Master thesis Business Administration, Strategy and Innovation
Multi-unit franchising and HRM.
Operate or delegate?
Name: Sjoerd van der Wal Adress: Abeelstraat 81 Postal Code: 9741 EE
Discipline: Msc BA: Strategy & Innovation Supervisor: dr. E.P.M. Croonen
Second supervisor: dr. C. Caroll
1 TABLE OF CONTENT
TABLE OF CONTENT 1
ABSTRACT 2
1.INTRODUCTION 2
1.1 RESEARCH QUESTION 5
1.2 SUBQUESTIONS 5
2.LITERATURE REVIEW 7
2.1 HUMAN RESOURCE MANAGEMENT 7
2.2 MULTI-UNIT FRANCHISING 9
2.3 HRM AND MUF’S 11
3.PROPOSITIONS 15
4.METHOD 16
4.1 EMPIRICAL SETTING AND DATA COLLECTION 16
4.2 MEASUREMENT 18
4.3 DATA ANALYSIS 21
5.RESULTS 21
5.1 ENTREPRENEUR 1 22
5.2 ENTREPRENEUR 2 25
5.3 ENTREPRENEUR 3 27
5.4 ENTREPRENEUR 4 30
5.5 ACROSS CASE ANALYSIS 33
6. DISCUSSION 36
7. LIMITATIONS 39
8. FURTHER RESEARCH 40
9.CONCLUSION 40
10. ACKNOWLEDGEMENTS 41
11. LITERATURE 42
12. APPENDIX 47
2 ABSTRACT
Multi-unit franchising is a trend in the Netherlands. But what impact does this phenomenon have on human resource management, which is an important source to gain a competitive advantage? The aim of this research is to find out how multi-unit franchisees deal with HRM and why they do it like this. Literature about multi-unit franchising, HRM and delegation is reviewed, and four entrepreneurs who own more than one supermarket unit in the Netherlands are interviewed. A new form of multi-unit franchising is found in this research en several reasons for (non-) delegation of decision rights according HRM are discussed.
1. INTRODUCTION
Human resource management (HRM), which refers to the policies, practices, and systems that influence employees’ behavior, attitudes and performance (Noe, Hollenbeck, Gerhart and Wright, 2008 p.4) has become more and more important in the past 20 years. It is seen to be linked to the achievement of a competitive advantage (Browning, Edgar, Gray &
Garett, 2006). Browning et. al. also state that this is because of the fact that traditional sources of competitive advantages like economies of scale and technology have become less important. Nowadays, to gain a competitive advantage, the workforce is one of the main sources, especially in service industries, because of the fact that the customer-employee relation is very important to secure high levels of service quality. This is also stated in the articles of Brand & Croonen (2010), Evans and Davis (2005) and Sels, de Winne, Delmotte, Maes, Faems and Forrier (2006)in which is said that HRM is an important strategic business function that influences the performance of both large and small firms.
There are two industries in which HRM is especially important, the retail industry and service industries (Miller, 2006; Mc Lean, 2006). In these industries there is one very important business strategy, business format franchising (Combs and Ketchen 2003; Welsh, Alon, Falbe, 2006). This is also the form of franchising this research is focusing on.
Business format franchising can be defined as: a contractual form of cooperation between a franchisor who owns a formula or a business format (i.e. a certain identity in the market and back office support), and franchisees which pay a fee for the right to use the business format in their own establishment, and the franchisor monitors this use (Croonen & Brand, 2010).
Business format franchising has the following characteristics:
- The franchisee pays a fee and/or royalties for the right to use the franchisor’s business format and know-how (Croonen, 2006).
- Both firms are legally-independent firms. The franchisee retains the rights to the establishment’s earnings (Rubin, 1978).
- The franchisor allows the franchisee to use the business format. The franchisee is granted the exclusive right to use the business format and know-how of the franchisor (Croonen,
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2006).
- The relationship is of a contractual nature (Croonen, 2006).
- The franchisor supervises to a certain degree the use of the business format by the franchisee to preserve the uniformity (Kneppers-Heijnert, 1988).
Although HRM and franchising are very important in the above mentioned industries, there is almost nothing written about how franchisees deal with HRM. There are a few articles about franchising and HRM. One of them is the article of Brand & Croonen (2010) in the Journal of Small Business Management, in which they found that that franchised units have a low HRM intensity but superior HR- performance, but here the focus is just on single-unit franchising. Also Truss (2004) writes about franchising and HRM, but about the fact that HRM can play a role as mechanism for inter-organizational control.
The article of Castrogiovanni & Kidwell (2010) in Human Resource Management also deals with franchising and HRM, but this article deals with the franchise relationship from a HR perspective and how franchisors can use HR instruments to manage the relationships with their franchisees, and does not study how franchisees deal with HRM in their units.
For a long time, it was considered that single-unit franchising, franchisees who own one outlet, was the most common form of franchising, but there is another form of franchising, the so called multi-unit franchising (Kaufmann & Dant, 1996). This form has become more popular since the 90’s (ING, Economisch Bureau, 2012) In this form franchisees own and operate more than the traditional single outlet (Grünhagen and Dorsch, 2003). For this research these multi-unit franchisees are franchisees who own and operate more than one retail unit. Kaufmann (1996) states that “single-unit franchisees are the exception, not the rule”. The last twenty years there are more and more franchisees who own more than one retail outlet. Kaufmann and Dant (1996) stated this as: “the typical location-based franchise system is populated with multi-unit franchisees”. This is the fact in both the US and the Netherlands (ING Economisch Bureau 2012; Kaufmann and Dant, 1996). To show that multi- unit franchising is really important, we can show the research of the International Franchise Association’s (IFA) Educational Foundation (2002), in which was found that more than half of all units across all industries in the United States are owned by multi-unit franchisees. Also in the Netherlands, multi-unit franchising is a trend. Between 1997 and 2011 the number of franchised retail units has grown from around 14.00 till 30.000 units, and a number of franchisees were so successful that they wanted to grow further, and this led to the multi- unit franchising phenomenon (ING, Economisch Bureau, 2012). This is also pointed out in the Dutch national franchise guide of 2012. They say that there are more and more formulas which face an increase of franchisees who open more than one store, for example at Albert Heijn and McDonalds, but also at C1000 and Jumbo (denationalefranchisegids.nl, 2012). The same thing was stated by retailnews.nl in 2009. They compared the number of multi-unit franchisees for 6 different supermarket chains in the Netherlands with the number of 2004 and they saw that there was an increase of 93 supermarket units which were owned by multi-unit franchisees (retailnews.nl, 2009). But multi-unit franchising does not only exist in
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the supermarket industry, but also for example bakery store chains, bookstore chains and warehouse chains face an increase of multi-unit franchising (ING Economisch Bureau, 2012).
