Standardization versus entrepreneurial behavior: the case of enabling and coercive control in a franchise system

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Standardization versus entrepreneurial behavior: the case of enabling and coercive control in a franchise system

June, 2016

Master Thesis MSc Business Administration Track Organizational & Management Control

University of Groningen Faculty of Economics and Business

by

Mariska de Winter - S2114828 m.b.de.winter@student.rug.nl

Word Count: 11.541 excl. references and appendix 13.487 incl. references and appendix

Supervisor: Mr. dr. W. Kaufmann Co-assessor: dr. H.J. van Elten

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ABSTRACT

This research investigates how coercive and enabling control affect standardization and entrepreneurial behavior of franchisees and employees in a franchise system. Using Adler and Borys’

(1996) enabling and coercive control framework, the objective of this research is to enhance our knowledge about coercive and enabling control elements in a franchise setting and the effect on the level of standardization and entrepreneurial behavior. Because empirical insights are still missing in the literature, a case study is conducted. Fifteen semi-structured interviews were conducted with franchisees and employees within the retail franchise system of Jumbo. It appears that enabling and coercive control can be used jointly within a franchise system. The belief in the business format by the franchisees and the room for some level of entrepreneurship, sustain the relationship. Concluded, both franchisors and franchisees appreciate some level of entrepreneurial freedom, but also agree on the need for standardization in key areas.

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INTRODUCTION

It is generally accepted that well performing management control systems (MCS) are necessary for organizations (Merchant & van der Stede, 2012). MCSs provide managers with tools to guide people in the desired direction in order to ensure that they achieve organizational goals (Chenhall, 2003). This is important because employees make things happen within an organization and have a strong hold on achieving organizational goals. Despite the fact that management control (MC) prevents reputation damage, provides guidance, and possibly averts organizational failure (Merchant & van der Stede, 2012), there are also harmful consequences. For example, MC can foster dissatisfaction, hinder creativity, and demotivate employees (Hoy & Sweetland, 2001).

This double effect indicates a tension between efficiency and flexibility and has been investigated by several researchers (e.g. Chenhall, 2003; Ouchi, 1979; Simons, 1995). Adler and Borys (1996) made a distinction between coercive and enabling control. Coercive control is often referred to as the top-down approach, using rules and procedures to coerce people’s compliance and efforts. It highlights preplanning and centralization and is often used in mechanistic organizational structures within a stable environment. In contrast, enabling control helps committed employees to do their jobs more effectively and enables people to better manage their work tasks. It puts employees in a position to deal directly with the unavoidable contingencies in their work, instead of following certain rules laid upon them by higher management. This enabling and coercive framework of Adler and Borys (1996) supports in identifying why and how MCS might be used to provide, rather than to constrain, subunits by highlighting four system design characteristics. These four characteristics are:

repair, internal transparency, global transparency, and flexibility and can be used to compare enabling and coercive control (Ahrens & Chapman, 2004).

The framework of Adler and Borys (1996) is used within different contexts and areas. For example within a school structure (Hoy & Sweetland, 2001). These authors argued that schools can be designed with hierarchical structures and procedures that help rather than hinder control, and refer to enabling bureaucracy. Proença (2010) examines the nature of self-managed work teams within manufacturing firms, by considering both coercive and enabling control. However, no investigation is done in the franchise context. This is remarkable because franchising is designed around a standardized business format and one of the most important elements are the rules and regulations for the entire franchise system. Franchisors want to protect their business format in order to maintain uniformity toward customers (Brand & Croonen, 2010) and therefore, express coercive control in order to monitor franchisees. However, franchisees operate in a local market and want to respond to local needs. Therefore, in order to deal with these changing circumstances in their local environment, franchisees prefer an enabling control system. However, less is known about this phenomenon and therefore, this research addresses this gap by investigating the enabling and coercive control within business format franchising. This is important because, although control elements are not directly

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5 visible to customers, control elements include the management and operational structure of the units and its entire franchise system (Kaufmann & Eroglu, 1998).

Business format franchising is composed of a franchisor and a franchisee. The franchisor creates a business format and duplicates it by entering into contractual relationships with franchisees (Brand & Croonen, 2010). To enhance consistency within the franchise system, the business format franchise contract consists of detailed requirements that franchisees closely have to follow (Yin &

Zajac, 2004). These rules and regulations within the franchise contract are examples of coercive control expressed by the franchisor to the franchisee. In this way, the franchisor is able to prevent quality deterioration, to protect the brand name and to ensure a high level of standardization. This is an essential and intangible asset to ensure stability and uniformity for customers (Pizanti & Lerner, 2003). A high degree of standardization allows for a consistent image in the market and results in economies of scale (Brand & Croonen, 2010). In brief, the use of coercive control results in a higher level of standardization.

In contrast, franchisees operate in different local market environments and need some flexibility and an opportunity to innovate (Falbe, Dandridge & Kumar, 1998). Franchisees are an important source of local adaptation and system-wide innovation (Kaufmann & Eroglu, 1998), and create a competitive advantage (Baucus, Baucus & Human, 1996). For example, it was a franchisee that came up with the idea of the Big Mac (Webber, 2013). Enabling control provide franchisees at least some discretion over the use of MC elements so that they can use their entrepreneurial behavior to attend to local needs. The level of entrepreneurial behavior can be restricted by the use of coercive control, whereas enabling control allows more freedom. Therefore, enabling control is more suitable in contrast to coercive control, and will increase the level of entrepreneurial behavior.

This means that enabling and coercive control can influence both the levels of standardization and entrepreneurial behavior. Where coercive control allows for more standardization to prevent quality deterioration (Pizanti & Lerner, 2003), and allows for economics of scale (Kaufmann &

Eroglu, 1998), at the same time, coercive control hampers entrepreneurial behavior which is essential to meet the local needs of customers. The other way around is also applicable. Where enabling control is more suitable for increasing entrepreneurial behavior to meet local market needs (Falbe et al., 1998) and provides competitive advantages (Baucus et al., 1996), at the same time, this hampers and negatively influences the level of standardization.

