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Strategies for Business Format Franchisors to Expand into Global Markets

Article  in  Journal of Marketing Channels · April 2006

DOI: 10.1300/J049v13n03_03

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 Strategies for Business Format Franchisors
to Expand into Global Markets
John F. Preble
Richard C. Hoffman

ABSTRACT. Franchising is emerging as a highly effective strategy for

growth, job creation, and economic development and is spreading rapidly
around the globe. However, the pursuit of global markets by franchisors
has traditionally relied on employing just three generic franchising op-
tions (i.e., direct franchising, master franchising, area development). This
paper presents a more expansive view of strategic choice for franchisors
by presenting first-mover, platform, and conversion strategies as addi-
tional strategic approaches that may be utilized to meet the challenge of
expanding into international markets. Propositions are advanced to first
suggest which strategic approaches are most appropriate under varied for-
eign market conditions and then how these approaches should be linked to
the three generic licensing options to create combination strategies based
on franchisor experience/capabilities and similar/dissimilar markets. A
contingency model of global franchising is presented, which depicts the
above relationships and provides an overall framework that can assist
franchisors in solving the foreign expansion and distribution question.
Managerial and research implications are then provided. [Article copies
available for a fee from The Haworth Document Delivery Service: 1-800-
HAWORTH. E-mail address: <docdelivery@haworthpress.com> Website:

John F. Preble is Associate Professor, Department of Business Administration,

Lerner College of Business and Economics, University of Delaware, Newark, DE 19716.
Richard C. Hoffman is Professor, Perdue School of Business, Salisbury University,
Salisbury, MD 21801 (E-mail: rchoffman@salisbury.edu).
Address correspondence to: John F. Preble, Associate Professor, Department of
Business Administration, Lerner College of Business and Economics, University of
Delaware, Newark, DE 19716 (E-mail: preblej@lerner.udel.edu).
Journal of Marketing Channels, Vol. 13(3) 2006
Available online at http://www.haworthpress.com/web/JMC
© 2006 by The Haworth Press, Inc. All rights reserved.
doi:10.1300/J049v13n03_03 29
30 JOURNAL OF MARKETING CHANNELS

<http://www.HaworthPress.com> © 2006 by The Haworth Press, Inc. All rights

reserved.]

KEYWORDS. Franchising, geographic expansion strategies, global

markets, licensing, market characteristics, market orientation, Canada,
China, Eastern and Western Europe, Japan, Middle-East, Nordic coun-
tries, United Kingdom

INTRODUCTION

As business format franchisors enter foreign markets for the first

time or extend their international presence into more distant locales,
they must become familiar with and adapt to environmental differences
based on host country cultures, economics, politics, and the like (Miller,
1992). Additionally, franchisors themselves vary in terms of size,
scope, experience, capabilities, and resources that they bring to the task
of successful global expansion. Also, further complexity is introduced
as new skills and capabilities may need to be learned as franchisors
move from domestic to international markets (Fladmoe-Lindquist, 1996).
Proper strategic alignment or fit (Venkatraman & Camillus, 1984)
requires development of international franchise strategies that success-
fully integrate distinct franchisor characteristics with unique environ-
mental conditions prevalent in host country markets (Miller, 1992). Yet,
franchise industry observers note extensive use of only three generic
franchising options (i.e., direct franchising, master franchising, area de-
velopment) to solve the foreign expansion and distribution challenge
(Petersen & Welch, 2000; Steinberg, 1994). This approach is too limiting
as these strategies are fundamentally alternative licensing forms that
should be employed operationally once a foreign market or region is fi-
nally selected. This leaves the strategy formulation question of which re-
gions or countries to enter, when and how (i.e., strategic approaches and
competitive expansion strategies) largely unaddressed by franchisors.
Thus, a key goal of this article will be to identify from the literature a
set of competitive strategies to be utilized by franchisors for interna-
tional expansion. Host market conditions will determine strategic
choice, which will then be linked to the appropriate licensing alternative
based on franchisor experience and similarity of markets. The relation-
ships and propositions generated throughout are then depicted in a
 John F. Preble and Richard C. Hoffman 31

contingency framework and model that can aid business format

franchisors in increasing their likelihood of success as they enter vastly
more complex and uncertain international markets.
We begin by describing the growth of franchising, particularly in
foreign markets. The development of franchisor capabilities through
successful experience is then examined. Three generic franchise/licens-
ing strategies used historically by business format franchisors to expand
internationally are explained next. Drawing on the franchise literature
and other related relevant literatures (e.g., competitive strategy, interna-
tional market selection, entry mode, international business expansion,
etc.), we identify, from a plethora of possible strategic alternatives
found in this literature, a narrower set of strategic approaches and com-
petitive strategies that are most appropriate for franchisors to utilize in
the pursuit of global markets. As these strategies (i.e., first-mover, plat-
form, conversion) are presented, we advance propositions that suggest
where they should be employed, depending on competitive conditions
prevalent in the host market at the time. Furthermore, arguments are set
forth for matching these competitive strategies (i.e., first-mover, plat-
form, and conversion) with the most appropriate licensing form to cre-
ate combination strategies. These combination strategies are based on a
franchisor’s experience/capabilities and the similarity/dissimilarity of
the host market. A contingency global franchising model is presented
depicting these strategy relationships. The model suggests areas for fu-
ture research and provides an overall framework to assist franchisors in
making international expansion and distribution decisions.

