M.M. HUIZINGA Master Thesis

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THE INFLUENCE OF E-COMMERCE STRATEGIES ON

RELATIONSHIP SATISFACTION IN FRANCHISE SYSTEMS

MSc Business Administration

Small Business and Entrepreneurship

M.M. HUIZINGA

Master Thesis

January 2015

University of Groningen

Faculty of Economics and Business

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ACKNOWLEDGEMENTS

I would like to sincerely thank my supervisor, Dr. E.P.M. Croonen, for her support and guidance. I experienced her feedback as positive and constructive, which motivated me throughout the process of writing my thesis. In addition, her knowledge on franchise systems and contacts within the world of franchise were of great value to my research and are highly appreciated.

Also, I would like to acknowledge the added value of FRANCHISOR1_{, LAWYER and}

RESEARCHER. I have experienced the interviews as very pleasant and constructive, which was really helpful in conducting a research in a field where literature is so limited.

Finally, I want to thank my family, who always showed patience and support, each in their own way, and made it possible for me to study at the University of Groningen with such joy.

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ABSTRACT

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1. INTRODUCTION

The aim of this paper is to find and analyse existing E-commerce strategies within the franchising sector and subsequently develop new theory regarding the influence of the different strategies on relationship satisfaction from both the franchisees’ as well as the franchisors’ perspective. First, a more comprehensive understanding will be created on E-commerce strategies within franchise systems and their advantages and disadvantages. Second, the adoption of an E-commerce strategy is a relatively new issue in franchise literature and has given a new dimension to the franchisor-franchisee relationship. E-commerce strategy has become a large source of conflicts and resistance (ING, 2013; Perrigot and Penard, 2012), while at the same time successful relationship management has proven to be key in managing conflicts within franchise systems (Perrigot and Penard, 2012; Dant and Nasr, 1998; Watson and Johnson, 2010). The key sources of conflict in franchise relationships include disagreements regarding the profitability of both parties, different perspectives on the provision of certain services and contradicting opinions regarding on safeguarding the brand equity (Watson and Johnson, 2010). Since these sources of conflict play an important role in the adoption of an E-commerce strategy in franchise systems (ING, 2013), but little research has been conducted on their influences, this research will aim to fill that research gap between current franchise relationship management literature and additional conflicts that are created by the adoption of an E-commerce strategy. From a practical point of view this might result in one (or more) best practice(s). For this research, a best practice refers to a strategic decision, which leads to a higher satisfaction of both the franchisor and franchisee, compared to all possible alternatives. Since these ‘best practices’ might as well be just a small part of the E-commerce strategy, they do not guarantee overall increased satisfaction of both parties in the end. Many other decisions might contribute in determining the E-commerce strategy as well, which on its turn might influence the final satisfaction of both parties. In the following part the most important concepts will be briefly introduced.

1.1 E-commerce

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which leads to both opportunities as well as threats for the traditional firms (Perrigot and Penard, 2013).

1.2 Franchising

At the moment, the franchising sector is one of the fastest growing business sectors (Dada, Watson and Kirby, 2010) and shows continuous growth in both developed countries (e.g., United States, United Kingdom and Australia) and emerging countries (e.g., China, Brazil and India – European Franchise Federation, 2010). In 2010, the US by itself already reports over 1500 franchising chains, with more than 760,000 franchisees and about 18 million employees (Dada et al., 2010). A franchise agreement is defined as “one lasting for a definite or indefinite period of time in which the owner of a protected trademark [i.e., the franchisor] grants to another person or firm [i.e., the franchisee] for some consideration, the right to operate under this trademark for the purpose of producing or distributing a product or service” (Caves and Murphy, 1976, p.572). Usually, this agreement includes a specified region, an exclusive territory in which the franchisee, and only that particular franchisee, may operate (Combs and Ketchen, 2003). This organizational form is popular in a large amount of sectors, e.g., fast-food chains, hotels and convenience stores, which operate with a chain of multiple decentralized units (Caves and Murphy, 1976; Michael, 2003). One widely used theoretical explanation for franchising is the agency theory (Combs & Ketchen, 2003). This theory refers to agency relationships, in which one party, the principal, delegates authority to a second party, the agent (Eisenhardt, 1989a). Here, the agent is likely to be self-interested, which means that the principle should deploy resources in order to monitor the agent’s behaviour and make sure this is in the principal’s best interest (Combs and Ketchen, 2003). Franchising reduces the need for –and subsequently the costs of– monitoring, since franchisees invest their own capital into the unit’s assets and are the residual claimants (Combs and Ketchen, 2003; Croonen and Brand, 2013; Michael, 2003). Therefore, they are likely to be more motivated, but at the same time more critical in evaluating the system (Combs and Ketchen, 2003; Croonen and Brand, 2013). The fact that franchisees reap the benefits of the unit’s performance also means that they attach a high value to their exclusive territory and are more likely to be resistant to changes that are not beneficial to their own profits or their unit’s performance (Dada et al., 2010; Watson and Johnson, 2010).

1.3 E-commerce within Franchise Systems

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literature on this field is still scarce (Perrigot et al., 2013). The remainder of this section briefly discuss both the opportunities and threats of the adoption of an E-commerce strategy.

1.3.1 Opportunities of E-commerce

The adoption of an E-commerce strategy leads to several new opportunities to franchise systems. Firstly, the E-commerce strategy can allow a franchise system to increase communications both internally –between the franchisor and franchisees– and externally – between the franchise system and its suppliers and customers (Franson and DeSmith, 2005 Plave and Amolsch, 2000, p.17). The increased external communication can be used by franchisors to effectively promote the system, especially the network’s uniformity and the brand name, which are both considered key elements to successful franchising (Perrigot and Penard, 2012; Perrigot et al., 2013; Plave and Amolsch, 2000). Other opportunities of E-commerce to franchise systems are the fact that E-E-commerce leads to higher market saturation –which means that more customers within the existing market have been reached–, that it enables franchisors to reach new customers virtually anywhere and that it may lead to new sources of revenue (Perrigot et al., 2013).

1.3.2 Threats of E-commerce

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1.4 Research Question

Corresponding with the research’s aim –developing new theory regarding the influence of the different strategies on relationship satisfaction from the perspective of both parties–, a research question has been formulated, which will be used as a guideline throughout this research:

How does a franchise system’s E-commerce strategy influence relationship satisfaction from both the franchisor’s and the franchisee’s perspective?

