Professor John Stanworth Stuart Price David Purdy Dr. Nicos Zafiris & Dr. Alessandro Gandolfo

PUBLISHED BY UNIVERSITY OF WESTMINSTER PRESS ISBN 1 85919 097 9 © University of Westminster Press

University of Westminster, London, UK. "The International Franchise Research Centre (IFRC) is committed to improving the understanding of franchising. This is achieved by the publication of impartial research and by the encouragement of informed debate." Franchising operates in a dynamic environment, with new issues and challenges emerging, including: globalisation, coping with competition, disclosure, industry regulation, managing relations with franchisee associations, franchisee recruitment & market saturation. Against this backdrop, the IFRC was established in 1993 by Professor John Stanworth (Director of the Future of Work Research Group at the University of Westminster), supported by Brian Smith (exBFA Chairman, franchisee, franchisor and author), and Chair of its Steering Group. FOUNDER MEMBERS Founder members and sponsors included: Barclays Bank, the British Franchise Association (BFA), Dyno-Rod, Franchise Development Services Ltd., Lloyds Bank (now Lloyds Group), Mail Boxes Etc., Midland Bank (now HSBC), Prontaprint, Rosemary Conley Diet & Fitness Clubs, Royal Bank of Scotland, The Swinton Group, and Wragge & Co. PUBLICATIONS Their support enabled the IFRC to publish a number of reports, including its Special Studies Series Papers, journal articles, book chapters and conference papers. Two IFRC papers received three awards over a period of 12 months (1996-97). The first being Business Format Franchising: Innovation & Creativity or Replication & Conformity ?, which received the Best International Paper Award in 1996, from the Society of Franchising. This paper also received the Outstanding Paper of 1996 award from Franchising Research: An

International Journal (MCB University Press). Additionally, Franchise Growth And Failure In The U.S. And The U.K.: A Troubled Dreamworld Revisited received the Best International Paper Award in 1997, again from the Society of Franchising. This paper was later published in Franchising Research: An International Journal. Close links were fostered with universities in Rome and Pisa (Italy), Haute Alsace (France) and Boston, Minneapolis and Texas (USA), with a view to research collaboration. Professor Pat Kaufmann of Atlanta, Georgia, addressed our inaugural annual strategy seminar, in 1994. Overseas speakers in subsequent years included Cheryl Babcock, Director of the Franchising Institute, University of St. Thomas, Minneapolis (1995), Professor Rajiv Dant, University of Boston (1996), Professor Francine Lafontaine, University of Michigan (1997), Professor Claude Nègre, University of Haute Alsace (1997), Colin McCosker, University of Southern Queensland (1998), Professor Frank Hoy, University of Texas at El Paso (1998), Professor Jack Nevin, University of Wisconsin-Madison (1999), Professor Tom Wotruba, San Diego State University (1999), Professor Bruce Walker, University of Missouri, (2000), and, Professor Wilke English, University of Mary Hardin-Baylor (2000). IFRC members were active supporters of the International Society of Franchising, and hosted the ISoF 2005 conference in London. The IFRC ceased its research activities in 2007, when John Stanworth took retirement. Web versions of IFRC Special Studies Series Papers 1993-2001 (listed overleaf) Many of the earlier papers have been re-set, to allow a successful conversion to Acrobat, and are now available online. John Stanworth, Emeritus Professor, University of Westminster business David Purdy, Visiting Fellow, Kingston University December 2010

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LIABILITY DISCLAIMER The information and analysis in each report is offered in good faith. However, neither the publishers, the project sponsors, nor the author/s, accept any liability for losses or damages which could arise for those who choose to act upon the information or analysis contained herein. IFRC Special Studies Papers 1993-2001 Web versions published online December 2010, via via 1 The Blenheim/University of Westminster Franchise Survey: Spring 1993, (Stanworth & Purdy), 1993 2 Improving Small Business Survival Rates via Franchising: The Role of the Banks in Europe, (Stanworth & Stern), 1993 3 Targeting Potential Franchisees: Industry Sector Backgrounds and Declared Areas of Interest, (Purdy & Stanworth), 1994 4 The Impact of Franchising on the Development Prospects of Small & Medium-sized Enterprises (SMEs) in Europe, (Stanworth & Purdy), 1994 5 The Blenheim/University of Westminster Franchise Survey: A Comparison of UK and US Data, (Stanworth, Kaufmann & Purdy), 1995 6 Developing a Diagnostic Questionnaire as an Aid to Franchisee Selection, (Stanworth), 1995 7 Franchising as a Source of Technology-transfer to Developing Economies, (Stanworth, Price, Porter, Swabe & Gold), 1995 8 Aspects of Franchisee Recruitment, (Macmillan), 1996 9 Business Format Franchising: Innovation & Creativity or Replication & Conformity ?, (Stanworth, Price, Purdy, Zafiris & Gandolfo), 1996

10 London: A Capital City For Franchisee Recruitment, (Mills, Stanworth & Purdy), 1997 11 The Effectiveness of Franchise Exhibitions in the United Kingdom, (Chapman, Mills & Stanworth), 1997 12 Franchising: Breaking Into European Union Markets, (Stirland, Stanworth, Purdy & Brodie), 1998 13 Succeeding As A Franchisor, (Stanworth & Purdy, published jointly with Business Link London Central), 1998 14 Direct Selling: Its Location in a Franchise Typology, (Brodie & Stanworth), 1999 15 Unravelling the Evidence on Franchise System Survivability, (Stanworth, Purdy, English & Willems), 1999 16 Survey: Professional Services For Franchising In The U.K., (Stanworth & Purdy), 2001

