Compliance with and Deviations from Chain Standards – Behavior of Agent, Underlying Attitude, and Principal´s Appropriate Reaction

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Master Thesis

Compliance with and Deviations from Chain

Standards – Behavior of Agent, Underlying

Attitude, and Principal´s Appropriate Reaction

20-06-2017

Nora Annekatrin Bothe S3217264

Supervision: Dr. N.J.B. Mangin

Co-Assessor: Dr. J.S. Gusc

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2 Abstract

The goal of this study is to provide a comprehensive view of the appropriate reaction of a principal to the behavior of his agents. Franchises in the restaurant industry were researched

to explore the issue. A better understanding of the importance of correct interpretations of the attitudes underlying the observable behavior of agents for the principal to choose the appropriate reaction is highly needed. This improves the relationship between the involved

parties as well as the business performance. The literature usually focuses on principal’s reactions based on observed behavior of the agent – compliance to standards is perceived as

the right behavior and thus gets rewarded while deviations are believed to jeopardize chain performance and get sanctioned. The truth can also be the exact opposite: Minimal compliance may be freeriding on the brand name and thwarts developments of the concept

and its procedures while well-intentioned deviations contribute to further improvements. The attitude underlying the behavior should therefore be carefully investigated and reactions

should be based on this. Especially relationship characteristics seem to determine franchisees´ attitude and behavior: A sufficient level of trust is the foundation for

well-intentioned behavior while formal structures determine the boundaries for explorative actions.

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1 Introduction

In franchising a franchisor entitles a franchisee to operate a unit under a developed business format in exchange for an upfront fee plus ongoing royalties (Perryman et al., 2012). The essence of franchising is basically “the cloning of a common system of practices in geographically dispersed units” (Szulanski and Jensen 2008, p. 1734). This definition illustrates the importance of compliance to standards and uniform representation. The franchisor benefits in several ways from the cooperation with franchisees: Compliance of franchisees is typically expected due to high-powered incentives created by them having residual claimant rights (Windsperger et al, 2004). In addition, the franchisor can leverage the local expertise and entrepreneurial spirit of the franchisee (Akremi et al., 2011; Bradach, 1997). Franchising also allows for quicker geographical extension without the need for high investments as the franchisees invest the needed capital. The critical mass is thus achieved in a shorter time period (Combs, 2003). Franchisees choose this business relationship to take advantage of the strong brand name, the proven formula and operational support while still being relatively independent (Davies et al., 2011). Since franchisees share, to a large extent, their aspirations towards autonomy and innovativeness with entrepreneurs, they may deviate from standards by experimenting and innovating. As franchisees are usually more distant from their franchisor than employees are from their employer, their behavior cannot be as heavily controlled. Therefore, franchisors are challenged to establish a control system which enforces compliance with standards without thwarting franchisees ambitions (Davies et al., 2011).

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franchisor by sharing his practical expertise. It becomes apparent that the same observable behavior can stem from different unobservable underlying attitudes.

The literature discusses, to a certain extent, possible consequences of deviating behavior of a single outlet on the whole chain. While some deviations contribute to the improvement of the overall business, an exact replication of the proven template is usually most successful if a replication of large-scale businesses is desired because of the aim to quickly reach critical mass or to simply further expand the scope (Jensen and Szulanski, 2007). Any deviation from the template is therefore counterproductive and could jeopardize not only one outlet but the whole chain (Akremi et al., 2011; Szulanski and Jensen, 2006).

Deviating behavior is often perceived as negative, opportunistic behavior and therefore gets punished by the principal. However, if franchisees deviate in order to perform better, the franchisor´s aforementioned reaction might be dysfunctional and discourages efforts. Innovative behavior, if desired by the franchisor, is thwarted which is detrimental to the overall performance. Contrary to that, compliance is usually rewarded even though it can also be ill-intentioned. In this particular case, it should be interpreted as a lost opportunity. Basing the reaction only on the observable manifestation of behavior is therefore not sufficient. Instead, the reaction should be based on the underlying attitude. This should lead to the accomplishment of better management and control resulting in better outcomes of the cooperation. Therefore, the franchisor must correctly assess the behavior and the underlying attitude. This understanding is essential to not foster a dysfunctional mechanism but to develop an appropriate mechanism to support well-intentioned behavior and sanction ill-intentioned behavior - despite the behavior itself. Literature mostly pays attention to the behavior and the resulting consequences for the chain but little attention has been paid on the true underlying attitude and how the franchisor should choose an appropriate response to the observed behavior. Therefore, the research question of this paper is:

“Why do franchisees choose to comply to or deviate from chain standards set by the franchisor?”

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2 Literature Review

2.1 Franchising: Uniformity versus Entrepreneurialism

Franchising represents one form of entrepreneurship where autonomy and dependence can coexist synergistically (Dant and Gundlach, 1998). While the franchisees are bound by a contract and have to comply to the general concept and rules, they autonomously operate their own outlet. Thus, one major challenge is to find the required level of uniformity to obtain economies of scale while not stifling efficient local market adaptations that come from franchisees´ autonomous behavior (Kaufmann and Eroglu, 1999).

A franchisor initially decides to franchise his concept due to two distinguishable, but not mutually exclusive reasons. (1) First, a quick extension of the scope of its operations is desired. Since the franchisee has to invest the resources, i.e. time and money, in the establishment of the outlet, an expansion is possible even if the franchisor lacks the required resources. The expansion is achieved by the exact implementation of the provided formula through all franchisees in their managed outlets. This way, system-wide uniformity is achieved. The quick expansion accelerates the achievement of the critical mass that is needed to generate economies of scale (Combs, 2003). (2) The franchisor can also intend to benefit from franchisees´ entrepreneurial mindset in order to renew the brand, to become aware of new opportunities and threats, and to exploit franchisees´ innovations (Bradach, 1997). The concept of entrepreneurial orientation describes the interest and involvement of an organization towards entrepreneurial behavior such as engaging in product market innovation, undertaking risky ventures and developing proactive innovations (Miller, 1983). Franchisees promote this entrepreneurial orientation since they behave similar to entrepreneurs. Therefore, franchisees can contribute to the further development of the concept. According to Dada and Watson (2013), the three underlying dimensions are innovativeness, risk-taking, and proactiveness: The development and experimentation of new practices (innovativeness dimension) by one franchisee might benefit the whole franchise for example through the anticipation of future market opportunities, e.g. new products or services (proactiveness dimension). However, this involves not only the acceptance of the costs of failure concerning the own outlet but also the whole chain and as a result can harm the whole franchise (risk taking dimension). Therefore, it is depending on the initial reasons for choosing to franchise whether deviations are appreciated or even latently expected by the franchisor or not.

