The Impact of Franchising on Economic Growth - Coursework Example

Franchise Sector Institution Name Introduction The impact of franchising on economic growth is felt globally. Since the 1950s, franchising has grown rapidly and is currently omnipresent in the United States. A study by PriceWaterhouseCoopers approximated that there were just about 767,000 business setups in the United States that engaged in Franchising in 2001. Overall, they provided approximately $1.5 trillion output at the time (Aliouche & Schlentrich, 2004). As evident from the popularity of franchising, it may seem clear that it enables firms to attain superior financial performance (Aliouche & Schlentrich, 2004). Bennett et al. (2009) however argues that the popularity of franchising is essentially based on its inclination to reward franchisees with residual profits and to provide them with an incentive to manage productive tasks that are difficult to monitor away from the franchisor’s headquarters. This implies that for franchising to be attractive as a structure for governing organisations, the productivity of the franchisees cannot be measured by using variables such as the residual profits the downstream assets generate (Rubin, 2000). Theoretical perspective To analyse the problems of franchising, this essay argues that the three key resources that should be centred on to reduce the franchisor’s general risks, as well as ensure substantial positive impact on financial performance include managerial expertise, low cost capital and superior local market knowledge. According to Hendrikse et al. (2008), the best practices in the franchise sector should reflect these three areas. Towards this end, two franchising theories are suggested: resource scarcity theory and agency theory. As conjectured by the agency theory, the relationship will exist between the franchisor and franchisee once the principal (the franchisor) hires an agent (another organisation or the franchisee) to offer services and assign decision-making. Since their self-interests may not correspond, the potential for conflicting interests may happen (Comb & Ketchen, 1999). Hence, the franchisee may not often act in the franchisor’s best interests, unless best practices are outlined. This explains the significance of having best practices to guide the industry standards. In fact, Stanworth et al. (2004) suggest that since franchising is supposed to align the interests of the franchiser and franchisee, there is a need for monitoring the franchisee, so as to ensure compliance with best practices for maximal performance. Resource scarcity theory posits that franchising is a solution for information, managerial and capital limitations. According to the theory, firms seek expansion in order to access scarce capital. Based on this theory, the franchisors are provided with an effective way to acquire managerial expertise necessary for growing the business (Hendrikse et al., 2008). Problems in the Franchise sector Intense competition in the franchise sector has led to chaos in the franchise sector, calling for keen examination to determine what makes a franchise to either fail or succeed. This paper posits that the key problems facing the franchise sector include lack of flexibility to conform to franchisor’s standards, poor communication, poor marketing of the brand and inability to identify and transfer local resources (Lozada et al., 2005). Lack of flexibility is a problem the franchisees face. Franchisors often seek to identify and take advantage of new opportunities. Their entrepreneurial ventures are distinguished from other business based on their perceptions of the new opportunities that may arise at any point within the value chain. According to Argote and Ingram (2000), individual initiative and flexibility within an enterprise present the needed impetus for growth. However, these present a challenge as the franchisees may be inflexible to change and hence fail to incorporate the standards required by the franchisor. Some franchisees lack infrastructural and informational support leading to deficient operational management. Due to lack of support, a critical challenge facing the franchisees is identifying and transferring the right resources to ensure growth of the franchisor’s brand. Aliouche and Schlentrich (2004) comment that franchisors are obligated to provide products that enable the franchisees to deliver the return on investment. In fact, when the business run by the franchises grow and continually seek to surpass the expectations of their customers, franchisors have to provide high support for the franchise services. Poor communication between the franchisor and franchisee is also a problem. Round-the-clock support through emails and telephone are essential in managing the franchises. The franchise support also entails providing standardised marketing tools tailored to work in most global market. Therefore, lack of proper marketing and communication tools can hinder operation of a profitable franchise (Stanworth et al., 2004). Recommendations on best practices: training As stated by Cumberland and Githens (2010), franchises need to be profitable by generating revenues. They also need low financial investment, continuous training and brand identity. These elements sum up the ‘best practices’ and strategic positioning that leading franchises have to adopt. Continuous organisational learning, intensive training, and peer development are the designated best practices for successful franchising. Training can address the issues of inflexibility, poor communication, poor marketing, and inability to identify and transfer local resources on the part of the franchisee. This would enable the franchisors to strengthen their brand and optimise operational efficiencies and market awareness while staking claim to substantial profits. Aliouche and Schlentrich (2004) suggest that franchises that lead in the industry have managed to stay on top through sustainable networks, enabled by continuous organisational learning, intensive training and peer development. He further argued that while many companies engage in training routinely, other do it internally, randomly and concentrate on skewed results. Hurley et al. (2005) argues that training is part of knowledge management. The researchers defined knowledge as the process through which a business seeks to create, capture, acquire, impart and use knowledge to improve organisational performance. Cumberland and