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Revised version of an award-winning paper presented to the Society of Franchising, February 17-18, 1996, Honolulu, USA,

Best International Paper Award Sponsored by Franchise UPDATE Publications

Franchising, as an organisational form, continues to increase in importance in the provision of services, jobs and self-employment opportunities. However, as contextual environments become increasingly complex and dynamic, so innovations are needed in order to improve operating efficiencies, initiate or renew life-cycle stages, and realise a closer fit between organisations and the rigours of their markets. There are a number of correlates of innovation in franchising, including external environmental conditions, organisational culture and climate and franchisee characteristics. This paper offers an exploratory overview of these factors and argues that franchisee autonomy can play a pivotal role in influencing innovative behaviour. Keywords: Franchising, Innovation, Organizational Change, Large-Firm/Small-Firm Links

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The growth of franchising in America and Europe since the 1970s (Trutko, Trutko & Kostecka, 1993, Dant, 1995, British Franchise Association, 1995) has led to this business form assuming increasing importance in a number of academic debates, including the fields of law, marketing, organisation theory, services growth, etc. One of the most interesting issues here is the potential of franchising to provide self-employment opportunities. After all, not only are most franchisees small businesses, but so are most franchisors. For instance, in Britain, half of the franchise systems in existence in 1995 were less than 5 years old and 43 per cent had 10 outlets or less (Purdy, Stanworth & Hatcliffe, 1996). Franchises are based, ideally, on a ‘proven’ and ‘tried-and-tested’ recipe for business success. The importance of replication and standardisation which this implies would appear to offer a short-lived license for success in a world undergoing an ever accelerating rate of change. Thus, the question arises - how do franchise organisations innovate and cope with change? An adjunct to this question is the issue of the role of franchisees who, whilst not independent in the sense of the conventional small business person, certainly do not see themselves as conventional employees either, and have certain expectations of participation in the processes of which they are an integral part. In today’s environment of rapid technological and market change, shortening product life cycles and changing customer tastes (Ansoff, 1989), the strategic management of innovation has attracted increased attention amongst researchers, particularly pertaining to innovation management and implementation (Atuehene-Gima, 1993). For example, recent strategic management discourse has been emphatic on how sustainable competitive advantages and superior economic rents derive from the process of innovation (Kay, 1993; Pennings & Harianto, 1992; Friar & Horwitch, 1985; Porter, 1985). Much of this debate has concentrated on structural, environmental and individual correlates of innovation (Burns & Stalker, 1961; Kay &

Willman, 1991), rather than developing an eclectic or multi-dimensional model of the correlates of innovation. Further, whilst this stream of research and debate has added to the level of understanding of the process of innovation within organisations generally, few texts have examined the causes of, and barriers to, innovation within franchises specifically. This article begins to redress this issue. In particular, it suggests that franchisee autonomy can have a major influence on rates of franchise system innovation. The article represents a distilled overview of what the authors see as the key literature relating to the over-ridingly important challenge of franchise system innovation. It does not claim to offer franchise practitioners prescriptive check-lists and ‘quick-fix’ solutions to their everyday operational problems, though it does point in the direction of broader policy directives. It presents twelve general propositions, distilled from a welter of research conducted, largely, on operational franchise systems and is intended as a step forward in the task of developing a general model of franchising.

It has been inferred by Agency-Theorists (Brickley & Dark, 1987; Krueger, 1991) that franchising, in itself, is a form of innovation deriving from resource constraints (Caves & Murphy, 1976). This arises from two perspectives. Initially, franchising permits the parent company to overcome problems of ‘shirking’ and motivation, and thus is a method of reducing the costs associated with managing employees. Others argue that, of ultimate significance to the franchisor, is that franchising is a hybrid capital market (Jenson, 1989). Franchising not only entails semi-ownership, without incurring costs, but provides a constant stream of finance to the franchisor. There are a variety of definitions of innovation and the relevant literature usually draws a distinction between ‘innovation’ and ‘invention’ (Davis, 1991, and Clipson, 1991). ‘Invention’ usually implies ‘breakthrough’ (often of a technical nature), whilst ‘innovation’ implies successful commercial use of such an invention, or some novel administrative use of


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a previously established body of knowledge. Obviously innovations can vary in scale and, for the purposes of this paper, even very modest innovations are of relevance since the cumulative effects of continuous small-scale innovation, multiplied across many business units, can bestow significant competitive advantage (Gold, 1981; Sahal, 1984 and Kay, 1993). Technical innovation involves ideas for new products, processes or services. Administrative innovations permeate fields such as recruitment policies, allocation of resources and the social structure of organisations. On occasions, the two may be inextricably interlinked (Emery & Trist, 1969). For instance, the early successes of the McDonald brothers in their San Bernardino fast food restaurant in the 1950s combined strong elements of both technical and administrative innovation. Initially the McDonald brothers sought technical innovations designed to save labour and speed up the process of delivery to the customer. They began inventing the essential tools of the early fast-food industry (Love, 1986) such as the hand-held stainless steel pump dispenser which required just a single squeeze to dispense the required amount of ketchup and mustard evenly onto a bun - a variation of this device is still in use in McDonald’s burger bars today. Boas & Chain (1976), claimed:

To some degree, the cultural aspects of managing franchisees are, in themselves, highly relevant to innovation. The franchise literature argues that effective management of franchisees requires a multitude of skills and an organisational culture which is suited to franchising (Forward & Fulop, 1993). Franchise management inevitably entails administrative innovation since it requires different skills to those required to manage employees. For some, this is a potential source of conflict since the franchisor is unable to alter the organisational climate sufficiently to encompass the rigours of franchisee management and the changing nature of the franchisor-franchisee relationship over time.