To gain insight into this topic, this research investigates how a food retail franchise system is dealing with coercive and enabling control. Given the increasing interest in the franchising industry and the contribution of entrepreneurial behavior to economic wealth creation and the economic importance of the franchise industry (Shane & Venkataraman, 2000), it is relevant to understand how franchisees and employees deal with the control of the franchisor and how this affects their level of standardization and entrepreneurial behavior (Croonen, Brand & Huizingh, 2014). Empirical research is lacking which examines how coercive or enabling control influences this relationship. Such

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6 empirical insights enhance our knowledge about coercive and enabling control elements. This also provide franchisors with more information on how to balance standardization versus entrepreneurial behavior.

Based on the literature of Adler and Borys (1996) about enabling and coercive control the following research question will be answered:

How to balance standardization versus entrepreneurial behavior in the case of enabling or coercive control in a franchise system?

To answer the research question, a case study is conducted within the food retail franchise business format of ‘Jumbo’. Jumbo is the largest food retail franchisor of the Netherlands. On the one hand, many franchisees want to respond to local needs by using their entrepreneurial behavior. On the other hand, it appears that there is also a high level of standardization because of the traditional company-owned structure. Therefore, Jumbo is the appropriate franchise business format to investigate how enabling or coercive control affect the level of standardization and entrepreneurial behavior and how the franchisor has to deal with this balance.

The remainder of this paper is structured as follows. In the next section, the literature about enabling and coercive control and franchising is reviewed. The third section includes the methodology and describes how this research is conducted. This is followed by the results section. In the last section, the findings are discussed and conclusions are given. This is followed by the limitations of the study and directions for future research are provided.

LITERATURE REVIEW

A detailed description of the literature about the main concepts of the study is given. First of all, the literature about management control is explained, followed by an investigation of the franchise literature. Finally, both are combined and an analysis about the relationship between enabling versus coercive control, and standardization versus entrepreneurial behavior is given.

Management control system

MCSs are defined broadly to contain everything managers perform to ensure that their organization’s plans and strategies are executed (Merchant & van der Stede, 2012). The definition of MCS has changed over the years. Where the narrow focus has started on the delivery of financial quantifiable and formal information for assisting managerial decision making, this focus has changed toward a broader scope that embraces more information. This broader scope includes external information related to customers, competitors, and non-financial information linked to processes and controls (Chenhall, 2003). Conventionally, some authors have stated that MCS are perceived as a passive tool only to provide information to assist managers (Chenhall, 2003), while a more sociological orientation views MCS as a more active control mechanism (Simons, 1995).

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7 Malmi and Brown (2008) suggest that systems, practices, values, rules and other activities meant to guide employee behavior, have to be called management controls. And if these are complete systems, then they have to be called MCSs. This behavioral orientation in directing employees is also important within franchise systems. Because franchisees run their own unit under the brand name of the franchisor, the franchisor needs systems, rules and practices to direct and control the behavior of the franchisees. The control systems are important for the franchisor in protecting his brand name and to prevent quality deterioration (Quinn & Doherty, 2000). Therefore, this paper uses the broader definition of MCS by Malmi and Brown (2008), because the aim of this paper is to provide a broader understanding of management control within a franchise system and how this affects the level of standardization and entrepreneurial behavior.

Coercive and enabling control

To structure the problem of control within business format franchising, this study builds on Adler and Borys’ (1996) description of formal controls. These authors distinguish two types of formalization in bureaucracies: coercive and enabling formalization. Coercive formalization describes organizational rules aimed for producing a reliable system (Ahrens & Chapman, 2004). Employees have limited options for action and have to focus on the preplanned standards and objectives (Anthony, 1965). In contrast, within enabling formalization organizational rules are defined to enable employees to deal more successfully with unavoidable incidents and to allow them to make some improvements (Ahrens & Chapman, 2004).

Ahrens and Chapman (2004) draw on these two types of formalization and make a distinction between a coercive use and an enabling use of a MCS. A one-sided relationship between management and their subunits is a coercive use of MCS. Management specifies a fixed range of standards and operational rules in order to impose them on their subunits. These subunits have only little room in adapting local needs and emerging situations. An enabling use, on the other hand, is aimed to stimulate interactions between management and their subunits. Subunits have at least some freedom over the use of particular MC elements and can attend to local needs and changing circumstances, without undermining the hierarchical relationship (van der Meer-Kooistra & Scapens, 2008). Four integrated design characteristics are presented within the framework of Adler and Borys (1996). Based on this, enabling control systems can be defined in terms of repair, internal transparency, global transparency, and flexibility. Each characteristic will be discussed in further detail.

Firstly, repair stimulates employees to discuss about practical problems with standards, rules, and the control systems. The standards and rules, translated in standard costs or piece rates, are logical for financial experts but irrelevant to most employees (van der Veeken & Wouters, 2002). Repair is about the possibility and permission for employees to modify this formal system. In case of a problem or breakdown, employees have capabilities for fixing them (Jordan & Messner, 2012).

Secondly, internal transparency means that members have a good visibility of the internal

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8 processes and have an understanding of the logic of the system (Jordan & Messner, 2012). For example, users can highlight the key components of processes, have an understanding of the underlying reason for certain control elements, and have knowledge about their performance. For a successful design, employees should have access to target information, but without an information overload (Ahrens & Chapman, 2004). Therefore, target values need to be communicated to the employees (Jordan & Messner, 2012).

The third characteristic of an enabling system is global transparency and provides visibility for users about their performance compared with the whole organization. Budgets and other key targets are available and communicated more widely toward other units (Ahrens & Chapman, 2004). These insights are not only available during the budgeting and review stage, but during the entire period.

Finally, flexibility refers to the employees’ discretion over the use of control systems and the possibility to turn the system off (Ahrens & Chapman, 2004). For example, specific procedures can be adjusted in order to suit the individual project within a process control system (Jørgensen & Messner, 2009).

The main differences between a coercive control and an enabling control are investigated, based on these four characteristics mentioned by Adler and Borys (1996). These four characteristics are important to measure whether coercive or enabling control elements are applied within business format franchising. Now the main constructs have been clarified, the study will proceed with the specific investigation about enabling and coercive control in franchising.