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independent since they are responsible for their own legally distinct outlet and therefore not bound by as many rules as employed managers (Mendelsohn, 1995). Franchisees are not as heavily subject to control and punishments through their supervisors and hence “free” in their behavior.

2.2 Behavior and Consequential Effects

The behavior chosen by the franchisees and its consequential effects on chain wide performance are depicted in table 1. The contribution of the literature in each cell is reviewed in the following.

Table 1: Behavior – Consequential Effect

Consequential Effect

Good Bad

Behavior

Comply

Good Compliance “Applying prescribed rules and

regulations”

Bad Compliance “Complying to minimal extent, with minimal effort, suboptimal

practices remain in place”

Deviate

Good Deviation

“Exploring new opportunities and improving concept and procedures

further"

Bad Deviation

“Exploiting brand name by cutting costs on expense of quality, shirking

or undesired deviations that harm the overall chain”

2.2.1 Good compliance

The provision of a working business concept and the identification with the brand are the main reasons for entrepreneurs to open a business under the franchise name. Therefore, compliance with the rules and regulations is typically expected. Additionally, franchisees are bound to the chain by a relational contract with its explicit and implicit rights and obligations (Hadfield, 1991; Bradach, 1997). These formal and informal obligations ensure compliance which is usually in the interest of all involved parties.

The franchisor expects compliance to ensure service uniformity and reliability resulting in increased customers´ satisfaction and trust which ultimately strengthens the brand. This secures current locations and allows for further expansions. The franchisor tends to standardize most operations to maintain this uniform reliable service presentation. A positive side effect of standardization is that monitoring of outlets´ performance becomes easier (Kaufmann, 1989; Kalnins, 2004).

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how. Noncompliance of one franchisee could be perceived as opportunistic behavior by other members endangering the belonging to the group (Cochet et al., 2008). Noncompliance might also harm the desirable good relationship with the franchisor.

2.2.2 Good deviation

As the relationship evolves, franchisees´ initial acceptance of control diminishes and issues of compliance are more likely to emerge. Franchisees become more familiar with their franchisor´s operational methods and strategies and consequently become aware of associated strengths and weaknesses. Franchisees may lose trust in the competence and integrity of the franchisor (Davies et al., 2011). As tenure and success increase, franchisees might become more confident about their own entrepreneurial abilities due to the belief that their performance results from their own skills and efforts (Buchanan, 1992). Franchisees´ reassessment of the franchisor´s value thus often leads to a negative adjustment (Davies et al., 2011). Doubts about the effectiveness and efficiency of the prescribed rules and regulations may arise. The franchisee might not only disagree with rules and regulations but also becomes aware of possibilities to further improve the performance of his own or of all outlets, e.g. by improving efficiency through cutting unnecessary costs or providing the customers with a better service (Akremi et al., 2011).

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The research of Cruz et al. (2009) about the implementation of global systems in local settings illustrates why local practice variations might even be necessary to implement a global system. The investigated Portuguese company loosely implemented the system imposed by the global parent by creating a system which incorporates demands of the global actor and local adaptations. This is supposed to be the most likely response from an individual organization when faced with multiple and non-conflicting logics since a rigidly applied global system cannot meet all specific local needs. Especially a crisis, which can be detected by low sales or negative customer reviews, can signal the need for deviations from chain standards to satisfy the customers. The organizational decision-making literature further researches this “loose coupling” which might occur in situations where “elements are distinct (independent or with some degree of independence) from, yet respond (are connected or linked) to others” (Cruz et al., 2009, p. 95). Loose coupling might also be necessary to locally implement a general franchise concept and therefore justifies franchisees´ deviating behavior.

2.2.3 Bad deviation

Winter et al. (2012) argue that even though adaptations to the salient characteristics of the host environment seem to be needed to maximize unit effectiveness, their implementation can be very hazardous. The complex and interdependent nature of business activities, which create an effectively working system, might be imperfectly understood. Even small deviations could therefore carry severe performance penalties due to unexpected negative interactions and the negative impact on the consistency of the whole formula. Also, a series of cascading adaptations might follow one small adaptation as a result of efforts to solve problems created by the original change. “Tight coupling”, which is the rigid, unquestionable execution of regulations, should thus better be followed.

Bad deviations from chain standards comprise franchisees´ behaviors that benefit themselves while affecting the whole chain and thus the franchisor negatively. This is labeled opportunistic behavior and usually entails failing to pay royalties or non-compliance to quality standards through shirking, excessively cutting on costs at the expense of quality and free-riding on other outlets (Bradach, 1997; Kidwell et al., 2007). This leads to misrepresentation of the whole chain, image ambiguity and distortion of core components. The franchisor naturally wants to constrain this “self-interest seeking with guile” (Williamson, 1975, p. 26).