Growth in International Franchising

Franchising has emerged in recent years as a highly effective strategy

for business growth, job creation, and economic development. For exam-
ple, in the United States, the Washington-based International Franchise
Association (2003) has estimated that about 2,000 U.S. franchised orga-
nizations operate some 320,000 units which account for more than 40
percent of all U.S. retail sales, 8 million jobs, and over $1 trillion in sales.
In the United Kingdom about 35% of all sales are through franchised or-
ganizations, and in Canada the figure is estimated to be above 40%
(Swartz, 1994). According to industry data, a new franchise opens about
every eight minutes in the United States and every two hours in Canada
(Bellett, 2003). In fact, franchising has been so successful that in some
franchise sectors (e.g., fast food) market saturation has increasingly
32 JOURNAL OF MARKETING CHANNELS

become the norm in the United States, Canada, Western Europe, and
Japan (Alon & McKee, 1999). However, major growth opportunities
still exist, even for fast food franchisors in China, Eastern Europe, the
Middle East, other parts of Asia, and Latin America, for example
(Preble & Hoffman, 2003). Underlying these new market opportunities
for some 75 sectors/categories of format franchising are favorable
changes in the global economic environment such as falling trade
barriers, increased integration across national boundaries, and greater
homogeneity in buyer behavior (Chan & Justis, 1992; Quinn, 1999).
Concomitantly, numerous franchisors have been building capabilities
through experience for successful international expansion. This combi-
nation of domestic market saturation, rapidly expanding international
opportunities, homogenization of consumer tastes, and franchisor capa-
bilities is leading to the rapid development of international franchising
and has led one observer to contend that franchising is rapidly becoming
the method of choice for cross-border expansion of business (Swartz,
1994). This forecast would appear to be coming true as Hoffman and
Preble (2004) recently reported that the absolute growth in the number
of franchising companies worldwide grew by over 30% between 1993
and 2001. Yum! Restaurants International (Yum.com) is a leader in this
growth. In 2004 they reported that it was their fifth straight year of
opening more than 700 restaurants outside of the United States. They
have also doubled their operating profits since going public in 1997 as
Yum! Brands. With such a rapid increase in international franchising, it
is interesting to explore the capabilities that franchisors are developing
through experience that can assist them in conquering even more com-
plex and distant markets.

The Development of Franchisor Capabilities

Franchisors have been rapidly growing their systems and gaining

experience and capabilities that can assist them in expanding internation-
ally. Walker’s (1989) early research reported that the majority of his
franchisor respondents had at least 5 years of domestic experience (U.S.)
and/or at least 100 units operating in the home market before going inter-
national. Similarly, Huszagh, Huszagh, and McIntyre (1992) identified
core competencies that would allow franchisors to expand internationally
and concluded that experience and size were key factors in the interna-
tional expansion decision. Larger firms tend to have more cumulative
experience, brand name recognition, recruitment and selection skills, etc.
 John F. Preble and Richard C. Hoffman 33

and as a consequence they have the capabilities to pursue multinational as

well as domestic expansion (Julian & Castrogiovanni, 1995). Experi-
enced franchisors are better at standardization, site selection (Huszagh,
et al., 1992), and in monitoring their franchisees as units become more
geographically dispersed (Julian & Castrogiovanni, 1995). Shane
(1996) suggests that franchisors need to possess a superior capability to
reduce franchisee opportunism (e.g., franchisee shirking on product
quality) in order to expand successfully into international markets.
Larger franchised systems that invest in monitoring systems and learn
supervision skills over time will develop superior capabilities for reduc-
ing franchisee opportunism that can be extended into distant markets.
When franchisors have acquired significant experience and capabili-
ties in their home market (as described above) then they are probably
ready to start expanding internationally. However, Fladmoe-Lindquist
(1996) argues that international franchising may require some capabili-
ties that may be different from those skills acquired domestically and that
these skills may need to be learned. She further indicates that the specific
skills needed for international franchising are distance management, cul-
tural adaptability, host country policy evaluation, and exchange rate man-
agement. Fortunately, firms that expand abroad can learn and acquire
knowledge about foreign sites and international knowledge generally that
reduces the perceived risks of distant markets (Eroglu, 1992). Further, as
firms expand abroad they are more likely to acquire knowledge about for-
eign sites (Barkema, Bell, & Pennings, 1996) that they can use to increase
their international expansion. What may also be critical at this juncture is
that franchisors will need to become strongly market oriented, which has
been shown to yield a substantial positive relationship to business profit-
ability (Kohli & Jaworski, 1990; Slater & Narver, 2000). In addition to
obtaining and acting on information about customers’ verbalized needs
and preferences in the foreign market, franchisors must generate market
intelligence related to exogenous factors like government regulations,
competitive conditions, technological changes, and other environmental
forces that might influence current and future customer preferences
(Kohli & Jaworski, 1990). The acquisition of location specific market
knowledge can also be obtained through partnering (Fladmoe-Lindquist,
1996). For example, Sashi and Karuppur (2002) argue that franchisors
can supply certain standardized elements of the marketing mix and retain
overall control while foreign franchisees can provide local market knowl-
edge and country-specific management skills. We will now examine the
three generic strategies that have been used by business format fran-
chisors historically to expand internationally.
34 JOURNAL OF MARKETING CHANNELS

