Franchising Dilemma 2: Control versus Independent Brand Image
In addition to the fast food restaurant business, a diverse range of retail companies have also become aware of the advantages for international expansion that the franchise model may bring. This approach has been adopted not only by niche retailers, for example Benetton, Body Shop, and Yves Rocher, but also other retailers such as Casino (France), GIB (Belgium), and UK stores Marks & Spencer and BHS. Of course this has not been the only mode of expansion for these organizations; they have employed other strategies in parallel with franchising.
Franchising theory is based on the concept of the principal-agent relationship where one party (the principal) delegates work to another (the agent) who performs the work on a day-to-day basis. In the standard theory of the firm, under the divorce of ownership from control, shareholders represent the principals in the relationship and management the agents. In the context of the principal-agent relationship, agency theory highlights the importance of the information transfer process and associated monitoring costs. This information problem arises in the principal-agent relationship because agents, being in day-to-day control of a company, have detailed knowledge of its operations. The principals have neither access to this knowledge, nor, in many cases, the ability to interpret the information, even if access was perfect. Quinn and Doherty contend that the franchisor-franchisee relationship parallels the principal-agent relationship, thus allowing agency theory to provide insights into international retail franchise activity (Quinn and Doherty, 2000).
One of the fundamental aspects of agency theory is information asymmetry. For example it can occur where differing levels of economic development exist between foreign and domestic markets, where there are differences in retail regulation with regard to employment law, planning regulations, and opening hours, and where the internationalizing firm's ability to assess the risk of the foreign venture is limited due to these complexities. As such, the franchisee (the agent) has much more detailed knowledge of operations in the foreign market than the franchisor (principal).
Other examples arise where cultural practices of both consumers and management differ between the home and host countries, where human resource management practices differ, and where the degree to which domestic managers would be exported to run and better monitor the foreign operation varies.
Given the geographical and cultural distance factors, it may be proposed that supporting and maintaining an international franchise network is considered particularly difficult, and that subsequently the cost of providing franchise support is usually higher in an international as opposed to a domestic setting. In an international franchise network, it may be more feasible to use coercive sources of power.
Agency theory, on the other hand, suggests that the control and power base should rest with the franchisor. This is due to the risk of opportunism and moral hazard as a result of the existence of the significant amounts of intangible assets and the potentially high information asymmetry problem that is characteristic of the retail sector in particular. Of the types of franchise agreements that can be chosen, master/area franchising and joint venture franchising offer the retailer the greater amount of control and power. Coupled with the appropriate type of franchise agreement should be a stringently enforced franchise contract to protect the sector-specific intangible assets. However standards may be difficult to maintain in practice.
When the question of international expansion arises, a company should begin by assessing their strengths and weaknesses to determine their preparedness for it. Whether the franchisor completes the assessment or uses outside resources, evaluation should include:
· competitive capabilities in the domestic market,
· motivation for going international,
· commitment of owners and top management to international expansion,
· product readiness for foreign markets,
· skill, knowledge, and resources to expand, and
· experience and training.
This assessment is only a beginning and there is much more to consider before a sound decision can be reached.
Though the domestic system may use a long and well-established support infrastructure that allows reasonable and effective control to manage the system, the cost involved to build the same degree of infrastructure internationally is often exorbitant. By choosing exclusive area development as a format for international expansion, a territory of sufficient scale is awarded so that the franchisee's economic model can fund a professional infrastructure to self-support the business. The franchisee can factor in functional areas such as training, marketing, and purchasing. Using this method, the franchisor provides direct and indirect guidance and support to local professionals.
Thus this type of franchising supports two important tenets of successful international expansion: "Think local-act local," and "build franchisee self-sufficiency." Both tenets lead to high degrees of efficiency and effectiveness for both the franchisee and franchisor. Area development also benefits the franchisor by usually not discounting fees or royalties.
Hybrid subfranchising combines the desirable traits of master franchising with key elements of exclusive area development. It awards a large territory to a master franchisee who must first operate a minimum number of outlets and maintain a minimum percent of all operated shops. Additionally, subfranchising activity is limited to exclusive area subdevelopers. The rights for subfranchising are awarded jointly by the franchisor and master franchisee. Sub-franchisees are granted exclusive territory with a shop development requirement that exceeds a set minimum. Many of the negatives associated with master franchising are avoided using this method (Evankovich, 2003).