In order to fully answer this question and clearly define the scope of this research, the research question will be divided into three sub-questions. First, in order to correctly measure the influence of E-commerce strategy on relationship satisfaction, it is key to have a clear understanding of how this relationship satisfaction is measured. This allows for a distinction between characteristics of E-commerce strategies that do contribute to relationship satisfaction and those that do not, so that the latter can be neglected in further parts of the research. Therefore, the first sub-question was defined:

Sub 1: How is relationship satisfaction level measured in franchise systems, from both the franchisor and franchisee’s perspective?

This question will be answered by performing a literature review within the field of franchisor-franchisee relationships from a marketing-channel perspective. The results will be presented in section 2.2.

Next, in order to be able to determine the influences of a franchise system’s E-commerce strategy it is essential to know which activities are included within this paper’s definition of E-commerce and which are not. So to further delineate the scope of this research it is necessary to have a clear understanding of the definition of E-commerce, which led to the second sub-question:

Sub 2: Which activities are part of the concept of commerce and more specifically, the E-commerce strategy?

Section 2.3 will provide an answer to this question by studying existing literature on the definitions of E-commerce.

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approach the influences for franchisee and franchisor satisfaction separately, which led to sub-question 3:

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2. LITERATURE REVIEW

2.1 Introduction

The literature review analyses the most important concepts for this research and its content is broadly displayed in figure 1. First, the different measures of both franchisee and franchisor satisfaction will be defined, resulting in four different dimensions of satisfaction. Second, a specific definition of E-commerce will be constructed for this research. This increases the consistency in which activities to include in the E-commerce strategy and which not. Third, possible forms of E-commerce within a franchise system will be defined. These E-commerce forms reflect the number of online channels in the franchise system and whether the franchisee and/or franchisor is involved in these channels (figure 2). In this phase several sources of conflict are identified and classified into three groups. By understanding both the consequences of the different forms of E-commerce on the sources of conflicts (part 1, figure 1) as well as the influence of the sources of conflicts on the franchisee and franchisor relationship satisfaction (part 2, figure 1), the indirect influence of the E-commerce form on relationship satisfaction can be identified. Now, an elaborate explanation of the models and their variables and relations will be provided.

Franchisee/

franchisor-satisfaction

Sources-of-conflict

E3commerce-form

2. 1.

Figure 1 – Broad Research Model

2.2 Franchisor-Franchisee Relationship Satisfaction

The franchise system relationship satisfaction is considered a key component in exchange relationships which occur between two or more partners (Dwyer, 1980; Stern and Reve, 1980; Frazier, 1983). Relationship satisfaction affects the morale of the members of the system, encourages participation in collective activities and is considered vital to achieve long-term viability of the system (Dwyer, 1980; Gauzente, 2003).

2.2.1 Channel Member Satisfaction

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(Gauzente, 2003; Geyskens, Steenkamp and Kumar, 1999; Hunt and Nevin, 1974; Viera and Slongo, 2007). According to Schul et al. (1985, p.13), satisfaction of members of the marketing channel, in this case franchisees and franchisors, “is defined by the member’s emotional attitudes and his feelings about the main characteristics of the organization’s internal environment and about the relationships between themselves and other institutions in the context of the working of the system.” Within the channel member satisfaction approach, different distinctions arise. Some papers take a closer look at the differences between franchisee and franchisor satisfaction as a channel member (Jambulingam and Nevin, 1999; Schul, Little and Pride, 1985), others make a distinction between two different forms of channel member satisfaction, namely economic and social satisfaction (Biong, 1993; Geyskens and Steenkamp, 2000; Geyskens et al., 1999; Rodríguez, Pére and Gutiérrez, 2008). It is important to note that these approaches are simply two different ways of looking at satisfaction and therefore do not exclude each other. This allows for them to be combined, resulting in four dimensions of satisfaction, which all might be influenced differently by certain E-commerce strategies:

1. Franchisee economic satisfaction 2. Franchisee social satisfaction 3. Franchisor economic satisfaction 4. Franchisor social satisfaction

The remainder of this section will first discuss the distinction of economic and social satisfaction, followed by a discussion regarding the four different dimensions.

2.2.2 Economic vs. Social Satisfaction

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concerned and willing to exchange ideas with him” (Rodriguez et al., 2008, p.6). Socially satisfied channel members appreciate contact with their partners and like working with them, on a personal level (Geyskens et al., 1999, p.224).

It is important to make this distinction, since certain events might increase economic satisfaction while undermining the social part of satisfaction or the other way around (Geyskens and Steenkamp, 2000). Moreover, understanding these different types of satisfaction makes it easier to understand, and thus to effectively manage long-term relationships (Geyskens et al., 1999). Failure on this matter “will lead to contradictory research results and will reduce the firm’s ability to effectively manage channel relationship” (Geyskens and Steenkamp, 2000, p.13). It is also important to keep in mind that research has proven both types of satisfaction to be related in a way that economic satisfaction originates social satisfaction, i.e., economic satisfaction positively influences social satisfaction (Biong, 1993; Rodriguez et al., 2008).

2.2.3 Franchisee vs. Franchisor Satisfaction

In addition, several researchers focus more on another view regarding the channel member satisfaction by treating franchisee and franchisor satisfaction as two separate matters which are both determined differently (Hunt and Nevin, 1974; Jambulingam and Nevin, 1999; Schul et al., 1985). The remainder of this section will discuss the characteristics of franchisor and franchisee satisfaction and subsequently combine them with the economic and social satisfaction, resulting in a more complete understanding of the four dimensions of satisfaction.

Franchisee satisfaction

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contacts. The social satisfaction might also be influenced by the extent to which they experience they are treated fairly, the level of support they receive from the franchisor, and possibly by some non-financial rewards, such as an increased status of the franchisee’s unit.

Franchisor satisfaction

From a franchisor perspective, it should be noted that this paper looks at the franchisor relationship satisfaction on a system level –i.e., with all franchisees as a whole and not on an individual level –i.e., with specific separate franchisees. This is because the E-commerce strategy is implemented on a system level and because the franchisor’s relationship satisfaction is determined by the performance of the system, instead of by the performance of one single unit. This also means that franchisee characteristics, e.g. level of desired autonomy of one specific franchisee, are not taken into account.