We can make a link between strategy and multi-unit franchising, which actually is an innovative form of strategy. Strategic orientation means the firm’s philosophy of how to conduct business through a deeply rooted set of values and beliefs that guides the firm’s attempt to achieve superior performance (Gatignon & Xuereb, 1997). When the market conditions change, it sometimes is necessary to change this strategic orientation. We see that multi-unit franchising becomes a new organizational form and it is important to gain a better understanding of it.
For franchisees and/or franchisors, there could be a lot of advantages and disadvantages for multi-unit-franchising, which will be explained further on in this research. In earlier literature multi-unit franchising is mentioned, but almost always from a franchisor perspective. For example Hussain and Windsperger (2010) examine the franchisor’s choice of ownership strategy between single-unit and multi-unit franchising. Another example is the article of Kaufmann and Dant (1996), which describes two arguments to choose for multi-unit franchising from a franchisors’ perspective, respectively the agency argument and the capital acquisition argument. One of the articles that isn’t written from a franchisors’ perspective is the article of Grünhagen and Mittelstaedt (2002), which describes some reasons for choosing a multi-unit structure from a franchisees perspective, and they found that it could be either an investment or entrepreneurial ambitions. So there exists some literature about multi-unit franchising, but there is very little known about how these multi-unit franchisees deal with HRM This is important, because of the fact that HRM is one of the few areas in which a franchisee has relatively large freedom (Brand & Croonen, 2010). It is interesting to find out how this is arranged when a franchisee has more than one store. The earlier mentioned article of Brand & Croonen (2010) is about HRM in single-units, and there were significant differences between the performance in franchised and company-owned units.
Multi-unit franchising could be more complex than single-unit franchising, for example because of the physical distance between units (Colombo and Delmastro, 2004). It could be that a multi-unit franchisee makes use of store managers, responsible for the day-to-day business of the units. It is interesting to find out what this means for HRM in the multi-unit franchised stores. Decision rights about HRM can be delegated managers responsible for the day-to-day business of the stores. Delegation can take work from the multi-unit franchisee, but can also cause an agency problem (Kaufman & Dant, 1996; Jindal, 2011). Brand &
Croonen (2010) also state this in their further research section. It would be interesting to find out if a multi-unit franchisee develops HR-practices for all of his/her units, or is this delegated? (Brand & Croonen, 2010).
So, the focus of this research will therefore be on the reasons to delegate decision rights to store managers. When speaking of delegation in this research, delegation of decision rights is meant.
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To summarize, multi-unit franchising is becoming more and more popular in today’s world but there is almost nothing written about it from a franchisee’s perspective. HRM is important in franchising, and this is one of the very few areas in franchising in which a franchisee has relatively much freedom to make his or her own choices (Brand & Croonen, 2010). Because of this fact the goal of this research is to gain an in-depth understanding of of how multi-unit franchisees deal with HRM and why they do it like this, with special attention to the delegation of decision rights.
1.1 RESEARCH QUESTION
According to the above, the main question of this research is:
-How do multi-unit franchisees deal with HRM in their units and why?
1.2 SUBQUESTIONS
There are several subquestions which are important to answer before the main question can be answered. The goal of this research is not to find “hard” answers to the following questions by means of quantitative research, but to find out what the underlying explanations of multi-unit franchising are from a franchisee’s perspective, and creating a more in-depth understanding of how the multi-unit franchisees organize HRM in their ways, and why.
QUESTION 1
HRM consists of several areas, so the first subquestion will be:
1) Which HRM areas are important in a franchised business unit?
This question will be answered by reviewing literature about HRM in business units and about HRM in service- and retail units.
QUESTION 2
Multi-unit franchising can take different forms according to Kaufmann & Dannt (1996).
So the next question will be:
2) What are the different forms of MUF?
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The different forms of multi-unit franchising are used to demarcate this research. Also, there may be differences in how different types of MUF deal with HRM. This question will also be answered by reviewing literature on multi-unit franchising.
QUESTION 3
To answer the question how multi-unit franchisees deal with HRM, it is important to find out why a franchisee would choose for a multi-unit structure, and what the risks are in his or her opinion. The reason why a franchisee chose for this form is important because it can have an influence on the way the MUF-chain, the collection of units owned by the same franchisee, is managed:
3) Why does a franchisee choose for a multi-unit structure?
This question will be answered by reviewing franchising literature, literature about the motivations of entrepreneurs and small business owners and by interviewing multi-unit franchisees.
QUESTION 4
In franchising, HRM is one of the very few areas in which a franchisee has most often a lot of freedom (Brand & Croonen, 2010). An important aspect over here at a MUF level is the responsibility of store managers in a multi-unit structure. This can be arranged in different ways, as will be showed later on.
When a franchisee makes use of store managers, it can be that there are certain decision rights which are delegated to these store managers. Because of the fact that an earlier mentioned agency problem can arise, it is interesting to find out to what extent and why a franchisee delegates decision rights to store managers.
The next subquestion is:
4) How is HRM organized in MUF-chains? And why?
We can split this question up in two parts:
4a) To what extent are the different HRM activities delegated to store managers, and why?
4b) What are the reasons for delegation or non-delegation?
As shown above, this research contains a literature study and an explorative research with interviews. These interviews will be held with multi-unit franchisees. Interviews are used because it is “permitting us to see that which is not ordinarily on view and examine that which is looked at but seldom seen” (Rubin & Rubin, 2005). Interviews will help to see the
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topic from the sight of the multi-unit franchisee, which is important in this case, and together with literature research it will provide the information needed to answer the main question of this research.
2. LITERATURE REVIEW
This section will show a summary of the literature about the topics of this research.
Literature is found by searching for it in search engines like Business Source Premier and Google Scholar, using key-words like Human Resource Management, HR-practices, franchising, multi-unit franchising, decision rights, delegation, allocation of decision rights and standardization, and combinations of these key-words. About 80 articles were read and The most relevant articles were used. Also books provided in the bachelor Business Administration about HRM and franchise related topics were used.