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and / or managerial support or appreciation of franchisees´ accomplishments are lacking (Davies et al, 2011; Anderson and Narus, 1990). Third, arising conflicts can lead to bad deviations. Conflicts may occur if franchisees perceive themselves as being unfairly treated or feeling betrayed if their franchisor for example creates competition by opening another outlet nearby, often labeled as cannibalization (Michael and Combs 2008). The “franchise problem” which naturally occurs due to the financial interdependencies between the two partners combined with the asymmetrical exercise of power might also lead to conflicts (Davies et al., 2011). Additionally, Lambert (2001) introduces three general areas of potential, diverging interests of the actors: (1) The franchisee (agent) is effort averse. He might reduce efforts due to the gap between his private benefit resulting from his own investment and the total benefit for the chain (Galo-Or, 1995; Brickley, 1999). (2) The franchisee might divert resources for his private consumption. He might spare resources that he is expected to invest or even use company property for his private use. This could also stem from high, unrealistic constraints imposed by the franchisor since he does not have to bear the corresponding costs. (3) The partners´ time horizons might differ. This issue is reduced as the franchisor-franchisee relationship is typically not a single period but a repeated partnership (Narayanan, 1995). Due to these reason, franchisees might be tempted to lower their investments in improving or maintaining quality, leading to the provision of unreliable, lower quality services. Generally, franchisees are primary concerned about optimizing the performance of their own outlet. Therefore, they are striving for reducing their costs as far as reasonably possible while the franchisor does not care much about costs since the fees, which are the franchisor´s income, are usually only based on revenues. A social dilemma exists due to the inherent tension between cooperation and competition when “an individually rational but socially defecting choice may lead to a higher payoff for an individual” (Zeng and Chen, 2003, p. 587). A deviation might thus threaten the performance and survival of other outlets and hence harms the entire chain despite the benefits for one particular outlet / franchisee (Winter et al., 2012). Based on this argument, it can be concluded that nonauthorized deviations jeopardize chain performance regardless of franchisees underlying (good or bad) intentions (Akremi et al., 2011; Szulanski and Jensen, 2006; Gassenheimer et al., 1996).

Bad deviations might occur more frequently within franchises than in normal organizations since franchisees´ entire income depends on profits. If an increase in revenues seems to be too difficult or too time-consuming to achieve, franchisees can prefer to extensively cut costs and free ride on the franchise´s reputation while damaging it. Employed managers might also face tougher punishments or even termination of their employment in case of misbehavior due to the stricter design of their jobs and possible related sanctions (Holmstrom, 1994).

2.2.4 Bad compliance

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to lead to the best possible outcome in the long run. Local market needs could not be met and the franchisee does not contribute to the improvement of the franchise concept and thus endangers the long-run persistence of the chain. Innovation and deviation from the routinized behavior could be needed. Good deviations (described in 2.2.2) are thus getting impeded despite their necessary, positive consequential effects. Besides being unwilling, the franchisee could simply be unable to behave better.

2.3 Underlying Attitudes

The literature review indicated that most research streams are focused on only one aspect at the time and are thus failing to pay sufficient attention to the complex structures and interactions within the relationship between franchisor and franchisee as well as their chosen behavior and its consequences. Also, most authors focus their research on observable actions, and are thereby assuming the underlying attitudes. These assumptions are rarely empirically investigated. Due to the perspective of the agency theory, individuals are usually assumed to act egoistically. Therefore, compliance is generally interpreted as the “right” behavior and deviations, if not desired be the franchisor, as “bad”. Bad compliance and good deviation seem to contradict this and are counterintuitive. However, the franchisor must be well aware of the true attitude in order to correctly assess franchisees´ behavior and hence choose the appropriate response. A lack of attention may result in wrong interpretations resulting in inappropriate, dysfunctional reactions: Deviating behavior, despite being well-intentioned and conducted by a motivated and innovative franchisee, might get punished while ill-intentioned compliance is rewarded. This dysfunctional mechanism leads to a deteriorating relationship and performance. A more in-depth research of the attitudes and intentions should help to understand how these unfavorable misunderstandings arise and why the franchisor´s reaction should be based on the observable behavior and on the correctly assessed underlying attitude. Therefore, the research question is:

“Why do franchisees choose to comply to or deviate from chain standards set by the franchisor?”

3 Methodology

As the phenomenon is not yet covered by a mature literature field, a theory development /refinement approach is followed. The research is aiming towards exploring why franchisees adopt a particular behavior, how they justify it and how franchisors interpret it. The knowledge derived from the literature review will be intimately connected to the empirical reality which will be observed through interviews. The goal is to develop a testable, relevant and valid theory (Eisenhardt, 1989). The results of this study should contribute to further research and enable theory testing.

3.1 Setting

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Organizations within a service industry were chosen since provided services are partially intangible, therefore subject to discussion and are easily alterable. Restaurants were approached due to the applicability of the issue and wide distribution. Due to the delegation of some areas of responsibility and set rules and regulations, centralized as well as decentralized decision-making and operations are daily issues. Thus, compliance and deviations occur and were expected to be easily observable.

Multiple cases ensured the replication of findings (Eisenhardt, 1989) and enabled meaningful comparison of different traits. In every case, at least two people were interviewed to reduce the respondent bias. Every case company must have been well established, i.e. being at least 10 years in business and have a minimum of 50 outlets. Particular chains and outlets were individually chosen due to different, in the following explained reason. The company DD was chosen since the interviewed franchisee owns four outlets located in completely different environments which makes it very interesting to study pressures for local adaptations. LL was interesting due to the modern and simultaneously traditional concept, that might impact the chain structure and procedures which promised interesting insights. MM and SS are very well-known and successful chains which could imply that the procedures in place are working. The characteristics of the different franchises are displayed in table 2.