GENERIC FRANCHISE STRATEGIES

This study will focus on business format franchising, principally

because this form of franchising has accounted for most of the unit
growth in franchising both in the United States and abroad since 1950
and because it has been predicted to be the dominant form of franchising
internationally in the twenty-first century (Hoffman & Preble, 1993).
Additionally, most of the current global franchisors have a majority of
their units franchised and only a small percentage of their units as
company owned or as joint ventures. For example, Subway, the larg-
est franchisor in the United States, has only one (1) company owned
unit, while Arby’s, Dunkin’ Donuts, and Century 21 Real Estate Corpo-
ration are all 100% franchised (Franchise Zone, 2003). Other major
franchisors such as McDonalds and YUM Brands are about 75%
franchised.
Franchising is an example of a contractual vertical marketing system
(VMS), where channel members are joined together by contracts and
act as a unified system, rather than as independent channel members
(Kotler & Armstrong, 1989). The contractual arrangement that fran-
chising depends on is known as licensing. Contractor (1982) defined
a licensing agreement as an arrangement where a licensor grants the
rights to intellectual property to another entity (the licensee) for a speci-
fied period, for a fee. The licensing of product or process technology
is used primarily by manufacturing firms. Franchising is employed
primarily by service firms (Dunning & McQueen, 1981). Business
format franchising is an elaborate form of licensing, whereby, a firm
(franchisor) grants an independent entrepreneur (franchisee) the right to
use both intangible assets (e.g., brand name or service) along with tan-
gible assets (e.g., products, methods of operation) in a specified geo-
graphic area over a specific time frame (e.g., 10 or 15 years). This type
of franchising is also known as a “package franchise” which means rep-
licating an entire business format, namely, a marketing strategy and
plan, operating manuals and standards, quality control, and ongoing
two-way communication and assistance (Preble & Hoffman, 1994).
The next section will discuss the three generic strategies commonly em-
ployed by format franchisors. Using direct franchising, the franchisor
sells individual units to foreign franchisees for an initial fee, plus a per-
centage royalty of future sales of the foreign franchise. The franchisor
then supports each unit and manages the resulting franchise network.
Area franchising is similar, but an individual or company is licensed to
establish, develop, and manage individual units, owned solely by them, in
 John F. Preble and Richard C. Hoffman 35

an assigned area. Thus, the area developer tends to rely on the franchisor
for operational support and pays an initial fee and royalties for each unit
to the franchisor. A master franchisor has similar territorial rights
(sometimes for a whole country) but is licensed (buys the rights) to es-
tablish (sell franchises), develop a specific market, and manage and
support (i.e., training marketing and operations assistance) a network of
“sub-franchises” in the foreign market. Advertising fees coming from
sub-franchises are usually retained by the master franchisee for local
advertising, while typically 60 percent of the royalty payments are also
kept by the master franchisor and 40 percent are submitted back to the
headquarters (i.e., the franchisor) operation (Chan & Justis, 1992; Pe-
terson & Welch, 2000; Steinberg, 1994). It should be noted that these
strategies may be utilized domestically or internationally, but are de-
scribed above as they are applied in foreign markets.
Utilizing these three forms of licensing (direct franchising, master
franchising, area development) the format franchisor has a set of core
strategies available to pursue in a wide variety of global settings. Yet
these generic franchising strategies are unlikely to be sufficient to be able
to expand into challenging new markets and regions, as well as defend
against increasingly aggressive competitors. The underlying problem is
that these three generic franchising strategies are fundamentally alterna-
tive licensing forms to be employed operationally once a foreign market
is chosen. The strategy formulation question of which regions/countries
to enter when and how to enter them is simply not addressed. What
franchisors increasingly need to do first is to adopt overall strategic ap-
proaches and competitive expansion strategies (Gupta & Giovindarajan,
2000) that can then be used in combination with the three generic forms
of licensing to be able to create competitive advantage in today’s global
marketplace. The strategic approaches suggested here for meeting this
challenge are preemptive/first-mover or early-mover strategies; plat-
form/bridgehead/beachhead strategies; and conversion strategies. In the
next section of the paper we will examine each strategy type in extensive
detail. For purposes of analytical clarity (i.e., in order to see the linkages
more easily), each section will also introduce combination strategies (i.e.,
strategic approaches paired with generic licensing strategies) based on
franchisor experience/competencies and market characteristics. The rela-
tionships being suggested will be clearly delineated by providing propo-
sitional statements throughout each section of the paper.
36 JOURNAL OF MARKETING CHANNELS