2.1 HUMAN RESOURCE MANAGEMENT
2.1.1 WHAT IS HRM
As said before, Human Resource Management (HRM) plays an important role in amongst others the retail- and the service industry. These are two industries in which franchising is very popular. But what really is HRM?
A common definition of HRM is mentioned by Noe, Hollenbeck, Gerhart and Wright, 2008.: “Human resource management (HRM) refers to the policies, practices and systems that influence employees’ behavior, attitudes and performance”. (Noe et. al. 2008, p.4).
They also give the reason why HRM is important: “Effective HRM has been shown to enhance company performance by contributing to employee and customer satisfaction, innovation, productivity and development of a favorable reputation in the firm’s community” (Noe et. a. 2008, p.4).
2.1.2 QUESTION 1: IMPORTANT HRM PRACTICES
Human resource management contains according to Noe. et. al. (2008),) and Sels et. al.
(2006) several HR practices. These authors are chosen because of the fact that their list of practices is most complete. Sels et. al. created a system to measure the practices and this is the reason why their practices are used for this research. The practices will be explained in this research for two reasons. First of all it shows us what HRM is in todays’ business, and the second reason is because of the fact that it can be interesting to see if there are any differences in the amount of delegation between these practices. In the following section the practices of Sels. et. al. (2006) will be explained in the following section with the help of the book of Noe. et. al. (2008), because of the fact that Noe et.al. describe the practices in a very understandable way. They use the same practices as Sels. et. al. (2006), except from participation, which is mentioned by Noe. et. al. in the career practice (2008).
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The practices are:
- Training
- Recruitment and selection - Compensation
- Career
- Performance management - Participation
Training
Training is meant to make sure employees learn how to do their job as good as possible.
(Noe et. al, 2008). Training activities are important to realize the goals of the company, because employees can develop skills which are necessary to perform their jobs. To measure training it is important to know if training is available for operational staff, if there exists a plan for the training, if the need for training is analyzed and wether or not the training results are evaluated (Sels. et. al., 2006)
Recruitment and selection
The second HR-practice is recruitment, which means look for and hire new employees.
Recruitment is important to affect three different aspects: The number and the type of candidates and if they want the job if they get an offer (Noe et. al., 2008).
Personnel selection is the choice for a company to hire a new employee or not. It is very important for a firm to select people which characteristics are matching with the goals of the firm. According to Sels et. al. (2006) it is important to forecast if there are too much or too less employees and to evaluate the effects of the selection and recruitment procedures in the firm (Sels et. al. 2006).
Compensation
Compensation, or pay, has a big impact on employee attitudes and behavior. The kind of employees that is attracted to the firm depends strongly on the compensation, it can also be powerful to make sure the employees of a firm strive for the goals of the company (Noe. et al. 2008.
There can be different kinds of compensation. One can think of:
- A fixed wage, one earns the same amount of money every month;
- A flexible wage, a part of the wage is fixed and further one can earn a bonus;
- Pay for performance, one gets a certain amount of money for a certain performance;
-Other benefits, like for example health support and extra days off.
The compensation can be the same for the whole company but can also be based on the skills of every single employee, and this is called a person-based pay structure.(Milkovich &
Newman, 1999).
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For measuring compensation, it is important to know if there are other forms of compensation than wage, if there exist incidental or structural incentive pay and if an employee can earn a bonus for a special performance (Sels. et.al. 2006).
Career/development
Career can be described in the context of mobility within an organization (Noe. et.al., 2008.
P. 401). For example, one can start as a cashier in a retail store, and become chief or manager due to increasing expertise, experience and performance.
The career path of an employee “can be mapped out in such a way that they produce a progressive improvement in knowledge, skills and abilities, thereby striving for an increase in both efficiency and productivity” (Sels. et. al., 2006 p.88). To measure this, one must know how important it is in a firm to fill in vacancies with own employees, if there exists a system to review the potential of employees and what the opportunities for horizontal mobility are (Sels. et. al. 2006)
Performance management
One can recruit, select and train people, but in the end the performance of those people is important and has to be managed and evaluated. That is why performance management is the next HR-practice. Performance management looks at the performance of employees and is a way to make sure that what employees perform is congruent with the goals of the organization. (Noe et. al. 2008). Steps in this process are gathering information about how well an employee is doing his or her tasks and providing an employee with this information.
Reward- and performance reviews has to be present and the procedure of appraisal has to be transparent (Sels. et. al. 2006).
Participation
The last practice is participation. According to Sels et. al (2006) there are two sorts of participation, structural participation and financial participation.
Structural participation means that employees are directly and indirectly involved in the decision-making process.
Financial participation means that employees share in the company’s profit (Sels et. al., 2006).
For this research it is interesting to look at how multi-unit franchisees deal with the above practices. When a franchisee makes use of store managers, it is important to know whether or not, and especially why, a franchisee delegates decisions about these practices to the store managers. More about this will be explained in the proposition section.
2.2 MULTI-UNIT FRANCHISING
In this section, multi-unit franchising will be explained.
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2.2.1 QUESTION 2: DIFFERENT FORMS OF MUF
We now see a trend in multi-unit franchising. Multi-unit franchising can be defined as: “A franchisee that owns, operates or controls more than one outlet or franchise” (Kaufmann &
Dant, 1996).
There are two forms of multi-unit franchising: it is often the case that successful single-unit franchisees seek additional opportunities to grow their businesses, and the performing of the existing units is most often the reason to expand. “This form of multi-unit franchising is sometimes referred to as incremental or sequential expansion (Kaufmann, 1992.
Another form of multi-unit franchising is the area development agreement or “master franchising”. This entitles the master franchisee to open and operate multiple outlets under a prespecified schedule (Kaufmann & Dant, 1996, Grünhagen & Mittelstaedt, 2002). The master franchisee has now the rights to recruit franchisees for this area, or he or she hires employees to run a business unit. Important over here are the decision rights, the rights, the authority to deploy and use the firm’s asset (Mumdziev and Windsperger, 2011). When the master franchisee recruits other franchisees, the decision rights can be at the new franchisee, but when it is an employee of the master franchisee, the decision rights are at the master franchisee. The same incentive problems as in the company-owned stores can now occur.
Because it is very difficult to compare the different forms of multi-unit franchising with each
‘other we have to focus on one form. For this research this will be the incremental form, because of the fact that this is the most common form in the Netherlands.
