8-Sep-14

1. 8-Sep-14 | 1 Session I: The Franchisor’s Perspective Dr. Evelien Croonen e.p.m.croonen@rug.nl Lecture at the University of Rennes 1, November 2o12

2. Contents for today • Gettingtoknoweachother… • Very brief (!) introductionto franchising • Franchising in the Netherlands • The franchisor’sperspective • Practical case aboutEat&Enjoy

3. Getting to know each other… (1) University of Groningen (The Netherlands) Faculty of Economics & Business +/-28.000 studs. +/- 5.000 studs.

4. Getting to know each other… (2) • My teaching: • Course coordinatorandlecturerfor courses on small business, entrepreneurship, andinnovation. • Coordinator of ‘Honours Bachelor programme’. • My research (includingall kinds of projectswith consultants andpractitioners): • Franchising; strategyand management frombothfranchisors’ andfranchisees’ perspectives.

5. Getting to know each other… (3) • Please, write down on a piece of paper: • Your name • The brand name of ‘your’ franchise system and the sector • Your position in the organization • The size of ‘your’ system in # units

6. Our focus, e.g.: Introduction to franchising Price (1997): • Product-distribution franchising (e.g. retailing) • Trade-mark franchising (e.g. soft drinks) • Business format franchising (e.g. fast food, retailing) ‘First generation’ ‘Second generation’

7. Business format franchising • Exchange of ‘business format’ • Two legally and financially independent firms • Franchisor owns business format (IPR) • Franchiseepaysfeesand/or royalties • Franchisorsupervisesuse of business format byfranchisees

8. Directly visible to consumers Internal procedures Definition of a ‘business format’ • Four elements of a business format (Kaufmann & Eroglu, 1998): • Product/service deliverables • Benefit communicators • System identifiers • Format facilitators

9. Franchising in The Netherlands (Data provided by the Dutch Franchising Association: NFV; there are differences in databases…)

10. Developments in Dutch sectors (# systems) Retail food Retail non-food Services Hospitality Other (indices provided by EIM, NFV, Rabobank in May 2011)

11. But this has grown now! The economic impact of franchising in The Netherlands Figures for 2008; Van Essen & Pleijster (2009)

12. The Franchisor’s Perspective

13. Management challenges Bradach’s (1998) four ‘management challenges’: • Uniformity of the system • Local Responsiveness • System wide adaptation • Adding units to the system Two sides of the same coin: ‘Franchise system’s centralization level’

14. Five strategic franchise system characteristics Croonen (2006, inspired by Bradach, 1998): • Positioning in the market • Level of centralization • Rate of innovation • Strategic participation by franchisees • Type of growth objectives

15. Class discussion (1) • What choices does your franchise organization make on these five franchise system characteristics? With what effects? • Also think about possible interrelationships between the franchise system characteristics!

16. Interrelationships between franchise system characteristics Centralization level Positioning Rate of innovation Strategic participation by franchisees Type of growth objectives

17. Class discussion (2) • Has your franchise organization ever tried to introduce (major) changes in one or more of these franchise system characteristics? • If no, why not? Do you think changes would be desirable? What factors would impact franchisee responses to such changes? • If yes, how did the franchisees respond? Why?

18. Franchisee responses to change: the EVLN-typology Active ‘Considerate Voice’ ‘Aggressive Voice’ ‘Exit’ Destructive Constructive ‘Neglect’ ‘Loyalty’ Passive Source: Hagedoorn et al. (1999)

19. Response antecedents on the basis of the EVLN literature • EVLN research so far: antecedents of expected responses to hypothetical ‘problematic events’ in various settings (e.g. Hirschman, 1970; Hagedoorn et al., 1999; Parhankangas & Landström, 2006). • Possible antecedents on the basis of this: • Relationship satisfaction • Alternative attractiveness • Switching costs

20. Response antecedents on the basis of change literature Three groups of response antecedents (e.g. Mishra & Spreitzer, 1998; Armenakis & Bedeian, 1999, Bouckenooghe, 2010), namely change recipient’s perception of: • The contents of the changes. • The way the changes are implemented (process). • The organizational context.

21. Methodology Croonen (2006): • Case studies of eight ‘strategic change processes’ (SCPs) in four Duth drugstore systems. • All SCPs included changes in the franchise system characteristics. • For each SCP I interviewed several franchisees (total of 74 interviews) about their perceptions and behaviors during the SCP.

