Coping with inter-organizational relations within franchises in the hospitality industry.

Coping with inter-organizational relations

within franchises in the hospitality industry.

Keywords: Inter-Organizational Relations, Trust, Control, Franchises, Hospitality Industry

Master thesis

MSc. Business administration: Organizational & Management Control

Faculty of Economics and Business

University of Groningen

Author: Inez Makaske (S3041352)

Date: June 20

, 2017

Abstract

Introduction

When a small business is successful the management of the business may see new opportunities that may lead them to expand the business. There are multiple forms of expansion that a firm can use to grow its business, but not all these types of expansion are suitable for every organization. Business can also choose to seek these new opportunities by working with others and thereby starting inter-organizational relations (IOR).

There are multiple forms of inter-organizational. The relation between the partners can take several forms. They may be close to equal such as with strategic alliances, were both parties agree to the interchanging, sharing, or to the developing of new products, services or a new technology together (Gulati, 1998). But the relationship may also show asymmetric power, for example with vertical networks were the supplier are often more vulnerable in regards to the buying firms that tend to have more power. (Subramani &Venkatraman, 2003) One can also make a distinguishing between the different hierarchical levels of collaboration, where relationships imply less collaboration than alliances, and levels of collaborations are even higher with networks. (Tomkins, 2001) Another distinction between the different organizational forms that present IOR’s is the nature of these relation they may be voluntary or bounded by a legal contract. This distinction has implications for the form of these partnerships. (Hall et Al., 1977) One can also make a distinction in the organizational forms with IOR’s that are there for a certain time period and the alliances that are built to last indefinitely. The fact that an alliance with one partner has ended, does not necessarily mean that all alliance with this partner end indefinitely. Alliances that have been formed in the past, may also lead to alliances with the same partner in the future. (Goerzen, 2007) It is of course also possible for firms to have multiple alliances. So, the collaboration can take multiple forms, one other form that is worth mentioning is franchising. With franchising a company sells rights to use its business formula to franchisees, who can then exploit this business formula. (Rubin, 1978) This research will be conducted within franchises in the hospitality industry.

can also develop a problem because the relation is not developing enough to keep up with expectations. Doz (1996)

All these tensions might lead to the failure of these organizational forms. Since firms generally want to prevent their partnership from failure, one needs to find a way to deal with these tensions. In the literature, there has been written a lot about how trust may be beneficial or harmful for IOR’s. Generally, the conclusion to this literature is that too much trust might lead to some serious complications. It has however been stated by several researchers that trust might have a positive influence on the IOR’s and might serve as a solution for the tensions as described above.

Besides this positive effect of trust, trust alone might not be enough to deal with these tensions, firms can and do use control mechanisms. There are multiple control mechanisms a firm can use, from controls that are more oriented on the results to controls that are meant to influence the actions leading to these results. (Merchant & Van der Stede, 2012)

There is literature about the relation between trust and control, but the different relations as suggested by these studies differ and are therefore inconclusive. For example, Mouritsen & Thrane (2006) distinguish three possible explanations concerning the relationship between trust and accounting in the literature. The accounting system may produce trust, but accounting may also be an alternative for trust (where trust is more effective) and trust may be seen as a necessary condition. The goal of this research is to understand better this relation between trust and control.

It is meant to provide new insides in this relation between trust and control. Besides this theoretical relevance, this would also provide benefits form a managerial perspective since more insights about these relations might help managers to make better decisions when developing control mechanism and how to deal with trust. The research question for this study will be:

RQ: What is the relationship between trust and control within organizational forms with IOR’s?

Literature Review

As stated in the introduction there are multiple organizational forms with IOR’s, although these may differ from each other, in all forms tensions may exist. These tensions arise because there are multiple actors involved which have different expectations and interests. In this section, these tensions and why they may lead to the failure of IOR’s will be discussed further. Furthermore, this section will also discuss multiple strategies that can be used to deal with these tensions that exist in IOR’s.

Tensions in Inter-Organizational Relations Opportunism

Opportunism is the behavior of misleading the other party in a way that serves the self-interest. (Jap & Anderson, 2003) Jap & Anderson (2003) state that opportunistic behavior has two elements: (1) giving the other party the wrong or incomplete information and (2) not fulfilling the commitments that are made to the other party. They also state that both parties can engage in this opportunistic behavior and that this can happen both before the transaction starts and during the transaction. This is a form of active opportunistic behavior, Wathne & Heide (2000) state that one can make a distention between passive and active opportunism. Active opportunism is the behavior as described earlier where one party behaves in a way that is prohibited either explicitly or implicitly, passive opportunism is the behavior where one party evades its obligations. (Wathne & Heide, 2000) One can make a distinction in the circumstances at which opportunistic behavior takes place, the previous examples were both in case of excising circumstance’s. When circumstances are changing one can show passive opportunistic behavior by refusing to adopt or by showing inflexibility and one can show active opportunistic behavior by using the new situation to renegotiate a new contract were the other party is forced to make concessions. (Wathne & Heide, 2000)

Moral hazard

When individuals engage in activities at which they both share risk, but it is not possible for one individual to take actions when the other acts in a way that influences the eventual outcome of their partnership this may give rise to moral hazard. (Hölmstrom, 1979) One of the reasons for this moral hazard can be asymmetric information, which entails that the behavior of one individual cannot be observed and therefore it is not possible for the other person in the relation to take action. (Hölmstrom, 1979) Asymmetric information entails that the parties involved do not have the same information, one party can therefor act in a way that is not beneficial for both parties without the other party having knowledge of this. This is also an uncertainty for organizations with IOR’s (Ring & Van de Ven, 1994) If a firm engages in a partnership with another firm at which they are dependent on each other to finish a project and the other firm takes large risk regarding its financial position this may have a serious impact on the financial position of the other firm as well. If the firm went bankrupt because of the large financial risk taken it won’t be able to finish the project which in effect also influences the financial position of the other firm, since that firm might lose the income of the project as well. (Tomkins, 2001)