Table 2: Characteristics of chain and researched outlet

Chain Country of origin, HQ Outlet located in… Number of outlets (global; local) Age

(in years) Standard Concept Management1

DD Germany Germany ~ 70, ~ 60 ~ 10 Mid-scale Modern & healthy Founder

LL Germany Germany ~ 100, ~ 80 ~ 17 Mid-scale

Traditional family restaurant mod-ernly implemented Founder + Professional MM US Netherlands > 30.000; > 200 > 70 Low-budget Fast food restaurant, mostly take away Professional SS US Netherlands > 40.000; > 150 > 50 _budgetLow- Healthy fast food _restaurant Professional

3.2 Data Collection

Interviews are an effective approach to obtain insights into personal perceptions of behaviors and attitudes. Therefore, in-depth interviews were conducted on the micro-level on three hierarchical levels, i.e. individuals working as employees, franchisees or franchisors, as an attempt to obtain the complete picture. The semi-structured interviews were conducted by a research team consisting of five students. The limited time available was used most efficiently to obtain as many insights as possible. Also, the partial collaboration

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enhanced the creative potential and unnoticed aspects got detected due to different perspectives on the issue (Eisenhardt, 1989).

A set of questions which were in every interview asked in the same order and manner was designed in an attempt to structure the shared interview guide. This clear structure helped to minimize the researcher bias and to ensure the comparability of the results (Akens et al., 2012). The guide, listed in Appendix A, consisted of general and issue-specific questions aiming at uncovering franchisees´ attitudes regarding deviations and compliance. It was divided into four broad topics: (1) general information, (2) relationship between franchisee and employees, (3) relationship between franchisor and franchisee, and (4) the implementation and development of the chain concept. The guide was developed in close collaboration with the research team. Additional feedback from an experienced interviewer was incorporated. To reduce the acquiescence bias and capture the interviewees´ true point of view, the questions were formulated as open as possible and in a way not implying a right answer. Anonymity and a confidential, undisturbed atmosphere were ensured to increase the likelihood of honest answers (Bennett and Robinson, 2000) and to reduce the social desirability biases (Tourangeau and Yan, 2007).

The collected primary data was complemented by secondary data through the analysis of data (reviews etc.) found on the internet (e.g. www.tripadvisor.com, company owned website). Different methods (triangulation) to gather insights were utilized to control for the instrument bias and to contribute to a stronger substantiation of constructs and propositions (Eisenhardt, 1989). The focus was on qualitative data that provided rich descriptions and thus enabled the researchers to explain any found relations (Jick, 1979).

3.3 Data Analysis

As Eisenhardt (1989) proposes, within-case as well as cross-case analyses were performed. Firstly, the interviews were recorded, transcribed, and complemented with additional notes. This was translated into a detailed case study write-up for each site. The transcriptions were used to reread the interviews to detect any overlooked aspects. The software package NVIVO (QSR International, version 11) was utilized to code and systematically analyze the data. The used code book can be found in Appendix B. The obtained overview was then used for cross-case comparisons. Similarities within different categories and intergroup differences were carved out. A more sophisticated understanding was also achieved by comparing pairs of cases dependent on occurring different traits. This cross-case analysis lead to a more accurate and reliable theory (Eisenhardt, 1989).

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rival explanations reduced internal validity. Also, logics models were used (Yin, 1984). Field notes, that are an ongoing stream-of-consciousness commentary about what happens, were made to retain an overview (Eisenhardt, 1989).

4 Why Franchisees Choose to Behave in a Certain Manner

Trust and formal structures seem to have a great impact on franchisees´ attitude and behavior. 1) As researched by Davies et al. (2011), lacking trust in the integrity and competence of the franchisor can lead to noncompliance. However, they did not mention nor researched whether the occurring deviating behavior is well- or ill-intentioned. Insights concerning this gap are gained from the cases and are presented hereafter. Generally, it seems that if a business is directly run by the founder, trust in the franchisor´s integrity is higher than if it is run by a professional management. Consequently, the franchisees feel more committed to behave well to support the franchisor. However, franchisees´ trust in the competence of a founder and a professional may differ with respect to different regards, such as running a large organization. 2) The nature of processes and relationships in an organization can be formal or informal. While some organizations have a very clear structure, manifested in their distinctly defined and carefully attended to hierarchical organizational chart, reporting relationships, and work processes, other organizations value informal structures in order to accelerate processes or promote creativity. Generally, older and larger firms tend to be more formal.

In the following the derived insights are further explained and the grounding in the data is described.

4.1 Trust and Informal Structures: Case DD

Generally, mutual trust improves the overall relationship (Davies et al., 2011). Informal structures particularly facilitate the exchange of new ideas, experience and good practices among the franchisees as well as with the franchisor. In combination, it is the most promising foundation for further discussion, joint development and successful implementation of innovations.

The case company DD represents these two characteristics: (1) The franchisee expressed multiple times his trust in the franchisor´s integrity and competence and his admiration of the franchisor´s skills and know-how:

“He is a genius. That´s incredible. He really is on a different level and has great ideas.” 2

He also believes that “trust is the basis”3_{for a successful cooperation. (2) DD has very informal} structures. Though general structures are in place, the relationship is very open, honest and personal:

2_{Original quote: “Der ist halt auch wirklich voll das Brain. Das ist unglaublich. Er ist wirklich auf einem anderen Level} und hat super Ideen.” (Franchisee, DD)

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“The franchisor has an open mind in all regards. He acts completely transparently and is happy to answer any question.” 4

The franchisor and the franchisee interact frequently and collaborate if desired by one party. This might primary be due to the personalities of the franchisor and the franchisee and their intrinsic motivation to work. The franchisee has always been eager to start his own business. Despite his previous good and secure job, he always felt that “there was something missing”5_{. He described himself as very ambitious,} goal-driven, and competitive, which is also manifested in his former career as a successful professional athlete. He is truly eager to run a perfect business and values the challenge of “transforming a bad performing outlet into a highly profitable one”6_{. Therefore, he expects his employees to give him direct feedback about} customers´ demands and other suggestions for adaptations and further developments. He also expressed his preference of non-material (good feedback and appreciation) above material (monetary bonusses):

“To serve as a model or to get positive feedback is of much greater value for me than 1000 gifts.” 7