Hall (1987), defines the environment as the general and specific influences acting upon the organisation. The general environment is made up a series of socio-economic subenvironments which influence entire societies (Curran & Stanworth, 1983):
■ cultural, ■ economic, ■ political, ■ technological, ■ legal and

"Each innovation made the service more uniform; each refinement served the cause of standardization, volume and profit. Speed ... constituted the essence of Hamburger Science."
Allied to this level of technical innovation came a move from cooking being a personalised art form towards the construction of a factory-styled, ‘Fordist’, assembly-line working like a ‘crack drill team’ (Love, 1986). Factory production techniques and principles, ‘Fordism’ and ‘Taylorism’, had been around for some time but their disciplined application to an antiquated restaurant trade which had traditionally operated on a largely ad hoc and highly personalised basis was truly innovative and initiated the industrialisation of service (Levitt, 1976).

■ demographic

Yavas (1988), in a study of macro-economic influences on fast-food restaurant franchising in the USA, established that the key general environmental factors affecting the expansion of restaurant franchising were:
■ the shift of population from rural to urban

■ increased demand for food purchased

away from home due to an increase in female employment,
■ increased demand for food purchased







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disposable income,
■ shortages of capital and high interest rates,

thus limiting the potential for ‘independent’ growth and encouraging the development and growth of franchising using franchisees’ capital and resources.

initiatives in other areas of the labour market, e.g., women, ethnic minorities, poorly capitalised but otherwise suitable individuals, etc.

‘Complexity’ refers to the number of linkages required to manage resources. Child (1972) describes environmental ‘complexity’ as ‘the heterogeneity and range of activities which are relevant to an organisation’s operations’. The level of complexity within franchising is often strategically limited by the franchisor through the contract. For example, in some franchises, there is an obligation on franchisees to buy goods connected with the essential object of the franchise business exclusively from the franchisor or designated suppliers (Adams & Pritchard-Jones, 1990). Adams & Pritchard-Jones (1990) observe that franchisors often adopt this form of ‘tie’ because it serves the purposes of, ‘economising on franchisor quality-policing costs’, thereby reducing complexity (Klein & Saft, 1985). Thus, high levels of complexity may be seen as a catalyst for innovations designed to reduce levels to more manageable proportions.

Factors such as the above can best be operationalized in a paper such as the current one by harnessing more specific contextual environments such as those presented below.

Specific environments are often termed task or contextual environments (Thompson, 1967). These refer to the organisations, groups and individuals with which the organisation is in direct interaction. Analysis at this level is probably most appropriate where the organisation represents the key point of focus. Dess & Beard (1984) suggest that ‘munificence’, ‘complexity’ and ‘dynamism’ are widely considered as important dimensions of the task environment affecting organisational strategy (Aldrich, 1979).

‘Munificence’ is an expression of surplus (or scarcity) of resources (Castrogiovanni, 1991) experienced by a franchise organisation. Environmental ‘munificence’ can be seen to affect franchising in various ways. For example, prevailing conditions in employment labour markets may increase or reduce the numbers of potential franchisees searching for franchise opportunities (Purdy & Stanworth, 1994). Support (or absence of support) by government and banks for small businesses and franchising could be construed as yet another dimension here (Walker & Greenstreet, 1991), as can the tendency for financial institutions to lend to individuals who can rely on the support of a well established franchisor (Garceau, 1989; Stern & Stanworth, 1994). It can be argued that ‘scarcities’ in the environment are likely to promote innovations. For instance, as franchise companies experience growing difficulties in recruiting franchisees from traditional channels, they are increasingly likely to spawn innovational

‘Dynamism’ is defined as change that is hard to predict and which may cause the firm to ‘jump’ rather than follow a smooth trajectory throughout its life cycle. Such ‘jumps’ may have positive outcomes leading to increased size (Aislabie, 1992), or downward leading to failure (Scapens, Ryan & Fletcher, 1981). Dynamism may affect a franchise as a result of munificence changing in a beneficial or harmful way for reasons beyond the control of the firm. Dynamism may occur, for instance, through the market entry of competitors. As franchises operate within the confines of set geographic territories, there may exist a necessity for the franchisee to engage in price and non-price competition. This may require alternative operating methods and products to counter the potential loss in market share.

Inter alia, it may be argued that if service orientated business franchises are already


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operating under stochastic conditions, the operating environment should be one receptive to innovation, since that innovation will not be instigating a great movement in established boundaries and skills. The exigency caused by environmental dynamism may require the franchisee to innovate either through new product development or through causing an alteration in the manner in which the franchise is operated. Consideration of these three specific environment dimensions, ‘munificence’, ‘complexity’ and ‘dynamism’ suggests that all can be seen as parameters of environmental pressure for innovation. Hence three general propositions may be proposed here:

respect to the external environment.” (1981)
Thus as slack resources in an organisation increase, so does the probability of innovation and adaptability to task environments (Cyert & March, 1963). In the context of non-price rivalry, Leiberman & Montgomery (1988) argue that it is generally less costly to mimic a competitor’s action than to undertake an entirely new action. It may therefore be hypothesised that firms with fewer slack resources will be, on average, more likely to imitate a rival’s actions rather than initiate their own innovation. We are not saying here that this will, of necessity, always be the case since, on occasions, weaker rivals may be motivated to leapfrog stronger competitors with completely new innovations. Additionally, this may be more likely in sectors where innovation costs are relatively low. However, it is in the nature of this paper to offer general propositions as a basis for further debate. Singh (1986) differentiates between two types of slack: absorbed and unabsorbed. Whereas absorbed slack indicates the slack absorbed within the costs of organisation, unabsorbed slack refers to uncommitted liquid resources. However, in spite of the existence of organisational slack within some franchisee concerns, Price (1993) shows that UK fast food franchisees have generally lower levels of unabsorbed slack than franchisors.