Inter-organizational conflict

One can distinguish two types of interorganizational conflicts, structural conflicts and operational conflicts. Strcutural conflicts is about the basis of the relationship, the responsibilities and identieties of both parties, operational conflicts involve disagreements and disputes within the relation. (Molnar & Rogers, 1979) Molnar & Rogers (1979) found that organzaitions that have similarities are experiencing more structural conflicts, because the comparisons seemed to enlarge the awarenes about the differnce in purpose and direction of both parties. These conflicts might eventually lead to the termination of the relation.

Failure of organizational learning

learning. In case of low organizational learning the strategic alliance will likely not be able to still satisfy the conditions of both parties, resulting in a failure of the partnership.

Trust

An important aspect of IOR’s seems to be trust, it has been a subject of several researches. There is however not one clear effect of trust that can be distinguished. Trust can be either seen as a success factor, but trust has also been described as harmful. These different effects of trust on will now be discussed. But before the discussion about what the effects of trust might be can start it is important to have a clear definition of what trust entails. For this paper, the definition of trust by Tomkins (2001) will be used.

Tomkins (2001) defines trust as:

“The adoption of a belief by one party in a relationship that the other party will not act against his or her interests, where this belief is held without undue doubt or suspicion and in the absence of detailed information about the actions of that other party.” (p. 165)

Now a discussion will follow about why trust might be seen as a success factor or as harmful. Trust as a success factor

A certain amount of trust is important to allow for successful IOR’s. When a firm has low levels of trust it might decide not to invest in certain business opportunities that latter might end up to be valuable, in this way successful business opportunities are missed. (Wicks et al., 1999) Gulati & Nickerson (2008) also found evidence that trust improves the performance, because trust can reduce the conflict that exists because of inter-organizational relations.

Besides the authors that have stated that trust might lower the need for control mechanisms, some authors have also described trust as a control factor, were trust can control and protect a firm from certain tensions as described in the previous section. Bradach & Eccles (1989) state that overtime trust may affect the arrangements with firms to be of more informal nature. This may make that contracts can be less specific and this might make them less costly.

Trust as a harmful factor

Trust might also be harmful, when a firm trust too much this might have negative consequences. When a firm has high levels of trust and thus overinvests in trust in other parties they may invest their resources in a less optimal way and take unnecessary risks, which can have a negative influence on the firm’s performance. (Wicks et al., 1999) Too much trust may also be seen as a cause for trouble when it is not provided by both parties involved. Zeng Chen (2003) state that when forming an alliance, it is important to trust the partner to some extent to make the partnership possible, but when this trust is not mutual it may lead to a disadvantage for the more trusting partner.

Jeffries & Reed (2000) state that trust might also lead to motivational problems for the negotiators of contracts. They state that when trust is high this might reduce the motivation to search for an optimal solution regarding the contract, since this will result in less optimal solutions the firm’s performance suffers.

Jap & Anderson (2003) found that the relationship between trust and performance is difficult. They found that when the interpersonal trust is high, the relationship performs better, it leads to better results and longer lasting relationships, but this positive effect disappears or may even be reversed in case of opportunistic behavior. Once this opportunistic behavior occurs, other people in the organization will be involved and when this happens the once important trust build is no longer relevant.

So, trust can be both a success factor, but might also be harmful. It might be said that trust is good for the performance of the relation, but too much trust might be harmful. Wicks et al. (1999) have suggested that there is an optimal level of control.

Control

mechanisms: (1) results controls, (2) action controls and (3) personnel/ cultural controls. They suggest that these controls can help prevent the following problems that can summarized in three categories: (1) Lack of direction, (2) Motivational problems and (3) personal limitations.

Results controls

Results controls are meant to encourage employees to make the right decisions or actions by making them aware and reliable for the consequences. These types of control allow employees a certain amount of empowerment, because they are not dictated certain actions, but are only held accountable for the results. This should allow personnel to use their own talents to achieve these results. (Merchant & Van der Stede, 2012) This is a control that might prove to be very valuable for several forms of IOR’s, since this form of control provides an opportunity to benefit of the specific talents of the partners and still control for the results that need to be achieved.

Action controls

In contrast to result controls action controls are more direct controls that are concerned with the specific actions that employees take. So, whereas result controls focus on the final result, action controls are meant to make the employees take specific actions as stated by the firm. This type of control work as a prevention rather than as a detection of behavior that is undesirable. (Merchant & Van der Stede, 2012) These controls may not always be applicable for every form of IOR, since it concerns a very direct form of control and therefore also implies the possibility to control the operations directly. Whether these controls can be used therefore depend on the amount of involvement the firm has. The control might be relevant for franchises as suggested by Merchant & Van der Stede (2012), but might for example be less relevant for strategic alliances were one might rely more on the specific talents of the partner in this case results control seem more relevant.

Personnel and cultural controls

Interplay Between Trust and Control

Now that both the concepts of trust and control have been discussed it is possible to take a closer look at how these two concepts relate to each other. The interplay between trust and control is complex, some of the possible relations will now be discussed.