According to Lewis and Lambert (1991), it is widely recognized that channel member satisfaction and channel performance are closely related. Key to the franchisor’s relationship satisfaction on a system level is the reduction of conflict (Frazer, Weaven, Giddings and Grace, 2012). Conflicts in franchising relationships lead undoubtedly to detrimental effects for the franchisors –e.g. franchisees exiting the system (Frazer et al., 2012)– which makes conflict reduction the key issue to his social satisfaction. The franchisor’s economic satisfaction, however, can directly be derived from its definition, which is the satisfaction with the effectiveness and productivity of the relationship with their partners and the resulting financial outcomes (Geyskens et al., 1999). This implies that franchisors might seek a balance between minimizing conflicts while optimizing their personal financial outcomes. The fact that franchisors aim at minimizing conflicts implies that they might also be willing to offer some kind of support or compensation, both financially and non-financially, in case this would decrease the level of conflicts.

2.2.4 Measuring Satisfaction

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2.3 Defining E-commerce

As a field of study, E-commerce cuts across every functional business discipline, which gives it many perspectives (Holsapple and Singh, 2000). A report of the ING (2013) indicates that most conflicts within franchise systems arise due to disagreements regarding the mere transactions of goods and services, with customers, through a transactional website. Therefore, the trading view of Holsapple and Singh (2000) is adopted, which mainly concerns the electronically buying-selling activities and its enabling technologies. According to this view, E-commerce “tends to be associated with computer-based means for performing commercial transactions –buying and selling” (Holsapple and Singh, 2000, p.152). One definition that follows this view is that of Hayashi (1996), who defines E-commerce as “the use of computer networks to conduct business –basically the buying and selling of goods and services– electronically with one’s suppliers, customers and/or competitors.” In addition, Kalakota and Whinston’s (1997) categorization of commerce is also taken into account. They subdivide E-commerce into three categories:

1. Inter-organizational or business-to-business (B2B) 2. Intra-organizational; within the business

3. Business-to-consumer (B2C)

For this research, the scope will be limited to the third category, i.e., Business-to-consumer E-commerce; mainly because this is the portion of an E-commerce strategy which is most difficult to implement as a result of the tensions it produces within franchise systems (Floriani and Lindsey, 2002). All prior findings and choices result in the following final definition of E-commerce:

The use of computer networks to conduct business –basically the buying and selling of goods and services– electronically to one’s customers

2.3.1 E-commerce Strategy

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(Chatterjee, Grewal and Sambamurthy, 2002; McAfee and Brynjolfsson, 2008)– and the external environment –e.g., determining the market players or its own market position (El Sawy, Malhotra, Gosain and Young, 1999; Porter, 2001). Although one should be aware that E-commerce strategy is a much broader concept, this research limits its E-commerce strategy to those decisions that might be a source of conflict in specifically franchise systems. Other decisions –such as where to position the online channel in the market– might as well be a source of conflict to any other organizational form and are therefore outside the scope of this research.

2.4 E-commerce Forms

The ING report (2013) provides four E-commerce forms that can appear within franchise systems (figure 2), which indicate whether the franchisor and/or franchisees are involved in the E-commerce activities, and if so, whether this happens combined or separately:

1. Franchisor Form – A central online channel, where the franchisor is responsible for all E-commerce activities

2. Joint Form – A combined online channel, where franchisor and franchisees cooperate. 3. Franchisee Form – Only the franchisees exploit a –joint or separate– online channel 4. Separate Form – Both franchisor and franchisees have their own online channel for

which they are responsible

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online retail channel (Trice, 2001; Perrigot et al., 2013). This means that, legally, the franchisor cannot prevent Franchisee Form and Separate Form from coming into existence.

Figure 2 – E-commerce forms

2.5 Sources of Conflict within the E-commerce Strategies of Franchise Systems

According to Perrigot and Penard (2012, p.4), “the adoption and implementation of an E-commerce strategy may be a source of conflict within franchise networks”. Actually, the implementation of an E-commerce strategy can be a source of conflict in several ways (Dixon and Quinn, 2004; Emerson, 2010; ING, 2013; Plave and Miller, 2001), which are related to three types of issues:

1. Financial issues 2. Issues of uniformity 3. Issues of order fulfilment

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2.5.1 Introduction to the Research Model

Figure 3 shows the expected influences of the sources of conflict on the economic and social satisfaction of the franchisee and franchisor. Although each group type of issues influences both the franchisee and franchisor satisfaction, the actual issues differ between both parties. Also, it was argued earlier (section 2.2.4) that conflicts are probably a key determinant of the franchisor and franchisee social satisfaction. Therefore, this research assumes that, next to the direct influence of some sources of conflict, all sources of conflict also have an indirect influence on the social satisfaction of both parties due to an increased level of conflicts. This means that the level of conflicts is incorporated in the research model as a mediator between the sources of conflict and the franchisee and franchisor social satisfaction. Finally, it should be noted that the direct influence of economic satisfaction on social satisfaction, which researchers have proven to exist (Biong, 1993; Rodriguez et al., 2008), is not included. Although one should be aware of this connection, it is not part of the scope of this literature since it would make this research to complex.

Figure 3 – Satisfaction Research Model

2.5.2 Financial Issues

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structure (Floriani and Lindsey, 2002), which shows a large variety of possibilities. Franchisors can sell directly to customers, refer sales directly to franchisees, or decide to control the sales themselves, while paying a reverse royalty to the franchisees in respect of online sales (Floriani and Lindsey, 2002). The latter could be paid to the franchisee unit closest to the customer’s billing or shipping address or through a general account to be distributed later among franchisees in certain agreed proportions (Floriana and Lindsey, 2002). As for the costs of the online channel, most franchisors start by appropriating all of it, which makes it harder to persuade franchisees to share some of these costs in a later stadium (ING, 2013).