2.2.2 QUESTION 3: REASONS FOR FRANCHISEES TO CHOOSE FOR MULTI-UNIT FRANCHISING
2.2.2.1 REASONS TO CHOOSE FOR MULTI-UNIT FRANCHISING
There can be different reasons for franchisees to choose for multi-unit franchising. Three reasons found in the literature are the reason that he or she wants to grow further because they are successful in their first store or business unit, the anticipation of scale efficiencies and the reason that they compete in a tournament set up by the franchisor, in which the reward for winning is an additional business unit.
The first reason, willing to grow further has something to do with the motivations of the entrepreneur. Different motivations of entrepreneurs are explained by Carland, Hoy, Boulton and Carland (1984. They explain the difference between a small business manager,
“who establishes and manages a business for the principle purpose of furthering personal goals”, and a real entrepreneur, “who establishes and manages a business for the principal purpose of profit and growth” (Carland, Hoy, Boulton, & Carland, 1984). So when a
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franchisee is a real entrepreneur he or she will have an extra motivation to grow further, a reason for a franchisee to choose for multi-unit franchising we did see before. Open more stores because they are successful in their first unit (Kaufmann, 1992) We can also refer to this as habitual entrepreneurship. Habitual entrepreneurs (HE’s) are people who have had
“experience in multiple business startups”(MacMillan, 1986). HE’s have characteristics like seeking new opportunities, pursuing only the best and they can engage the energy of everyone they are working with (McGrath and MacMillan, 2000). So the motivations of the entrepreneur can be a reason to choose for multi-unit franchising.
The second reason to choose for multi-unit franchising is the anticipation of scale efficiencies and this can be achieved through central buying, advertising can be less costly and efficiencies in for example personnel accounting, and finance areas are much more easy to achieve in a multi-unit structure than in a single unit (Grünhagen & Mittelstaedt, 2002) A third reason found in the literature is related to the so called tournament theory (cf. Gillis, McEwan, Crook & Michael, 2011). This means that a franchisor sets up a sort of tournament for all franchisees. Based on the performance of the stores of a franchisee, the best can get an extra business unit as a reward for his or her performance. (Gillis et. al., 2011) Gillis et.al.
state that franchisors set up these tournaments to create another solution for agency problems because “ the prospect of additional units ensures effort”. The franchisee sees the additional unit as a reward, and it is positive for the franchisor because he does not have to do screening work because the franchisee already exists.
2.3 HRM AND MUF’S
In this section, HRM in multi-unit franchise systems will be discussed. The agency problem that can occur in a multi-unit franchised system will be explained, several forms of multi-unit franchising will be showed and the allocation of decision rights in multi-unit franchised systems will be discussed.
2.3.1 AGENCY PROBLEM
Above, several reasons are mentioned for franchisees to choose for multi-unit franchising, however, there is a chance of agency problems when applying multi-unit franchising. An agency relation arises “whenever one person (the principal) delegates decision-making authority or control over resources to another (the agent)” (Jones, 2007, p. 39). So we speak of an agency problem when there is a problem in “determining managerial accountability which arises when delegating authority to managers” (Jones, 2007, p. 39). So when a multi- unit franchisee has more stores and has to employ store managers for the day to day business, there can arise agency problems. This can result in store managers who follow their own interests and are not doing what is best for the store (Demsetz, Saidenberg &
Strahan, 1997).
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2.3.2 WHERE ARE THE DECISION RIGHTS ACCORDING HRM IN MUF’S AND WHY?
In the next figure, different forms of franchise system governance and the consequences for HRM at the unit level will be showed.
Figure 1: Different governance structures and consequences for HRM at the unit level in franchise systems
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Legend: (colours do not have a special meaning) CO: Company owned store
SUF: Single-unit franchisee MUF: Multi-unit franchisee
MUS: Multi-unit store: One of the units in a multi-unit franchise chain SM: Store Manager
In the picture we can distinguish different possible forms of managing HRM in a system. We start with the left side of the picture, which shows that every single-unit franchisee is largely responsible for managing the human resources of his or her own store. At the top of the picture, we can see the company-owned units. In this form the decisions about HRM are centralized at the franchisor. Both parts of the picture come from Brand & Croonen (2010).
For multi-unit franchising, there are several options possible. At the bottom of the picture we can see one of those options for multi-unit franchising. The decisions about human resources are made for each individual unit by the unit’s store manager. This store manager is an employee of the multi-unit franchisee and is responsible for the day to day business at the unit. There can exist differences in this option. It may be, for example, that one store manager has more or less decision rights than another. There can be different reasons for this, which will be explained later on in this research. The last option we can see on the right side of the picture. Over here the multi-unit franchisee has not delegated decision rights regarding HRM to store managers, but is responsible for the HRM of all his stores. In theory there can exist other forms, for example a multi-unit franchisee who has a store manager at some of his units, but for other units is responsible for HRM by him- or herself.
Decision- and ownership rights are very important over here. Decision rights are “the authority to deploy and use the firm’s assets” (Mumdziev and Windsperger, 2011 p. 449) and ownership rights are “The rights of individuals to the use of resources”(Alchian, 1977).
In this research the focus will be on decision rights, because of the fact that the ownership rights are always at the MUF. In the MUF option where HR is set up for every single unit the decision rights can be both at the franchisee or the store manager, this depends on several factors. In the option where the multi-unit franchisee sets up HR for all units, the decision rights are lying at the franchisee.
2.3.3 FACTORS WHICH INFLUENCE THE ALLOCATION OF DECISION RIGHTS
In this section, several factors which influence the allocation of decision rights are discussed.
These reasons are found in literature about allocating decision rights in an organizational context. It will be interesting to see if these reasons are the same for multi-unit franchisees
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Differences in the degree of allocation between units and between practices will be distinguished.
ALLOCATION OF DECISION RIGHTS TO STOREMANAGERS
According to Mundziev and Windsperger (2011) who explain in their paper the structure of decision rights in franchising networks using property rights theory, and Windsperger (2002), the allocation of decision rights depends on the amount of so-called innovation assets (Mundziev and Windsperger, 2011; Windsperger 2002.). They state that when a franchisee has so-called innovation assets, (i.e. intangible knowledge about the local market, intangible knowledge about the muf-chain), this will have a positive influence on the amount of decision rights. Jensen and Meckling (1992) do also state this: When a store manager does not have much intangible local market knowledge, the decision rights will remain centralized. So the intangible knowledge about the local market and about the muf-chain are important. From now on this will be called specific knowledge in this research.