Some authors have argued that trust can be seen as a control mechanism and can be seen as complementary to other control mechanisms. (Bradach & Eccles, 1989) (Poppo & Zenger, 2002) Bradach & Eccles (1989) have stated that trust is a form of control mechanism and might therefore be part of the controls installed, they state that it is best to use multiple forms of control including trust. Others have argued that although trust can be seen as a control mechanism the relation between trust and control is interchangeable. They state that trust can be seen as a substitute of control mechanisms. (Tomkins, 2001; Gulati & Nickerson, 2008)

Poppo & Zenger (2002) found that when trust is high the contracts used in relations may become more customized, these customized contracts seem to have higher results when it comes to preventing opportunistic behavior. They also found that this combination leads to higher satisfaction with the outcome of the exchange. So, trust may also have an effect on control and might result in better working control mechanism. It has also been stated that the control mechanisms might have an influence on trust. Aulakh, et al. (1996) found that different control mechanisms might have different influences on trust. They found that social controls may have a positive effect on trust, whether output control and process controls have no significant effect on control.

So, to conclude several tensions can be distinguished in an organizational form with IOR’s. These tensions arise, because multiple actors are involved and they may have different expectations and interests. To cope with these tensions one can use multiple control mechanisms, but trust is also an important factor.

The literature provides several possible explanations about the relation between trust and control, but overall there is little knowledge about what this relation entails specifically. So, it is interesting to further investigate what the specific relation between trust and control is. This will be the purpose of this study, to further investigate this relation. This will be done by trying to answer the research question:

Methodology

In this section, the method of data collection will be introduced, and the choice for the specific organizational form of franchise organizations will be explained. Then a description of the research method used and a description of the data and the data selection process will be given. Furthermore, the method of analyzing this data will be explained.

Method of Data Collection

To answer the research question of this study a case study will be conducted, this can help understand the complex social phenomena that underlies the IOR. Yin (2003) states that the case-study is a good research method to understand “how” and “why” questions and is therefore a good research method for this study. The data will be gathered by conducting semi-structured interviews, which will be recorded and later transcribed.

This study will focus on franchises, because this particular organizational form is a good example of the tensions that may exist in IOR’s. The next part will give a description of the literature about franchises and their IOR’s.

Franchise Organizations

When a company decides to expand with the use of a franchise formula the company that is called the franchisor sells rights to another company that is called the franchisee, this is done with a franchise agreement. (Rubin, 1978) There are multiple forms of franchise chains, these forms can be distinguished by the type of rights that a franchisor sells to the franchisee. These rights allow franchisees to use the brand name of the franchisor to sell certain products or services, but it may also give the franchisee the right to use a certain business format as is the case in for example restaurants (Combs et al., 2004) This case-study will be conducted among several franchise companies in the hospitality industry, which are part of a franchise chain that franchises a business format.

One can distinguish two different roles in these franchise formulas: the franchisor and the franchisee. The specific interest of these two partners and how these different interests might lead to tensions will now be discussed.

Franchisor

The franchisor is an owner of a business that has decided to franchise (parts of) the business. Although this type of growth strategy brings several advantages there are also challenges. An important challenge is that the franchisor has no full control over the actions of the franchisee and therefore cannot prevent the franchisee from harming the business concept. Franchisors give franchisees the right to use the brand name of the company. (Brickley & Dark, 1987) When a franchise formula has a valuable brand name, franchisees may be inclined to use this brand name without contributing as much to the reputation of the brand as others in the franchise chain, this is called the free-riding problem. (Barthélemy, 2008), (Holmstrom & Milgrom, 1994) This is an important risk for the franchisee and relates to the concept of opportunistic behavior that was discussed earlier.

Franchisee

A franchisee can be seen as an entrepreneur. (El Akremi et al., 2011) A franchisee has several incentives to join a franchise-formula, instead of starting a new business format as a sole owner. The formula provides the franchisee with a brand name, which might be of high-value (Barthélemy, 2008), (Holmstrom & Milgrom, 1994) But operating a business as a franchisee may also have disadvantages in comparison with operating a business as a sole owner. The franchisee has to pay the franchisor to be part of the franchise formula, this is traditionally done with two types of payments: a fixed amount upfront and later a percentage of the revenues, or a percentage of the sales. (Bradach, 1997) (Rubin, 1978). This of course lowers the profit margin for the franchisee and therefore a franchisee has to work efficiently to earn enough money, otherwise the financial incentive the franchisee gets may be very little.

Control and trust

To conclude a franchise organization is an organizational form which prevails a lot of tensions that are common in IOR’s. They mostly involve complex IOR’s, which makes franchise organizations an interesting object to study. As shown in this section they can prevail multiple control mechanisms and since franchisors may have many franchise operations it seems almost impossible to control everything and therefore trust should play an important role. This makes franchise organizations relevant to study trust and control in IOR’s.

The cases

For this study two organizations were chosen, both organizations are restaurant franchises in the low budget segment of fast-food. Two case studies were conducted at both organizations that form now one will be called brand A and brand B. Both organizations have a similar structure when it comes to the organization of the franchise formula, since these are large organizations there is not just one franchisor. Both franchise-formulas are originated in the US. and have restaurants all over the world. Although both organizations have franchises in multiple countries, the case-studies were only conducted in the Netherlands. Since both franchise organizations are positioned in multiple countries and have a lot of restaurants, these cases are very interesting for our study because this large size of the organization makes it hard to control everything and therefore there must be a certain amount of trust in these organizations. So, it can be expected that all the subjects that are of an interest for this study can be found in these cases.