This mindset also shapes his relationship with his employees – “if the chemistry is right and the applicant seems to fit in the team, everything else is of minor importance”8_{. The employees share this} attitude: One of them said that a good salary might be the basis, but what really matters is the joy at work and that everyone feels comfortable and appreciated. The franchisor encourages this personal atmosphere by e.g. visiting all stores in person. This indicates that the franchisor genuinely cares for the business and all outlets. It could also indicate that he favors tight, personal controls. The franchisee values this behavior because for him it makes a difference whether he talks directly to the franchisor who founded the business or to a trainer.9_{The franchisee said:}

“We are a very young business, meaning that even [the franchisor] himself is still acquiring a lot of new knowledge. He is dependent on [the franchisees], and we are currently all growing together towards becoming a mature business.” 10

There is still plenty of room for refinement and development. The small size of the chain also strengthens the voice of the franchisee, as he owns almost six percent11_{of all outlets. Acording to the}

4_{Original quote: “Er ist bei allem sehr, sehr offen. Es wird alles auch preisgegeben und man kann auch immer} nachfragen.” (Franchisee, DD)

5_{Original quote: “Aber für mich hat halt immer etwas gefehlt.” (Franchisee, DD)}

6_{Original quote: “…[und es auch zu schaffen,] einen Laden, der nicht so gut läuft, nach oben zu bringen.” (Franchisee,} DD)

7_{Original quote: “Das [als Vorbild genommen werden] und gutes Feedback ist dann für mich auch viel mehr wert ist} als 1000 Geschenke.” (Franchisee, DD)

8_{Original quote: “Wenn die Sympathie stimmt und die Person ins Team passt, ist alles andere erstmal zweitrangig.”} (Franchisee, DD)

9_{Original quote: “Von ihm die Sachen zu hören ist halt auch noch einmal anders als von einem Trainer…Und das} braucht man halt auch.” (Franchisee, DD)

10_{Original quote: “Wir sind ein sehr, sehr junges Unternehmen. Das bedeutet, dass er [der Franchisegeber] selber ja} auch gerade erst vieles dazu lernt. Und daher ist er auch angewiesen auf die ganzen Leute [die Franchisenehmer] und wir wachsen gerade gemeinsam zu einem reifen Unternehmen.” (Franchisee, DD)

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dependence-theory, this increases the likelihood of exchange relations as the actors are more mutually dependent (Molm, 1997). The final implementation of a promising innovation is also not as difficult and slow as in larger chains.

Due to the aforementioned reasons, the franchisee usually complies by closely following the prescriptions. Still, he deviates in mind by questioning the adequacy of regulations, thinking about further improvements and refinements of the overall strategy, and possible adaptations to fit the local environment. If the franchisee develops a promising idea, he proposes the optional deviation to the franchisor. This open communication might stem from their long-shared history as well as franchisee´s acknowledgment of franchisor´s expertise and approachability as he also admits misjudgments12_{. If the proposal is accepted,} they work together on the refinement. The franchisee benefits of the franchisor´s expertise and appreciates the collaboration (synergy). He then tests the idea by implementing it in his own store. If it works out it will be implemented chain wide. An example for this is the extension of the concept by adding a new segment – a healthy breakfast.13_{However, he would never deviate against the franchisor´s will. The withdrawal of a} smoothie from the range of products due to the non-sufficient nationwide demand illustrates franchisee´s full compliance. He complied despite the success in his store to preserve the uniform picture:

“It has to work everywhere. If that´s not the case, it [complying] is not a big deal and doesn´t harm you.”14

It can be concluded that whether the franchisee complies with or deviates from standards stems from careful considerations and concerns for the consequences for the whole business. His behavior seems to always be well-intentioned. This might be attributed to the close and trusting relationship between the actors and the existing informal organizational structures. The franchisee actively contributes to the further development and the perfect alignment to local markets by deviating which even impacts core concepts and procedures of the chain.

4.2 Trust and Formal Structures: Case LL

As mentioned before, trust strongly contributes to a good relationship. In the context of formal structures the collaborative exchange of ideas, experience and good practices is limited to the allowed scope.

The case company LL represents these characteristics. (1) It is characterized by a mutually trusting relationship. The franchisee and the franchisor treat each other with respect, are understanding and willing to explain the grounding or application of rules. (2) The organization is in some regards very formalized while still being flexible in other areas. LL has very detailed rules in place (e.g. how to exactly welcome a

12_{Situation: The franchisor discouraged the franchisee to open a store at that particular location – now he admits that} it is actually a very good location.

13_{Right now, they are still in the development phase.}

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guest or where to place the cutlery). Closely based on these, the franchisees are evaluated. As the franchisee said:

“When the guest calls to make a reservation and you forget to say “buongiorno”, there´s no way you will get 100%.” 15

Not only the franchisor is fond of standardization, but also the franchisee. The franchisor encourages personal, informal contacts by e.g. organizing events aside from work. If an inspection reveals unacceptable standards or bad performance, the franchisees will not get punished but helped by a firm consultant to get back on track. This positive relationship might also stem from the similar personalities of the franchisee and the franchisor. The major motivation of the franchisee is to be a good host. He previously worked as a barkeeper and expressed his initial aversion towards system catering:

“System catering is nothing else than mass-processing, everything is standardized. It does not have anything to do with being a great host.” 16

After a friend convinced him to give it a chance, he was quickly convinced of the concept: “It was incredible - LL”17_{. He is an analytical person who describes himself as being reliable, honest and ambitious,} which is also expressed by his keenness for sports. He has a positive mindset and truly believes in positive reinforcement. He is truly concerned about his employees, about their well-being at work (e.g. he hosts them in the morning) as well as in their private lives (even cares for healthy nutrition and private issues). Applicants do not have to have any certificates or similar, they “just” have to fit within the team. A principle of the entire organization is that “egoism does not get tolerated”18_{. The relationship in general is very open} and personal which is manifested in the franchisee referring to “la famiglia”. LL is still founder-run which might be the reason for the passion behind every single product and process.19_{The franchisee also stated:}

“The franchisors are not businessmen, they are hosts. When they visit a store and it is very busy, they immediately pick up a tray and wait the guests.” 20