STRATEGIC APPROACHES TO GEOGRAPHIC EXPANSION

First- and Early-Mover Strategies

The timing of market entry has increased in importance. The

evidence from the strategy and marketing literatures suggests that being
a first- or early-mover into a new or emerging market can often have
positive long-run strategic performance implications. Specifically,
“pioneers” traditionally enjoy larger market shares (market dominance),
abnormal returns (profits), and lasting competitive advantage, than do
followers or late entrants (Brown & Lattin, 1994; Kerin, Varadarajan
& Peterson, 1992; Lambkin, 1988; Lieberman & Montgomery, 1988;
Makadok, 1998; Miller & Camp, 1985). With respect to market share,
for example, Robinson and Fornell (1985) analyzed 371 mature con-
sumer goods businesses and found first movers had higher market
shares than later entrants. Specifically, on average, first movers had a
29% market share, versus 17% for early followers and 12% for late en-
trants. Interestingly, in a severe test (i.e., utilizing a fragmented, hyper-
competitive, emerging growth industry with easy imitation) of first-
and early-mover pricing and share advantages, Makadok (1998) found
these advantages to be surprisingly longstanding (i.e., sustainable).
Similarly, in a recent study of pioneering advantage in the emerging
market of India, Mittal and Swami (2004) examined a large and diverse
sample of local companies and concluded that pioneering advantage
seemed to provide long-term competitive advantage as pioneers’ per-
formance were consistently better than followers’ performance over the
years. These authors also found that first-movers were generally more
aggressive then followers in pursuing strategic investments in R & D,
advertising, promotion, and distribution. Since these investments
required significant resources they tended to create entry barriers for
followers. With respect to franchising, early research by Hackett (1976)
indicated that U.S. franchisors were motivated to expand internation-
ally by a desire to penetrate high growth markets early (i.e., first-mover
advantages). More recently, Michael (2003) developed and tested a
model of first-mover advantage through franchising in the retail indus-
try. Michael (2003) found support for the model, in that, first-mover ad-
vantage initially took the form of a lead in the number of retail outlets,
followed by a market share lead, and, lastly, superior profitability.
According to Julian and Castrogiovanni (1995), first-mover advan-
tages for franchisors would include capturing the best locations, estab-
lishing strong local reputations, duplicating previously successful
 John F. Preble and Richard C. Hoffman 37

practices in new geographic markets, and attempting to saturate those

markets with franchised outlets. These types of preemptive moves would
likely prevent or inhibit competitors from duplicating or countering such
advances. For example, Barney (1991) suggests that a valuable location
can act as an imperfectly imitable, physical capital resource for a firm.
Similarly, Day and Wensley (1988) see location as a tangible resource
that enables a firm to exercise its capabilities leading to positional advan-
tage. Thus, achieving early entry into new markets can be a key strategy
for franchisor success. Of course, those franchisors that are the most
likely to achieve first-mover advantages are those with substantial home
country experience (i.e., have pursued national expansion), developed
brand recognition, skills in recruitment and selection, structuring and
managing the franchise relationship, and generally established successful
track records (Julian & Castrogiovanni, 1995). McDonalds is illustrative
of the experienced franchisor who faced increasing market saturation at
home (i.e., United States) in the 1980s and wide-open business opportu-
nities abroad. Thus, McDonalds set goals and began to accelerate its in-
ternational expansion plans and started to move aggressively into
multiple foreign markets at that time (Romeo, 1988).
Consistent with the goal of achieving first-mover advantage in multi-
ple markets is the notion that franchising itself is often viewed as a
growth strategy (Preble, 1992). Julian and Castrogiovanni (1995) see
franchising as a key tactic for pursuing the goals of territorial expansion
and sales growth. Resource constraints theory argues that franchising is
used for rapid expansion into new markets when businesses lack ade-
quate resources, but instead are able to penetrate markets rapidly using
franchisee capital (Boyle, 2002). In a study of Canadian franchise
systems, Carney and Gedajlovic (1991) developed a taxonomy of
franchisors that included Rapid Growers who had been franchising for
the shortest period of time, but had the largest retail networks, which
were 92.7% franchised.

