. From a geographic perspective, it is expected that generalization beyond Australia, the source of this large dataset, could be applied with some degree of confidence to countries with similar economic, social and cultural structures (i.e. the USA, the UK and other western cultures

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within the EU). It is suggested that the applicability of this study could be further enhanced if this study was replicated in other countries. Some interesting avenues for future research are summarized below.

•

•

It would be interesting to make comparisons between singleunit and multiple-unit franchisees. Some individuals, possessing higher levels of human capital, may well be attracted to the franchising option as it offers a mechanism for rapid growth through multi-unit ownership. Past research suggests that this passive ownership strategy appeals to franchisees with an entrepreneur˘nhagen and Mittelstaedt, 2005). Therefore, they ial orientation (Gru may exhibit higher levels of human capital than single-unit franchisees. The examination of additional dispositional characteristics, which may be relevant to the recruitment process and business survival, may provide a fruitful avenue for further investigation. Personality has been recently suggested as a determinant of organizational choice, with Caliendo et al. (2014) finding that openness to new experiences and extraversion affect the decision to enter self-employment. Moreover, Zhao and Seibert (2006) showed that the personality profiles of entrepreneurs differ from that of managers. Therefore, this notion could be extended into the independent versus franchise framework. It would be interesting to see if the same findings hold true when considering organizational form choice in small and medium enterprises.

7. Conclusion Ultimately the effectiveness of marketing channels does not reside within their various structural forms, but rather within the behavioural responses of individuals who operate within the boundaries of these structures. In other words, it is the complementarity of human form and structural form that determines market channel efficacy and its subsequent economic form. This notion, which can be applied to any form of marketing channel (e.g. conventional, online, virtual etc.), warrants further research attention. In doing so, we believe the domain of marketing channel research can be significantly augmented in the future. The findings of our primary and supplemental studies, when taken together, indicate that the comparison of business models is appropriately framed by human capital theory. While the variables of interest in this study did not predict survival or failure, they were successful in predicting business model choice. Therefore, we suggest that it is not what the individual “brings to the table” in the business arrangement (i.e. human capital assets), it is the “fit” or marriage between the individual’s human capital assets and their chosen business model that will ultimately determine business survival/failure. Acknowledgement This research has been funded by the Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education (DIICSRTE) and the Australian Research Council (ARC) through the ARC Linkage Grant Scheme. References Ackerman, P.L., Humphreys, L.G., 1990. Individual differences theory in industrial and organizational psychology. Handbook Industr. Org. Psychol. 1, 223–282. Amit, R., Muller, E., 1995. “Push” and “pull” entrepreneurship. J. Small Busin. Entrepr. 12 (4), 64–80. Armstrong, J.S., Overton, T.S., 1977. Estimating nonresponse bias in mail surveys. J. Mark. Res. 14, 396–402. Bandura, A., 1994. Self-Efficacy. John Wiley & Sons, Inc.

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Please cite this article in press as: Scott Weaven, Brent L. Baker, Chase Edwards, Lorelle Frazer, Debra Grace, Predicting organizational form choice from pre-entry characteristics of franchisees, Australasian Marketing Journal (2017), doi: 10.1016/j.ausmj.2017.10.001