Although there are some similarities between the two organizations there are also some differences that make it interesting to study both organizations. Both organizations have a headquarter in the united states and also a headquarter in the Netherlands. At Brand A the Dutch organization is also divided into multiple regions, each with its own region manager. One other difference is that in contrast with Brand A Brand B owns the land and the restaurant itself, this gives the franchisee less control about the position of the restaurants. Both franchisees are responsible for to financing of the interior, the furniture and the kitchen material. This difference make that it is interesting to study both organizations and see what the differences between both organizations are in regards to trust and control.

There is also another difference between the two cases within brand B. One restaurant is owned by a franchisee and the other restaurant is owned by the Brand B. So, one restaurant has IOR’s in contrast to the other restaurant that has no IOR’s. This might give some interesting insights about the effects of IOR.

two employees of both restaurants were interviewed. Furthermore, to get the perspective of a franchisor someone of the headquarters of the Netherlands was interviewed. This person that from now on will be called the franchisor is a sort of bookkeeper for the headquarter and could therefore provide some interesting information about the business and its controls. The duration of the interviews differed from around 20 minutes for the employees, around 60 minutes for the franchisees and managers, and 100 minutes for the franchisor.

Table 1:Summary of the people interviewed

The data was gathered by conducting semi structured interviews. This method has been chosen so it is possible to provide enough structure to the interviews to get the information that is needed for the research while also allowing the person being interviewed to provide new insights into the problem that might otherwise not be brought to light. (Galletta, 2013) The use of semi-structured interviews and will also help increase the reliability. (Van Aken et al., 2012) (Yin, 2003) To find what control-mechanisms are in place the question “Are there controls ensuring that you both keep your end of the contract?” was added to the questionnaire. Where control mechanisms is a relatively easy concept to grasp, one can ask about the existence of these control mechanisms in the organization during the interviewees. This is a more complex issue for the concept trust. Trust is a concept that is hard to grasp, because it is made up of multiple diverse constructs (Kasper-fuehrer & Ashkanasy, 2001). It would not allow for the correct answer to simply ask the respondents if they trust the franchisor or franchisee respectively. Therefore, no specific questions were added regarding the trust part, but there were some questions about the interpersonal relations and whether the respondent experiences the relation as one with a common interest. These questions were expected to provide enough information to make conclusions about the trust in the organizations. The interview guide can be found in Appendix B.

Restaurant 1 (owned by brand A) Restaurant 2 (owned by a franchisee) Restaurant 1 (owned by a franchisee) Restaurant 2 (owned by a franchisee) 1 Franchisee 1 Franchisee

1 Manager 1 Manager 1 Manager

1 Employee 1 Employee 1 Employee 1 Frachisor

Method of Data Analysis

After the interviews were completed and transcribed, they were coded. The codes were developed during the coding stage. The codes concerning control were based on the different types of control mentioned in the interviews and the evaluation criteria. The codes concerning trust were common interest and positive or negative attitude towards the organization. The specific codes that were used, their description and examples can be found in appendix A.

During this progress, the software-program NVIVO was used, which can help with reliability issues by making the analyzing progress more systematically. (Van Aken et al., 2012) After the coding-process the control mechanism as mentioned in the interviews were linked to the specific control mechanisms of the frame work of Merchant & Van der Stede (2012). Then both brands were compared based on the specific control mechanisms that were mentioned during the interview and an analysis was made about the differences in trust. After this first analysis, a more in depth comparison was made between the different cases. In this analysis, an attempt was made to explain the relation between trust and control by carefully comparing the two cases based on the earlier found differences.

Results

In this section, the results from the case-study will be presented. First the control mechanisms in place at both brands will be discussed, and the types of control will be linked to the framework of Merchant & Van der Stede (2012). To finish this result section, the connection between trust and control will be explained in. The focus will be on the differences between the two brands and the differences within the brands.

Control Mechanisms

Selection of the franchisee

The first control mechanism that can be found in both cases is the selection of the franchisee. As stated by one of the franchisees of brand A the franchisors selected him for the job.

“You went to drink a cup of coffee with someone that is responsible for this [i.e. the selection of franchisees] and then things start and at some moment in time they feel like they see it working out with these guys and let’s just start somewhere” (Brand A, restaurant B, franchisee)

This selection of the franchisee before the relationship is started is a form of personnel control it helps with the control problems lack of direction, motivational problems and personal limitations. (Merchant & Van der Stede, 2012)

This selection of the franchisee before signing the franchise contract happens in both cases. There is no evidence in the data that suggest a large difference in this control mechanism between both cases. Only at Brand B, the contracts are only for 20 years and after this 20 years a contract renewal needs to take place where the franchisor again makes the decision to choose for the specific franchisee or not. This happens after twenty years, so this is not part of the specific control mechanism selection.

Training

The second mechanism that is in place in both cases is training. This is also a form of personnel and cultural control and helps with a lack of direction and personal limitations of the personnel. (Merchant & Van der Stede, 2012) Before they start all the franchisees get a training at brand A the franchisees get a 14 days training before they start their own brand A store.

“And there you’ll get a 14 days’ course, there you will be extensively trained to what our store managers do now. So, the Brand A way of working will be totally ingested.” (Brand A, restaurant B, franchisee)

“So, after two weeks of very intensive training, I saw everything, the rules of Brand A, the quality and all the obligations.” (Brand A, restaurant A, franchisee)

After these two weeks of training, the franchisee will be free to decide whether he or she wants to start his/her own restaurant. So, the decision moment is postponed till after the first two weeks of training. The same goes for the franchisees of brand B.

