The paper "The Impact of Franchising on Economic Growth " is a perfect example of marketing coursework. 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 argue 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 a 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.
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