Convert to Compete: Competitive Advantage through Conversion Franchising *

By Hoffman, Richard C.; Preble, John F. | Journal of Small Business Management, April 2003 | Go to article overview
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Convert to Compete: Competitive Advantage through Conversion Franchising *


Hoffman, Richard C., Preble, John F., Journal of Small Business Management


This paper offers an in-depth treatment of conversion franchising, where new franchisees are added to a franchised system by recruiting existing independent entrepreneurs or competitors' franchisees. The first part of the paper examines conversion franchising as a source of competitive advantage. This discussion leads to the articulation off our propositions. The second part of the paper looks at the empirical results of our study of 72 North American franchisors. Seventy-two percent of these firms use conversion franchising in their domestic markets, and 26 percent use conversions in international locales. The propositions relating to a franchisor's decision to use conversions based on increased levels of experience, economic resources, and to a lesser extent skills! knowledge, all were supported. These results lend support to the literature indicating that resources and skills serve as sources of competitive advantage. Implications for research and practice are discussed.

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Franchising is emerging as a preferred method of doing business throughout the global economy (Swartz 1994). A recent study by the International Franchise Association estimated that, by early in the new millennium, nearly 50 percent of every U.S. consumer dollar would have been spent in franchised locations (Russell 1997). Business franchising has spread rapidly to most continents during the past decade (Preble and Hoffman 1995). Given the widespread use of franchising, how can firms leverage better this method of doing business? Some firms have gained increased advantage by adding mobility to their franchised operation by bringing their products/services to the customer where and when they demand them (Preble and Hoffman 1998). But increasingly, firms are turning to conversion franchising as a way of enhancing growth and of gaining competitive advantage in multiple markets (Connell 1999; Hoffman and Preble 2000).

Conversion franchising occurs when a franchisor adds new franchisees to the system by recruiting existing independent businesses or competitors' franchisees. The purpose of this paper is to examine closely this emerging phenomenon by drawing on relevant literature and by reporting the results of an exploratory study of conversion franchising. Before discussing some of the competitive advantages that can accrue from employing conversion franchising, it first is instructive to review some of the advantages of traditional franchising.

Franchising and Its Advantages

Franchising's longevity and success also may be due to the fact that, organizationally, it represents a collaborative alliance. The alliance depends on the cooperation of two entrepreneurs (franchisor/franchisee) in order to be successful (Shane and Hoy 1996). Further, these partners depend on cooperation among a network of entrepreneurs to advance common methods and goals (Baucus et al. 1996), like the sharing of information on innovations that potentially could benefit all franchise partners (Gassenheimer et al. 1996).

Franchising traditionally has offered many competitive advantages over independently formed and operated businesses. The franchisor has access to capital (Bercovitz 1998) at lower risk; cost sharing with the franchisee; rapid market penetration at a relatively lower cost than establishing one's own distribution system; economies of scale; a motivated workforce of indigenous entrepreneurs; and reduced monitoring and control costs (Fladmoe-Lindquist and Jacque 1995). The franchisee gets an opportunity to enter a business at less cost with a proven product or service and brand name. Additionally, the franchisee frequently receives management assistance in the areas of business location, facilities design, operating procedures, purchasing, and marketing (Hoffman and Preble 1991). These advantages have been born out by a superior survival rate for franchising over independent ventures (Russell 1997). Next, we turn to a discussion of conversion franchising and its competitive advantages.

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