Bester (2004) explains in his article, which is about the allocation of decision rights in a single firm, the optimal assignment of decision rights. This is also key in this research.
According to Bester (2004), the expectation to meet customer needs is related to the allocation of decision rights. The lower the expectation is that an employee, or in this research a store manager will meet customer needs, the less decision rights he or she will have (Bester, 2004).
Another factor that influences the amount of delegation in a MUF is according to Colombo and Delmastro (2004), who test in their article the predictions of economic theory on the determinants of the allocation of decision rights, the distance between the different units. When the physical distance between the units of a muf-chain is great, it is difficult for the multi-unit franchisee to monitor the behavior of the store managers (Colombo &
Delmastro, 2004)..
Another factor that has to be taken into account when allocating decision rights is explained by Hu and Hendrikse (2007). They state in their article, which explains the allocation of decision rights between farmers and firms in China, that reputation is an important factor. In this article they mean the reputation a firm, and they measure it by so-called official honor/awards. They found that when a firm has more awards or governmental recognitions, they will have more decision rights. When we translate this to this research, it will be the fact that when a store manager has a higher reputation, for example because of his education or experience, he or she will have more decision rights. This has also something to do with trust, when a store manager will have a good reputation, the MUF will have more trust in him or her.
The last factor that can have an influence on allocating decisions rights is the performance of the store and the store manager. Paik and Choi (2007), investigate in their article the amount of control exerted by franchisors to franchisees in the international fast-food
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business. It is likely that multi-unit franchisees have the same reasons for allocating decision rights to store managers as franchisors to franchisees. Paik and Choi (2007) found that the autonomy was higher when a franchisee performed well. For our research this will mean that when a store manager experiences strong business performance the multi-unit franchisee will delegate more.
ALLOCATION OF DECISION RIGHTS BETWEEN PRACTICES
Colombo & Delmastro (2004) also state that decisions according to the workforce like decisions about the career path of a plant’s personnel or hiring and dismissal, are more allocated to store managers than financial decisions (Colombo & Delmastro, 2004). In terms of HRM we can think of financial decisions about the compensation or the financial participation. This is a proposed difference. It will be interesting to see if there are other differences between practices in the allocation of decision rights.
3.PROPOSITIONS
From the above literature review we can derive some initial propositions for this research.
It is stated by Mundziev & Windsperger (2011), Windsperger (2002) and Jensen and Meckling (1992) that specific knowledge (intangible knowledge about the local market and the muf-chain) are important when allocating decision rights. So the next proposition is:
Proposition 1: The amount of specific knowledge owned by the store manager will relate in a positive way with the amount of decision rights the store manager has.
The next proposition comes from the article of Bester (2004):
Proposition 2: The multi-unit franchisee’s expectation that a store manager will meet customer demand will relate in a positive way with the amount of decision rights the store manager has.
The fact that the second proposition is based on an expectation implies that allocating decision rights has also something to do with trust. The franchisee allocates the decision rights to the store manager. The expectation of meeting customer demand is a form of trust from the franchisee in the store manager. This has a strong link with the article of Hu and Hendrikse (2007) about reputation, so the third proposition is:
Proposition 3: The reputation of a store manager and the amount of trust a multi-unit franchisee has in a store manager will relate in a positive way with the amount of decision rights the store manager has.
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From the article of Colombo and Delmastro (2004) it appears that it is more difficult to control HRM when the physical distance between the units is bigger. This can mean two things: it can be that everything according HRM will be standardized as much as possible, to make sure it is the same in every store, or it can be that store manager will be used who have much freedom to make their own decisions about HRM. Because of the fact that the expectation is that MUF’s make use of store managers most of the time, the next proposition is:
Proposition 4: The physical distance between units of a MUF-chain will relate in a positive way with the amount of decision rights the store manager has.
From the article of Paik and Choi, (2007) we can derive the next proposition:
Proposition 5: The business performance of a store will relate in a positive way with the amount of decision rights the store manager has
The sixth proposition is derived from the article of Colombo & Delmastro (2004), and is about the difference in the degree of delegation between practices.
Proposition 6: Store managers will have more decision rights regarding non-financial practices than regarding financial practices (like compensation and financial participation).
It can be that there are other factors which influence allocating decision rights by the MUF to store managers. This is why an open question about important reasons will be in posed the interview.
4. METHOD
4.1EMPIRICAL SETTING AND DATA COLLECTION
For this paper, qualitative research is used. This is because of the fact that “qualitative research allows a researcher to see and understand the context within which decisions and actions take place” (Myers, 2009, p.5). Because this research is about gaining an in-depth understanding of how and why multi-unit franchisees deal with HRM it is important to see in which context decisions are made, so that is why for this research the qualitative way is applied.
4.1.1 EMPIRICAL SETTING: THE DUTCH SUPERMARKET INDUSTRY
For this research data is used from the Dutch Supermarket industry. This is one of the industries in which multi-unit franchising is a trend in the Netherlands (ING Economisch Bureau, 2012) and it is interesting because one can make a comparison between different companies with multi-unit franchisees in the same industry.
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The Dutch supermarket industry has grown from the first self-service store in 1948 to an amount of 4440 supermarkets and 1450 mini stores in October 2012 (Hoofdbedrijfschap Detailhandel, 2012; levensmiddelenkrant.nl, 2008). The total amount of jobs in the Dutch supermarket industry is 244.500. This number contains every single job in the sector, irrespective of the size (Hoofdbedrijfschap Detailhandel, 2012). This makes an average of 41,5 employees per store. In the Netherlands there are 27 different supermarket formulas, and at 19 of these it is possible to become a franchisee (denationalefranchisegids.nl)
4.1.2 SELECTION OF INTERVIEWEES
The data for this research is collected by means of interviews with four multi-unit franchisees from different supermarket chains. These supermarket chains are Jumbo Supermarkten, Albert Heijn and Plus. These four multi-unit franchisees are interviewed because entrepreneur 1, franchisee of different Jumbo’s in Groningen connected them with the author of this research. To his opinion these four multi-unit franchisees, including himself, are doing things different regarding HRM and are interesting to interview.
Jumbo Supermarkten is a Dutch supermarket chain which has existed for more than 90 years now. The success of Jumbo Supermarkten came in 1990, and the Jumbo as we know it now is existing from 1996. They created a formula in which the customer is really central. Jumbo has a total of 283 stores right now and 129 of them are franchised (jumbosupermarkten.nl).