Enabling and coercive control within franchising

The element of control is problematic within business format franchising. On the one hand, the franchisor must control his business format. However, on the other hand, the franchisees should also have some element of freedom in running their own business (Webber, 2013). Within business format franchising, there are two important players, who prefer a different use of the management control system.

Firstly, the franchisor is a company or person that has established a business model and a profitable system through experience, and allows other companies or persons through a license to operate under the franchisor’s brand mark (Webber, 2013). The franchisor is the owner of a business format, which includes a uniform identity to customers with detailed internal procedures (Brand &

Croonen, 2010), and replicates this format via a contractual relationship with franchisees. Because franchisors want to protect their franchise business format (Dada & Watson, 2013), the franchisor has to control the franchisees. This top-down approach, by using rules and procedures to press franchisees compliance and efforts (Kaufmann & Eroglu, 1998), is described as coercive control (Ahrens &

Chapman, 2004). Franchisors who use MCSs in a coercive way specify a fixed range of rules, procedures, and standards (van der Meer-Kooistra & Scapens, 2008) to control franchisees.

Secondly, a franchisee is a company or person that accepts the franchise agreement to

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9 purchase the right to operate an autonomous business using the knowledge, expertise and brand name.

In exchange, the franchisee has to pay a franchise fee (Webber, 2013). Because these franchisees are self-financed business owners under the business format of the franchisor (Truss, 2004), franchisees are highly motivated to seek for new chances and better serve local market conditions. Franchisees often spot threats and opportunities before they are observed by the franchisor. By providing suggestions for improvement, for example about the control system, the franchisee secures a better future for himself, but also for the entire system (Webber, 2013). Van der Meer-Kooistra and Scapens (2008) explain that an enabling use of a MCS allows subunits (i.e. franchisees) at least some discretion over the use of specific MC elements so that they can fit to local needs and to changing circumstances, without undermining the hierarchical relationship (i.e. with the franchisor). Therefore, franchisees prefer an enabling use of the control system.

The most important reason why franchisors want to franchise their business format is the growth potential, and the belief that it is a low-cost option (Kaufmann & Eroglu, 1998). To sustain this low-cost option, coercive control allows for uniformity across the different franchise units. Another benefit to the franchisor is that franchising is mainly funded by external financial sources, specifically by the franchisees’ investment. Since the franchisee materially invested in the success of the operation, franchisees are highly motivated to increase their returns. Finally, the franchisees operate in their own locality, meaning that they also bring local knowledge (Webber, 2013). Therefore, an enabling use of the management control system is more appropriate in order to adapt local needs. However, this can also bring some drawbacks for franchisors. Disadvantages for the franchisor are reduced ownership, split profits, change problems, and agency problems, i.e. free-riding (Webber, 2013). To reduce these disadvantages, the franchisor expresses coercive control toward the franchisees in order to control the business format.

There are also some benefits and disadvantages for franchisees. The greatest benefit is that franchisees will be joining a franchise whose business model has been tried and tested over a longer period of time (Kaufmann & Eroglu, 1998). Due to this tried and tested format and recognized brand name, the bank is more willing to lend money (Webber, 2013). Finally, franchisees can benefit from the economies of scale (Dada, Watson & Kirby, 2012). The last benefit for franchisees, is that they are business owner under a well-known business format and operate in their local environment. Therefore, franchisees are more familiar with the local market conditions. However, there are also disadvantages for the franchisee in joining the business format franchising. Franchisees have to pay an ongoing fee, face the risk of brand damage, and there are exit restrictions. Maybe one of the greatest shortcomings is restricted entrepreneurship. Because the franchisor has to control the business format, rules, and procedures are described. This means that entrepreneurial behavior is restricted and franchisees are less able to adapt local market needs.

The concept of franchising is not the most flexible of systems, because the concept is based on standardized business methods and operations manuals (Kaufmann & Eroglu, 1998), but franchisees

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10 need some room to operate in their own unit (Dada et al., 2012). When franchisors use MCSs in a coercive way, they specify a fixed range of rules, procedures, and standards (van der Meer-Kooistra &

Scapens, 2008) to control franchisees. The franchisor is able to protect the level of standardization, but at the same time, this hampers franchisees’ entrepreneurial behavior. However, when control is used in enabling way, franchisees have at least some discretion over the use of specific MC elements and can meet local needs. This allows for more entrepreneurial behavior, but hampers the level of standardization. The concepts of standardization and entrepreneurial behavior and the effect of coercive and enabling control are analyzed in further detail.

Control and standardization

The efficiency of daily operational activities requires standardization (van der Meer-Kooistra

& Scapens, 2008). Following these authors, standardization gives the option for cost savings and makes comprehensive planning possible. Also traditional management controls can be used, including implementing and monitoring differences from standards and the cycle of planning. Standardization of the business format has a positive effect on cost reduction related to monitoring (Kaufmann & Eroglu, 1998). A central concern in managing the entire franchise system for optimal output is quality control of the operational activities. A coercive control system allows the franchisor for a higher level of standardization in order to better monitor the franchisees. This gives the franchisor the ability to identify substandard performance of individual franchisees. By the use of coercive management control, the franchisor is able to prevent quality deterioration, to protect the brand name and to ensure a high level of standardization.

Besides planning and monitoring systems, inputs and products can also be standardized for franchisees. One of the key advantages of franchised businesses are the economies of scale (Pardo-del- Val, Martínez-Fuentes, López-Sánchez & Minguela-Rata, 2014). Also, the franchisor has a higher bargaining power toward suppliers. Buying all the same products from the same suppliers results in lower production and distribution costs. These buying efficiencies provide consumers with lower prices of products (Kaufmann & Eroglu, 1998), and results for each franchisee in higher operating margins (Pardo-del-Val et al., 2014). When inputs and products are standardized, the franchisor is able to control the franchisees. Another benefit of standardizing the franchise system is the use of the same internal system. With the use of the same standardized methods for reporting earnings and payments of royalties, there are no additional costs. It also permits efficient information transfers between franchisor and franchisee (Kaufmann & Eroglu, 1998). Besides these internal systems, products, and operational activities for cost minimization, more important elements are standardized. The image of the franchise units can also be standardized to obtain consistency for consumers (Brand & Croonen, 2010). For example, the design, clothes, and colors, can all be standardized to deliver uniformity within the franchise system.