As stated above the first trainings for the franchisee of brand B takes place before the franchisee is selected and the contract is signed and can therefore be seen as a part of the selection process. Besides these trainings for the franchisees there are also trainings provided to the managers of the restaurant. The employees get a training as well in the first week of their new job, but these are internally provided by crew trainers. So, this is the responsibility of the franchisee.

Training is arranged differently at brand A. After the franchisees have opened their store brand A provides more training through the years. Besides the training offered by brand A for the franchisees, there are also trainings for the employees, also arranged by brand A. So, besides the fact that one manager explained to have had trainings arranged by the franchisees, the managers and employees also get training from brand A directly. The first training is when they start working for brand A, they are required to follow an online course provided by brand A. This course is about the basic operations and what is expected of them by brand A, the restrictions, the rules. Throughout the years that they work for brand A the employees and managers will also be provided with more training by brand A. This is done in two forms, brand A may call the employees to the restaurant at a specific time to give a training in person, but they also provide an app where different types of brand A employees must go through a specific training. It was also stated by the manager that brand A looks at the percentage of personnel that completed the training as part of the evaluation.

Overall training seems to be an important control mechanism for brand A, since the training is given at all levels in the organization and not only at the beginning of the new relationship with Brand A, but also during this relationship. This seems to be a less important control mechanism for Brand B, in the following of this section the potential consequences of this difference will be discussed

Information flow

The third control mechanism is the information flow from the store to the franchisor. At Brand A, the franchisee has to report certain information to the franchisor, such as a small sort of profit and loss statement. Besides this information that the franchisee has to provide, there are also a lot of automatized data streams that flow from the cash system. These streams are available to both the franchisee and the franchisor.

This is arranged in a similar way for the Brand B case. Here the franchisees have to report a profit and loss statement to the franchisor as well. And here the data streams are also automatized in a way that they are easily accessed by the franchisor.

This is information flow is a result control, the output send to the franchiser is only concerned with the results. (Merchant & Van der Stede, 2012) It can be suggested that the following two control mechanisms, inspections and customer feedback are related to this control mechanism, because they also provide the franchisor with information. They will be treated as different control mechanism, because they were mentioned very specifically and different to some extend that it makes for a better comparison between both cases.

Inspections

The fourth control mechanism are the inspections by the franchisor. This inspection takes place once a month, during this inspection someone send by Brand A checks the store based on a list of 300 points, to see whether the franchisee complies with the franchise agreement. This use of procedures that must be followed is a form of action control as suggested by Merchant & Van der Stede (2012). The use of action control provides a very direct form of control, so in this way it differs from information flow as described above which is a less direct form of control. (Merchant & Van der Stede, 2012)

“And if we do things according to the expectations or not, for this someone of Brand A comes by once a month unexpectedly for inspection. To see for example whether the personnel follow the rules with customers or not? Do they follow the Brand A rules or not? They look at everything behind the kitchen, is it followed or not? So, you are checked on the expectations and when something falls outside the expectations, they will immediately write a report with what needs to be improved.” (Brand A, restaurant A, franchisee)

This inspection is very important, when some of the tasks are not performed the store can become “out of compliance”. After three times non-compliance, this could mean that the franchisor takes the decision to close the store. It was also stated by one manager that when there is for example a problem with food safety two months in a row you could be placed under supervision for one year.

At brand B there is also an inspection, although less frequently. Besides this inspection, they also use mystery shoppers, but the use of these mystery shoppers has declined in the last year.

“Those are mystery shoppers, but also field consultants, who comes along for a whole day and looks at how it goes now. He measures all sorts of things, that is a few times a year.” … “Last year there were two mystery shoppers every month, now this is only once every three months that someone from brand B Nederland comes in and does a mystery shop. (Brand B, restaurant B, manager)

Feedback from the customers

2012) The existence of this control mechanism makes part of the last control mechanism abundant, since the fact that customers can now give feedback makes that these customers become sort of mystery shoppers themselves. As explained by one of the employees of a Brand B restaurant.

“Now people can with their receipts via internet give a review about their experience here. So, yes that basically makes every guest a mystery guest of course. Every customer needs to be treated as a mystery shopper, because every customer can give a review. Which needs to be good.” (Brand B, restaurant A, employee)

At Brand A, they also use customer feedback as a source of information. Although the importance of this feedback was different according to the different people interviewed. The franchisee of one of the stores stressed that there is a pressure from the franchisor to solve official complaints submitted to the franchisor within 48 hours. The other franchisee said that the evaluations of customers were also used as a source of information about the performance of the store. This difference was also observed at the Brand B case, where it was stated that this information was a control mechanism in the sense that it provides a source of information for the franchisor. But it was also stated that this information was helpful for the managers and franchisees themselves since this gave them useful information about the performance of the restaurants as well.

Differences Between the Two Brands

Between the two cases there seems to be a difference in the level of trust. It can be suggested that there is more trust in the case of Brand A than in the case of Brand B. When looking at the level of the manager there was a clear difference. First of all, the manager of the franchise restaurant of Brand B did not really speak much about the relations with the franchisor. The manager of Brand A did have some positive remarks about the franchisor.

“Brand A is just a super nice company and yet within the franchise you have a lot of freedom. And yes, the work itself is fun, so I still like it yes.” (Brand A, restaurant B, manager)

The manager of the manager of the franchise restaurant of Brand B was less positive. Mostly about the large organizational structure. Although he stated that changes are being made in the organizational structure this is still work in progress.