This case shows that the franchisee in a context of trust and formal structures usually complies due to his trust in the overall concept and the franchisor´s work. He follows rules even if these initially do not make sense to him. Mostly, he then recognizes that they make sense and work. The franchisee is in general very satisfied with the concept. Thus, he only deviates slightly by refining procedures but barely has an influence on the development of the overall concept. This might also stem from the franchisor´s regulations preventing him from doing so. The franchisor does not (and not seems to desire to) leverage the practical

15_{Original quote: “Die […] reservieren einen Tisch. […] Wenn du nicht buongiorno sagst, gibt es keine 100%.”} (Franchisee, LL)

16_{Original quote: “Das ist halt einfach eine Massenabfertigung, alles ist standardisiert. Das hat nichts mehr mit} Gastgeber sein zu tun.” (Franchisee, LL)

17_{Original quote: “… und es war der Wahnsinn - LL!” (Franchisee, LL)} 18_{Original quote: “Auch Egoismus wird halt nicht geduldet.” (Franchisee, LL)}

19_{Original quote: “Da steckt so viel Herzblut hinter einem kleinen Produkt.” (Franchisee, LL)}

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expertise and creativity of his franchisees. Nonetheless, the franchisee´s behavior is usually well-intentioned. Good compliance and good, minor deviations take place.

4.3 Distrust and Formal Structures

Franchisees´ lack of trust in franchisor´s integrity or competence usually results in dissatisfaction. They develop a personal desire to deviate from rules and regulations they do not agree to. However, if formal structures are in place and the franchisor strictly enforces compliance, this behavior might be hampered and compliance might be achieved.

Two case companies represent these characteristics. Franchisees lack trust and are not fully satisfied. However, they usually comply since their behavior is restricted by formal rules. While the moderately high trust of the MM franchisee in his franchisor´s competence results in general acceptance of rules and only minor deviations, the SS franchisee almost completely lacks this trust which leads to partial ceremonial compliance. The derived insights are further explained in the following.

4.3.1 Case MM

The company MM is managed by professionals. (1) Little trust characterizes the overall relationship. This is manifested as the contract is set for 20 years and has to be renegotiated afterwards. If an offspring plans to take over the parent´s outlet, they must enter the usual application procedure. Information about outlet revenues are directly and automatically reported to the headquarter. This dehumanizes the relationship. This procedure might stem from fraudulent incidents in the past.21_{(2) MM is formal. Even} though there are some events besides work (e.g. barbecues) the relationship is impersonal. The franchisee stated that he speaks to the franchisor once or twice a year even though they planned to speak monthly. The relationship between the franchisee and the employees is also “more distant”22_{. This might be due to} the motivation of the franchisee which is simply to make business and money. 23

The franchisee tests a deviation which promises to improve performance or the working atmosphere in her own store (e.g. color of work attire). If it turns out to be successful, she shares the idea with other franchisees and the franchisor. However, these deviations are small and not major developments. They do not touch core components. The franchisor affirms that he desires it this way. He said that despite formal meetings where franchisees can propose their ideas, almost every innovation emerges from a creative team at the headquarter. These are tested in company owned stores. This indicates their refusal to rely only on franchisees. This approach is chosen either due to the high number of franchisees that makes it complicated and time-consuming or due to the lack of confidence in franchisees´ innovativeness and expertise:

21_{Original quote: “Het gebeurt he, fraude.” (Franchisor, MM)}

22_{Original quote: “...helaas wat afstandelijker.” (Restaurant Manager, MM 2)}

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“[Some franchisees] try to open their own restaurant. In most cases, this will not work out and they will fail.”24

The franchisee also noticed this attitude as he said that the ideas of franchisees usually do not get accepted anyway. However, there are also examples of major adaptations to the concept which got introduced nationwide.25_{Apart from this, the franchisee has sosme ideas on deviations but is not allowed} to realize these.26

4.3.2 Case SS

(1) The franchisee lacks trust even though he acknowledges that the brand is a strong chain with a meaningful concept. The franchisee questions franchisors´ competence as they are only relying on theoretical knowledge:

“They have probably never sold a sandwich to a customer. […] All they have is their Master´s degree in Business Administration, they have never actually worked.” 27

The franchisee worked previously as a consultant. He decided to become a franchisee because he desired a stable income and chose SS since he was able to identify himself with the “honest product”28_{, as} he put it. He is the most experienced franchisee in his region since he manages five outlets for now 13 years. He desires to actively improve the processes and the concept. However, he is usually not allowed to do this since SS is run by a professional management and all major decisions are made by the people working at the headquarter. (2) SS establishes formal structures by many clear and strict rules. A detailed report, similar to an all inclusive income statement, must be sent to the franchisor weekly. The outlets are inspected monthly and evaluated based on a list of 300 points. If any deviations are found, the franchisee receives a warning and is obligated to correct the issue within the following 60 days. Otherwise his contract gets cancelled. The handling of customer complaints is prescribed. The franchisee must react within 48 hours and send a copy to the franchisor as a proof. The utilizing of these strict mechanisms might not be meant personally but is just business as usual. SS might utilize these formal structures because controlling and monitoring in such a large organization is very difficult by other means. However, it may also signal franchisor´s lacking trust in the franchisees.

Even though the franchisee usually complies with general rules and regulations, there are areas of conflict. One employee said that they sometimes deviate but pretend to comply when they are inspected.29 This could be labeled as bad deviation, “decoupling”, or rather ceremonial compliance and operational

24_{Original quote: “Maar dan gaan ze [franchisenemers] wel zelf hun eigen hamburgerrestaurant beginnen. Dan blijkt} wel vaker dat dat in veel gevallen, dus niet lukt.” (Franchisor, MM)

25_{They introduced a popular Dutch dish not included in the standard range of products.}

26_{The franchisee for example wanted to change the packaging of some food to improve the handling.}

27_{Original quote: “Zij hebben waarschijnlijk nooit een broodje verkocht aan een klant. […] die hebben een master} gedaan in ‘business administration’ of ze zijn controller, ze hebben nooit gewerkt.” (Franchisee, SS 1)

28_{Original quote: “Het is een eerlijk product.” (Franchisee, SS 1)}

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deviation (Cruz et al., 2009). Sometimes they comply to rules although deviation might be beneficial: One of the franchisees would for example like to add ice-cream to the product range or offer a meatball sandwich. The franchisees´ practical experience and opinion is not valued and is not taken into account. The only way to be heard is via voting on proposed changes which does not satisfy the franchisee.