In brief, the fixed range of procedures and standards, to prevent for example the free riding

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11 problem and protect the brand name (Kaufmann & Eroglu, 1998), request for a coercive use of the management control system. Franchisees have to follow the rules, procedures, and standards imposed by the franchisor and therefore, the franchisor can easily monitor the franchisees by using coercive control. However, the lack of a market fit is the strongest argument against standardization (Brand &

Croonen, 2010). Under some conditions, allowing franchisees to customize standardized products, procedures, and systems may deliver system-wide revenue benefits that exceed the costs of modifications.

Control and entrepreneurial behavior

Various researchers have defined entrepreneurship. For example, Antoncic and Hisrich (2004) defined entrepreneurship as “the emergent behavioral intentions and behavior of organization which deviate from the customary way of doing business” (p.520). Shane and Venkataraman (2000) emphasized the discovery and exploitation of opportunities. Within this paper, the definition of Croonen et al. (2014) is used. The authors defined entrepreneurship as “the renewal activities that franchisees proactively initiate in their own units while operating under their franchisor’s business format” (p.4). This definition is especially suitable for entrepreneurial franchisee behaviors, while the other definitions are more general.

Franchisees’ rewards are related to their unit performance and tend to give a stronger incentive (Yin & Zajac, 2004). That is the reason why franchisees are searching for new opportunities to better serve the local market conditions and to increase their financial performance (Bradach, 1997). To adapt these local market needs, an enabling use of management control is more suitable. Markets differ in income, ethnical background, levels of competition, and consumer taste, which reduce the advantages of standardization (Cox & Mason, 2007). In most cases, franchisees are familiar in the local market and thus well aware of local needs (Combs, Ketchen & Hoover, 2004). It would be beneficial for the franchise system to allow franchisees to adapt to needs in their local market (Kaufmann & Eroglu, 1998). In brief, an enabling use of control elements result in higher level of entrepreneurial behavior and allows franchisees to adapt to local market needs.

Illustrations of entrepreneurial behaviors by franchises are reported in the literature, mostly within the food industry. For example, the Big Mac, Egg McMuffin, and Filet-O-Fish are all originally developed by McDonald’s franchisees (Bradach, 1998). The better knowledge and experience of the local environment stresses the importance to the need for entrepreneurial behavior within the franchise system (Cox & Mason, 2007).

In brief, while coercive control allows for more standardization, it also hampers entrepreneurial behavior. In most cases, the franchisee develops new products, and finds solutions to system-wide problems by using their local knowledge (Brand & Croonen, 2010. Excluding franchisees from the processes of improvement might create a slow and inactive system, which reduces the ability to function in a changing environment (Kaufmann & Eroglu, 1998). Enabling control allows the

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12 franchisees some discretion over the use of the MCS to attend to local needs (Ahrens & Chapman, 2004) and is therefore more suitable within a franchise system.

Enabling control will be more appropriate when the firm needs the franchisees’

entrepreneurial behavior. However, in order to maintain standardization, coercive control will be more appropriate. Despite the evidence that franchisees might occupy an entrepreneurial role, researchers still do not know how franchisees maximize their entrepreneurial behaviors without jeopardizing standardization and uniformity (Dada et al., 2012) and how to balance both elements with the influence of enabling or coercive control.

The next section will investigate how coercive or enabling control affects standardization and entrepreneurial behavior in a franchise system. To answer this research question, a case study will be conducted. Data will be generated within the single food retail franchise system of ‘Jumbo’.

METHODOLOGY

This section describes how the study was conducted. Firstly, the research method is discussed.

Secondly, the case description and selection are described, followed by the data collection. Finally, the data analysis procedure is disclosed.

Research method

This study aims to understand how to balance standardization versus entrepreneurial behavior in the case of enabling or coercive control within a franchise system. Where coercive control allows for more standardization, enabling control is more suitable when an organization needs the franchisees’ entrepreneurial behavior. However, at the same time coercive control hampers entrepreneurial behavior which is essential to meet the local needs of customers, and enabling control hampers the benefits of economies of scales achieved by standardization. Earlier researchers have not addressed this phenomenon, so there is a need for new investigation. Given this setting, theory development gives an in-depth understanding of aforementioned phenomenon (Cooper & Schindler, 2008) and is appropriate to answer the research question. Furthermore, since the research question involves a ‘how’ question, a case study is the appropriate research method (Yin, 2013).

A case study can be defined as a research strategy focusing on understanding the dynamics within single settings (Eisenhardt, 1989), with numerous levels of analysis (Yin, 1984), and is applicable when existing literature is incomplete or inadequate (Scapens, 1990). The benefit of case study research is the possibility of developing new insights and combines theory with practice (Eisenhardt, 1989). Since a case study tries to find evidence across cases, by interchanging between theory and practice, one of the advantages is that creative insights can be developed (Eisenhardt, 1989). Another advantage of case study is that within future studies, developed theory and creative insights can be tested by the use of hypotheses (Scapens, 1990). Because the aim of the study is to understand the balance between standardization and entrepreneurial behavior with the influence of

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13 enabling or coercive control in a franchise setting, and since this research topic has seldom been studied before, the case study is specifically applicable for this study.

Case description

To collect data, the food retail franchise system of ‘Jumbo’ is examined. Jumbo has an every- day low pricing formula and is characterized by ‘the 7 securities’. In 2014, Jumbo was elected as best supermarket chain in 2014 (www.distrifood.nl). The number of Jumbo stores grew in 2015 to 583, with a turnover of € 6.25 billion and is the second largest food retail market of the Netherlands (www.jumbowerkt.nl). Moreover, with 320 franchisees, Jumbo is the largest food retail franchisor of the Netherlands (www.NFV.nl). Jumbo stated at their annual report of 2015 that ‘the combination of strong support from the head office with the entrepreneurial local insight is a key to their success and results in a unique Jumbo success (www.jumbowerkt.nl)’.

Because case study research allows for developing new insights or extent emergent theory, case selection is an important part of case study research (Eisenhardt, 1989). This study was conducted at the franchise system of Jumbo because of two reasons. Firstly, because of the acquisition of C1000 by Jumbo, a lot of franchisees made the shift from C1000 to Jumbo to become franchisees under a new format. Franchisees use and adapt this formula according to their local environment. Their entrepreneurial behavior brings a lot of new ideas, products and adjustments to the franchise system.