Levels of franchise system innovativeness will correlate with the negative expression of environmental ‘munificence’, i.e., levels of ‘scarcity’.

Levels of franchise system innovativeness will correlate positively with levels of environmental complexity.

Levels of franchise system innovativeness will correlate positively with levels of environmental dynamism.

‘Munificence’ was identified above as a specific external environmental factor influencing innovation. This was seen as a measure of scarcity or surplus in organisational sub-environments. Likewise, and possibly related, levels of internal resource scarcity or surplus (slack) may influence an organisation’s options for innovation. Bourgeois defines slack as:

Organisational Autonomy
‘Organisational autonomy’ can be measured along many dimensions, including elements of structure, centralised or organic decision making, openness versus defensiveness, high versus low trust management style, levels of discretion, and tolerance or punishment of innovational failure (Anthony, 1994; Pheysey, 1993). Thus, ceteris paribus, should the franchisor develop a climate that nurtures and encourages innovative behaviour, then this may be expected to foster higher levels of innovation on the part of both franchisor employees and franchisees. Given that the latter will substantially outnumber the former, and have point-of-sale contact with customers, their potential for innovation and creativity is potentially high.

“that cushion of actual or potential resources which allows an organisation to adapt successfully to internal pressures for adjustment or to external pressures for change in strategy with

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Cohen (McDonald’s vice president of licensing), quoted in Shook & Shook (1993), observed that much technical innovation, at least, had been initiated by franchisees:

of time preparing employee work schedules. He found that, by developing and using computer software, he was able to lower costs by reducing manning levels. It is notable, however, that some of the most cited examples of franchisee-led innovation result from experimentation by franchisees that was not only not sanctioned by franchisors but was, on occasions, actually discouraged. Dandridge & Falbe (1994) infer that, to some extent, the management of innovation requires the actual nurturing of entrepreneurship within the franchise system.

“Experimentation has been very healthy for the system, and we encourage it from our franchisees. Most of the major break-throughs in our menu line were made by franchisees and, in most cases, they did it while working in conjunction with us. In some cases, particularly in the early days, we told them not to do something, but because the franchisees were aggressive entrepreneurs, they did it anyway and convinced us that it was a great idea.” (1993) (emphases added)
Specific examples of franchisees’ propensity to innovate according to the rigours of the market are well documented. Love (1986) and Shook & Shook (1993) both site the example of McDonald’s franchisee Lou Groen who owned a franchise in a predominantly Catholic neighbourhood. On Fridays, the franchisee found that his restaurant was not as busy as at other times of the week since on that particular day his customers ate fish. In order to maintain sales volumes, Groen developed a fish-sandwich. A year later, in 1964, the “Filet-of-Fish” was introduced systemwide. More recently, Ed Rensi, President and CEO of McDonald’s USA, has said:

Past Experience of Innovation
Burns & Stalker (1961), in their seminal work on the management of innovation, drew attention to the problems of implementation that result in innovations being technical successes but organisational failures. Their analyses stressed the complexity of organisational systems and the social inertia that damps out the effects of innovations as a result of political agendas and lack of prior experience in managing innovation and smothering the process. If historical experiences of the effects of innovation have been negative, then future attitudes towards innovation are, likewise, likely to be negative. From the above discussion, three further general propositions may be posited:

“Most of our new product ideas come from franchisees. Jim Delligatti, an owner/operator in Pittsburgh, came up with the idea for the Big Mac. Initially, he was rejected because we weren’t interested in expanding the menu. Subsequently, an employee encouraged him to try it, and Pittsburgh had tremendous sales results. Our Egg Muffin came from an owner/operator in California.” (Success Magazine, 1995)
Whilst the above examples of franchisee-led innovation focus on product breakthroughs, examples of administrative innovation are also cited in the literature. For instance, Love & Hoey (1990) have utilised the example of multi-unit McDonald’s franchisee owner, Al Boxley, who spent a disproportionate amount

Levels of franchise system innovativeness will correlate positively with levels of organisational ‘slack’.

Levels of franchise system innovativeness will correlate positively with levels of organizational autonomy.

Levels of current franchise system innovativeness will correlate positively with past experiences of success or failure in the management of innovation.


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Organisational Learning
Fundamental to the development of franchise systems are the concepts of ‘technology transfer’ and ‘learning organisations’ (Feuer, 1989). Here ‘technology’ is translated in broad terms rather than its popular - that is physical - manifestations (Kransberg & Pursell, 1967; Pine, 1987). Merrill propounds that a more adequate conception of a technology is that it is:

“... a flexible repertoire of skills, knowledge, and methods for attaining desired results and avoiding failures under varying circumstances.” (1968)
There are numerous perspectives of technology transfer (Seurat, 1979; Hamel, 1991). Dahlman & Westphal (1983) identify three levels of technology transfer, which it is possible to align to a context of franchise systems:
■ Level 1. Operating Capability:

Arguably it is Level 3 which is the most difficult to achieve since it requires imagination rather than technical ability. To some degree, this is also partially reliant on general environment conditions, such as a culture and educational system which encourages the willingness to accept change. Whilst realising Level 3 may also be a reflection of the range of experience, age and educational background of the franchisee, the quality of training in other developing operational capability may also be positively correlated to innovativeness. McGuire observes that there are however limitations in franchisee training programmes:

