Franchising as a Strategic Marketing Plan for Small Entrepreneurs: A Test Case of the Real Estate Brokerage Industry

By Brown, Richard S. | Academy of Entrepreneurship Journal, January-July 2009 | Go to article overview
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Franchising as a Strategic Marketing Plan for Small Entrepreneurs: A Test Case of the Real Estate Brokerage Industry


Brown, Richard S., Academy of Entrepreneurship Journal


BACKGROUND

Differences in industry structure can help to explain divergences in the strategic planning that new ventures undertake. Considering that entry barriers are lower in highly fragmented industries, one would expect to find that many new entrepreneurial firms gravitate toward these industries. Amongst the topics that are key to this issue is that of a new firm's strategic planning and, more specifically, its strategic marketing. The strategic marketing plan for a new venture is crucial to firm survival for a number of reasons dealing with the nature of scarce resources in startup companies. Resources such as brand name, financial capital and founder experience are central to many startup firms. However, there are few instances where all three are present at the initial conditions of firm founding.

In order to optimize a firm's survival, founders must utilize their scarce marketing resources efficiently and effectively or risk failure through death or substandard profits. In a fragmented industry, one way to maximize firm exposure is through franchising. Although many scholars in the Strategy field have seen franchising as an issue in the context of Agency Theory, franchising can also be viewed as a technique to maximize the problem of newness (Stinchcombe 1965) that many small firms face. Therefore, franchising can address several issues pertaining to both small, new firms and fragmented industries.

First, in an environment that approaches perfect competition, franchising can consolidate sellers by placing them under a common umbrella. Secondly, franchising can allow a startup to have instant brand recognition giving it validity and legitimacy (Terreberry 1971) through acquisition. Thirdly, franchising can act as a management mechanism for the franchisor by delegating the franchisee as a de facto corporate manager even though the franchisee is technically a proprietor. This paper will treat franchising as a strategic marketing tool in the context of fragmented industry space. The test case for the industry type is the real estate brokerage industry in the United States. Real estate brokerages can be considered fragmented because there are numerous small agencies (sellers) in the marketplace. In the past 20 years, franchising has become more prevalent in the brokerage industry as firms such as Remax, Coldwell Banker, Long and Foster, and Prudential consolidate small agencies under one umbrella.

A number of research questions follow. First, are there significant differences between franchised and non-franchised brokerage firms in terms of the number of listings per agent employed, days on market (DOM) of listed properties, commission rates, and advertising presence? Secondly, and in light of the findings to the first question, can it be stated that becoming a franchised brokerage is a strategic marketing option over becoming an independent firm. In other words, franchising is a business trade off. For the recognition and standardization that the franchisee receives, he or she must incur transaction costs which have to be no more than the benefits incurred. Is this the case?

This study will use brokerage data from the Philadelphia Multiple Listing Service (MLS) to answer the preceding questions. The paper will be empirical in nature in that hypotheses will be posited and tested which correspond to these research questions. Multiple regression, T-Tests and Probit Analysis will be used to analyze the data in order to test the overarching notion that franchises in fragmented industries act as a strategic marketing option over independent agencies. This work will add to the existing literature in Marketing, Entrepreneurship and Strategic Management.

The gap in the current literature that I am addressing in this paper is in looking at the decision to franchise or not as a strategic marketing decision in an entrepreneurial setting. Although there is an extensive literature on franchising as a phenomenon, very little of it is focused on the decision of the franchisee.

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