Because Jumbo is the biggest franchisor, it is interesting to see how this franchise system deals with the problem of control and entrepreneurial behavior.

Secondly, traditionally, Jumbo was a company-owned structure directed by branch managers.

These branch managers were guided by the rules and regulations of the headquarter. For example, Brand and Croonen (2010) found that company-owned units have more intensive human resource (HR) practices than franchise units. This is because company-owned units are part of a larger organization that has resources and bureaucratic needs to develop detailed and intensive HR procedures. This means that there is a high level of standardization expressed by the franchisor. This high level of standardization is introduced for better monitoring and directing managers. This higher level of standardization makes control by the franchisor easier.

Data collection

In order to gain cohesive answers and rich understandings to answer the research question, interviews were used. According to Yin (2010) interviews are a vital source for case study research to give a deeper understanding about the behavioral events and the human affairs in an organization. The interviews, the primary data source, are conducted in a semi-structured way. Semi-structured interviews allow for an open response rather than only ‘no’ or ‘yes’ (Longhurst, 2003). Respondents have the opportunity to give a broad explanation and the opportunity to express their views and opinions in their own words (Cohen & Crabtree, 2006). In return, this gives a broader understanding

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14 of the phenomenon (Saunders, Lewis & Thornhill, 2009).

In order to make sure that all questions were covered during the interview, the interview script was prepared beforehand (Myers, 2009). To ensure construct validity, interview questions are taken from and linked to the literature review (Rowley, 2002). Appendix A contains an overview of the interview questions derived from the literature.

This research examines a single retail franchise system, which reduces the external validity but improves internal validity (van Aken, Berends & van der Bij, 2012). This will also have consequences for the generalizability. However, by interviewing multiple employees and franchisees at different franchise units in the Netherlands the generalizability will be increased. In totality, within 7 franchise units, 7 franchisees and 8 employees with a managerial function were interviewed to give a broader understanding of the business phenomenon. Tessier and Otley (2012) found out that different employees might not appraise the MCS in the same way. Therefore, both franchisees and employees are interviewed to examine their perceptions about the MCS. The semi-structured interviews were conducted in a period of 2 weeks and had an average duration of 40 minutes. All franchise units were asked randomly on the basis of the Jumbo franchise unit name. Potential franchisees were contacted by e-mail or telephone to inform about their willingness to cooperate. The descriptive details of the interviewees are reported in Appendix B.

Data analysis

Eisenhardt (1989) provides steps for case study building research, which formed a guidance for this study. Collecting information for each individual case in the form of a within-case analysis was the first step of the data analysis. Every semi-structured interview is recorded and transcribed, which reduces the researcher bias (van Aken et al., 2012). The transcription of interviews is done in Dutch because interviews were also held in Dutch.

After receiving approval of the transcriptions, the interview transcripts of franchisees and employees were analyzed in isolation. This to become familiar with each case and see unique patterns before generalizing patterns across cases (Eisenhardt, 1989). The interview transcripts are read and re- read and specific, unique, and interesting quotes were marked.

After each separate case was marked, a cross-case analysis was conducted to search for general patterns. General themes were based on the literature, like standardization and entrepreneurial behavior. After reading the transcripts, important subthemes were also included, for example, auditor and foreign purchases. See Appendix C for these themes and codes. The transcripts were read again and the resulting quotes were consulted. After conduction resulting quotes, cases were explored on differences and similarities. Not only per location, but also between franchisees and employees. Now it became possible to make general conclusions about how franchisees and employees described the MSC of Jumbo and how this influence their entrepreneurial behavior and the level of standardization.

Finally, the new insights, resulting quotes and general conclusions were compared with the

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15 existing literature described within the literature review, and thereby creating a new understanding of the phenomena. This analysis is used to answer the research question and to conclude how enabling and coercive control influence standardization and entrepreneurial behavior.

RESULTS

This section presents the findings of the case study that was conducted to examine how to balance standardization versus entrepreneurial behavior in the case of enabling or coercive control within a franchise system. The results are presented as followed. Firstly, the management control system and the enabling and coercive elements of Jumbo’s MCS are described. Secondly, the specific relation between the management control system and standardization is presented, which is followed by a description of the relationship between the management control system and entrepreneurial behavior.

Coercive and enabling elements of Jumbo’s MCS

Different types of MCSs exist to guide the activities of the employees in order to achieve organizational objectives. This section explains the MCS of Jumbo and describes the enabling and coercive control elements within Jumbo’s business format franchise system. All franchisees operate under a franchise system created by Jumbo’s headquarter. This means there are rules, procedures, and control systems to guide franchisees and employees. The most common control tool of the franchisor is ‘the audit’. Once a year, the franchisor announces a period of 10 weeks wherein an auditor can drop by for 2 days. The auditor has a checklist for every division with different topics like hygiene, promotions, how operations systems are used, and how procedures are followed. After two days of checking and controlling the activities of the franchisee and employees, the auditor discusses the results with the franchisee. Franchisees must achieve more than 85% out of 100% in order to receive the incentive bonus. Because of this incentive, it is advantageous to follow the rules of the franchisor.

The audit, described above, is an example of coercive control. The franchisor has specified in advance a fixed range of standards for all the Jumbo units and is able to control all these standards with the use of audits. Both franchisees and employees describe that the main objective of the audit control system is to ensure that employees and franchisees do what the franchisor wants them to do.

‘Everyone has Jumbo on the facade. It is therefore good that we are controlled by Jumbo to do what they say (E1)’.

The audit is also a control element in which both the franchisee and the employee achieve knowledge about their performance once a year. They receive an explanation why certain elements are added and how they can use all different systems. One of the four characteristics was about internal transparency, which provides users a clear understanding of the underlying logic of control elements

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16 and feedback about individual performances. It appears that this is also the case for franchisees and employees within the franchise unit. The audit provides franchisees and employees the opportunity to learn about their performance, and discuss with the auditor about the control system. This means that the coercive control element also includes an enabling part, in which franchisees and employees are allowed to defend their choices if they do not follow certain rules or procedures which are checked in the audit. Also the defense at the end of the 2 days, includes an repair opportunity of the control system. The possibility to repair the control system is also one out of four characteristics of an enabling control system. However, discussing about the audit is not encouraged.