22. Case 1: The DA-system Case 2: The STIP-system SCP1 SCP 2 SCP 3 SCP 4 CV L N AV E CV L N AV E CV L N AV E CV L N AV E CV L N AV E CV L N AV E CV L N AV E CV L N AV E End conclusion STIP End conclusion DA Case 3: The ETOS-system Case 4: The UED-system SCP 5 SCP 6 SCP 7 SCP8 CV L N AVE CV L NAV E CV L N AV E CV L N AV E CV L N AVE CV L N AVE CV L N AV E CV L N AV E End conclusion ETOS End conclusion UED ‘Final’ conclusions = Theoretical replication = Literal replication SCP= strategic change process CV= considerate voice L= loyalty N= neglect AV= aggressive voice E= exit

23. Example: SCP2: introducing the ‘DA-2005’ format • New format togive DA • a lessexpensivepositioning • in the drugstore market • New franchise contract to • increaseDA’scentralization level (To be discussed in more detail on Wednesday)

24. Example: SCP6 the ‘Four Worlds format’ at ETOS • Togive ETOS a more • luxurious positioning • in the drugstore market • More enforcement of rules (thusincreasingcentralization)

25. +/- 20% for SCP2 ‘Ambiguity’ Overall results (1) Active ‘Considerate Voice’ ‘Aggressive Voice’ ‘Exit’ Constructive Destructive ‘Neglect’ ‘Loyalty’ Passive And: franchisees can move from one response to another

26. Overall results (2) Type and number of response antecedents depend on system’s centralization level: • Low centralization level: • Only expected profitability and ‘personal trust’ are important. • High centralization level: • Expected profitability. • ‘Personal trust’ AND ‘franchise system trust’. • Expected satisfaction on positioning, centralization per se, and franchisor support. • Alternatives and switching costs only become important in case of expected franchisee dissatisfaction.

27. Implications for franchisors • Franchisorsshouldbeaware of the possibility of different franchisee responses (e.g. ambiguity!). • A high and/or increasingcentralization level makes franchise relationships more complex to manage: • Potentialproblemsduetofranchiseeheterogeneity (‘franchiseestrategicorientations’) • Importance of franchisee trust Focus of following discussion

28. Franchisee trust Franchisee trust is: the willingness of a franchisee to be vulnerable to the actions of its franchisor based on the expectation that the franchisor will perform certain actions..., irrespective of the franchisee’s ability to monitor or control the franchisor (cf. Mayer et al. 1995).

29. “Here’s your lemonade and here’s some information on my franchising opportunities”

30. Dimensions and levels of franchisee trust Following Nooteboom(1999) and Zaheer et al. (1998): Two dimensions: competence and intentional trust Two levels of trust: personal and organizational Focus for today

31. Class discussion (3) • What is generally the level of trust that ‘your’ franchisees have in your franchise organization? Or are there many differences in trust levels between franchisees? • In your opinion; what makes ‘your’ franchisees trust or distrust your franchise organization? How can franchisors manage franchisee trust levels?

32. Franchisee trust • Factors impactingfranchisees’ organizational trust • (exploratorystudyby Croonen, 2010): • The organization of the Franchise Advisory Council • (FAC). • The presence of company-owned units (optimal #?). • The way of calculatingfees. • Procedures regardingautomatically sent-in goods. • The role of thirdparties. See the research presentation tomorrow!

33. Overall conclusions on the franchisor’s perspective (1) • There are five strategic ‘franchise system characteristics’ on which franchisors have to make decisions throughout the life-cycles of their franchise systems. • These system characteristics are interrelated!

34. Overall conclusions on the franchisor’s perspective (2) • In case of changing the characteristics, franchisors have to be aware of different franchisee responses. • The more centralized the franchise system, the more factors franchisees take into account in their responses. Important: different dimensions of satisfaction and organizational trust! • Franchisors can use several instruments to create and/or maintain trust among their franchisees.

35. Franchising as anEntrepreneurial GrowthStrategy: How Global Expansion of Eat & Enjoy Went Sour

36. Case discussion questions (1) • Why is franchising a potentiallyattractive • (international) growthstrategyfor entrepreneurs with a successful business concept? • What kinds of strategicand managerial challengesdid Marc and Susan face in setting up anddevelopingtheir chain of culinary gift shops in the Netherlands?

37. Case discussion questions (2) • What kinds of strategicand managerial challengesdid Marc and Susan face in entering the different internationalmarkets? • How do youevaluate Marc andSusan’sstrategicand managerial plansandtheir way of implementingthem? • Which factors have ultimately led toE&E’sbankruptcy in 2007, andwhatcould different stakeholders have donetopreventthis?

38. Questions?

39. Thankyouforyour attention! • Please, don’tforget: • To read the Teaching Case ‘Dutch • Druggists in Distressbefore the start of • Wednesday’ssession! • To bring your laptops (at least one per • group)!