Do relationship quality improvements within a franchise organisation lead to better performance?

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lead to better performance?

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V. de Jager - Master thesis Small Business & Entrepreneurship – Rijksuniversiteit Groningen 2

Preface

This master thesis is the final step in completing my Master of Business Administration, a step on my educational path that has provided me with more knowledge and insight in the organisation of a franchise organisation. This study gave the opportunity to further explore the theoretical background behind the franchisor-franchisee relationship within a franchise organisation and investigate the possible link between being FAN and performance of a franchisee theoretically and test it empirically. This combination of theoretical exploration and empirical testing gave me the opportunity to see and understand how the franchisor-franchisee relationship was formed, how the franchisees judge their relationship and were improvements could be made. All this while providing FANchise with usable data to further develop and promote their Fan-scan.

Finally I would like to use this preface to thank a number of persons that were directly or indirectly involved in my research. First of all, Emy Smolders and Pim Dirckx who created the opportunity to do this study. They formed the research area for me to execute my master thesis. Secondly my

supervisors Maryse Brand and Evelien Croonen for helping me executing and completing the research and the writing of the thesis. Last but not least, thanks to all of the persons who work for Fortune Hotdrinks and their franchisees. They made it possible to execute the empirical research and survey.

I sincerely hope you will enjoy reading this thesis.

Victor de Jager

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Abstract

This study explores the relationship between FAN and performance by investigating this relationship theoretically and testing the theoretical assumptions through a small empirical survey among the franchisees of Fortune Hotdrinks. A FAN is a franchisee that is satisfied with his/her franchisor and with the quality of franchise organisation. The FAN concept is investigated by looking at the quality of the franchisor-franchise relationship according to the franchisee. The performance concept is investigated by looking at the quality gains and financial performance of the franchisees. After

identifying the theoretical assumptions and relating them within the conceptual model the study shows that there is a positive relationship present between FAN and performance. It can be concluded that a franchisee as FAN of a franchise organisation will contribute to a better performance of that franchisee and indirectly to a better performance of the franchisor.

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Appendices...50

Appendix 1: Summary previous exploratory studies Appendix 2: Other important frameworks

Appendix 3: List of variables

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Chapter 1 Introduction

Franchising is a way of organising a business that helps to start and expand a business quickly without the extensive amount of investment required to start up a normal organisation. An entrepreneur can develop a business idea, a concept to enter a specific market, and by translating it into a franchise concept the entrepreneur can enter the market more efficiently and effectively. Within the franchise concept the entrepreneur becomes the franchisor who can with his franchisees establish a franchise system with several units to serve a large market. In short, franchising can be described as a

contractually based business arrangement between the franchisor who develops a product or service and the franchisee who buys the right to use the franchisor’s trade name and sell that product or service (Khan, 1992). In a franchisor-franchisee relationship, the franchisee is granted or sold the right to use the franchisor’s system of distribution and/or trademark.

As franchising becomes a more popular way of organising, the market share of franchise organisations keeps on growing. Statistics of the Dutch franchise association (2005) show this growth (see table 1). This popularity is partially explained by the fact that franchising allows rapid growth of the franchise system. Rapid growth is possible thought the presumption that franchisees who directly share in the profit are more motivated than managers in paid employment (Garg et al, 2005). Franchisees are expected to invest in opening an own business in accordance to the franchise concept. This way ensuring a lower investment by the franchisor who does not need to invest in expanding the business by adding units at own expense, but who will still experience the benefits of economies of scale.

Table 1: Growth of franchising in the Netherlands (source: www.nfv.nl)

Year Amount of franchise systems Amount of franchise establishments 1981 147 3,543 1984 195 6,074 1987 244 8,252 1990 302 10,200 1993 340 12,120 1996 345 11,910 1998 358 14,150 1999 380 14,250 2001 415 16,250 2003 437 18,300 2005 498 21,400 1.1 Cause of Research

Much research into franchising is aimed at the different aspects of franchise systems and the

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franchise organisation? Usually, quality in relationship with franchising is described using the general terms and approaches in use by the scientific community. Recently, caused by the imposed research question of FANchise, Lambers (2008) investigated the potential dimensions of the quality of a franchise organisation. In the study of Lambers (2008) the perceptions upon and the dimensions of the quality of a franchise organisation are identified and empirically explored through the use of case studies and expert interviews. Conclusions drawn by the study of Lambers (2008) say that quality can be seen as the integral, subjective and objective evaluation of the essential dimensions of the franchise organisation seen from the franchisor’s or franchisee’s point of view. Further information about this study can be found in a short summary in appendix I.