P1: Franchisors facing domestic market saturation and rapidly

growing markets abroad are more likely to utilize first-mover
strategies for international expansion.

Given that there are long-term advantages to being an early mover

into new markets and that franchising is often an expedient for
growth, which generic franchise strategies (direct franchising, master
franchising, area franchising) make the most sense under various
38 JOURNAL OF MARKETING CHANNELS

market conditions, and taking into account a franchisor’s accumulated

experience and competencies? As discussed earlier in the paper, experi-
enced franchisors have developed skills and competencies that position
them well for pursuing first-mover strategies into international markets.
The experienced franchisor may first be considering entering host mar-
kets that are similar to their home markets. Important factors to consider
in assessing market similarity would include level of economic devel-
opment (e.g., developed to developed), geographic proximity, cultural
and language similarities, and legal and regulatory conditions (Alon &
McKee, 1999). Thus, the experienced franchisor may take advantage of
direct and/or area franchising by setting up a subsidiary or company in-
frastructure in a similar country. Of course, the area development fran-
chise is similar to direct franchising, in that, the area developer does not
sub- franchise, but instead owns multiple units and receives support
from the franchisor. Since country characteristics would not differ that
much, the experienced franchisor need not forego the percentage of roy-
alty payments that the master franchisor would otherwise garner. Thus,
we propose:

P1a: Experienced franchisors pursuing first-mover strategies to

enter similar markets are more likely to employ direct or area
franchising.

However, for dissimilar markets (e.g., developed to developing

countries, or emerging markets, or transitional economies) character-
ized by high levels of perceived political and economic uncertainty, as
well as cultural and geographic distance (Sashi & Karuppur, 2001),
both experienced and inexperienced franchisors can benefit by partner-
ing with a master franchisor in those markets. The master franchisor is
an experienced indigenous entrepreneur or company who possesses lo-
cal market knowledge and skills for successfully managing in a country
where the franchisor is unfamiliar. The master franchisor needs to have
sufficient financial resources to buy the franchising rights from the
franchisor to develop a specific market (i.e., country). He/she would
then provide an in-country infrastructure and begin selling (act as a
sub-franchisor) franchises and supporting franchisees for the franchisor
in the foreign market. This kind of partnering approach can work well in
transitional economies, such as the Czech Republic, Hungary, and
Poland by combining the local entrepreneurial talent of the master
 John F. Preble and Richard C. Hoffman 39

franchisor with the branding, structure, systems, and overall support

elements of a franchised operation. Hence,
P1b: Franchisors pursuing first-mover strategies to enter dissimi-
lar markets are more likely to employ master franchising over
direct or area franchising.
While inexperienced franchisors should use master franchising when
entering dissimilar markets, this strategy is only appropriate when an
inexperienced franchisor sets highly ambitious goals of early entry into
as many markets as possible. However, Erramilli (1991) has suggested
that franchisors with limited international experience should first seek
out markets that are culturally similar and geographically proximate to
their present locations. Of course, these markets would need to provide
the opportunity to enjoy a pioneering edge in a franchise category (i.e.,
be underdeveloped) for a first-mover advantage to be realized. For ex-
ample, a U.S.-based franchisor who is inexperienced in international
markets can easily set up a subsidiary in Canada and begin direct fran-
chising there. In fact, Walker (1989) found that 57% of U.S. franchisors
that he studied used Canada as their launch country. Thus,
P1c: Inexperienced franchisors pursuing first-mover strategies to
enter similar markets are more likely to employ direct franchising.
We will now examine the nature and use of platform strategies by
franchisors seeking international expansion.

Platform Strategies

Franchisors frequently approach international expansion by identify-

ing a geographic region perceived as possessing a major market oppor-
tunity but then find that the countries within the region differ as to their
levels of economic development, political stability, and cultural traits.
This situation tends to create high levels of uncertainty and complexity
for franchisors. An approach to expanding into such an environment is
to select the most attractive country to enter initially within the region.
Thus, franchisors would launch regional expansion by establishing a
platform in the most “business-friendly” country in the region first and
then begin expanding into neighboring nations (Chaplin, 1998). This
approach is analogous to an incremental phased approach, as discussed
by Gupta and Govindarajan (2000), for entering strategically important
markets that may be difficult initially for franchisors to successfully
exploit. These authors suggest that a company first enter a beachhead
40 JOURNAL OF MARKETING CHANNELS

market (i.e., one that closely resembles the targeted strategic market, but
provides a safer opportunity) to learn and develop capabilities and skills
for entering similar but more difficult markets later. For example, U.S.
franchisors have frequently used the United Kingdom as a platform,
beachhead, or springboard for later entry into Continental Europe. Hence,

P2: Franchisors are more likely to employ a platform strategy

when expanding into a complex region by first entering the most
business- friendly nation within the region.

