Conceptualizing Industry Variations in the Survival of Franchising Systems

Article excerpt

ABSTRACT

Young firms grow faster through franchising than via the traditional organization. However, research shows that as much as three fourths of new franchise systems die within ten years of establishment. Although recent franchising system survival research has recognized industry as a potentially important variable, a theory for its influence has not been available. This paper develops propositions linking industry variations to the survival of franchising systems. Specifically, it suggests that franchising system survival is negatively related to the degree of decentralization of critical decision tasks, brand-space proliferation, and knowledge intensity, but positively related to labor intensity, cost of the material factor, specific investments and revenue variability. Implications of this theory for both prospective franchisors and franchisees are discussed.

INTRODUCTION

The study of firm growth and survival has been a central concern in entrepreneurship research. Increasing support is emerging for the view that contractual, hybrid forms of organizations such as franchising, strategic alliances, and licensing are viable alternatives to the traditional, hierarchical form of organization (e.g., Larson, 1992). In particular, franchising is seen as a means of faster growth relative to the traditional form of organization for young firms (Caves & Murphy, 1976). Franchising "creates opportunities for thousands of budding entrepreneurs every year" (Combs & Ketchen, 2003, p. 443), and "over 200 new franchisors appear in dozens of industries" (Michael, 1998, p. 162). However, Shane (1996) showed that as much as three fourths of new franchise systems die within ten years of establishment. Likewise, Bates (1998, p. 122) found that "franchises are dramatically less profitable and their survival prospects are worse than those of independent business start-ups." The low rates of survival of both franchising systems as well as individual outlets seem puzzling given the popularity of franchising among new entrepreneurs. Perhaps budding entrepreneurs lack an understanding of realistic prospects of franchising.

In order to prevent wastage of entrepreneurs' costly efforts, identification of variables that might influence the survival of new franchising systems is important. Although recent franchising system survival research appears to have recognized industry as a potentially influential variable (e.g., Bates, 1998; Michael, 1996; Shane, 1996), its role has been limited to a control variable. Perhaps what is needed is a theory explaining why differences in industry may be crucial to franchising system survival. This paper attempts to fill this important theoretical void.

The paper begins with a brief review of franchising and its two dominant viewpoints: the resource-scarcity thesis and the administrative-efficiency thesis. In light of these theses, a theoretical framework is developed involving several factors that might lead to important industry differences influencing franchising system survival. The industry variables are: the allocation of decision tasks, brand-space proliferation, labor intensity, the cost of the material factor, specific investment, revenue variability, and knowledge intensity. Propositions are presented suggesting the effect of each variable. Finally, important implications of this framework for franchising research and practice are discussed.

BACKGROUND OF FRANCHISING

Franchising involves granting exclusive rights for the local sale of a service or trademarked product and receiving in return a fee and/or royalty and conformance to quality standards, price controls, and other practices (Mathewson & Winter, 1985). A franchisor thus enjoys the benefits of revenue and control without having to make the investments required for ownership. The franchisee receives many services including training, advertising and, frequently, financing or assistance in obtaining finance (Bumstien, 1968-69; Woll, 1968-69). …