4.4 Distrust and Informal Structures

None of the case companies was characterized by distrust and informal structures. A relationship like this would probably never occur, quickly be dissolved due to its dysfunctionality or formal structures through rules would be implemented to ensure compliance.

5 Discussion

An interesting insight was derived earlier by the separation of two general issues: First, franchisees may deviate because the standard concept does not suit the specific local environment. The c ompany DD illustrated how that issue can be solved. They developed four different outlet styles to better suit specific locations.30_{The need for adaptations to local markets which carries the risk of bad deviation is thus} minimized. Second, the standard concept must be continuously improved to meet the changing market needs. The organization decides who should actively look for opportunities and threats and initiate possible changes as well as how these ideas can be further developed. The case company DD works in very close collaboration with its franchisees – while the interviewed franchisee noticed and proposed a possible deviation, the franchisor has supported him by further developing the idea and offering help with the implementation in the franchisee´s outlet. If the idea proves to be successful, the franchisor will implement it chain wide. LL, MM and SS on the other hand decided to centralize R&D and to test prototypes in company owned outlets.

Especially in a franchise setting, different tensions occur: uniformity versus local adaptations, standardization versus entrepreneurialism, exploitation of franchise formula versus exploration of new opportunities, and cooperation versus competition. These create complex issues. While the franchisor attempts to standardize procedures wherever possible, there still has to be enough freedom for necessary local adaptations. The franchisees meanwhile face a conflict between obedience to the franchisor and entrepreneurialism. In general, the exploitation of the franchise formula ensures profits in the short run while exploration of opportunities and threats is needed to stay profitable in the long run (Mrach, 1991). Different approaches to solve these issues are to some extent researched: Bradach (1997) for example suggests to use the plural form, i.e. the simultaneous use of company and franchise units, to preserve uniformity while adapting to changing markets. Anderson et al. (2014) found out that performance risk, which is the risk of failure despite full cooperation (Das and Teng, 2001), can be reduced by careful partner selection and contractual outcome agreements.

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However, this research focused on another potential mechanism that can improve an already established relationship between franchisor and franchisee through an appropriate reaction to franchisees´ behavior or by changing the structures in place. What emerged from the analysis are insights that closely link the quality and characteristics of the relationship to the occurrence of collaboration and franchisees´ general attitude to work. Particularly trust and formal structures seem to greatly determine the reasons underlying compliance or deviations.

The organizations DD and LL apply social controls in the form of personal feedback, communication and collaboration. This approach creates a working environment of psychological and actual support which reinforces franchisees´ motivation for well-intentioned behavior and exploration. Yet, if organizations do not desire excessive innovative behavior of franchisees, they can utilize formal rules to clarify clear boundaries (as can be seen in organization LL). Both, DD and LL, are relatively small which can be closely linked to the extensive use of social controls. The small size facilitates close contact. Social controls supposedly have not only a direct effect on well-intentioned behavior but also an indirect effect mediated by a positive impact on mutual trust. The organizations are founder-run which reinforces well-intentioned behavior since the franchisees feel more committed to the franchisor who is the soul of the company. Therefore, the trust in franchisor´s integrity is usually high. However, the founder may lack expertise on how to efficiently run a larger organization due to lacking experience in this regard. LL faced this dilemma and dealt with it by complementing their management team with a professional.

In contrast, the large organizations MM and SS utilize very little social controls and more formal controls. This might stem from a lack of trust in the franchisees or the need due to the many franchisees to control. Either way, the franchisees might interpret this as lacking trust in their abilities, respect or appreciation which hampers their motivation and explorative activities. The franchisees choose to comply if they trust the franchisor and his proposed actions. If they lack this trust, as in our example, they tend to bad deviations or compliance. The professional management of the organizations might negatively impact franchisees´ trust in franchisors´ integrity since professionals might not identify themselves as much with the business as the founders and thus do not share their high motivation. Despite the past success of the concept the SS franchisee even questioned the franchisor´s competence. The behavior in general is not as cooperative as in the aforementioned cases.

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belief systems as well as descriptive and interactive control systems to increase the efficiency of procedures already in place while simultaneously enabling the exploration of new opportunities, if desired. Belief and interactive control systems particularly generate innovativeness and creativity while boundary and descriptive control systems have a control effect (Simons, 1995a). Also, the franchisor´s awareness of franchisees´ intentions can ensure that innovative behavior remains within the desired range and direction and thus does no harm. The success of the chain will accordingly grow due to achieved higher efficiency and effectivity. Also, the relationship between franchisor and franchisee is improved since franchisees do not feel misunderstood but rather appreciated. This leads to highly motivated franchisees. However, the larger a chain is, the more difficult it is to implement these social controls.

Yet, cases MM and SS indicated that franchisees´ innovativeness is not always desired. Although the franchisor cooperates with entrepreneurs, the franchisees, he expects close compliance to the rules from them. This is paradox. A case introduced by Winter et al. (2012) of a bakery franchise resembles this phenomenon. They made their franchisees swear an oath of operating exactly according to the rules, even if these do not seem to make any sense. Winter et al. explain this by stating that modifications increase the risk of failure. The strict rules imply that the motive is not to leverage entrepreneurial spirit. Since these organizations are all large, successful chains they have the resources to establish and operate their own outlets. This implies that there is another reason besides these two well-known reasons.