The United Kingdom is seen as business-friendly by U.S. franchisors

in that it has a similar language (Queen’s English), an established fran-
chise community, with supportive lending institutions, no pre-contract
disclosure laws or franchise legislation generally, franchise and small-
business magazines and exhibitions to promote a franchise opportunity, a
professional franchise organization (British Franchise Association), in-
tellectual property protection (e.g., trademarks), and political stability
(Duckett, 2001; Tomzack, 2003). With little discrimination against for-
eign franchisors and consumers that are already favorably disposed to
franchised goods and services, the United Kingdom can act as an out-
standing learning platform for European expansion into somewhat more
difficult markets such as France and Germany. However, it should be
noted that the European region is not seen as extremely difficult or
nuanced to operate in (relative to developing or emerging nations)
because the region is highly developed and has large markets with high
levels of discretionary income. Therefore, it is recommended that
experienced franchisors and also those franchise companies with little in-
ternational experience begin by setting up country or regional subsidiar-
ies and franchise support structures in similar markets like the United
Kingdom and utilize direct franchising and/or area franchise strategies.
Thus,
P2a: Franchisors pursuing platform strategies in similar markets
are more likely to employ either direct or area franchising for
market entry.
Platform strategies are not limited to developed markets like the
United Kingdom for Europe or Canada for the United States. These
strategies may be even more powerful in developing regions and in tran-
sitional economies that are moving from communist political systems
with centrally planned economies to democratic political systems with
market economies. For numerous experienced franchisors, the Middle
 John F. Preble and Richard C. Hoffman 41

East is increasingly being seen as a region with great potential for

franchise development. However, the region is considered difficult to
exploit due to language difficulties (mostly Arabic), differences in cul-
ture, customs, and social mores rooted in religion (mostly Islam), as
well as diversity in corporate laws, tax structures, labor practices, etc.
(Chaplin, 1998). Thus, navigating this complex environment for
franchisors new to the region requires platform thinking with initial
entries into countries like Egypt, Saudia Arabia, and/or the United Arab
Emirates who are currently leading the way as business-friendly re-
gional platforms for U.S. and European franchisors. The governments
of these nations see franchising as an engine for economic growth by
providing jobs, training, and the efficient distribution of high-quality
goods and services. Thus, these three Middle Eastern governments are
paving the way for franchising with improved economic infrastructures,
tax-free facilities, improved property rights legislation, and the like
(Chaplin, 1998). Middle East consumers are brand conscious and favor
established brands that they may have seen when traveling abroad.
Thus, franchisors like the Body Shop, Mothercare, Fastframe USA Inc.,
McDonalds, Burger King, KFC, Pizza Hut, and Planet Hollywood have
all successfully entered the region (Chaplin, 1998).
As a consequence of the complexity in the Middle East environment,
it is recommended that only experienced franchisors enter these dissim-
ilar markets by utilizing master franchising to handle the legal, admin-
istrative, religious, and cultural differences that characterize the region.
Recruiting master franchisees in this area may not be a problem as it has
been estimated that half a million high net worth investors (around U.S.
$5 million liquid investable assets) are living in the region. Many of
these individuals also have substantial corporate experience, shrewd
business skills, and a strong motivation to succeed (Chaplin, 1998). Ini-
tial entry should be made into business-friendly platform countries like
Egypt, Saudia Arabia, and/or the United Arab Emirates, drawing on the
vast pool of high potential businesspersons to become master franchi-
sees. Once experience and competency is demonstrated in these plat-
form countries, then a franchise system can be rolled out into other
Middle Eastern countries (e.g., Abu Dhabi, Bahrain, Jordan, Kuwait,
Lebanon, Oman, Qatar). Thus,
P2b: Experienced franchisors pursuing platform strategies in dis-
similar markets are more likely to employ master franchising for
market entry.
42 JOURNAL OF MARKETING CHANNELS