Franchisee perspective

From the perspective of the franchisee, three main sources of conflict arise regarding the financial issues: appropriation of costs, appropriation of revenues and encroachment. Firstly, conflicts regarding appropriation of costs and revenues obviously have a direct negative impact on the economic satisfaction of the franchisee. The franchisee might seek to appropriate as much revenues as possible, while at the same time trying to minimize his appropriated costs. However, if the franchisees want to (partially) appropriate these revenues, franchisors might argue that they should (partially) contribute to the investments as well. Therefore, it is reasonable to assume that the desired level of appropriated revenues and costs of the online retail channel(s) are partially determined by each other. Secondly, from a franchisee’s perspective, E-commerce can be seen as unfair competition regarding the exclusive territories of their physical stores, which has proven to be so important in franchisor-franchisee relationships (Emerson, 2010; ING, 2013; Kalnins, 2004; Watson and Johnson, 2010). This unfair competition is often referred to as encroachment. Traditional encroachment is defined as “the phenomenon where the franchisor has authorized a new franchise or established a company-owned unit within an existing franchisee’s market area” (Emerson, 2010, p.193). The use of Internet, however, is a non-traditional form of encroachment which does not directly include infringements of the physical boundaries of this territory (Emerson, 2010), but might lead to something similar, where franchisees claim that not a new unit, but the online retail channel cannibalizes their revenues. Since franchisees directly reap the benefits and suffer the losses from their unit (Michael, 2003), their economic satisfaction will be negatively influenced. Eventually, this experienced encroachment might even have a direct negative impact on the franchisees’ social satisfaction when he feels treated unfairly.

Franchisor perspective

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the franchisor looks at the revenues and costs at the system level. The ING report (2013) adds that franchisors often start by making all investments themselves. However, when the online retail channel grows, so do the investment costs. At this stage it becomes very hard for franchisors to persuade franchisees to contribute to the investment costs, since they did not have to do so in earlier stages either (ING, 2013). Secondly, although it can be expected that increased cannibalization of the franchisees’ revenues will increase the franchisors’ economic satisfaction, this would clearly lead to a large amount of conflicts with the franchisees, thus decreasing their social satisfaction. It can be expected that the franchisors are looking at some kind of optimum, where a certain maximum amount of customers buys products online, but the level of conflicts is minimal if any at all. In case franchisees experience encroachment, the franchisor might be inclined to offer some kind of support, both financial and non-financial, in order reduce the level of conflicts.

2.5.3 Issues of Uniformity

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The overall role of uniformity on franchisee satisfaction might be a source of conflict to the franchisees in three ways: experienced restrictions, personal image and unit’s performance. Firstly, the franchisor might impose certain rules to ensure product, price or product uniformity between the online channel and the franchisees’ stores. If a franchisee feels he is restricted by these rules, this might lead to the franchisee feeling he is not supported or treated unfairly, decreasing the social satisfaction. Next, a decrease in brand, price and/or product uniformity can lead to a decreased brand image or status (Perrigot et al., 2013). This decreased brand image might lead to franchisees who experience a decrease in their own local image or status, which would decrease the franchisee’s social satisfaction. Finally, since uniformity might lead to an increased overall performance of the system (Flosdor, 2002), a decrease in this uniformity, and thus the system’s performance, might also lead to a decrease in the performance of the franchisee’s own unit, decreasing his economic satisfaction.

The franchisor’s satisfaction might be influenced by two sources of conflict that are related to uniformity: overall uniformity of the system and experienced restrictions by the franchisees. Firstly, Flosdorf (2002) argues that brand consistency is crucial for success and survival of the franchise system and that an increased uniformity of the system will increase its performance. This means that the overall uniformity of the system is expected to have a direct impact on the economic satisfaction of the franchisor. Second, the franchisor can take measures in order to ensure uniformity. A franchisor can, for instance, impose certain products or maximum prices, in order to be more in line with the online channel (ING, 2013). These measures might lead to franchisees who feel restricted because they experience less freedom to decide for themselves. These experienced restrictions are likely to increase the level of conflicts and thus decreasing the social satisfaction of the franchisor. It should be noted however, that franchisors might decrease these conflicts by offering the franchisees support, both financially and non-financially. One possible solution is offering franchisees a template to use when developing their own websites (Trice, 2001).

2.5.4 Issues of Order Fulfilment

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franchisee in order fulfilment will be treated here: deliveries and return policy. First, depending on the strategy of the franchise system, discussions can arise whether the delivery should be made by a franchisor, or whether it is easier for one of the franchisees to send the product to the customer. Likewise, discussions can arise regarding the customer’s delivery pick-up location. Second, unclear regulations regarding the return policy are a frequent source of conflict (ING, 2013). A research of UPS (2013) found that, overall, almost 50% of Dutch online consumers require the possibility to return goods –that are bought online– to a physical store.

The key issue to franchisees regarding their involvement in order fulfilment is probably whether the franchisee thinks it is beneficial for him personally to be involved in these activities. Franchisees might regard such services as outside their scope (Perrigot and Penard, 2012) and they often consider these services as extra tasks, which are wasteful and time consuming, since they do not yield any added value for them (Perrigot and Penard, 2012). Therefore, the franchisee satisfaction might be influenced in two ways: added value of involvement to the franchisee’s own unit and costs of involvement. First, the added value is likely to be in terms of money. If their involvement would lead to more customers for their store, these customers might buy additional products which would increase the franchisee’s revenues and thus, his economic satisfaction. Second, the costs could be both financial and non-financial. Non-financial costs would be, for example, that the franchisee experiences these services as time-consuming or outside his scope. This might lead to franchisees that feel they are not valued properly or treated fairly by their franchisor, decreasing their social satisfaction. On the other hand, the financial costs of being involved –such as labour costs or paying refunds to the customer– would clearly lead to a decrease in financial satisfaction. Overall, the extent to which they are willing to perform these activities is likely to be dependent on the support they receive from the franchisors. As long as they are properly compensated for their order fulfilment activities, they might be willing to perform them.