“Franchise training executives point out that their principal difficulty is not providing the technical or managerial skills requisite to their operations, but in changing the would-be franchisee’s outlook from that of an hourly or salaried employee to that of an independent entrepreneur.” (1971)
Wolf et al (1990) expound that people actively select appropriate skills or transfer knowledge for a given occasion from their own individual sources. This, they argue, involves defining or recognising a problem as belonging to a certain category. Thus, the wider the range of situations the more likely they are to build up a repertoire of very general problem types, and ‘schemata’ for dealing with these. The more general the schemata, the more varied the particular situations for which they have a response.

the capability required to operate a technology, for example, to run and maintain a business unit (such as a quick service restaurant)
■ Level 2. Investment Capability:

the capability required to create new productive capacity (or new restaurants)
■ Level 3. Innovative Capability:

the ability to modify and improve methods and products

Human Capital
All of these levels require different skills and support from the franchisor. Levels 1 and 2 are relatively simple to achieve through onthe-job and training. Historically, franchise training was generally limited to providing the franchisee with a manual. However, many have become increasingly sophisticated in how they develop franchisees operating ability through the combined use of class-room and hands-on techniques. Contemporary franchisee training, however, is generally performed at one of four basic training facilities: a) at a full-service training centre; b) at a training store; c) by a franchisee/trainer; and/or d) a certified store manager/trainer. Hambrick & Mason (1984) argue that a manager’s business experience, education and age (‘human capital’) are indicators of his/her flexibility, capability and risk taking propensities. They contend that if managers have spent their careers within a single industry or organisation, they will have a limited knowledge base from which to analyse and understand competitors and environmental change. Similarly, they argue that organisational innovation, or an organisation’s openness to change, is positively related to educational levels. Inter alia, well educated franchisees will be more likely to recognise opportunities for improvement and new product or service

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development than their less educated counterparts. Finally, they suggest that innovativeness is inversely related to age. This suggests a possible paradox since, on the one hand, youth is perceived to be a positive correlate of innovation whilst, on the other, experience has the same effect. UK data (Stanworth, 1984a) indicates substantial differences between different franchise systems in terms of the educational backgrounds of franchisees, their age of entry into franchising and prior levels of commercial experience. A key factor here is the level of front end fees charged by different franchisor systems. The higher the level of investment required, the greater is the tendency for access to be limited to those who have achieved high earnings levels in previous employment. In turn, such people tend to be well educated and older, on average, than entrants to lower entry cost franchisees. The ‘human capital’ preferences of franchisors may change at various stages in the life-cycle of a given franchise system. We have cited franchisees’ ‘human capital’ or previous experience as a positive indicator of likely levels of innovation. Research recently conducted in the UK at the University of Westminster indicates that managers of mature franchise systems (10 years and over) are notably more likely to prefer franchisees without prior experience of self-employment (Macmillan, 1996) or experience in the operational line of the franchise, than those in their formative period (first 4 years). This situation could be interpreted as a perceived need by early-stage franchisors to supplement their own in-house expertise with that of previously self-employed people from the same business sector as the franchise. Older franchise systems, on the other hand, may deem the issue of organisational ‘control’ and compliance of increasing importance, and thus prefer franchisees from outside the sector in question and without prior self-employment experience. The above discussion suggests evidence for the following general propositions:

A positive relationship will exist between levels of variety and achievement established in a franchisees’ previous career (‘human capital’) and innovativeness as a franchisee.

Franchisors will adjust their franchisee recruitment priorities over time in line with their perceived needs for franchisee innovation.

The Franchise Relationship
Any understanding of the role of franchisee autonomy as a correlate of innovation has to be founded on a clear understanding of the domain of both the franchisee and franchisor. Indeed, it is arguable that the degree of franchisee autonomy has a pivotal position in determining the implementation and latitude to innovate. It would be expected that, in order to enhance the level of franchisee innovativeness, the franchisee would need sufficient autonomy in order to respond to the rigours of the task environment. As Doz (1988) indicates, reduced autonomy may curtail innovative output. Extant research concerning franchisor-franchisee relations has yielded a rich debate around the issue of autonomy (Heide, 1994).

Felstead (1991; 1993) has examined the distribution of power and control within the franchise relationship. After a detailed study of franchise contracts, he argues that the franchisor controls the relationship through the ownership of the key factors of production and the intangible assets. Such control is evident and exercised within three key aspects of the franchise relationship:

A positive relationship will exist between franchisor training investment and franchisee innovativeness.

“First, despite operating without close and direct supervision, franchisees are required to operate within procedures laid down and often subject to unilateral change. Moreover, franchisees are sometimes committed to adhere to franchisor-set performance targets, and, in any case, to give the aim of the franchisor (turnover maximisation) primacy in the running of the business.