‘At the end of the audit, we talk about the good and bad points. You go into conclave and usually, depending on your score, they want to listen. However, the opinion of the auditor is the most important one. Therefore, it is very difficult to make recommendations (F6)’.

The audit is perceived differently by franchise units. Some employees experience feelings of stress and tension, while others found it childish, and another found it part of the system. In one extreme case, the franchisee decided to send off the auditor twice. He did not agree with the checklist of the auditor and had a different view on the appropriate checkpoints. In this case, the franchisee did undermine the hierarchical relationship with the franchisor. As a consequence, the franchisee did not receive the incentive bonus, even though he did pay a weekly franchise fee.

A second control element is about monitoring. It appears that the franchisor can look along operations systems of franchisees. This was agreed in a branch covenant between the franchisor and the franchisee. In this covenant, the franchisee agreed upon the fact that the franchisor can follow all cash transactions and consequently can see suspicious transactions as well. When the franchisor sees a suspicious transaction, he sends an email and asks for more explanation. Subsequently, the franchisee must explain on paper what this transaction was about.

‘You feel as if you are being watched and monitored. But you have to accept that. If you think you do the right thing, then they can watch. If I cannot explain this, probable I do something wrong (E3)’.

Also this second type of control can be described as a coercive way of control. The franchisor is able to monitor employees about the agreement they have made with the franchisee. Within this control element, none of the four characteristics of an enabling control system are present. All franchisees had to sign the covenant and for example, the opportunity of repairing the system, is not available. But franchisees also see the advantages of this control element. First of all, the tax authority checks the franchisor instead of the franchisee. Second of all, it is less difficult to detect fraud.

Lastly, franchisees and employees are checked via external agencies. For example by, ‘Bureau Nuchter’. With 3 mystery guests, cashiers are checked for alcohol sales. The minimum age for buying alcohol in the Netherlands is 18 years. These mystery guests are younger and they try to buy alcohol with the purpose of checking the action of the cashiers. If the rules are violated, the cashier will be

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17 checked more often. Another division which is often checked by external parties, are the greengrocers.

KCB (Quality Control Bureau) is an external bureau that controls issues such as date and freshness.

Bureau Nuchter and KCB are hired by the franchisor in order to control franchisees and employees.

This is a third type of coercive control. When the alcohol control is not done properly, a unit can get a ban on alcohol sales. Since this is often a major revenue source, both the franchisor and franchisee do not want to take this risk. Also within this third control element, there is not an enabling characteristic present. Franchisees are controlled by the franchisor, and have to follow the rules.

Another control element is the incentive arrangement. Each quarter, a control topic is chosen by a working group consisting of 5 franchisees and a few board members of Jumbo’s headquarter. For example, a control topic can be the age checks on the sale of alcohol. All franchisees pay a weekly fee for this arrangement and if the unit succeeds in this control, the unit receives the last piece of the margin. If not, the total amount will be divided among the units who passed the control. This is an example of enabling control within the franchise system of Jumbo. Franchisees do have some discretion over the use of this specific management control element so that they can react on to emerging contingencies.

‘There are specific committees within Jumbo. Therein are people who have been screened and possess a feeling about specific topics which are to be discussed. So if I have problems or ideas for the incentive arrangement, I can contact a colleague. These committees have influence, in quotation marks (F7)’.

Because of the monthly meetings, franchisees also have the opportunity to repair this control system. For example, when some franchisees want to add or change the control topic, they have the possibility to do so. When franchisees and employees receive the bonus, they also know that they did well. This is an indication about their performance, which is included in the characteristic of internal transparency. However, franchisees only have knowledge about their own performance. They do not know how other franchise units performed. Therefore, the global transparency is low, which is an indication of coercive control. Also the level of flexibility is not available. Franchisees have to follow the agreed control topic and this control topic cannot be used flexible.

The fifth control element described by the interviewees is the intermediate report. These reports present the level of service units provided within the business model. This is for franchisees themselves a tool through which they can monitor employees. Every week the franchisee and the branch manager realize a weekly budget. At the end of the week, the budget will be compared with the actual results. When there are major differences, more details are needed. These reports provide insights about the profit per division, the cost of labor per division, and the level of food losses.

Executives have to explain the results. Jumbo facilitates in the data, but it is the responsibility of the unit to do something with the data. However, there are differences in taking this responsibility:

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‘Everyone needs control. Mistakes are made and it would be a shame if you lose on that. My executives get the freedom they want and they like that. They know that when they are doing well, they can keep this freedom (E1)’.

‘We have hired an external agency: Total Control. With Total Control we look at all the data. Total control also makes reports, and we have our own reports. From these reports, we start to analyze.

With this analysis we head toward the department. Previously, only the executives were able to do so.

But we are going to expand this level of control. The first layer, sales managers, will join. With this information, we specifically can see which department needs more attention. By involving everyone in the process, we try to increase the support (E8)’.

This is an example of an enabling use of the control system by franchisees. An enabling use of the management control systems allows the franchisee at least some freedom to decide over the specific control elements. Where some franchisees decide to control employees at a stricter and coercive way (E8), other franchisees give employees more freedom and use the control systems of Jumbo at a more enabling way (E1). With this control element of Jumbo, franchisees are able to make weekly budgets in order to provide employees with performance information. Also for franchisees, this is the opportunity to get an indication about their performance, which is important in the internal transparency characteristic of an enabling control system.

‘The delivered control systems by Jumbo gives me a lot of insights into numbers. You are able to better manage your unit with these insights. As an entrepreneur, you find that important (F2)’.

Finally, also the operational manager appears as a control element of the franchise system of Jumbo. The operational manager is responsible for a cluster of different franchise units spread over the Netherlands and is employed by Jumbo to mediate between the franchisor and the franchisee. Once a month, the franchisee and the operations manager discuss the performance and the opportunities for improvement. The operational manager looks at the franchise unit, makes his findings and shares this with the branch manager or the franchisee. The operational manager provides the franchisee with information about the franchise unit performance, which is an example of internal transparency and indicates an enabling control element.