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consistency of the order fulfilment of the entire franchise system. An increased quality of these activities is likely to lead to an increased quality of the system and thus, will increase the economic satisfaction of the franchisor. However, franchisees might demand (financial) support for this involvement. Therefore, a second issue, namely the costs of increasing this franchisee involvement, might decrease the economic satisfaction. Franchisors will probably try to increase the quality of the order fulfilment of the system as long as the increased quality outweighs the costs involved with the increase. Again, regarding the actual conflicts, providing the franchisees with sufficient support could reduce conflicts and increase the franchisor’s social satisfaction. Franchisee economic satisfaction Franchisee social satisfaction Level of conflicts Financial issues Appropriated revenues Appropriated costs Issues of uniformity Experienced encroachment Issues of order fulfilment Unit’s performance Experienced restrictions Added value of involvement Costs of involvement Personal image

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Financial issues Appropriated revenues Appropriated costs Issues of uniformity Issues of order fulfilment Franchisor economic satisfaction Franchisor social satisfaction System’s overall uniformity Experienced restrictions by franchisee System’s order fulfilment quality Costs of increased franchisee involvement Level of conflicts Experienced encroachment by franchisee

Figure 5 – Franchisor Satisfaction Research Model

2.6 The Influence of E-commerce Forms on the Sources of Conflict

Now that the sources of conflict and their expected influences on franchisor and franchisee satisfaction are known, the only part of the model that needs more explanation is the influence of the E-commerce strategy forms on the sources of conflict. The E-commerce strategy forms refers to figure 2, which shows the different possibilities of involvement in the online retail channel of both the franchisee and the franchisor. Now, the expected consequences of the different forms on the sources of conflict will be discussed, which is summarized in table 1.

Encroachment

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Appropriation of revenues and costs

In case of Franchisor Form, the franchisor is likely to argue that he is responsible for all activities and thus for all costs and all profits. However, the franchisee might argue that the online channel does negatively influence his unit’s revenues and that he wishes to be compensated for this profit loss. This will only increase in Joint Form, when the franchisee does perform certain activities. Franchisee Form might show something opposite of Franchisor Form, i.e., the franchisor might argue that the activities are performed under the brand name of the franchisor and that he therefore has the right to claim a part of the revenues. Regarding Separate Form, it is very likely that both parties are responsible for all revenues and costs of their own channel, decreasing the possibility of conflicts.

Uniformity

Firstly, Franchisee Form and Separate Form are most likely to lead to conflicts, since franchisees starting their own online retail channel increases the chances of brand inconsistencies (ING, 2013, Perrigot et al., 2013). This might be reduced by the use of a certain template for the online channels (Trice, 2001). The chance of inconsistencies, and thus conflicts, is probably even further reduced in Franchisor Form and Joint Form, since there is only one online channel and this channel is at least partially controlled by the franchisor. However, there is still a chance that this one online channel is inconsistent with the identity of the total system. Secondly, conflicts regarding price and product inconsistencies depend on whether there are inconsistencies between the website and the physical store or inconsistencies between the prices of two (or more) different websites. The first inconsistency is probably reduced when the franchisee has his own website, leading to less conflicts in Franchisee Form and Separate Form, while the latter is reduced when the number of websites decreases, meaning less conflicts in Franchisor Form and Joint Form. Looking at a combined channel, so far no reason can be found why increased involvement of the franchisee in its activities would directly lead to a change in the level of conflicts.

Franchisee involvement in order fulfilment

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of the parties are not happy with the current form. Since franchisees are mostly not so inclined to handle processes regarding the order fulfilment (Floriani ad Lindsey, 2002), while a large proportion of customers –and thus probably the franchisor as well– does have the expectation that franchisees are included in these processes (UPS, 2013), it can be expected that all forms where the franchisor is involved lead to conflicts regarding the role of the franchisee, meaning Franchisee Form shows less conflict than the other three.

Table 1 – expected level of conflicts within the franchise system, based on its e-commerce form

2.6.1 Expected Preferences Regarding the E-commerce Forms

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3. METHODOLOGY

This paper aims at finding and analysing existing E-commerce strategies and subsequently developing new theory regarding the influence of these strategies on the franchisee and franchisor relationship satisfaction. This chapter will start by explaining the concept of theory development and how it is applied in this research. Subsequently, the expert interviews will be explained extensively, since current literature disagrees on whether and how to use this method (Bogner and Menz, 2008). Finally, the quality criteria, and subsequent measures to increase the quality of this research will be discussed.

3.1 Theory Development

This research’s field of literature deals with many unresolved issues and therefore the theory-development process will be used (van Aken, Berends and van der Bij, 2012). Theory development is highly suitable for research into business phenomena that are generally recognized in companies but insufficiently addressed in current academic literature, which is applicable in this case (van Aken et al., 2012). The actual steps followed by this research can be seen in the following model:

Analyze the process by conducting expert interviews

Develop explanations while comparing findings with existing literature

Come to propositions that are changes of and/or additions to existing literature Business process, Not explained in academic literature Construct research models by performing a literature review

Figure 6 – Research Steps One way to observe a process/event and subsequently generate new theory is by performing expert interviews (Bogner and Menz, 2009; Meuser and Nagel, 1991). The objective is to collect primary data by means of qualitative research, in this case interviewing the experts. Bogner and Menz (2009) indicate that the debate about expert interviews has become more concrete recently and that there are disagreements on how expert interviews should be used as a valid method and even whether this is even possible in the first place. Therefore, the method of using expert interviews as a theory-generating tool will be explained and discussed extensively in the next section.

3.2 Expert Interviews

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to those ‘simple information gathering meetings’, expert interviews that are intended for the purpose of qualitative research require careful validation and solid theoretical basis (Bogner et al., 2009).

3.2.1 The Theory-Generating Expert Interview

The relevant type of expert interview for this research is the theory-generating expert interview: “The essence of the theory-generating interview is that its goal is the communicative opening up and analytic reconstruction of the subjective dimension of expert knowledge” (Bogner and Menz, 2009, p. 35). Researchers aim at formulating a theoretically rich conceptualization of (implicit) knowledge, routines and conceptions of the world, which the expert has developed over time through performing his activities (Bogner and Menz, 2009). In the end, qualitative theory is composed via theoretical sampling and comparative analysis, which is made possible by interpretative generalization (Bogner and Menz, 2009).

3.2.2 Defining Experts

Bogner and Menz (2009) indicate that, prior to their research, existing definitions of experts were highly criticized. Individuals were often uncritically accepted as experts (Bogner and Menz, 2009) or definitions made it hard to interpret situations in which expert knowledge has distinct contributing effects (Meuser and Nagel, 1997). Taking all criticism into consideration, Bogner and Menz (2009) established a new methodological definition of experts:

An expert has technical, process and interpretative knowledge that refers to a specific field of action, as a result of the fact that the expert acts in a relevant way

Now, the core concepts of this definition will be explained:

• Technical knowledge contains information about operations and events directed by rules, bureaucratic competences, field-specific application routines, etc.