Another thing pointed out by the manager was that that both parties, the franchisee and the franchisor seemed to be focused mostly on profits. And that the focus shifts a lot, making it difficult to balance objectives.

“One year they are busy a lot with the back office, then just on the front office, then about the costs, and then it is about the price, then about possibilities, and then they just go into the other direction. Searching for balance, every year again, every quarter, every moment again.” (Brand B, restaurant B, manager)

Table 2 provides a presentation of the differences in the control mechanisms in both cases. Although the control mechanisms in place at both cases seem to be very similar to each other there are some differences between both cases. In this rest of this section, some of these differences will be explained further in connection with the differences in the level of trust between both cases.

Table 2:Summary of the control mechanisms in place at both cases

Differences in Training

Although both franchisors provide training to their franchisees. Only in the case of brand A training is also provided to the employees. So, it can be concluded that brand A relies more on the control mechanism training by not only influencing the franchisee and thereby indirect the employees of the different restaurants, but also by influencing these employees directly by means of training.

Control

mechanism/ Case Brand A Brand B

Selection of franchisee

By means of interviews and training, before the contract signing.

By means of training, before the contract signing and by contract renewal after 20 years.

Training

Provided to all layers of the organization and seems to be one of the most important control mechanism.

Only provided to franchisees.

Information

Profit and loss statement. Other information flows are highly automatized.

Profit and loss statement. Other information flows are highly automatized.

Inspections

Once a month by someone who is recognizable and checks everything on the basis of 300 points.

A consulted looking at the operation for one day a couple times a year and a mystery shopper once every three months.

Feedback from customers

Provides a source of information for the headquarter about the quality of the stores operations.

One of the franchisees of brand A also stated that he sees it as a positive point that the people coming to check whether all procedures are followed also give feedback to the employees. He stated to see this as an extra form of guidance that makes that he benefits from the fact that he has a franchisor.

“The people that come to monitor also have conservations with our personal, or conversations, but if the store manager is there at the moment then they will say, take a look at that and at that. This and that is not going well, this needs to be done differently. Or if things are going well, they will say go on this way and this and that. This guidance you have” (Brand A, restaurant B, franchisee)

So, this extra form of control was not seen as an invasion, but more as another helpful aspect of the specific relation between the franchisee and the franchisor. This would then of course be less at brand B, since the training of the employees is done internally over there. So, in case of new products, or new protocols the franchisees and, or managers of brand A can rely more on the franchisor to explain these new rules to the staff. In the case of brand B, the restaurant itself is more responsible for this training. If this benefit for brand A leads to more trust is hard to say. But it can be said to build more of a bond with the company, which may lead to more trust. Kasper-fuehrer & Ashkanasy (2001) suggest that a method for building trust is to develop a common business understanding, and developing identical ethical norms. It is possible that these trainings given by the franchisees are building these common business understandings and identical ethical norms. This common interest was also something that the people at brand A and mostly the franchisees found to be true. As one franchisee stated he felt as though Brand A could be seen as a family.

“People that work for Brand A are kind pretty much like a family.” (Brand A, restaurant A, franchisee)

Again, it is also another thing that the franchisee can rely on to be arranged by the franchisor as stated by one of the franchisees this is seen as a positive result of their relationship. It is of a common interest of both parties and therefore it may explain the more trustful relationship.

Difference in the organization

My relation with Amsterdam is just very business and purely exchanging information and or relation with the “DA” is different we worked with them for 12 years. With them you have an excursion once a year. They come by to drink a cup of coffee and just to ask how it goes, yes that relation is very different. That is the person you can call at the moment that we have to negotiate new leases and they will help you with that. I think that this relation has become more personal in the last years, more than the business relations you have with the Brand A headquarters” (Brand A, restaurant B, franchisee)

This personal bond with the region manager can be seen as a form of social control. This form of social control is not present at brand B. The franchisee stated that he feels to have a larger personal relation with the region manager. As with the training this may lead to a better bond with the franchisor organization. One person the franchisee can specifically rely on when he or she needs help. As stated by the franchisee this region manager provides specific help at for example the renegotiations of lease contracts. But it was also stated by one of the franchisee that he can always call the region manager when he has a new idea and wants some help to develop this further. So, it seems that franchisees trust the region manager to help them therefore I might be said that this social control mechanism has a large impact of trust.

“We have a lot of email contact with each other [with the region manager], nowadays we do a lot via app. Occasionally, for example we are working on delivery bikes, we call them and ask them: what do you think, are there already suppliers you have experiences with? That kind of thinks, you just call them and discuss it.” (Brand A, restaurant B, franchisee)

One other thing stands out in the data of both brands. When starting a restaurant under the franchise-formula of both chains, the future franchisee has to sign a contract. This franchise agreement differs in one particular way that stands out, being that the contract of Brand A is for an unlimited amount of time, where the franchise agreement of Brand B is for twenty years. After these twenty years both the franchisor and the franchisee have to decide whether they want to proceed the franchise agreement for another twenty years. Although twenty years is a large amount of time, the franchisee has less assurance that he can have the restaurant for as long as he wants. The uncertainty might be bigger for brand A since the contract there might be terminated anytime if some the store is ‘out of compliance’ for too long, but the symbolic difference is big with the contract for twenty year at brand B. It provides the franchisee with the knowledge that the relationship ends at one point of time, this may also be part of the explanation for the different amounts of trust.

Differences between Brand A restaurants

Pressure from the franchisor

Although it seems like the trust in the franchisor is higher in Brand A. Within the brand A case there were also differences that seem interesting to exploit. In particular, there is one statement made by one of the franchisees that seems worth exploring further.

