Discuss the Dominant Challenges That Might Be Encountered in an Existing Franchisor-Franchisee Relationship

Introduction

In the current business environment, franchising is one of the crucial business strategies being adopted by firms for growth and expansion. However, franchising has its challenges. Whereas franchising should lessen the amount of the opportunistic behaviours linked to business networks, it eradicates them. Thus, significant attention in the literature has been placed on the inherent challenges associated with effective management of the franchisor-franchisee relationship. The aim of the current paper is to discuss the dominant challenges that can be encountered in a franchisor-franchisee relationship.

Autonomy and Dependence

A crucial challenge in the management of franchising relationships stems from the need to cautiously balance the competing interests of autonomy (independence) and dependence (Altinay & Brookes 2012). Barthélemy (2011) characterised franchised business as a type of a small business activity differentiated by its visibly close association with another large business (franchisor). Based on such perspective, franchisees are likened to several small, independent businesses that interact with larger businesses in an asymmetric manner when conducting their business operations (Welsh, Desplaces & Davis 2011). In addition, franchised business has been described as a managed outlet that represents the corporate strategy of the franchisor, which is an independent entity. Based on this description, a hierarchy-like control exists, whereby the franchisee is dependent on the franchisor, and this control is exercised using formal methods, such as contracts and informal methods (Keup & Keup 2012).

The promise of autonomy is one of the main reasons why franchisees are interested in making agreements with franchisors (Blut et al. 2011). The challenge in managing the franchisor-franchisee relationship entails accommodating the franchisor’s need for preserving its brand equity and goodwill, quality control, consistency, standardization, and the franchisee’s quest for independence. Watson & Johnson (2010) assert that the concurrency of independence and dependence in franchisor-franchisee relationships presents an endemic challenge. Providing franchisees with excessive autonomy tends to undermine the control and authority of the franchisor, which can lead to a significant systemic crisis attributed to the franchisor’s loss of its corporate identity, as well as the weakening of its brand equity (Combs et al. 2011). Contrariwise, when franchisors exercise extreme control and monitor the behaviours of their franchisees, post-contractual agency problems may be encountered. In addition, extreme franchisor control demoralises and demotivates franchisees (Dant et al. 2013). From a management point of view, balancing the competing forces of autonomy and dependence is crucial in ensuring successful franchisor-franchisee relationships.

Conflict

Conflict can be encountered in any form of relationship, including franchising. In franchising, franchisees have the main objective of growing profitable business by associating with the franchisor, whereas the franchisor is driven primarily by the need to increase market coverage by associating with franchisees (Dant, Grünhagen & Windsperger 2011). Therefore, both the franchisor and the franchisee have different motives for entering the franchising arrangement.

The leading cause of conflict in franchising relationships is the franchisor failing to provide support to the franchisee (Seawright et al. 2013). Frazer et al. (2012) reveal that, for franchisees, lack of support from the franchisor is the primary factor contributing to conflicts in franchising agreement. Davies et al. (2011) showed that the great number of the franchisees is of the view that the support provided by the franchisors does not satisfy their expectations, with some franchisors viewing the support as too scanty to be beneficial. In some extreme cases, some franchisors abandon franchisees to their own devices after making an agreement with franchisors (Ketchen Jr, Short & Combs 2011). Contrariwise, studies show that franchisors are satisfied with the support they offer to franchisees and do not view this as a significant factor contributing to conflict in franchising systems (El Akremi, Mignonac & Perrigot 2011). Such conflicting perspectives can be attributed to the incongruity of expectations by the franchisor and the franchisee before and during the start of the relationship (Gillis & Castrogiovanni 2012). IN the process of recruiting franchisees, the franchisors often promise to provide support, which subsequently results in higher expectations from the franchisees, and exceeds the support level that can be delivered by the franchisor.

Fees, also known as royalties, are another source of conflict in the franchising relationship. Fees are more significant problem cited by franchisees in relation to franchisors (Pruett & Winter 2011). In addition, there are different viewpoints between franchisors and franchisees on the issue of fee. Ozanne, Ozanne & Hunt (2011) reported that franchisees believe that they pay fees to receive certain services from franchisors, particularly support, which is the leading factor contributing to conflicts from the perspective of franchisees. Thus, when the provided support does not meet their expectations, franchisees can stop paying the fees or may request to reduce the fees. Additionally, when the business is facing financial difficulties, they stop paying the deed (Nijmeijer, Fabbricotti & Huijsman 2014). From the perspective of franchisors, non-payment or underpayment of fees amounts to a significant breach of the franchising contract regardless of whether or not franchisees are satisfied with the services they are receiving for the fees.