• Process knowledge relates to acquisition and inspection of information about sequences of actions, interaction routines and events where the expert is directly involved in or at least has more precise knowledge because it is close to his or her field of action

• Interpretative knowledge are subjective interpretations, points of view, rules and orientations that suggest a picture of diversified and accumulated expert knowledge • Specific field of action is the concrete field in which the expert acts, with reference to

the analytical range of the study being carried out

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According to the above definition, the population for this research consists of individuals who have technical, process and interpretative knowledge that refers to the field of E-commerce strategies within franchise systems, as a result of the fact that the expert personally acts in a field of action that is relevant for this subject. As a final remark, one should be aware that it is not always leading figures within an organization that have access to the knowledge that is relevant to the investigation (Bogner and Menz, 2009). This means the group of experts can consist of individuals of all levels of hierarchy within organizations.

3.2.3 Selecting Experts

Now that the definition of experts is determined, the next step is to determine which experts within the population are suited for the interview. Just as other interview-based investigations, the success of an expert interview significantly depends on the ‘quality’ of the interviewees (Gläser and Laudel, 2009). Therefore, random sampling will not be suited for this research, but instead, theoretical sampling will be used, which means experts will be selected on the basis of their theoretical attractiveness. The selected experts should understand which information is needed, be able to provide this information in extensive, detailed and complete responses and adapt their communication to the interviewer’s desired directions of the conversation (Gläser and Laudel, 2009). The problem is that the very reason the expert interviews are conducted is to access their special knowledge, i.e., knowledge the researcher does not (yet) possess himself (Gläser and Laudel, 2009). This makes it very hard to evaluate how much of this knowledge a certain expert possesses and how well he will be able to reproduce it. Therefore, and because “outsiders are hardly able to judge the abilities of an expert” (Gläser and Laudel, 2009), this research will not aim at finding the ‘best’ experts, but instead use a guideline provided by Pfadenhauer (2009) in order to at least ensure that the quality is satisficing, while increasing the likelihood that the quality of the chosen experts is at among the ‘best’.

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different groups of professionals whose likelihood of relevant actions has increased, namely franchisors, lawyers and researchers, who must all have personally acted frequently in the field of E-commerce strategies within franchise systems. By selecting experts with different professions, the research will incorporate different views. This, on its turn, contributes to the validity and reliability of the results (Yin, 1994), which will be treated more extensively in section 3.3. It can be expected that the variety of information is relatively large when two experts from different professional groups are interviewed, compared to two experts from the same professional group. Therefore, one expert from each professional group will be selected, leading to the three interviews with FRANCHISOR, RESEARCHER and LAWYER.1_{A brief}

description of each expert can be found in Appendix C. It should be noted that franchisees are not part of the expert group since it is very likely that the selected franchisee would have had very little diversified, and thus interpretative, knowledge. This makes it hard to consider the franchisee as an expert. Including the franchisee would have been more suited in a case study approach, which focuses on “understanding the dynamics present within single settings” Eisenhardt (1989b, p.534).

3.2.4 Interview Style

In principle, expert interviews should not aim to subject the interviewee to a ‘non-directive’ interview situation, nor to an interrogation-like situation (Pfadenhauer, 2009). Rather should the interviewer aim at conducting a quasi-normal conversation, i.e., quasi-normal to the expert (Honer, 1993). In order to achieve this, the researcher should strive at creating a setting that approaches the conversation situation among experts as closely as possible, as opposed to a conversation between an expert and a ‘lay-person’ (Pfadenhauer, 2009). This means the status of the interviewer plays an important role. Although the interviewer must keep in mind that he typically at best achieves the status of a quasi-expert, he must aim at increasing his thematic competence (Pfadenhauer, 2009). The fact the interview should be a quasi-normal conversation, also means the interview should follow a flexible and interview-situational guideline (Meuser and Nagel, 1991). The design of this guideline should reflect the comprehension and appropriate knowledge of the interviewer as much as possible (Honer, 1994).

In accordance with these findings, a flexible interview guide (Appendix A) was made for the expert interviews, which adequately reflects the researcher’s knowledge and comprehension of E-commerce strategies within franchise systems. In order to construct the interview guide, the book of Emans (2004) was used, which elaborately discusses the process

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of formulating an interview guide. The guide also takes into account the rules of Trinczek (2009), who studied the methodology of expert interviews and argues that ‘the researcher must of course allow interviewees time and sufficient opportunity to give shape to their positions’ but at the same time that ‘the interviewer regularly confronts the interviewees with opposing views during the interviews.’ This again requires a certain amount of the researcher’s knowledge regarding the subject, while the latter also means that, during the interview, questions regarding the franchisor’s and franchisee’s perspective should alternate each other.

In order to increase the flexibility of the guideline, the researcher did not follow a predetermined sequence of the questions but was aware of the fact that questions might be answered through other phases of the interview. Most questions included a score from 1 to 5 (Appendix B), which made the answers more generalizable and led to clearer motives to support or reject certain influences. An open-ended part was also incorporated in these questions by asking the interviewees to clarify their answers. In this way, the researcher was able to provide a more in-depth explanation of why certain conclusions are made (Patton, 1990). Accordingly, the interviewer saw to it that the expert did not go too much into detail. Finally, one should be aware that –since it is a flexible guideline– none of the interviews occurred in the exact order of the interview guide. However, the interviewer did see to it all questions were answered.

3.3 Shaping Propositions

Once the expert interviews are conducted, the next step is to analyse the results and systematically compare the emergent themes, concepts and/or relationships between variables that are new to, or different from the current academic literature (van Aken et al., 2012; Eisenhardt, 1989b). The definitions of the constructs were refined and evidence was built which measures these constructs. By constantly comparing theory and data, the eventual goal is generating propositions that closely fit this data. Further research could engage in testing these propositions, but it should be noted that this is not a part of this paper.