“I’m a sandwich, for example a hamburger, you have the upper part of the bread, the bottom part of the bread and in-between the burger. And our organization is just like me, this is the franchisor (upper part of the sandwich), I’m the franchisee (burger) and these are the employees (bottom part of the sandwich) I’m in-between, I’m being pressed from both sided. So, as a franchisee I’m in a difficult position, a difficult position. You are pressed from both sides; do you understand what I mean?” (Brand A, restaurant A, franchisee)

This franchisee thus experiences a certain pressure from both the employees and the franchisor. A pressure that did not came forward in the interview with the other franchisee of the Brand A restaurant. So even these two franchisees that operate in the same franchise organization seem to experience the pressure by the franchisor in a different way. There are multiple possible explanations for this difference, which may be found in the personal threats of the two franchisees. But there is also one other difference that stands out from the two interviews. While one franchisee stated that although he did not always agree with the decisions taken by the franchisor he still believed that the franchisor is in a better position to make certain decisional than the franchisees would be. This is clearly illustrated by the following quote:

“Look Brand A is a company which is situated in I know how many countries. There are I thing 43, 43 thousand offices, it exists since 1965 already and I don’t have the illusion that I can make more intelligent decisions than a company that has proofed itself that way.” (Brand A, restaurant B, franchisee)

In comparison to this franchisee that beliefs that Brand A can make better decisions, the other franchisee felt like the franchisor did not connect with the restaurants and the customers and that it would be a good idea for these professionals at headquarter to also work in the store. He felt as though there is a distance between the people doing the work and the people making the decisions, that stands in the way of the business making the right decisions. This franchisee said the following about his involvement at the making of new broad strategies for the whole organization:

have never seen customers, have never worked in the shop. So, they just come up with the decisions in the office and we feel like we are not involved in some things, mostly when it concerns our customers. We know what the customer wants.” (Brand A, restaurant A, franchisee)

So, both franchisees clearly think different about the ability of the people at the headquarters to take the right decision. This may also explain why one franchisee feels pressure from the franchisee, while the other franchisee mostly states about the help he gets from the franchisor.

Why one franchisee feels that the headquarter is better equipped to make decisions for the whole organization and the other franchisee seems to think that the people at headquarters lack the experience to make the right decisions, is an issue that cannot be easily answered with the data from the interviews. One difference between the two franchisees that may provide a possible explanation for these differences is that the one employee that seems to have more faith in the decisions of the people of headquarter started his career as a franchisee at brand A right after he finished college. The other franchisee is older and has had a different career before he started as a franchisee for brand A. The fact that this franchisee has had more working experience before becoming a franchisee, may explain why he feels as though he can make better decisions. While the fact that the other franchisee, has been a franchisee at Brand A his whole working life may explain why he has more faith in the ability of the franchisor to make the right decisions, because he lacks other experience himself. Further information about the franchisees does not provide a possible answer to this difference, both franchisees have been a franchisee for the same amount of years and they both own multiple stores. A possible other explanation may be that one store performs better than the other, explaining why one franchisee would be more content with the franchisor.

One other difference is that one franchisee manages the stores by himself, while the other franchisee has managers for each restaurant. It might be that the amount of involvement of these franchisees with their own stores explains this difference. The one franchisee also has a companion with whom he owns the multiple stores. So, it might be interesting to see whether the fact if the management and the ownership of the restaurants is divided may have an influence on this difference. It might be that this decreases the personal involvement with the stores, which may lead to a less critical view on the decisions by the franchisor and more focus on the eventual results.

“No, not from certain things [i.e. the opportunity to deviate from the policies], but that is also of course a decision you make when you start a franchise company.” (Brand A, restaurant B, franchisee)

As one of the franchisees also suggested that this was important to protect the formula.

“The franchisor must be strict, because they must of course protect their own formula.” (Brand A, restaurant A, franchisee)

But overall the one franchisee seems to have more faith in the decisions made by the headquarter and seems to see more benefits to the franchise agreement than the other franchisee.

Differences Within Brand B

Within brand B there is a difference between the two restaurants, one is owned by a franchisee and the other one is owned by brand B. This may cause differences between the two cases, these differences will now be discussed. For both cases only the managers were interviewed, were one is operating as a manager under the franchisee, the other is operating the store for brand B and is directly responsible for the operations of the restaurant. As stated by this manager, she feels as though she is an entrepreneur, more so as when she was a manager for a restaurant owned by a franchisee.

“You see I’m employed by Brand B Nederland. But I see this restaurant just as my own company. That is how I see it. Because, yes, I do have a supervisor I can ask for help, but I’m the one that is responsible for all the numbers, the personnel and anything else we do. I influence that myself. But I make my own plan for the coming year, and yes, I apply it and adjust it if necessary. Or when I think, we are not going to make it or we are going to run even more. Then I’m the one that needs to take action.” (Brand B, restaurant A, manager)

This manager is also part of a larger project that trains managers in multiple stages, including a traineeship. So, she her relation with the franchisor is really different from the relation between the manager and the franchisee restaurant and the franchisor. This also seemed to have an influence on the difference in the amount of trust. As stated earlier the manager working for the franchise restaurant was less positive about the franchisor. The manager of the restaurant that is owned by Brand B is more positive. She also made remarks about their personal relation and these were more positive.

Since she is under direct contract of brand B and is part of a traineeship she can be seen as a ‘normal’ employee, manager as can be seen by other organizations without franchisees. From the data gathered in this study it can be suggested that this relationship contains more trust than the relationship between a manager of a franchise restaurant and a franchisor. If this also holds for the franchisee is more difficult to state from this data, but there are certainly signals that seem to suggest this.