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Secondly, while they appropriate the profits (and losses) of the business, they do so only after they have made turnover payments to the franchisor. Thirdly, although franchisees buy or lease much of the physical business apparatus, some parts remain in the hands of the franchisor, and some have franchisor-imposed restrictions on their use both during and after the currency of the agreement. Furthermore, franchisees have no ownership rights in the intangible assets - they simply ‘borrow’ the business idea, trading name and/or format.” (1993)
Housden (1984) suggests that the franchisor may well restrict the franchisee’s ability to respond to local demand conditions through the control of key marketing variables (advertising, promotion, territory etc.). Several studies establish that franchisees often complain about the controls on services provided by the franchisors and the lack of autonomy in decision making (Knight, 1984; Ayling, 1987; Withane, 1991). According to this research, some franchisees feel that they are not manifesting their desired level of entrepreneurial spirit as they are provided too little opportunity to participate in strategy formulation for their businesses. However, Stanworth et al (1984b) differentiate between formal and operational franchisee autonomy, and establish the existence of greater levels of operational autonomy than are indicated by the formal contract:

When this situation eventually came to the notice of the franchisor, our respondent instigated a competition urging franchisees to notify head-office of such operational innovations. Though many franchisees acknowledged having made such innovations, and often having shared them with other franchisees, only 3 subsequently co-operated in the franchisor’s attempts to ‘gain ownership’ of them. It is possible that this is close to the ‘norm’, rather than being an exception, and indicates the scale of the potential for the release of local innovative flair in a collaborative environment. It might be suggested here that the degree to which franchisees are willing to share their own innovations will be a function of perceptions of the quality of relationships with the franchisor.

Joint Representative Committees
It can be argued that permitting franchisees to participate in shaping management policymaking via, say, joint representative committees, may help to solidify the unity of the franchise system, not all franchise companies have any definite machinery for such participation. A recent survey of franchisors in Britain found them almost equally divided on this (BFA, 1995). Franchisee participation in decision-making process has a number of advantages. The franchisee is often the closest to consumers and most aware of their needs, and can therefore direct innovative effort. Also, franchisee participation may increase the acceptance of decisions as they will be more aware of the factors that led to the decision. Thus, the more the franchise organisation is viewed as a set of coupled units, where joint actions rest on negotiations, the more any strategy for the encouragement and implementation of innovation must emphasise the need to mobilise coalition (Weick, 1976).

“ an everyday level, operational autonomy is much more evenly spread between franchisors and franchisees than is suggested by consideration of the formal level alone. There are clear limits to the control franchisors can exercise physically or normatively at the operational level.” (1984)
In Britain recently, research involving the British license-holder of a large and successful US franchise system revealed that new franchisees often relied upon advice from other franchisees, rather than the franchisor, in order to safeguard themselves against deficiencies and inaccuracies in the franchise manual, which would otherwise prove costly.

Technical versus Administrative Innovation
Daft (1978) construes the organisation as comprising two cores: an administrative core and technical core. He argues that each core has its own sphere of expertise. In the innovation process, technical innovations will tend to derive from the technical core, whilst administrative ones will derive from the administrative core. Within the context of

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Figure 1 - Correlates of Innovation

General External Environment Economic, Political, Cultural Systems, Legal, Demographic, Technological Trends & Institutions

Specific/Contextual External Environment Scarcity, Complexity, Dynamism

Internal Organisational Environment Slack, Autonomy, Learning, Human Capital, Recruitment Policies & The Franchise Relationship


franchise businesses, franchisors may be equated to the administrative core of the organisation since they are orientated to governance issues such as planning (Barney & Ouchi, 1986) and monitoring the system (Rubin, 1990). It may also be observed that, where there are dual-systems of distribution and the franchisor operates company-owned units, that the franchisor has access to a technical core other than franchisees. From the above discussion, the following

general propositions are suggested:

Franchisees will generally experience sufficient functional autonomy to facilitate their meaningful participation in the process of franchise innovation to the extent that ‘ownership’ of innovations may be withheld from franchisors.

Franchisors will devise a range of


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administrative procedures over time as an aid to gaining access to the fruits of franchisee ideas and innovations.

Franchisee innovativeness will tend to be oriented towards technical rather than administrative issues.

and political institutions plus technological, legal and demographic changes. Constructing a theory of franchising with the business franchise system as the key focus, we began by conceptualising three specific external organisational environments and stressed the importance of ‘scarcity’, ‘complexity’ and ‘dynamism’ as correlates of innovation. We subsequently stressed the importance of a degree of organisational ‘slack’, autonomy and previous successes and failures in innovation as factors influencing innovation success in the future. Similarly, levels of franchisee training provided by the franchisor, plus levels of available ‘human capital’, i.e., quality and quantity of past achievements and experiences were posited as important factors influencing likely levels of innovation. The interesting issue of ‘ownership’ and transfer of operational innovations established by franchisees and possibly unknown to the franchisor was raised and the relationship challenges which that involves if the innovative potential of the franchisee is to be harnessed. Writers such as Mintzberg (1983), Burns & Stalker (1961) and Kanter (1985) have offered fairly solid evidence that organically structured organisations are best equipped to cope with innovation and change. Mintzberg sees ‘adhocracy’ as the most creative and innovative organisational form. Yet franchises tend to be typically organised into more hierarchical structures, that is, along the lines of what Mintzberg terms a ‘machine bureaucracy’. Consistent with this view are frequent claims that ‘franchisors seek replication not innovation and conformity not creativity’ from their franchisees (English & Hoy, 1995). Paradoxically, however, it is this homogeneity which may provide both speed of diffusion and ease of implementation of an innovation within a franchise system. Johnston & Leenders (1990) indicate that operations in different facilities of the same company may be standardised, and therefore share common problems and opportunities for improvement with even minor innovations. At an every-day level, the reality appears to be often one facilitating innovative expression of franchisee autonomy. Pinchot (1986) has shown that