5.1 Contributions

This research provides a comprehensive picture of behaviors and different underlying attitudes. Behavior and consequential effects (table 1) were categorized in, to the best of my knowledge, a new scheme that provides a clear overview. The aim was to clarify the underlying causal mechanisms that lead to a particular attitude and behavior and explain the relationship. This knowledge is necessary to understand where undesired behavior stems from, how it can be prevented and how an appropriate, direct response to observed behavior can be chosen. These insights should motivate franchisors to rethink their structures and mechanisms in place by analyzing their influence on franchisees´ behavior. If undesirable consequential effects do occur, structures and mechanisms can be changed to eliminate these failures.

Davies et al. (2011) concluded that trust positively influences compliance. These results, which were based on relational exchange theory, were refined by differentiate between good and bad deviation and compliance.

5.2 Limitations

The development of a grounded theoretical framework based on a relatively small sample entails some limitations and biases limiting the generalizability of the results.

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different classifications were underrepresented and no quantitative data was used to further support the results. A larger sample could increase the sample variability and might point out different relationships or other independent factors. Also, the case companies were operating in two different countries. The national culture and other situational influences might impact agents´ behavior and attitude. The German culture is known to be more long term oriented which might limit opportunistic behavior. This could be an alternative explanation for the observed behavior. Germany is also known to be more “masculine” which implies that people are driven by competition, achievement and success rather than quality of life and caring for others (Hofstede, n.d.).31_{Interestingly, rather the opposite was observed in this research.}

Secondly, there might be discrepancies due to the respondents. The reliability of answers might differ due to the nationalities. The social desirability bias might be fostered due to the very sensitive topic. If, for instance, the German respondents did not answer as honestly as the Dutch the results are distorted. The observance of only good behavior in the German cases would be a misperception. The non-respondent bias might prevent observing bad behavior. The people who agreed to the interview might have done so due to their positive character which biases the results further towards well-intentioned behavior. The interviewed employees were not selected randomly or in accordance to exact conditions, despite having some experience, but were chosen by the franchisee who could favor those sharing his opinion. In addition, in some cases not all or only one representative per perspective (i.e. the franchisor, franchisee and employee) were interviewed, fostering respondent bias. Capturing all perspectives would have contributed to obtaining a more realistic and objective picture.

Thirdly, there is an interviewer bias. This might distort the interview outcomes due to different phrasing or tenor of questions directing towards preconceived answers. Since the interview guide did not exclusively focused on the issue addressed in this paper the obtained insights might be superficial and incomplete. Important details or alternative explanations for the observations might not have been come up. It was not controlled for intercoder reliability which fosters subjective assignment of codes.

Since there are many constructs, such as nature of task to be executed, the general work climate etc., which might impact behaviors and underlying attitudes the internal validity of the results is questionable.

5.3 Future Research

The limitations suggest directions for future research. The general results are worthy of detailed future investigation on a larger, more diverse sample. Franchisees´ freedom and franchisor´s lateral expectations might be, directly or indirectly, dependent on chain characteristics not observed in this study (e.g. industry, multinationalism, national culture, chain culture, chain standard, opportunities for standardization) as well as on individual characteristics (e.g. age of alliance, skill level).

Another interesting area worth investigating is the occurrence of deviation and compliance on different levels – i.e. not the compliance of franchisees to franchisor´s regulations but employees´ to

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franchisee´s. Also, a detailed analysis of the similarities and differences between the issue in a normal organization and a franchise would improve the external validity and generalizability of results.

Also, trust might not only influence franchisees´ behavior but also influences the franchisor´s interpretation of franchisees´ behavior. An attribution bias, which is a cognitive bias referring to systematic errors when assessing behavior, might lead to favorable assessments of franchisees´ behavior by the franchisor. An empirical analysis could be performed in order to prove or contradict this assumption.

6 Conclusion

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8 Appendices

8.1 Appendix A: Interview Guide

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(Give small introduction: joint research, anonymity)

Can you tell a little bit more about yourself and what you do?

- Function? How long? Why this firm?

How did the relationship with your franchisor/chain/employer/employees start?

- Who? Who started the structure? When? Why?

- Why this chain? (Why you?) Franchise/License?

- Are you satisfied with the franchiser? Why (not)?

These two questions are about the level beneath the interviewee

What do you expect from the level underneath you (chain/employer/employees)? What’s in it for you?

- information? expertise? suggestions for adaptations to local market needs?

- rights? advantages? benefits? values?

- likes? dislikes?

- information always reliable?

What does the franchisor/chain/employer/employees expect from you? What’s in it for them? - Information? expertise? suggestions?

- duties? constraints? downsides? evaluation criteria?

- mutual benefits?

-

These two questions are about the level above the interviewee

What do you expect from the one level above you? (franchisor/chain/employer/employees)? What’s in it for you?

- information? expertise? support for adaptations to local market needs?

- rights? advantages? benefits? values?

- likes? dislikes?

- Do you have the feeling that the franchisor (knowingly) withholds information? Do you experience this as dependence?

What does the franchisor/chain/employer/employees expect from you? What’s in it for them? - Information? Information sufficient? expertise? Suggestions for adaptations to changing market

needs?

- duties? constraints? downsides? evaluation criteria?

- mutual benefits?

Give small intro: This question is about interpersonal relationship

How do you perceive/feel about the relationship with the person above (=franchisor) you?

- How often do you meet? e-mail? phone calls? For what reason?

- location? frequency?

This part is about the contract of the franchisor with the franchisee

Are there controls ensuring that you both keep your end of the contract?

- Reporting? Visits? Mystery shoppers?

- Meetings? Trainings to improve skills?

- Benefits? Bonuses?

- Underperformance? Consequences? Penalties?

- How is the franchisor/manager/employee assessed in his work?

Compliance with and Deviations from Chain Standards – Behavior of Agent, Underlying Attitude, and Principal´s Appropriate Reaction

Master Thesis