Albert Heijn is the biggest supermarket chain in the Netherlands, and the first store was opened in 1882. The first self-service supermarket as we know it now was opened in 1952.
Albert Heijn has 850 stores and 220 of them are franchised (albertheijn.nl).
Plus supermarkten has emerged from Plusmarkt in 1999. Plus is an interesting firm, because they have 259 stores, which are all franchised. By a total of 216 franchisees (plus.nl).
The reason that interviews with franchisees are used is well explained by Myers (2009): “Interviews permitting us to see that which is not ordinarily on view and examine that which is looked at but seldom seen” (Myers, 2009, p. 121).
I used semi-structured interviews because there can arise new questions during the interview and this can be useful for the research.
4.1.3 DATA COLLECTION:VALIDITY AND RELIABILITY
For this research, as much is possible is done to make sure it is valid and reliable.
Internal validity: “This refers to the causal relationship between variables and results”
(Gibbert, Ruigrok & Wicki, 2008 p. 1466). For this research several instruments to guarantee internal validity are used. First of all there are multiple MUf’s interviewed. These interviews were audiotaped and transcribed afterwards. There also was made use of data display,
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which means that the data are organized in a way that permits conclusion drawing (Croonen, 2006).
Construct validity: “This refers to the quality of the conceptualization or operationalization of the relevant concept” (Gibbert et. al., 2008 p. 1466). Preliminary research was done by having an informal interview with a multi-unit franchisee to gain a better understanding of what this function means, and by reviewing literature about multi-unit franchising.
External validity: This refers to the generalizability of the research. Outcomes from the research should be the case not only in the setting of the research, but also in other settings (Gibbert. et. al., 2008) According to Eisenhardt (1989) an cross-case analysis with four till ten case studies can be a good basis for analytical generalization, which means the generalization from empirical observations to theory (Yin, 1994). This research contains four cases, and a cross-case analysis is done.
Reliability: “Reliability’ refers to the absence of random error, enabling subsequent researchers to arrive at the same insights if they conduct the study along the same steps again” (Gibbert et. al., 2008. p. 1468). According to Yin (1994) a way to improve reliability is to keep a case study database. This means keeping the notes made during the case study, the documents and the narratives collected during the study to facilitate retrieval for later investigators. For this research every note took during the interviews, and the complete audiotaped and transcribed interviews are kept. Also the questions of the interviews are kept. This is shown in appendix 1.
4.2 MEASUREMENT
The interview is the main source of gathering date in this research, together with the literature review. In the following chart is shown which questions come from which sources.
For the complete interview, see appendix I.
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Question Theme and Source
1 - 6 General information
7 - 13 Reasons for MUF: Grünhagen & Mittelstaedt
(2005)
14-16 Delegation of decision rights. To obtain a
first insight into the relevance and validity of the propositions.The MUF has to fill in several scores for the amount of freedom and has to explain and give a score why decision rights are delegated. Brand &
Croonen (2010), Mundziev & Windsperger (2011)
17-24 HR- Practices. Sels et. Al (2006).; Noe et. al.
(2008).
Table 1: Explanation of interview questions
Because it is important for this research to know the amount of delegation of the HR- practices, the interviewees are asked to answer some questions about this and to fill in a score for the amount of delegation for every HR-practice. The questions about the HR- practices are based on the article of Sels et. al.(2006). They developed some indicators to measure the HR practices, which are discussed in the literature review part of this research.
In table 2 a summary of these indicators are listed Questions about these indicators are asked to gain an objective view about HRM in the MUF-chains of the interviewees.
For the analysis of the interviews, a degree of delegation is calculated for every interviewee.
This is calculated as follows:
The interviewee is asked to fill in a number from 1 till 5, were 1 is low and 5 is high to define the amount of freedom a store manager has on different HR-practices for every single store.
This list is as follows:
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Practice Indicators
Training Provided for operational staff, plan, analyzation
of need, evaluation Recruitment & selection Forecast imbalances, evaluation
Compensation Presence of other forms than wage, incentive pay and bonuses
Carreer Importance of internal labor market, presence of potential review and opportunities for hori- zontal mobility
Performancemanagement Presence of reward and performance reviews, transparency of appraisal procedure
Structural participation Involvement of employ- ees in decision making process.
Financial participation Sharing of employees in the company’s profit
Table 2: List of HR-practices and indicators of Sels et. al. (2006)
In the interviews the entrepreneurs were also asked to fill in a score for every reason to allocate decision rights form the propositions. Next to this they were asked if there were any other important factors which influence the allocation of decision rights.
Entrepreneur
Physical distance between units
Reputation & Trust Specific knowledge Meeting customer demand
Performance
Table 3. List of factors that can influence the allocation of decision rights
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4.3 DATA ANALYSIS
The data gathered during the interviews had to be analyzed. This is done in the following way: First of all, the interviews were recorded. After recording it, the interviews were transcribed. After this, the interviews were codified based on certain key words that are useful to find an answer on the subquestions and the propositions of this research. After codifying the transcription of the interviews, there is the pattern matching part (Yin, 1994).
This means that the data gathered in the interviews was compared with the theory, and the findings from the interviews were compared with the propositions from the literature in the literature review part and a conclusion was drawn.
5. RESULTS
A description of every interviewee will be given in this section, and the following table will be filled in for every interviewee.
Entrepeneur Formula
Number of stores
Working with store managers?
Degree of delegation (1-5) *
Most important reasons to delegate:
Table 4: Summary of interview with entrepeneurs
*See explanation below
As explained in the measurement part, every entrepreneur filled in a score for the amount of freedom of store managers on every HR-practice. This will be shown for every entrepreneur in the degree of delegation part.
Three of the four interviewees said that for every store the freedom was the same, so they gave one score (1-5) for each of the practices, where 1 is low freedom and 5 is total freedom. The degree of delegation is then the summed score of these seven practices, divided by seven. Because of the fact that every interviewee indicated that the employees did not share in the company’s profit, there was no score for financial participation. So the total will be divided by six.
One interviewee had 3 stores and gave different score for every unit. So this are six scores for three units, which makes a total of eighteen scores. The sum of these eighteen scores divided by eighteen brings us to the degree of delegation.
22 5.1 ENTREPRENEUR 1:
Introduction and personal characteristics
The first interviewed entrepreneur is the owner of three supermarkets. The formula which he is connected to is called Plus. The family has always worked in the supermarket business.