This article has attempted to identify key correlates of innovation in franchising and develop them into a general model (See Figure 1). We do not assert that our analysis is totally comprehensive but, rather, a step towards a better understanding of franchising at a general level (Curran & Stanworth, 1983) and, hopefully, a catalyst and platform for further debate. It is a truism that franchise organisations do survive in fast-changing market places and this, in itself, is testament to an institutionalised ability to innovate and adapt. In tandem with a stress upon predictable bureaucratic structures, detailed operating manuals and prescribed methods of operation, franchise organisations tend to operate methods of harnessing the innovative potential of franchisees. Field visitors, consultants, ‘mystery customers’, workshops, in-house newsheets, plus normal everyday contacts and communications, all act as filters for ideas. The mere decision by business owners to expand their business via the use of franchising may be deemed highly innovative, judged from a human resource, financial or ownership point of view. However, despite the franchisor’s initial innovative effort in adopting franchising as an organisational form, corporate survival at different stages of the development of a business, market or industry requires innovative change. Given the pivotal position of the franchisee in terms of nearness to customers, the franchisee’s role in innovation can be crucial. Any general theory of franchising conducted at the societal level would focus upon what we have termed the ‘general environment’, stressing factors such as cultural, economic

International Franchise Research Centre - Special Studies Series Paper No.9


entrepreneurship and innovation can still function within more mechanistic structures. What Pinchot terms ‘intrapreneurs’ (entrepreneurs within corporations), manage to innovate in structured environments, often by creating a pool of adhocratically organised space within a broader mechanistic whole the presence of powerful sponsors/protectors or mentors can be vital here. Such strategies are open to franchisees, particularly powerful franchisees with high levels of financial turnover and well staffed businesses allowing them time away from dayto-day pressures. English & Hoy (1995) have examined the notion of the franchisees as innovating entrepreneurs and suggest that multi-unit franchisees (as are common in, for instance, restaurant franchises) may well be a particularly fruitful territory in which to concentrate our search for franchisee entrepreneurs/innovators. In this article, we have presented a range of propositions, grounded in the literature, which we feel have some general validity. These general propositions are not offered as laws, ultimately governing organisational outcomes with total certainty but, rather, as general guides to correlates of innovation in franchising. It will be the task of future researchers to subsequently add precision to each of these propositions and ground them more deeply in the various sectors and niches of the franchise industry.

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CURRAN, J. & STANWORTH, J. (1983) ‘Franchising in the Modern Economy - Towards a Theoretical Understanding’, International Small Business Journal, Vol.2, No.1, Autumn, pp.8-26 CYERT, R.M. & MARCH, J.G. (1963) A Behavioural Theory of the Firm, Prentice Hall, Englewood Cliffs, NJ DAFT, R.L. (1978) ‘A Dual-Core Model of Organizational Innovation’, Academy of Management Journal, Vol.21, No.2, pp.193-210 DAHLMAN, C. & WESTPHAL, L. (1983) ‘The transfer of Technology-Issues in the Acquisition of Technological Capability by Developing Countries’, Finance & Development, December DANDRIDGE, T. & FALBE, C. (1994) ‘The Influence of Franchisees Beyond their Local Domains’, International Small Business Journal, January-March, Vol.12, No.2, pp.39-49 DANT, R.P. (1995) ‘Motivations for Franchising - Rhetoric Versus Reality’, International Small Business Journal, Vol.14, No.1, pp.10-32 DAVIS, W. (1991) ‘The Innovators’, in: Henry, J. & Walker, D. (Eds.), Managing Innovation, Sage Publications, pp.142149 DESS, G.G. & BEARD, D.W. (1984) ‘Dimensions of Organizational Task Environments’, Administrative Science Quarterly, March, pp.52-73 DOZ, Y. (1988) ‘Technology Partnerships between Larger and Smaller Firms: Some Critical Issues’ in: Contractor, F. & Lorange, P. (Eds.), Co-operative Strategies in International Business, Lexington Books, MA, pp.317-338 EMERY, F.E. & TRIST, E.L. (1969) ‘Socio-Technical Systems’, in: Emery, F. E. (Ed.), Systems Thinking, Penguin ENGLISH, W. & HOY, F. (1995) ‘Are Franchisees Actually Entrepreneurs?’, Society of Franchising Conference Proceedings, The International Challenge - Towards New Franchising Relationships

FELSTEAD, A. (1991) ‘The Social Organization of the Franchise: A Case of “Controlled Self-Employment”’, Work, Employment and Society, Vol.110, No.5, May, pp.17-23 FELSTEAD, A. (1993) The Corporate Paradox - Power and Control in the Business Franchise, Routledge, London FEUER, D. (1989) ‘Franchising the Training Game’, Training, Vol.6, February, pp.40-45 FORWARD, J. & FULOP, C. (1993) Large Firms Entry in Franchising: Strategic and Operational Issues, City University Business School, London FRIAR & HORWITCH (1985) ‘The Emergence of Technology Strategy: A New Dimension of Strategic Management’, Technology in Society, Vol.7, No.2/3, pp.143-78 GARCEAU, P. (1989) ‘Financing a Franchise’, Canadian Banker, Vol.96, Vol.2, March/April, pp.24-29 GOLD, B. (1981) ‘Technological Diffusions in Industry: Research Needs and Shortcomings’, Journal of Industrial Economics, Vol.24, No.3, pp.247-269 HALL, R.H. (1987) Organisations: Structures, Processes and Outcomes, 4th edition, Prentice-Hall International, Inc. HAMBRICK, D.C. & MASON, D.A. (1984) ‘Upper Echelons: the Organisation as a Reflection of its Top Managers’, Academy of Management Review, Vol.9, No.2, pp.687-707 HEIDE, J.B. (1994) ‘Interorganisational Governance in Marketing Channels’, Journal of Marketing, Vol.58, January, pp.71-85 HOUSDEN, J. (1984) Franchising and Other Business Relationships in Hotel and Catering Services, Heinemann, London JARILLO, J.C. (1986) ‘On Strategic Networks’, Strategic Management Journal, Vol.9, pp.31-41