Conflict in Franchising Relationships

Conflict in franchising relationships can also be attributed to communication problems. Franchisors and franchisees differ in terms of relative significance of communications (Kidwell & Nygaard 2011). Watson & Johnson (2010) explain that franchisees consider communication with more importance when compared to franchisors. A study revealed that franchisees believe that they are sufficiently informed regarding the franchise, the operational needs, and the brand’s direction. On the other hand, franchisors have expressed concerns that franchisees fail to inform them by submitting reports and other pertinent information (Hennart 2010). It is also evident that communication problems can be linked to the disparity in the expectations of the franchisors and franchisees, as well as the willingness and the capacity of the parties to satisfy each other’s expectations.

Another factor contributing to conflicts in franchising agreements stems from obsolescing bargains, which is a temporal aspect of the contributions made by the franchisor and the franchisee to the relationship (Dant et al. 2013). With time, the value of the services and the assets that franchisor offers to the franchisee significantly reduces. Whereas franchises rely on the continuing value from the effort of the franchisor to enhance the franchising brand name and reduce costs through economies of scale, bulk of this value diminishes over time. For example, franchisees find it beneficial when the franchisor offers set-up and training assistance. However, the significance of such issues reduces after the franchisee learns the ways of operating the outlet without relying on the help of the franchisor (Barthélemy 2011). Conflict may arise since franchisees may feel that the royalty they pay is fixed over time, while the value of the services received from the franchisor has reduced.

Conflicts stemming from territory issues can be attributed to franchisees feeling that the franchisor is limiting their growth by constraining them to one specific area. Disagreements in outlet concentration are common franchising agreements. At the same time, franchisors anticipate franchisees to capitalise on the market penetration of a particular area rather than offering goods/services outside the market.

Non-Compliance

Another crucial challenge in franchising relationships is lack of compliance with the franchising system (Frazer et al. 2012). Franchisors and franchisees have different perspectives regarding compliance. Gorgievski, Ascalon & Stephan (2011) show that franchisees have expressed concerns that franchisors tend to be extremely rigid when enforcing compliance, which is likely to create tensions between franchisors and franchisees. Studies also indicate that franchisees have a preference for profitable businesses to an extremely-compliant business. On the contrary, franchisors are of the view that compliance is a core requirement for maintaining brand integrity, which then subsequently increases the performance of the franchisee (Hennart 2010). Thus, franchisees view franchisors as undermining their business and endangering the brand promise in the franchise network.

Divergence in Franchisor-Franchisee Goals

Franchising relationship is characterized by an inherent conflict in the goals of franchisees and those of the franchisors (Davies et al. 2011). Since franchisors make revenue through royalties on the sales, their goal is to maximise the sales from their franchisees. On the contrary, franchisees benefit from the profits gained from their outlets thus, their goal is to maximise the profits at their respective outlets. According to Barthélemy (2011), the strategies used for maximising system-wide sales and those used for maximising profits at the individual outlets are different, which results in the adoption of different strategies by franchisees and franchisors.

The goal conflict of profit maximisation versus sales maximisation results in conflict on whether to utilize low-margin or high-volume business level strategies. Generally, sales maximisation is associated with lower price offering at higher quantities when compared to profit maximisation. As a result, franchisees have a preference for strategies characterized by selling at lower quantities but at higher prices to the dislike of franchisors. Such divergence in goals is manifested through disagreements between the franchisees and franchisors regarding the product mix (Dant et al. 2013). An example is auto-repair franchising. In this case, brake work may be an item of high-margin but low volume, since few customers may require brake repair services. On the other hand, an oil change is a higher-volume service due to the frequent need to change oil. Nevertheless, oil change has a low profit margin for the firm. Franchisors operating in the auto-repair sector can encourage their franchisees to focus on oil change, whereas franchisees would focus mostly on brake repair.

Goal divergence about profit maximisation versus sales maximisation also occurs when franchisors adopt strategies aimed at encouraging sales in the outlets of their franchisees. One of the commonly used methods for encouraging sales entails generating interests in the franchise’s products (Dant, Grünhagen & Windsperger 2011). Franchisors often prefer offering coupons as a means of increasing sales, and thus, the royalties paid to the franchisee. Nevertheless, using coupons escalates the costs of sales, since the company must offer extra fee or items that have been discounted. The resulting increase in sales coupled with an increase in costs lowers the profit per unit, which, in turn, lowers the profit made by the franchisee (Barthélemy 2011). Consequently, franchisees are often against the utilization of coupons as a means of increasing sales when franchisors encourage them to use.