Conversion Strategies

In an increasingly competitive, global environment franchisors are

acquiring existing firms or chains as a means of rapidly developing a
franchise system into new country markets (Welch, 1992). A conver-
sion strategy is one in which the franchisor adds new franchisees to the
system by acquiring independent businesses, chains, and/or franchisees
from other franchise systems. This is similar to reverse franchising or
taking existing businesses and building them into a new franchise sys-
tem (Falbe & Dandridge, 1992). Rapidly changing, competitive, and
even saturated environments appear to be conducive for the use of con-
version strategies especially in such industries as fast food, lodging, real
estate, travel, and other non-retail sectors (Hoffman & Preble, 2003).
Globally, it has been estimated that conversion franchising accounts
for 20% of international franchise units (Watkins, 1991). A recent study
revealed that, while only 26% of North American franchisors have used
conversion strategies for international expansion, 61% of these fran-
chisors intend to increase the use of conversions for international
growth in the future Hoffman & Preble, 2003). Conversion franchising
enables penetration into already crowded markets by acquiring an exist-
ing location (e.g., otherwise potentially prohibitively expensive real
estate), and it offers foreign franchisors opportunities to penetrate satu-
rated markets, eliminate competitors, and take advantage of their con-
verts’ established business connections. Resource dependence and
competitive advantage theories help explain the attraction of conver-
sion franchise strategies for some firms. By acquiring existing busi-
nesses, franchisors obtain critical resources and skills (Barney, 1991)
such as a proven location, know-how, and experience. Acquiring firms
with experienced managers provide franchisors with a source of mana-
gerial talent (Sen, 1998) and critical local market knowledge for inter-
national expansion (Huszagh, et al., 1992), as well as needed market
skills and a proven customer base (Hoffman & Preble, 2003). Addition-
ally, the acquired resources and skills can provide sources of competi-
tive advantage (Day & Wensley, 1988). Economic resources such as
enhanced economies of scale and a faster income stream than a startup
are examples of the advantages that accrue to the firm pursuing
conversion strategies, according to a recent study (Hoffman & Preble,
2003).
Competitively, the acquired firm or franchisee benefits from a known
brand name (Day & Wensley, 1988), new technology, training, and
logistical support from the franchisor (Hoffman & Preble, 2003). It is,
 John F. Preble and Richard C. Hoffman 43

therefore, not surprising that there has been an increased use of conver-
sion strategies by franchising companies in recent years. Examples of
firms that have grown primarily through conversions include Best
Western Hotels and Century 21 Real Estate. This discussion suggests
that,

P3: Franchisors are more likely to use a conversion strategy to

expand into host countries that are saturated, competitive, and
high cost.

Conversion strategies in combination with generic franchise strategies

are especially attractive for firms operating in slow growth or fragmented
markets that seek rapid penetration into new markets having similar
characteristics (Hoffman & Preble, 1991). Conversions are especially
useful in such cases for rapid penetration because experienced firms can
acquire whole chains that enable them to rebrand multiple units all at
once and embrace the converted units’ competitiveness in a crowded
market. Express Temp Services of North America converted Sweden’s
largest personnel agency to their existing franchise system of temporary
services, thus, permitting a multiunit expansion into similar developed
markets of Denmark, Finland, Norway, and Sweden (Steinberg, 1993).
Area franchises were used for the most part in each country to implement
the conversion. This leads to the following proposition:

P3a: Experienced franchisors pursuing conversion strategies in

similar international markets are more likely to employ area fran-
chising.

Local master franchisors can develop markets for experienced

franchisors in dissimilar markets containing high political, economic,
or competitive risk and, thereby, preserve the franchisor’s limited re-
sources (Hoffman & Preble, 1993). Park Plaza International Hotels and
Resorts (USA) has experience in both the North American and Euro-
pean markets. This firm employed master franchisors to expand rapidly
into unfamiliar Asian markets (Miller, 1997). The master franchisor
implements the conversion of multiunit properties in their territory.
Hence,

P3b: Experienced franchisors pursuing conversion strategies in

dissimilar international markets are more likely to employ master
franchising.
44 JOURNAL OF MARKETING CHANNELS

On the other hand, less experienced franchisors who wish to expand

into similar markets and convert single units prefer direct franchising.
Days Inn’s first international property was a direct conversion in the
developed economy of the Netherlands (Hoffman & Preble, 1991). Un-
like area and master franchises, direct franchising permits the inexperi-
enced franchisors to retain greater control and maximum profitability.
Thus, the following:

P3c: Inexperienced franchisors pursuing conversion strategies in

similar international markets are more likely to employ direct
franchising.

In summary, conversion strategies can be used by both internationally

experienced and inexperienced franchisors to expand into international
markets that are saturated or highly competitive in nature. In the follow-
ing section a model summarizing the proposed relationships between
competitive and generic franchising strategies is presented along with
its implications.

SUMMARY AND MODEL

This paper began by making the case that the strategy of franchising
has emerged as a highly effective method for the rapid expansion of
business firms. Over 50 countries on six continents have developed sig-
nificant franchising sectors, and franchising continues to be a preferred
method for cross-border expansion (Hoffman & Preble, 2004a).
Focusing on business format franchising, the three generic forms of
franchising most traditionally utilized by franchisors were described in
detail (i.e., direct franchising, master franchising, area development).
Drawing on several literature bases, the strategic approaches of first-
mover, platform, and conversion were then presented as key competi-
tive strategies for franchisors to use in expanding into global markets.
Matching these two sets of strategies, based on franchisor experience
and competencies and host country considerations, combination strate-
gies (competitive strategies matched with generic strategies) were then
advanced (in each strategy section) to account for these contingencies.
These combination strategies resulted in three multipart propositions
for future empirical testing and are shown in Figure 1. This figure pro-
vides the reader with a contingency model of franchising depicting the
central conditions under which the combination strategies are likely to
 John F. Preble and Richard C. Hoffman 45