Another task is to make recommendations to the headquarter. This also includes recommendations about the experiences of the franchisees concerning the control system. Many franchisees still have a wish list of control elements they want to add. For example, real-time inventory. This is a system in which the unit directly can see how much stock is present. After doing several recommendations, by different franchisees, this system is now upcoming. In short, for both the franchisee and the employee the ability to repair the control system exists. However, this takes a lot of time and franchisees and employees believe that this could be improved.

The operational manager is also responsible for a cluster. A cluster consists of 12-15 different

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19 Jumbo units. The operational manager gives information about labor costs, losses of food, and sales of all the cluster units. However, franchisees do not receive any further insights into the details. So franchisees do not know the specific characteristics of the market area, what the organizational structure is, how many investments are made, and what the final results are after deducting all costs.

This type of benchmarking depends not only on the operational manager, but also on the franchisee.

Where one franchisee shares all the data with their neighbor (F4), another franchisee did not say anything about their results (F5). One of the four characteristics is about global transparency. Overall, the franchisees described the level of global transparency as substandard. Information about how their performance fit within the whole organization is available, but franchisees do not agree on the details.

Because of the present repair, internal transparency and flexibility characteristics, it can be stated that this control element is an enabling control type. The operational manager provides performance information about the franchise unit, but also about the whole franchise cluster. There is an option to repair the control system via the operational manager. Finally, the franchisees can decide how they will use all these reports. However, some suggestions for change toward the franchisor should be made.

It appears that different control elements are included in the MCS of Jumbo. Where some elements are used in a coercive way, others are used in an enabling way. Both ways have an influence on the level of standardization and entrepreneurial behavior. In the next section, a broader understanding of these relationships is described.

Management control system and standardization

The different control elements are conducted to direct the behavior of employees in the desired direction of the franchisor. To control the franchise units, a lot of processes, rules, and systems are standardized. Traditionally, Jumbo is a company-owned organization. This means that managers are in paid employment and are only hired to control the company-owned unit. After Jumbo took over C1000 in 2011, suddenly there were a lot of franchisees because C1000 only existed out of franchisees. Because of the traditional company-owned structure of Jumbo, managers need to be able to exchange between different units. That is why all business processes are standardized and described in the ‘Jumbo Handbook’. The standardized Jumbo Handbook includes different topics. For example, the lists of duties: what, how and at which time do employees have to perform a task.

Besides the lists of duties, more lists are standardized. One important standardized layout element is the shelves plans. For every unit, there is a standardized layout of the shelves which is, in the eyes of the franchisor, the best way to provide the most sales.

‘Why do we want to reinvent the wheel? I think it is nice that a lot is standardized. For example, when the shelves plan is not standardized, it becomes a tangle between stores. So this is much easier (F1)’.

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20 Franchisees are controlled by the audit in a coercive way in order to maintain standardization through all franchise units. Because the lists and shelves planes are standardized, it is possible for the franchisor to control all the different units. Now all franchise units have to follow the same rules and standardized business processes, the franchisor is able to protect the business format and deliver uniformity toward customers. If these lists are not signed, or a franchisee does not follow the rules of the Jumbo Handbook, the franchisee gets a point deduction in the audit. Franchisees and employees also have to follow the standardized shelves plan, otherwise they are as well punished in the audit.

This means that the audit, an example of coercive control expressed by the franchisor, guides the behavior of the franchisees and employees.

However, one franchisee decided to send off the auditor twice because he does not want to follow all the standardized rules and procedures. This implies that the level of standardization is damaged, because at the same time, the franchisee created a new sandwich selling point within his franchise unit. Therefore, it can be stated that coercive control is needed to direct the franchisees to obtain standardization throughout the units.

Another consequence of the audit is that franchisees are restricted in adding new products or changing the shelves plans in order to meet local market needs. Because of the coercive characteristic, franchisees are not allowed to make changes or recommendations. Only in the last 2 hours of the audit, there is an opportunity to explain why certain rules are not followed. This means that the audit, does allow for a high level of standardization in order to protect the business format, but at the same time, the audit restricts the entrepreneurial behavior of franchisees.

Also the branch covenant is a coercive control element in which franchisees have to follow the fixed range of operational rules. For example, there is a standard operational method for the cash register reconciliation.

‘Jumbo has a really fraud-proof method for cash register reconciliation. It can be done in only one way. If something needs to return, it has to be in that way. You must indicate specifically what is going to return and why. But this is positive. This way it is the same for all units (E2)’.

This allows the franchisor to control the franchisees in making mistakes. This level of standardization reduces the monitoring costs, because every cashier has to use the same method in the same standardized way, which makes it easier for the franchisor to see suspicious transactions. This also allows the franchisor to control all the different units at the same way.

Another control element was the incentive arrangement. It appears that this is an enabling control element in which the franchisee is allowed to add control topics. This means that franchisees do have some discretion of the use of specific control elements to react on local needs. However, when every franchise wants to react on local market needs, it hampers the level of standardization. For example, every quarter another control topic is chosen. This is sometime confusing for franchisees.

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21 This implies that enabling control hampers the level of standardization, but do allow freedom to react on local needs.

Management control system and entrepreneurial behavior

Despite of the high level of standardization within the business format of Jumbo, franchisees have the opportunity to distinguish themselves from competitors. One way of distinguishing is through the use of its own name above the facade. Customers do now know who the owner is of the unit and develop a bond with the franchisee. Another way how franchisees distinguish their unit is through selling local products from external suppliers. For example, one franchisee from the north of the Netherlands sells ‘Veendammer mosterd’. This franchisee wants to offer a little bit more than is expected, to better serve local market needs. This is allowed, but the franchisor has implemented a limit of 5% foreign purchase. Therefore, the franchisee is restricted in selling local products and cannot react on all local market needs. Because this limit is controlled within the audit, which is a coercive control element, entrepreneurial behavior is reduced. This implies that coercive control hampers entrepreneurial behavior. It became clear as well that some franchisees frequently go beyond the strict rules of the system. To illustrate, some franchisees often exceed the 5% free purchasing choice and as a consequence, these franchisees receive a fine. But that is less important for franchisees. This indicates that some franchisees often use more entrepreneurial freedom than they are formally granted, which lowers the level of standardization and uniformity.