His grandfather had a supermarket himself, en after that his father. He did not plan to work in the supermarket business also but blood is thicker than water and in 2005 he became the owner of the store of his dad.
Reasons for multi-unit franchising
The reason to choose for multi-unit franchising was the fact that by delegating tasks to his employees to motivate them, his own workload became lower. So he bought a second and later on a third store. This is a new reason for choosing multi-unit franchising which was not found in the literature.
Degree of delegation
Starting point is that he wants everything to be delegated, but this will depend on the characteristics of the store managers. By this entrepreneur 1 means the level of experience, the amount of trust in the store manager and the level of education. Every store manager has his own strengths and weaknesses, and the challenge for the multi-unit franchisee is to provide support that will help improving one’s weaknesses so that he can work completely independent. Trust is a very important factor for allocating decision rights in his eyes. “I trust everyone for 100 percent, but when this trust is violated, you have to make sure that the tasks are done by another person as soon as possible “.
We see over here that entrepreneur 1 delegates in steps. He is personally very involved with the stores. In Amersfoort he was delegating more and more tasks to the employees, and then he opened a second and later on a third store. In the second store (Barneveld) the delegation is somewhat less, and in the third store the degree of delegation is the lowest.
This is consistent with the reasons for multi-unit franchising of this entrepreneur. He motivates his store managers by delegating, the workload becomes lower for himself and he opens a new store. Here delegation is somewhat less, and will be more when the store manager gets more experienced, as we see in Barneveld. This pattern is followed in the third store, were an inexperienced store manager is working now, and delegation will become more when he gets more experienced.
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Entrepreneur 1 Amersfoort Utrecht Barneveld
Training 5 5 5
Recruitment
& Selection
5 3/4 4
Compensation 3 2/3 3
Career 4 3/4 4
Performance management
4/5 2/3 2/3
Structural participation
5 5 5
Financial participation Not relevant Not relevant Not relevant
Table 2a: List of HR-practices with the scores from entrepreneur 1 (1= low freedom, 5 is total freedom)
Reasons for (non-) delegation Entrepreneur 1
Physical distance between units
1 Reputation & Trust 5 Specific knowledge 5 Meeting customer demand 5 Performance 5 Motivating employees 5
Table 3a: List of factors that can influence the allocation of decision rights for entrepreneur 1 (1 is little importance, 5 is very important)
There exists a difference between the amount of freedom the store managers have on the HRM- practices. This is mainly based on the experience of the store manager, but also the trust in the store manager and the satisfaction of customers are important reasons for delegation. We can also see this in table 2a. In Amersfoort the degree of delegation is higher than in the other two stores. This is mainly because of the fact that the store manager in Amersfoort has a lot of experience. In Utrecht there is a store manager who does not have much experience in being a store manager. He is a sort of student of entrepreneur 1. This is the main reason that the amount of freedom is lower. He gets more help and attention from entrepreneur 1. Also motivating employees is an important reason to delegate tasks for entrepreneur 1. This is a new factor which was not mentioned in the literature. Entrepreneur one said: “I delegate tasks to my store managers to make sure they stay motivated. They can delegate tasks to their chef’s and so on. In this way we all perform tasks we like and the challenge in our work remains”.
There are two striking differences in table 2a. The first one is at recruitment and selection.
Because of the fact that the trust of the MUF in the store manager in Amersfoort is very big,
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this store manager has total freedom to recruit and select his employees. In the other two stores this is less. Barneveld has still somewhat more freedom than Utrecht, again because the store manager in Barneveld is more experienced. In Utrecht the MUF does the recruitment for employees who work more than 25 hour a week, and in Barneveld he only has a last talk with employees who work more than 32 hours. This is just for approval.
The second striking difference is at performance management. Most of the performance measurements in this MUF-chain are based on the budget which is composed at the beginning of every year. In Amersfoort, the store manager composes the budget together with the chefs in the store, and this leads to goals for every department in the store. In the other two stores this works the same, but over here the budget is composed by the store managers together with the multi-unit franchisee.
Differences between practices
We can also see in table 2a that there are differences in the amount of delegation between the practices. Overall, compensation and performance management are less delegated than the other practices. Entrepreneur 1 explained that the compensation is often a fixed wage for a specific function in the store, and there are not much options for a store manager to change the compensation. The reason why performance management is less delegated is showed above, the multi-unit franchisee wants to participate in decisions about the budget of the stores.
For entrepreneur 1, personal involvement is very important, so the maximum number of stores entrepreneur 1 can handle is probably six, so that he can visit every store at least once a week.
Concluding, this entrepreneur’s starting point is to make sure that every store can run autonomously, and lots of tasks are delegated to the store managers, but he is still personally involved at the stores.
Entrepeneur 1
Formula Plus
Number of stores 3 (planning for the 4th)
Working with store managers? Yes
Degree of delegation (1-5) 4
Most important reasons to delegate: Reputation, trust, meeting customer demand and motivating employees
Table 4a: Summary of the interview with entrepreneur 1
25 5.2 ENTREPRENEUR 2:
Introduction and personal characteristics
The second entrepreneur is connected to the formula Albert Heijn and owns 7 supermarkets. Just like the first interviewee, his family has always been in the retail business. His work experience begins at Nettorama and later on he moved to van Eerd, the present owners of Jumbo supermarkets. At this company he worked on each department a supermarket has. After this he worked at van Eerd as space manager, making maps for stores which products to place on what place, for eighteen months and in 1991 he became store manager of the van Doormalen supermarket in Waalre, which was owned by his dad.
In 1992 the van Doormalen stores were converted to Albert Heijn.
Reasons for multi-unit franchising
Entrepreneur 2 knows no better than that van Doormalen supermarkten had more than one store, so multi-unit franchising was not a conscious choice for him. Asking him about the reasons for being an entrepreneur, he explained that family security was the most important when van Doormalen supermarkten started. But nowadays independence and challenge are the most important reasons for him. Recognition is not a goal, but a consequence of success.