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JENSON, M.C. (1989) ‘Eclipse of the Public Corporation’, Harvard Business Review, September-October, pp.61-74 JOHNSTON, D.A. & LEENDERS, M.R. (1990) ‘The Diffusion of Innovation within Multi-Unit Firms’, International Journal of Operational Management, Vol.10, No.5, pp.15-25 KANTER, R.M. (1985) The Change Masters, Unwin Hyman, London KAY, J.A. (1993) Foundations of Corporate Success: How Business Strategies Add Value, Oxford University Press, Oxford KAY, J.A. & WILLMAN, P. (1991) ‘Managing Technological Innovation: Architecture, Trust and Organisational Relationships in the Firm’, Centre for Business Strategy Working Paper, 102: London Business School KLEIN, B. & SAFT, L.F. (1985) ‘The Law and Economics of Franchise Tying Contracts’, Journal of Law and Economics, Vol.XXVIII, May, pp.345-361 KNIGHT, R.M. (1984) ‘The Independence of the Franchise Entrepreneurs’, Journal of Small Business Management, April, pp.53-61 KRANSBERG, M. & PURSELL, C.W. (1967) Technology in Western Civilisation, Vol.1, Oxford University Press KRUEGER, A. (1991) ‘Ownership, Agency and Wages: An Examination of Franchising in the Fast Food Industry’, Quarterly Journal of Economics, Vol.56, Issue 1. February, pp.75-101 LEIBERMAN, M.B. & MONTGOMERY, D.B. (1988) ‘First-mover Advantages’, Strategic Management Journal, Vol.9, pp.41-58 LEVITT, T. (1976) ‘The Industrialization of Service’, Harvard Business Review, September-October, pp.63-74 LOVE, J.F. (1986) McDonald’s: Behind the Arches, Bantam Books, New York

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PURDY, D., STANWORTH, J. & HATCLIFFE, M. (1996) Franchising in Figures, University of Westminster Press RUBIN, P.H. (1990) Managing Business Transactions, Free Press, New York SAHAL, D. (1984) ‘The Innovation Dynamics and Technological Cycles in the Computer Industry’, Omega, Vol.12, No.2, pp.153-163 SCAPENS, R.W., RYAN, R.J. & FLETCHER, L. (1981) ‘Explaining Corporate Failure: A Catastrophe Theory Approach’, Journal of Business Finance and Accounting, Vol.8., pp.1-26 SEURAT, S. (1979) Technology Transfer: A Realistic Approach, Gulf Publishing, Houston SHOOK, C. & SHOOK, R.L. (1993) Franchising: The Business Strategy that Changed the World, Prentice Hall, Englewood Cliffs, NJ SINGH, J.V. (1986) ‘Performance, Slack and Risk Taking in Organisational Decision Making’, Academy of Management Journal, Vol.29, pp.562-585 STANWORTH, J. (1984a) A Study of Power Relationships and Their Consequences in Franchise Organisations, University of Westminster, London STANWORTH, J., CURRAN, J. & HOUGH, J. (1984b) ‘The Franchised Small Enterprise: Formal and Operational Dimensions of Independence’, in: Lewis, J., Stanworth, J. & Gibb, A. (Eds.), Success and Failure in Small Business, Gower, Aldershot STANWORTH, J. (1995) ‘The Franchise Relationship: Entrepreneurship or Dependence?’, Journal of Marketing Channels, Vol.4, Nos. 1/2, pp.161-176 STERN, P. & STANWORTH, J. (1994) ‘Improving Small Business Rates Via Franchising the Role of Banks in Europe’, International Small Business Journal, Vol.12, No.2, pp.15-25

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John Stanworth is the director of the International Franchise Research Centre and has been engaged in research into franchising since the mid-1970s. He also leads the Future of Work Research Group, based at the University of Westminster, which has a record of specialist research in Teleworking, Small Business Development and Human Resource Management. Studies have been undertaken for many clients, including The Department of Trade & Industry, The Department for Education and The Economic & Social Research Council. Stuart Price, David Purdy and Nick Zafiris are members of the London Management Centre, University of Westminster. Alessandro Gandolfo is based at the University of Pisa, Italy.

The International Franchise Research Centre (I.F.R.C.) is committed to improving the understanding of franchising. This is achieved by the publication of impartial research and by the encouragement of informed debate. Membership is suitable for anyone with an interest in franchising and further details are available from the address on the rear cover.

Papers in the Special Studies Series are supplied free of charge to I.F.R.C. members and are published a minimum of four times a year. They report upon a range of issues which are felt to be of interest to the franchising community. Subject matter includes the findings of surveys of franchisors, franchisees, and potential franchisees, and also special interest matters, such as finance for franchising.

No.1 The Blenheim/University of Westminster Franchise Survey: Spring 1993 No.2 Improving Small Business Survival Rates via Franchising: The Role of the Banks in Europe No.3 Targetting Potential Franchisees: Industry Sector Backgrounds and Declared Areas of Interest No.4 The Impact of Franchising on the Development Prospects of Small & Medium-sized Enterprises (SMEs) in Europe No.5 The Blenheim/University of Westminster Franchise Survey: A Comparison of UK and US Data. No.6 Developing a Diagnostic Questionnaire as an Aid to Franchisee Selection No.7 Franchising as a Source of Technology-transfer to Developing Economies No.8 Aspects of Franchisee Recruitment


International Franchise Research Centre - Special Studies Series Paper No.9

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