Power in Franchising Systems: Its Impact on Aspiring Entrepreneurs

By Withey, John J.; Lee, Monle et al. | Journal of Business and Entrepreneurship, March 1998 | Go to article overview

Power in Franchising Systems: Its Impact on Aspiring Entrepreneurs


Withey, John J., Lee, Monle, Finley, Lawrence, Journal of Business and Entrepreneurship


ABSTRACT

Degree of franchisor intrusiveness, the nature of the franchise agreement, and financial arrangements with the franchisor are three areas of concern for aspiring entrepreneurs considering business format franchising as a vehicle for their initial venture. The authors argue that the setting or environment, in which the franchise is to be launched will affect perceptions about the three areas of concern regarding franchisor power. The article reviews the current literature on franchisee/franchisor relationships and develops the concept of environmental setting for franchised units. Survey data from groups of aspiring entrepreneurs in Taiwan and the United States are used to test the authors' thesis.

INTRODUCTION

Aspiring entrepreneurs (AEs) must select a business vehicle to launch their ideas. The basic choice is starting, or acquiring, a business. An acquisition may be an independent business or one that is part of a more formal business system. Businesses may be organized at any point on a continuum from totally independent and autonomous (mom and pop restaurant) to highly structured and formalized (franchisee in large restaurant chain).

One of the key variables affecting the AEs choice of business form is his/her perception of the degree of power in the chosen channel system. It is probable that the AE accepts an initial subordinate position within the channel power structure, realizing that new entries cannot immediately be the locus of significant power or influence. But, the AE will be concerned with the nature of power within the system he/she is joining. Concerns over how strong power may be, how it is administered, and how secure the key power source is, should be on the mind of any new entrepreneur.

Past research points to two possible opinions about distribution channel power. In the classic model, channel power was possessed by the manufacturer, who chose channel members who would cooperate by profitably selling to end users. Porter (1980) and economists generally have emphasized power as a controlling device within distribution channels. Power was based on size of the seller, or market dominance, and access to resources (Brill, 1994; Finley, 1984; Wilkinson, 1996). This school of thought presents power as threatening to the powerless and carries negative connotations for the AE.

More recendy, a second school of thought has emerged that casts channel power in a more positive light. The newer definition uses concepts of 'partnering' and 'strategic alliances' to describe the relationship between the powerful and the powerless. Linking up with a powerful channel member is positive, something that AEs should strive for. Working with a dominant channel member will ensure security, longevity for the entire system, and a profitable partnership for all involved (Drucker, 1997; Wilkinson, 1996; Zietlow, 1995).

FRANCHISING SYSTEMS

The business format franchising system is a lucid example of channel power. Business format franchising occurs when a franchisee replicates the entire business concept of a franchisor, including business plans, marketing strategy, operating methods, and standards of quality control. This type of franchising is distinguished from situations where the franchisee merely acts as a distributor for a franchisor's product.

It is often argued (Storholm & Scheuing, 1994) that because the franchise agreement originates with the franchisor, power is skewed toward the franchisor. Conventional indicators of channel power in franchising systems usually point to the franchisor. Such things as corporate size, degree of vertical integration, number of company stores versus franchised stores, and dominance of brand recognition, usually point to more power for the franchisor over the franchisee.

The principal thesis of the research reported here is that an AEs attraction to franchising is a function of his/her perception of franchisor power. …

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