FANchise is a new consultancy agency whose aim is giving advice to franchise organisations. Two years ago, they were the initiator of an explorative research, executed by Fontys (appendix I), which was aimed at trying to understand what the mayor bottlenecks/problems of franchise organisations are. Outcomes after the market analyses were not that shocking. Improvements can be made, but franchise organisations are not into the idea of using external advice. They rather deal with their problem internally. Nevertheless, FANchise saw an opportunity in giving advice to franchise organisations and helping them improving their quality. This awareness led to the study of Lambers (2008). The study formed the grounds for the development of the Fan-scan, which is used to evaluate a franchise

organisation’s quality and indentifying their bottlenecks. The Fan-scan consists of the same six quality dimensions as used to describe the quality of a franchise organisation. The advice as given by

FANchise, using the outcomes of the Fan-scan, contributes to the increasing of the quality and the performance of the investigated franchise organisations. FANchise is also the initiator of this follow-up study into the relationship between being a FAN and performance. This study is aimed at providing evidence for FANchise’s statement of: “When a franchisee as FAN of the franchise organisation feels fine, is active with his business and the quality of the franchise organisation, and the franchisor does the same than the overall performance will be good (fanchise.nl, 2008).” To do this, it is important to understand and explore the different elements which make up the research question of FANchise.

1.2 Problem statement

Quality is a topic that receives much interest throughout the world. Companies and governments want to create quality products and services to comply with customer’s needs. Within a society who is ever becoming wealthier, the demand for quality increases. This also influences the way franchise

organisations need to work. As research into the quality of a franchise organisation has explained, the franchisor-franchisee relationship is crucial (Lambers, 2008). As the franchisor-franchisee relationship becomes better, processes will run smoother, parties become more motivated to perform their

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1.2.1 Goal

Taken the above in consideration the following goal can be developed.

‘Providing theoretical and empirical evidence for the statement that if a franchisee ‘Is FAN of a franchise organisation’ the performance of that franchisee and the franchisor will increase.’

FANchise can use the outcome of this study for their promotional activities to attract new clients who can make use of their consultancy activities. Besides, this study is also scientifically interesting because it looks at new aspects of the quality of the franchisor-franchisee relationship. The study explores a franchisee being FAN of a franchise organisation and the impact of this on the performance of the franchisee and indirectly of the franchisor. No research has investigated this relationship before.

1.2.2 Main question

The main question entails the research question and underlying assumptions as provided by FANchise. The following main question can be formulated.

‘When a franchisee is FAN of a franchise organisation will this contribute to higher performance of that franchisee and indirectly the franchisor?’

This research question will be answered by theoretically exploring the different elements of the relationship between being FAN and performance. Within the theoretical framework the different elements will be scientific explored and defined as necessary. After the theoretical framework is formed, a conceptual framework will explain the underlying relationships between the different theoretical elements and assumptions. The developed theoretical and conceptual frameworks and their underlying assumptions will then be empirical tested through field research within one franchise system.

1.2.3 Sub questions

The following sub questions need to be explored to answer the main question.

I. What are the important theoretical insights to consider when discussing the quality of the franchisor-franchise relationship?

II. How can franchise relationships and franchise relationship quality be described? III. How can the performance of a franchise organisation be determined?

IV. What are the theoretical relationships between being FAN and the performance of the franchisee and indirectly the franchisor?

V. In which way can FAN, performance and their mutual relationship be measured? VI. What are the empirical relationship between being a FAN and performance?

VII. What are the implications of the relationship between FAN and performance when put into practice?

1.3 Boundary conditions and limitations

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• The study is aimed at the Dutch franchise market;

• Central to the study stands the relationship between the franchisor and his franchisee(s), the same as the essence of the Fan-scan;

• The master thesis must meet the requirements as given by the Faculty of Economics and Business from the Rijksuniversiteit Groningen;

• The thesis needs to provide support for the imposed research question by FANchise; • All of the involved parties need to be informed of the results.

1.4 Methodology

In this paragraph the main outset of the used methodology will be described using the method presented in the book of Baarda and De Goede (2001). The research type and design used will be described, explained is how the research took place and which steps were taken to get to the expected result. The explanation of the methodology within the paragraph will be general, further and more precise descriptions of empirical part of this study will be presented in chapter 4: research

methodology.

1.4.1 Research type and design

The end result of this study is aimed at the acceptance or rejection of FANchise’s statement regarding being FAN of a franchise organisation and performance. The research type most suited for this study will be the quantitative testing approach, building a theoretical and conceptual framework to evaluate the statement of FANchise empirically. The study tries to answer the main- and sub questions along the way, so in the end an answer can be given on the research question of FANchise.