FIGURE 1. A Contingency Model of Global Franchising Strategies

+ For inexperienced firms pursuing platform or conversion strategic approaches deferred entry is
recommended in dissimilar markets until sufficient experience is developed.

be effective for market entry. The arrowed lines matching each strategic
approach with their appropriate generic strategy have been delineated in
alternate formats (solid, dashed, dotted) to clarify the appropriate
relationships under varied market conditions.
Extant research was utilized to make the case that there are signifi-
cant long-term competitive and performance advantages to early entry
into foreign markets. Based on our contingency model of franchising
(i.e., Figure 1), experienced franchisors should utilize direct or area
franchises in as many similar/developed markets (P1a, Figure 1) as is
practical in order to capture a larger royalty stream and to increase oper-
ational control. In extremely complex or uncertain markets master
franchisors (P1b) could be employed to satisfy the goal of early entry.
However, franchisors with insufficient international experience should
first enter markets where they would enjoy a pioneering edge in their
franchise category and that are culturally similar and geographically
46 JOURNAL OF MARKETING CHANNELS

proximate. The inexperienced franchisor should do this principally

through the use of direct franchising (P1c). However, if the inexperi-
enced franchisor adopts an extremely aggressive growth posture in
emerging/dissimilar markets, then they should take advantage of master
franchisors (P1b) in order to be early movers in markets with high levels
of environmental uncertainty (i.e., distance, culturally diverse, transi-
tional economies).
The discussion then focused on the use of a business-friendly country
within a complex, hostile, or poorly understood region to serve as a
platform to learn and gain skills for further regional expansion. Fran-
chisors at all experience levels that are expanding into culturally similar/
developed regions using platform strategies should combine these
with direct or area franchise forms of licensing (P2a). On the other hand,
experienced franchisors should pursue environmentally complex and
uncertain regions like the Middle East and Eastern Europe via platform
strategies combined with the careful selection and development of master
franchisors (P2b).
The conversion of independents, chains, or franchisees was recom-
mended for penetrating rapidly changing, highly competitive, or satu-
rated foreign markets. Single and multiunit conversions are highly
desirable in such situations as they allow the franchisor to acquire loca-
tion resources, local management expertise and market knowledge, and
existing customers. Conversion of single units are sometimes coupled
with direct franchising, but most often lend themselves to area franchis-
ing. Large-scale conversions are usually undertaken by experienced
franchisors who possess significant resources and brand equity. Experi-
enced franchisors using conversions should employ area franchising
(P3a) if the environment is perceived as similar. In dissimilar or devel-
oping markets, experienced franchisors should combine with a master
franchisor (P3b) to take advantage of the latter’s resources (financial
and market knowledge) to develop such a high-risk market. Inexperi-
enced franchisors using conversion strategies should employ direct
franchises (P3c) to expand into similar or developed markets. More-
over, it is advisable that inexperienced franchisors using either platform
or conversion expansion strategies delay entry into high-risk or dissimi-
lar markets until they have acquired more international capabilities
(Gupta & Govindarajan, 2000).
The use of this contingency model should facilitate both strategy
formulation and implementation for franchisors seeking competitive
advantage in the pursuit of global markets. We will now suggest some
implications of our framework for practice and future research.
 John F. Preble and Richard C. Hoffman 47

MANAGERIAL AND RESEARCH IMPLICATIONS

Franchisors with little international experience should first focus on

country markets that share some cultural, economic, and political similar-
ity with their domestic markets. Entering these markets reduces the diffi-
culties of adapting to the demands of a new country. Depending on the
franchisor’s goals and the growth in the market, franchise managers can
select any of the three strategic approaches coupled primarily with direct
franchising for market entry until they can gain more international experi-
ence. Firms possessing international experience may enter both similar
and dissimilar (in terms of culture, economy, etc.) markets using first-
mover, platform, or conversion strategies, whichever best suits their
firm’s goals, e.g., rapid growth versus market penetration and distribu-
tion. These strategic approaches should be combined with direct or area
franchises in similar/developed markets or with master franchising in
dissimilar/developing markets. Thus, franchisors are now provided
with a much richer set of strategic options for improving success and
creating competitive advantages in the new country markets they enter.
Future research in this vein should focus on testing the propositions
offered here regarding the combination strategies under various envi-
ronmental conditions and accounting for franchisor capabilities related
to accumulated experience. In addition, the fit between the firm’s capa-
bilities, environmental conditions, and strategy combination should be
linked to some measures of firm success. A variety of franchisor capa-
bilities/resources may be subsumed under “experience” (e.g., quality of
franchise format, experience in international markets, level of system
standardization, etc.); however, it would be appropriate to examine
some of these specifically as they relate to the use of the combination
strategies. Such research would further specify the conditions under
which certain strategy combinations might be viable. Research of the
type described above would help clarify and solidify the most effective
combination strategies for international franchisors.

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