3.4 Quality Criteria

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3.4.1 Construct Validity

Construct validity entails “establishing correct operational measures for the concepts being studied” (Yin, 1994, p.34). It refers to the extent to which a measuring instrument measures what it is intended to measure (de Groot, 1969), which has two sides: The instrument should completely cover the concept and the instrument should only cover the concept. This means the questions of this research’s interviews were aimed at measuring all influences of different E-commerce strategies on all different dimensions of satisfaction. At the same time, no questions were asked regarding the influences of different E-commerce strategies on other concepts than the dimensions of satisfaction, neither questions about concepts that do influence these dimensions of satisfaction but have nothing to do with E-commerce strategy. In order to increase this construct validity, the guidelines of Emans (2004) where used during the construction of the interview guide (Appendix A). These guidelines link all questions to the relevant variables of this research. Van Aken et al. (2012) suggest that researchers can ask third parties to evaluate the measuring instrument. Therefore, the supervisor was asked to evaluate the interview questions, prior to the actual interviews.

3.4.2 Internal Validity

Internal validity concerns “establishing a causal relationship, whereby certain conditions are shown to lead to other conditions, as distinguished from spurious relationship” (Yin, 1994, p.35). Study results are internally valid when conclusions about relations are justified and complete, i.e., there should be good reasons to assume relations to be adequate (van Aken et al., 2012). This means plausible competing explanations cannot exist and should be ruled out (van Aken et al., 2012). When eventually formulating the propositions of this research, not only should there be arguments provided that support these influences, but also arguments should be presented that rule out other possibilities. It should be explained why it is unlikely, or even impossible, that certain moderators or mediators influence the specific outcome. Although specific tactics for achieving internal validity are difficult to identify (Yin, 1994), it is likely that the fact that the expert interviews include interviews from different professional groups increases the internal validity. Experiences from multiple perspectives are analysed (expert triangulation), which increases the likelihood that all relevant relations will be discussed. The internal validity is also likely to be further increased by the fact that most questions during the interview included a rating from 1 to 5. In this way, the data analysis is less biased by the personal interpretation of the researcher.

3.4.3 External Validity

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number of objects studied (van Aken et al., 2012). Since this is a qualitative research, the number of objects is relatively limited, so generalizability cannot be guaranteed, until quantitative research has been performed to test the propositions of this research. However, besides the franchisor, all selected experts have been involved in the conflicts of numerous E-commerce strategies of franchise systems. Since their answers will be based on several different experiences, this increases the likelihood that they are generalizable and thus increases the external validity. With respect to the interview with the franchisor, the specific circumstances of that franchise system are taken into account in order to estimate to which extent the findings from this interview are generalizable or rather context-specific.

3.4.4 Reliability

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4. RESULTS

4.1 Introduction

This chapter will present the newly gained insights from the expert interviews and compare them with the findings of the literature review. Many results are based on the scores and corresponding explanations, which are summarized in Appendix B. In addition, one should be aware that this section displays the most important results. This means that those answers that are not regarded as valuable insights to this specific research have been left out. First, section 4.2 will briefly explain to which extent the different E-commerce forms appear in reality. Then, the actual issues regarding the sources of conflict will be introduced. The findings for each group of sources of conflicts will be presented separately in their own section (sections 4.3-4.5). Each section will discuss the actual relevant conflicts that may arise, followed by their influences on the satisfaction from the perspective of both the franchisee and the franchisor. Finally, the influences of the E-commerce form on that specific group of sources of conflict will be presented.

4.2 E-commerce Forms

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E-commerce form that is by far the most popular one is Joint Form. All experts say that involving the franchisee is key in reducing conflicts. There are numerous ways of increasing the involvement. The most important ones mentioned are involving franchisees in committees before (!) launching the E-commerce strategy and offering transparency and insight regarding the costs and revenues. Firstly, the involvement of franchisees in the development and implementation phase leads to franchisees that are more inclined to perform activities of the online channel, since they contributed to the conditions under which the online channel operates (RESEARCHER). Secondly, offering transparency and insight can create more awareness of the actual costs and revenues (LAWYER). Other ways of involving the franchisees are (RESEARCHER):

1. Including specific clauses in the franchise contract which clearly explain what they expect from the franchisee in terms of the E-commerce strategy.

2. Increasing internal communication by means of hiring consultants which explain the strategy to the franchisees

3. Inserting spaces for the franchisees on the central website where they can have some information about their own store.

The actual kind of involvement really depends on the strategy of the franchisor (RESEARCHER).

4.3 Financial issues

Financial issues can be seen as the most important group of sources of conflict. Although FRANCHISOR did not experience financial conflicts due to his E-commerce strategy, the other experts agreed that as soon as conflicts arise, money is usually involved. LAWYER even stated that “conflicts are always, to some extent, about money.”

4.3.1 Actual Appropriation and Encroachment

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4.3.2 Financial Issues of the Franchisee Appropriated revenues and costs

The economic satisfaction often decreases due to dissatisfaction with the level of appropriated revenues and costs. According to all experts, the franchisee is usually the one who is most dissatisfied with this distribution. Both LAWYER and RESEARCHER agree that the extent to which the franchisee wishes to maximize own revenues and minimize own costs regarding the online channel is higher than it should be. Besides, LAWYER adds that franchisees often argue that they pay a fee so that franchisors keep developing the formula, which, according to them, includes maintaining a website. Remarkably, FRANCHISOR shares this opinion and chose to be responsible for all costs, based on this argument.

Encroachment

The economic satisfaction of the franchisee decreases due to the assumption that about half of the revenues of the online channel cannibalize the revenues of the franchisee’s unit. Franchisees who experience encroachment always wish to be financially compensated for this. The negative impact on the franchisee social satisfaction due to experienced encroachment was also confirmed. LAWYER says most franchisees have the feeling they suffer from the online channel. He adds that they usually do not have to actually gain from the online channel; they just do not want to be harmed by it.

Unnecessary dissatisfaction

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4.3.3 Financial Issues of the Franchisor

Franchisor characteristics and appropriation of revenues and costs

The influence of financial issues on the franchisor’s economic satisfaction completely depends on how the economic satisfaction for the specific franchisor is determined. Some franchisors mainly aim at directly increasing their own economic satisfaction through increased revenues of the online channel, whereas others, like FRANCHISOR, are looking more at developing the formula, and thus, seek to increase their economic satisfaction in a more indirect way, i.e., by increasing the overall revenues or performance of the system. According to LAWYER almost all franchisors belong to the first group, saying that, in the end, own interest and maximizing own revenues are usually the most important to franchisors. This is in sharp contrast with RESEARCHER, who estimates that two third of the franchisors aim at long lasting relationships and prefer a reduction of conflicts to the maximization of own revenues of the online channel. FRANCHISOR also belongs to this group, saying that increasing their own relative revenues of the online channel is not their goal at all. Either way, both LAWYER and RESEARCHER agree that, in the eyes of the franchisor, the appropriated revenues and costs should be, to a large extent, determined by each other in such way, that increased costs of one party should lead to increased revenues for that party and vice versa.