Degree of delegation
Store managers are responsible for the day to day business of the units in this company, but between the entrepreneur and the store managers there is a retail-manager. It is interesting to see that store managers have a certain amount of freedom, but they regularly have to ask permission from the retail-manager. This retail-manager is interesting, because entrepreneur 2 explains that for the most HR-decisions the store managers have to ask permission to the retail-manager. This means that the retail-manager has a lot of decision rights. Entrepreneur 2 explains this as follows: “I am responsible for making sure that our company can exist for many more years, like political decisions. I take the risk to let the store manager experience entrepreneurship, and the retail-manager is responsible for making sure this and the performance of the stores goes well”. Entrepreneur 2 says that he dreams of the fact that he can give a 5 for every single HR-practice, but “at our level, caution is necessary”.
We see that again the reasons for multi-unit franchising are consistent with the degree of delegation. Independence and challenge were mentioned by entrepreneur 2. The main challenge he has right now is making sure the organization can continue and even grow, and that is way he delegates the day-to-day activities of the store to other people, the retail manager and the store managers.
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Entrepreneur 2
Training 2/3
Recruitment & selection 3,5/4
Compensation 3
Career 4
Performance management 3
Structural participation 5
Financial participation Not relevant
Table 2b:List of HR-practices with the scores from entrepreneur 2( 1= low freedom, 5 is total freedom)
Differences between practices
At this entrepreneur we see small differences between practices. Training is the lowest, because of the fact that the required training for every employee is determined by the company or the law. For the rest of the practices the store manager has almost the same amount of freedom. Career and structural participation are somewhat higher because entrepreneur 2 thinks it is important that a store manager involves and stimulates his or her employees.
Reasons for (non-) delegation Entrepreneur 2
Physical distance between units
4 Reputation & Trust 5 Specific knowledge 5 Meeting customer demand 5
Performance 5
Importance of unit 5
Table 3b: List of factors that can influence the allocation of decision rights for entrepreneur 2 (1 is little importance, 5 is very important)
Important reasons to decide whether something is delegated or not are according to franchisee 2 the performance and the importance of the store, the reputation of the store manager and the specific knowledge of the store manager. Performance and the importance of the store are easy to explain. When the store performs well there will be more delegated.
When a store is less important for the company, things can be tried, also in the delegating area. This is a new reason for delegation, which was not in the propositions of this research.
It will be discussed in the discussion section.
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The reputation, and especially the experience part, of the store manager is very important for the entrepreneur, the more experienced a store manager is, the more freedom he has.
The last point, the specific knowledge is also very important. At the company of this entrepreneur, there is, as said before, a retail manager. This retail manager can decide whether or not something is delegated and store managers often have to ask permission from him. Entrepreneur 2 says that he is not a franchisee, but a little franchisor. The reason to make use of a retail manager is because he has too much work next to the day-to-day business of the units. “Sometimes you are not an entrepreneur, or a store manager, but a politician. In this country there are so many rules that when you have seven supermarket units, you spend most of the time with political tasks, like applying for a construction license” this entrepreneur said.” Also the local politics are necessary to be involved in.
Knowing what is going on in the area is very important to lead a supermarket”.
Entrepeneur 2
Formula Albert Heijn
Number of stores 7
Working with store managers? Yes
Degree of delegation (1-5) 3,5
Most important reasons to delegate: Performance, importance, reputation and specific knowledge.
Table 4b: Summary of the interview with entrepreneur 2 5.3 ENTREPRENEUR 3
Introduction and personal characteristics
The third entrepreneur owns eight stores which are connected to the formula Jumbo.
This entrepreneur was also raised in a family which owned supermarket units. They asked him in 1999 to join the company, which was called Kooistra Supermarkten, but he refused.
After he had studied retail management he worked for Leaf (Sportlife) as a store-
accountmanager and he did not want to join the company because he thought that he was too young and also the fact that it was all family in the company did not appeal to him. But as he says: “I am a person who thinks: I have a good idea today, we are going to do it tomorrow! At Leaf there were too many commissions and persons from which you neede permission before you could take some action. I wanted more freedom and more challenge, so I finally joined Kooistra Supermarkten in 2000 anyway. Nowadays I am shareholder together with two others, also family, but I bought them out so in the foreseeable future I am the sole owner of this company and it will stay like that”.
Reasons for multi-unit franchising
When he joined the company, Kooistra Supermarkten had 3 very successful stores and they had won several retail-prices, or as the entrepreneur said: “we won everything there was to
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win”. But he wanted more, bigger, and was ready for a challenge. In 2002 he got into conversation with the van Eerd family and in 2003 the stores were converted to Jumbo.
After this it only got bigger. Something that he always wanted and was easier within Jumbo.
Asking about the pro’s and con’s of multi-unit franchising he explains that the focus becomes different. He has two passions, trying to make one single store the best supermarket of the Netherlands and managing. The first one, the full attention on the workplace, on “the boxes with banana’s and the packs of coffee” is no longer possible when you have more units, so that is why he chose for his second passion.
Degree of delegation
The degree of delegation scores a 5 in this company. Entrepreneur 3 says: “the store managers have one goal, they have to relieve my work. When they do that, I can focus on tasks that are necessary for the continuity of our company. The store managers are responsible for the operation of the units”.
But there is a remark to this score. The entrepreneur tells that every store manager is free to make his own decision about the HR-practices, as long as they reach their labor costs, which are budgeted at the start of every year. This entrepreneur also says: “Every little detail about HRM is on paper. Store managers could do everything they want as long as it would fit in to their budget and as long as they would stick to the guidelines provided by the company”. So the score of 5 at the degree of delegation by this entrepreneur means total freedom between predetermined lines. It is difficult to compare this score with the scores of the other entrepreneurs, because it is not clear what these predetermined lines exactly are.
Even though this problem, the interview with entrepreneur 3 can be useful for the comparison between the entrepreneurs because of the fact that some underlying reasons for delegation have become clear during the interview.
The fact that the labor costs are important at this company is reflected by a very large HR and absenteeism policy. Entrepreneur 3 has an agreement with a big production company and a large care center. They exchange employees. “I want to make sure that when one of my employees can’t do his or her job anymore, for whatever reason, he or she can start tomorrow with another job at this care center or at the production company. This also works the other way around. I can say whatever I want, but when my employees do not have the feeling that I think that they are very important, and will do everything to make them feel comfortable and save in their job, a store will never succeed”.
We see here that entrepreneur 3 has somewhat the same reason for multi-unit franchising as entrepreneur 2. He wanted to grow and manage a large company. This is reflected by the degree of delegation. Just like entrepreneur 2, entrepreneur 3 delegates almost everything according to the day-to-day business so that he can focus on activities needed for the continuation of the company.