Free Riding

Free rising is one of the transaction cost challenges associated with franchising relationships. Franchisors have the role of developing the brand and the system for ensuring that the product/service is delivered to the consumers by independent entities, namely the franchisees (Dada & Watson 2012). Since franchisees are considered legally independent businesses, a crucial externality is created. Franchisees make joint usage of the brand name belonging to the franchising system. As a result, the costs associated with the actions of one franchisee in degrading the brand are born by every entity in the chain. Contrariwise, the underinvesting franchisee captures the benefits associated with the degradation of the brand name (such as failing to ensure sufficient customer satisfaction) (Dada & Watson 2012).

The outcome is that an incentive is created for franchisees to embark on free, depending on the efforts adopted by other franchisees. An example is the case of oil change franchisees who fail to substitute oil filters by simply cleaning them. When customers visit a franchisee who does not properly substitute oil filters, they tend to develop a view that the franchising chain offers low quality services and may stop using its services. All the franchisees bear the costs stemming from low demand based on their customers (Barthélemy 2011). Nevertheless, the franchise that does not substitute the filters saves the money from failing to change the oil filters. It offers a free riding incentive, which is detrimental to the franchising system by increasing the costs. Preventing free rising can be achieved by incorporating quality standards to the franchising contracts and performing audits aimed at ensuring that franchisees satisfy the specified standards. The discretion of the franchisee can also be limited as a means of preventing free riding.

Franchisee Entrepreneurial Behaviours

The franchisee entrepreneurial behaviour is another challenge observed in franchising relationships. Dada & Watson (2012) allude that franchisors experience the challenge of balancing the franchisee’s entrepreneurial ambitions for autonomy with the efforts of the franchisor to ensure compliance with operational standards. Franchisors seek to enforce operational standards to in order to maintain consistency in the franchising network. It helps in promoting the brand image and protecting the franchising system against free riding. When franchisees are provided with higher levels of freedom and autonomy to behave entrepreneurially, there is a possibility that the outcomes associated with their entrepreneurial behaviour, such as their innovations, may not be beneficial to whole franchising system (Dada & Watson 2012).

In fact, some entrepreneurial behaviours may result in brand image inconsistencies. As a result, franchisors try to give the franchisee independence, which may result in further conflict and have negative consequences for the franchising system. Nevertheless, due to the fact that franchisees are capable of offering knowledge of the local market, providing them with some degree of flexibility and the opportunity to make innovations to cater for local market needs, they can benefit the franchising system (Davies et al. 2011). The challenge is that, on the one hand, when franchisees are provided with entrepreneurial autonomy, a harmonious relationship may be observed, since franchisees will gain higher levels of autonomy and the franchising system might benefit from their entrepreneurial behaviours. On the other hand, the possible advantages associated with entrepreneurial behaviours on the part of the franchisee can be offset by free riding from the side of franchisee coupled with misdirected efforts.

Deviation

The underlying principle for the franchising business format is uniformity and standardisation. Standardisation serves to minimise costs for both the franchisee and the franchisor. It also helps in lessening the costs associated with the franchisor monitoring the franchisee. Standardisation is also helps to ensure consistent brand image (Altinay & Brookes 2012). However, franchisees tend to deviate from the standardised business model due to self-interest, which in turn erodes the trademark and the quality of the brand. Standardisation results in tension between the franchisor and the franchisee, which is attributed to the franchisee’s entrepreneurial behaviour. Blut et al. (2011) indicates that franchisors seldom tolerate franchisees who deviate from the standard agreement. Deviation may also be caused by providing the franchisee with excessive autonomy. The opportunistic behaviour of franchisees can also result in deviation.

Conclusion

The franchisor-franchisee relationship faces numerous challenges stemming from autonomy and dependence, conflict, divergence in franchisor-franchisee goals, free-riding, and franchisee entrepreneurial behaviors. Such challenges can be attributed to the divergent perspectives held by franchisors and franchisees, which results in competing interests and forces. For instance, franchisors focus on maximizing sales, while franchisees focus on maximizing profits. Franchisors and franchisees also have different expectations in regard to outcomes of the franchising agreement. In addition, franchisors prefer exercising control, whereas franchisees want autonomy. The solution to such challenges is in achieving the right balance between the desires of the franchisees and those of the franchisors, which requires trade-offs on either party in the relationship.