Githens (2010) posited that training is critical as a best practice as it enables sharing and transferring of knowledge in organisations that are interconnected. Overall, best practices require that organisations identify who is performing well in the industry and stealing their strategies, learn from own mistakes and training the franchises. Consequently, organisational learning, intensive training and peer development can be ensured through an operational manual, onsite training, ongoing training and testing for competence. a) Operational manual The first step in training is having an operational manual, which serves as a quality control tool. The manual also acts as a franchisee’s agreement and hence binds legally as a compliance tool that has to impose all standards the franchisor requires. As a training manual, the operations manual should have content on labour laws, disability acts, sexual harassment as well as instructions on operating a business and expected performance standards. Siebert (2005) argues that without the operations manual, the industry standards are difficult to quantify. The training manual provides content for developing training programs. Therefore, detailed operations manuals ensure the training levels anticipate a certain level of competence, capacity and knowledge to ensure flexibility, effective communication, marketing, and ability to identify and transfer local resources (Hendrikse et al., 2008). b) Training at headquarters Training at the headquarters is also essential. An essential element of the majority of the franchise training programs comprises training at the headquarters of the franchisor. Consequently, before the franchise program is launched, or the contract is handed to the franchisee, the franchisor should develop a formal training agenda that details out the pre-opening training course at its headquarters (Hendrikse et al., 2008). The training should begin with a tour of the headquarters, archetype operation, and an introduction to staff. Among other portions of training that should be addressed include the daily operations, operating procedures, corporate history and philosophies, reporting requirements and insurance requirements to prevent inflexibility, poor communication, poor marketing, and inability to identify and transfer local resources (Siebert, 2005). b) Onsite training The franchisee and its staff should be assisted at the franchisee’s location to prevent inflexibility, poor communication, poor marketing, and inability to identify and transfer local resources. Dependent on the prior experience of the franchisee, onsite part of the training may differ among the franchisees. Therefore, the content and approach of onsite training need to be flexible. Training should be centred on the topics that assist the franchisee to become more flexible with daily operations (Hendrikse et al., 2008). c) Ongoing training The franchisees and its managements should receive persistent and refresher training. Accordingly, new managers and staff have to be trained properly once recruited to enable them have a clear perception of the franchisor requirements of new employees. Siebert (2005) suggests that a strategy for minimising erosion of systems standards, through deficient training, is to develop an effective training program that calls for ongoing certification on issues of core competence. The training should include routine refresher training on the top positions, new products and procedures to prevent inflexibility, poor communication, poor marketing, and inability to identify and transfer local resources (Hendrikse et al., 2008). Conclusion Rather than just generate revenue, the franchises need to be profitable. The unpredictable outcome of the franchise sector prompts investigating into what makes franchises to either fail or succeed. Based on the resource scarcity theory and agency theory, the best practices in the franchise sector need to be reflected in superior managerial expertise, low-cost capital, and advanced local market knowledge. The franchises also need low financial investment, continuous training as well as promote brand identity. However, the franchises face challenges in meeting their objectives, including lack of flexibility to conform to franchisor’s standards, poor communication, poor marketing of the brand, and inability to identify and transfer local resources. To solve these challenges, it is suggested that implementing effective knowledge management through training can help mitigate the challenges. Intensive training can be ensured through developing an operational manual., onsite training, and ongoing training that target these challenges. References Aliouche, H. & Schlentrich, U. (2004). Does Franchising Create Value? An Analysis Of The Financial Performance Of Us Public Restaurant Firms. Durham: University of New Hampshire Argote, L. & Ingram, P. (2000). Knowledge Transfer: A Basis for Competitive Advantage in Firms. Organizational Behavior and Human Decision Processes 82(1), 150-169 Bennett, S., Frazer, L. & Weaven, S. (2009). Is the franchising model attractive to independent small business operators? Presented at the 23rd Annual International Society of Franchising Conference Manchester Grand Hyatt San Diego, U.S.A. February 12-14, 2009 Comb, J. & Ketchen, D. (1999). Can Capital Scarcity Help Agency Theory Explain Franchising? Revisiting the Capital Scarcity Hypothesis. Academy of Management Journal 42(2), 196-207 Cumberland, D. & Githens, R. (2010). Tacit Knowledge Barriers within Franchise Organizations. AHRD 2010 Americas Conference, 1278-1300 Hendrikse, G., Tuunanen, Windsperger, J. & CLiquet, G. (2008). Strategy and Governance of Networks: Cooperatives, Franchising, and Strategic Alliances. New York: Springer Science & Business Media Hurley, T. & Green, C. (2005). Knowledge Management And The Nonprofit Industry: A Within And Between Approach. Journal of Knowledge Management Practice Lozada, H., Hunter, R. & Kritz, G. (2005). Master Franchising As An Entry Strategy: Marketing And Legal Implications. The Coastal Business Journal 4(1), 16-28 Rubin, P. (2000). The Theory of the Firm and the Structure of the Franchise Contract. The Journal of Law and Economics, 224-232 Siebert, M. (2005). Training Your Franchisees. Entrepreneur. Retrieved: Stanworth, J., Stanworth, C., Watson, A. & Purdy, D. (2004). Franchising as a Small Business Growth Strategy. International Small Business Journal 22(6), 539-559 Read More