Experienced encroachment by the franchisees

LAWYER indicates that most conflicts regarding the E-commerce strategy involve franchisees who experience encroachment. Although FRANCHISOR did not experience huge financial conflicts regarding the online channel himself, all experts agree that minimizing the experienced encroachment of the franchisees is indeed an important goal of the franchisor and that it just as well should be. However, unless a judge decides otherwise, most franchisors do not provide financial compensation to their franchisees in order to decrease the experienced encroachment (LAWYER). Again, FRANCHISOR shows contrasting results, since their franchisees receive fifty per cent of the profit of all products that are sold by the online channel to customers within their exclusive territory. This even does not decrease his economic satisfaction, since he indicates the performance of the stores is way more important to him than the revenues of the online channel.

4.3.4 Influence of the E-commerce Form on Financial Issues

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increased involvement does not necessarily only decrease the level of conflicts. If involvement means performing more activities, the franchisee will experience increased costs, which usually increases the level of conflicts (LAWYER). On the other hand, FRANCHISOR says he would then increase the share of revenues of his franchisees, concluding that thus the level of involvement of his franchisees would not affect the level of conflicts.

4.4 Issues of Uniformity

All experts agree that, regardless the type of inconsistency, the level of conflicts regarding uniformity is relatively low. This does not mean that issues of uniformity are not important. FRANCHISOR explains that the level of conflicts is in fact so low because both parties acknowledge the importance of uniformity. LAWYER adds that this is also due to the fact that most franchisors have recently increased or are increasing the quality demands regarding the consistency between different online channels and between the online channel and the stores. Furthermore, an important aspect is that all experts indicated that inconsistencies clearly lead to a decreased brand status, which influences the satisfaction of both parties in several ways. These and other influences of uniformity on satisfaction will now be presented.

4.4.1 Issues of Uniformity of the Franchisee Personal image and unit’s performance

Regarding the unit’s performance, all experts agree that a decreased brand status clearly leads to a lower performance of the franchisee’s unit, meaning that increased uniformity in fact increases the economic satisfaction of the franchisees. This is especially the case in the long term (FRANCHISOR). Also, according to all experts, a decreased brand status is directly related to a decrease in personal image or status, thus decreasing the social satisfaction.

Experienced restrictions

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assortment, which they often do according to LAWYER. FRANCHISOR, for instance, says his franchisees have the freedom to sell their own additional products, as long as the standard assortment is present and they keep him informed about what kind of products they added.

4.4.2 Issues of Uniformity of the Franchisor Overall uniformity of the system

All experts agree that, overall, an increased uniformity has a large positive influence on the franchisor’s economic satisfaction. FRANCHISOR and LAWYER estimate this to be proportionate to the increase of economic satisfaction of the franchisee. RESEARCHER argues it is even slightly more important to the franchisor, since an increased brand status is more important at the chain level than at the unit level. Most franchisees will ensure the uniformity through contractual agreements, as far as is allowed by laws, of which the earlier mentioned increased quality demands are an example (LAWYER). But even when law does not allow them to do so, franchisors often try to persuade franchisees to agree on prices of special offerings (LAWYER). FRANCHISOR confirms this, saying that they have some kind of ‘gentlemen’s agreement’ with their franchisees regarding their prices.

Experienced restrictions by the franchisee

The influence of experienced restrictions by the franchisees on the franchisor’s social satisfaction can be neglected, since earlier findings already stated that most franchisees do not feel restricted –or do not mind to be restricted– by the (contractual) agreements the franchisors impose regarding the uniformity between the stores and the website. In fact, restricting the franchisees might even lead to fewer conflicts and thus might indirectly increase the social satisfaction of the franchisor. As a natural consequence, most franchisors do not provide any support to decrease these experienced restrictions.

4.4.3 Influence of the E-commerce Form on Issues of Uniformity

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4.5 Issues of Order Fulfilment

Although the opinions of the experts differed regarding the actual level of importance of franchisee involvement in order fulfilment, all experts do acknowledge that the involvement should be, to a certain extent, an important issue to both the franchisors and franchisees. They all indicate that issues regarding the order fulfilment can indeed lead to conflicts, although they are clearly less frequent than financial issues. The actual level of conflicts also increases when the level of returns or deliveries at the franchisee’s unit increases (LAWYER; RESEARCHER). This is confirmed by FRANCHISOR, who explains he did not experience these conflicts himself, mainly due to the fact that his system experiences so little returns. The expert interviews pointed out that there are huge differences between the influences (and level of conflicts) of involvement in deliveries and those regarding the returns. The remainder of this section will explain these, and all other influences with respect to the issues of order fulfilment. Obviously there will not be a separate part explaining the influence of the E-commerce form on these issues, since all issues already treat the influence of involvement.

4.5.1 Actual Involvement of the Franchisee in Order Fulfilment

Regarding the actual involvement, both LAWYER and RESEARCHER agree that the level of involvement of the franchisees in returns is about the same as in delivery, but disagree on what the exact level is. LAWYER estimates them both to be quite high, while RESEARCHER knows that in France just about fifteen per cent of the franchisees is involved in both activities. They also both indicate that if franchisees are involved, this is usually imposed by the franchisor by means of contractual agreements. FRANCHISOR says his franchisees are involved in returns, but not in delivery. His main argument for his franchisees not being involved in the delivery of the products is that they lack the technical know-how for an integrated computer system, which means the franchisor would have to inform the franchisee by phone, each time a customer want to pick up a product. Regarding the involvement of his franchisees in returns, FRANCHISOR explains that this is mainly possible because there are so few returns in his industry, which decreases the number of phone calls to be made.

4.5.2 Issues of Order Fulfilment of the Franchisee Added value of involvement