As stated before, the coercive control element of the audit, hampers entrepreneurial behavior, but it protects the level of standardization. Where some franchisees exceed the limit, other franchisees indicate that this level of purchasing choice is enough:

‘These products are our distinctive character and also contribute to the identity of our unit to customers. But, I also agree that one of the benefits of this franchise system is the large amount of products Jumbo offers. However, I belief that I have more knowledge about what customers in Slagharen want to buy than someone in the headquarter. In conclusion, I believe there are lots of opportunities and there is a great trade-off to be entrepreneurial within the 5% (F6)’.

This quote described also the advantages of economies of scales derived from the level of standardization. Because all franchisees have to buy the products from the same supplier, Jumbo has a lot of bargaining power. When the franchisor wants to retain this advantage, franchisees have to stick to the rules. Therefore, the franchisor controls the franchisees in a coercive way through the audit.

However, here as well applies, when the franchisees have to sell all the standard products of Jumbo, the franchisee cannot serve local market needs and is restricted in entrepreneurial behavior.

Another example of the freedom you have as a franchisee is the choice of ‘can modules’. The flower corner is an example of a can module. As a franchisee you can decide whether or not you want this corner in your unit and also which size. This is an example of how the franchisor does allow some

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22 entrepreneurial behavior, but in a standardized way.

Both examples, free purchasing choice and the can module, are controlled by the franchisor in a coercive way via the audit. Franchisees want to pass the audit in order to get a large sum of money.

So if franchisees want to earn this amount, they have to follow the rules of the franchisor and are restricted in their entrepreneurial behavior. However, as explained, not every control element is used in a coercive way. The incentive arrangement does allow franchisees to negotiate about some control topics. Franchisees now have some discretion over the use of specific control elements, which in turn increases entrepreneurial behavior of franchisees. For example, it is possible to come up with a control idea which better fits within the local environment. The example described above is a combination of both coercive and enabling control within the Jumbo franchise system.

In one extreme case, the franchisee decided to send off the auditor twice. However, the same franchisee also decided to build a new website where he can sell sandwiches, made with Jumbo products. So, the franchisee started his own company within Jumbo.

‘The sale of this unit will not increase anymore. That is why I thought of something else. We have a selling point, within this unit, with our own sandwiches. We make from one product, another product.

We therefore have built our own site and Jumbo does not know of about this (F5)’.

This franchisee used his entrepreneurial freedom, but at the same time he hampers the level of standardization. The franchisee is not controlled anymore with the audit, and now he is building up a whole new concept within his unit. This franchisee is not the only franchisee that goes beyond the rules of the organization. Other examples of entrepreneurial behavior are: building a soft ice cream machine (F2), a home delivering service (F4), and new clothes for the bread department (F6). These examples hamper the level of standardization, which in turn reduces the level of standardization of Jumbo.

CONCLUSION AND DISCUSSION

In this paper the business format franchising system of Jumbo is investigated to answer the research question: how to balance standardization and entrepreneurial behavior in the case of enabling or coercive control. It turns out that enabling and coercive control elements are used jointly in the franchise system of Jumbo. With the use of the framework of Adler and Borys (1996) the four integrated design principles of enabling control are assessed. These four principles are repair, internal transparency, global transparency, and flexibility. It appears that within some coercive control elements, also enabling parts were presented. The different control elements will be described in more detail.

Firstly, the audit is a control element used in a coercive way. Rules, procedures, and standards are specified and the franchisor is able to control all these standards within the audit. However, the audit is not only a control element; it also provides franchisees and employees insights in their

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23 performance, which is included in the internal transparency characteristic. This implies that the coercive control element also includes an enabling control part. Besides the internal transparency, also the opportunity to repair this control element is provided. Franchisees can discuss and defend their choices in how they are running the franchise unit. When franchisees or employees propose an adjustment of the franchise system’s requirements, the franchisee does have the room for adaptations, only after long negotiations.

Secondly, within the branch covenant, the franchisor and the franchisees agreed on the fact that the franchisor can follow and monitor all cash transactions. This makes it easier to detect fraud.

Therefore, the branch covenant is also an example of a coercive control element. The four characteristics of an enabling control element are not presented.

Thirdly, external agencies are hired by the franchisor in order to control franchisees and employees. This is a third example of coercive control. Franchisees are checked, for example on the age for the sales of alcohol. When this is not done properly, the unit gets a ban on alcohol sales. Also within this third coercive control element, there is not an enabling characteristic present .

Where the audit, the branch covenant, and the external agencies are examples of a coercive use of the MCS, the incentive arrangement is an example of an enabling use of the MCS. As suggested by Dada et al. (2012), there are different franchise work councils that consist of franchisees that meet every month and can make some recommendations toward the franchisor. Therefore, franchisees do have some discretion over the use of the management control elements so that they can react on local market needs. But within this enabling control element, some coercive parts are also presented. For example, there is not an opportunity to know how franchisees performed relative to others. This implies that global transparency is not present.

Finally, also the budget reports and the operational manager are examples of enabling control elements. Both provide the franchisee with information about their performance, but also about the cluster franchise units. However, further details are not given. This means that franchisees do not understand how other units can provide more sales. In brief, franchisees have self-control and freedom and are responsible for their franchise unit.

These results underlines the importance of the framework of Adler and Borys (1996) which aims to understand the interface between the franchisor and franchisees with the influence of MCS in their attempts to direct, control, and guide organizational activities. With the use of the four characteristics, it appears that there is a coercive use and an enabling use of the MCS. This is also mentioned by Chenhall (2003), the control system is more a combination of both.

These different control elements do also have an effect on the level of standardization and entrepreneurial behavior. A lot of procedures, rules, and lists are standardized. For example the shelves plan which is, in the eyes of the franchisor, the best way to provide the most sales. Now all franchise units have to follow the same rules and standardized shelves plans, the franchisor is able to control all franchisees in a coercive way through audits. The franchisor is now able to protect the

Standardization versus entrepreneurial behavior: the case of enabling and coercive control in a franchise system