Discussion

In this section, the most important results will be discussed and a couple of proposition will be made that might be interesting to study further.

When comparing the restaurants from the two different brands a difference in the amount of trust can be found. This difference could be explained by the differences in control mechanisms that were used at both organizations. Based on this observation the following proposition can be made.

Proposition 1:

The relation between trust and control depends on the specific control mechanism used.

Based on the data it was also possible to make some suggestions about which specific control mechanisms produced more trust. There were some differences in control mechanism that might explain the higher levels of trust at brand A compared to brand B these will now be discussed.

At brand A, they did not only train the franchisees and the managers of the restaurants as is the case at brand B, but they also put a lot of effort in the training of the employees. The trainings were also seen as a more important part of the job as this was more mentioned by the employees and the managers and they were more satisfied about this. The trainings even went as far as the existence of the app called brand A university, implying that the employees were also student of the larger brand A network. This more specific form of control mechanisms and also the more personal touch, by means of the trainings that the staff got provided not only a form of control, but also a more personal bond with the brand and therefore more trust.

Another difference between the two cases was the difference in length of the franchisee contract. Although the contract at brand A could be ended at any moment by the franchisor in case of non-compliance, at brand B the contract with the franchisees is for 20 years and after this a new contract needed to be negotiated. So, although this might not bring more uncertainty about the contract it is of a huge symbolic difference.

These controls can be seen as social controls and therefore it can be suggested that the use of social control increases the levels of trust. This is in line with the findings of Aulakh, et al. (1996), who state that the use of social control might increase trust. Aulakh, et al. (1996) state that this effect can be explained because social controls provide a shared organizational belief for both parties.

This led to the second proposition:

Proposition 2:

The use of social control mechanisms provides a larger amount of trust then the use of other control mechanisms.

Within the Brand B case it seemed as though the trust was larger for the relation between the manager of a restaurant owned by Brand B and the franchisor in comparison with the relation between the manager of a franchisee restaurant and the franchisor. This suggest that levels are higher for a more traditional employee employer relation then in the relation between franchisee and franchisor. This would be plausible since this relation does not involve the tensions that are involved with IOR’s as described earlier. This leads to the following proposition.

Proposition 3:

Conclusion

The goal of this research was to answer the following question: What is the relationship between trust and control within organizational forms with IOR’s?

The conclusion that control may provide trust is one that may explain the differences found in the cases. The case that showed more trust, was also the case that had more control mechanism in place. But this study also showed evidence that this relation between trust and control is more complex then only the amount of control mechanisms. There are a lot of control mechanisms available that may have different influences on trust. This study found that, training, frequent interactions with a region manager and the symbolic contract permanence increases trust. Since these types of control can be categorized as social control, one can make the conclusion that social control increase trust.

It was also found that the level of trust is higher for more traditional employee employer relations then for relations with IOR’s relations. This suggest that the specific tension that exist within IOR’s also have an impact on trust.

Besides this it was also shown that cases with the same amount of control mechanisms allowed for franchisees to experience certain levels of trust. This leaves an interesting field for further research. In the rest of this section some of the limitations of this study will be discussed together with some directions for further research.

Limitations

There were some limitations to this study that might have affected the conclusion. Some of these limitations will now be discussed followed by some directions for future research and how these shortcomings might be addressed to provide more definite answers.

One important limitation is that the interviews with the franchisees were not available for all cases, so it was not possible to really comprehend the level of trust between the franchisee and the franchisor in the case of brand B. It was also not possible to retrieve an interview with the franchisor of brand A, so for both brands it was not possible to observe the relation between franchisor and franchisee from both ways.

from this study are therefore quite limited and for future research it is certainty interesting to see whether there are relations to be found in other cases.

Although the interview guide was carefully developed and discussed in depth to make sure that all students understood the questions in the same way, the interviews of both cases were conducted by different interviewers. This may be a cause for a reliability problem, since the questions were not fully standardized and the follow-up questions may differ from one interviewer to the other. (Van Aken et al., 2012)

Directions for future research

For further research, it would be valuable to try to get a clearer image of the trust between these two parties to get an even better understanding of the excising relationship between control and trust. This would also provide a good opportunity to see whether the propositions made in the discussion would still hold in a larger case study and to further exploit these propositions.

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Appendix A: Overview of codes

Appendix B: Interview guide

Interview Questions

(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 your relationship with this 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 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?

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?

Give small intro: This question is about interpersonal relationship

How do you perceive/feel about the relationship with the person above you?

- How often meeting? e-mail? phone calls? Why? - 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?

Which (dis)advantages do you have from the fact that the franchisor makes policy decisions, which also influence this location?

- Examples?

- Able to deviate from predetermined policies? Adaptations to local market needs? - Involvement in making new (overall) strategies?

Do you feel sometimes that the expectations of the franchisor/chain/employer/employees are unnecessary or even have a negative influence on your performance? (or too difficult to implement)

- unable to do? unwilling to do? Does not fit needs of local market? - examples?

- pricing? products? Interior equipment / decoration? Other

What do you do when that happens?

- Compliance? Good or bad? - Deviation? Good or bad?

Do you sometimes have disagreements or conflicts with the

franchisor/chain/employer/employees, and how do you solve them?

- How do you improve the relationship? - And the level beneath/above you?

How do you value electronic feedback?

- Action based on negative reviews? Which? Why? - Pressure from superiors due to negative feedback?