The study starts by exploring previous research into this topic. Quality of a franchise organisation plays a crucial role to exploring the definition of being FAN. The aim was to develop a theoretical framework to explore and explain all the relevant and important elements that make up the research question. The developed theoretical framework was the starting point for the development of the conceptual framework. Through the use of the conceptual framework the mutual relationships and underlying assumptions surrounding the theoretical framework will be presented and explained. After exploring all relevant elements of the relationship between being FAN and performance and their underlying assumptions theoretically, it is time to test these theoretical assumptions in practice. A quantitative survey was developed, which was executed within one franchise system. The purpose of the questionnaire was to measure the amount of being FAN now and in the past and the performance of a franchisee. This way differences in being FAN and performance can be discovered between different franchisees and in the development of one franchisee in particular. With all the necessary information collected it became possible to discover and/or confirm the imposed relationship between being FAN and high performance.

1.5 Structure

In this paragraph an overview of the outline of the thesis. A graphical overview can be found in figure 1.1. The different chapters of the thesis will be described briefly. In chapter two and three the

theoretical framework is build, this framework presents the theory that influences the different elements of the main- and sub questions. The elements that play a crucial role and that are theoretically explored are franchising (franchise system and franchise organisation), franchise

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the relationship between being FAN and performance. The fourth chapter presents the conceptual framework that forms the base for the empirical research. The different relationships between the main concepts FAN and performance of this study are presented and explored. In the fifth chapter the research methodology of the field research is described. The survey outlay and the analysing approach will be set, so the empirical study can be executed and the relationships within the conceptual

framework can be tested. The sixth chapter explores the survey results by presenting and analysing them. This in accordance to the data analysing plan as created in chapter five. The final chapter of this thesis will consist of the conclusion and recommendations that can be made in accordance to the results of the executed survey. This chapter will answer the research questions as presented in the introduction.

Figure 1.1: Structure of the thesis

Chapter 1: Introduction

Chapter 2 and 3: Theoretical Framework

Chapter 4: Conceptual Framework

Chapter 5: Research methodology

Chapter 6: Results and analyses of field research

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Chapter 2 Franchising & franchise relationship quality

The different theoretical insights that are used in chapter two and three are aimed at creating a theoretical framework to explore and explain the relationship between being FAN of a franchise organisation and the effect this will have on the performance of the franchise organisation. Building on previous research into the quality of a franchise organisation by Lambers this study tries to use his previous insights and conclusions to create support for the imposed research question of FANchise. The theoretical framework will be build using different theoretical view of different authors

surrounding the important concepts of this study. The aim of this first theoretical chapter is to create clarity concerning the first main concept FAN. The first part of this chapter creates clarity concerning the franchising concept and the second part discusses the FAN concept seen as franchise relationship quality.

2.1 Franchising defined

Before the main concept FAN that is crucial to this study will be discussed there is first some attention for the franchising concept and its related terms. Franchising can be described as a contractually based business arrangement between the franchisor who develops a product or service and the franchisee who buys the right to use the franchisor his trade name and sell that product or service (Khan, 1992). Franchising offers opportunities for individuals and business firms who want to expand the number of their distribution outlets carrying their products and services (Khan, 1992). Franchising is unique among most other types of entrepreneurial activity in that it involves symbiotic and legally

differentiated economic forms. In the franchisor and franchisee relationship, the two entities remain distinctly separate, yet are closely linked to one another, leading to the description of franchising as a partnership or strategic alliance (McIntyre, Young, and Gilbert, 1994).

Among the many types of franchise systems that are in use today three general types can be identified. The first one is product distribution franchising, where a franchisor uses a selective or exclusive distribution system by making the franchisee a dealer of the exclusive product line (with specific brand) (Kneppers-Heijnert, 1988). The second one is product trade-name franchising, where a contractual channel of distribution is created by the franchisor (Lee, 1999). The third one is business format franchising, where a franchisor grants license to a franchisee to duplicate the franchisor’s business concept in another location (Lee, 1999). With product distribution franchising the franchisor wants to create a selling point for its products. Product trade-name franchising arose from

modernization of technology that produced a nation-wide market and significant increases in the volume of production. Product trade name franchising was the forerunner of business format franchising. Business format franchisors sell the opportunity for business ownership, whiles product trade-name franchisors sell their goods through franchised outlets (Lee, 1999).

As the previous pages show, when talking about franchising the terms franchise system and franchise organisation are used frequently and besides one another. That is why before franchise relationships can be explored it is important to create a concrete distinction between the terms franchise- system and organisation and choose the term which will be used within this study.

2.1.1 Franchise system

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Carty (2004). According to him a franchise systems exists to couple the efficiencies of scale and standardization with the advantages of local participation in ongoing operations and delivery of the organization’s product. Carty’s description of a franchise system provides insight in the relationship between the franchisor and the franchisees and the elements that are important to this relationship. It also explains that a franchise system can be centralized, decentralized or federalized, depending upon the efficiencies and/or philosophies of its members. But the main aim is building a franchise system that is focused on the needs and resources of the community that the system needs to serve. Also the franchise system consists of different parties (the franchisor and his franchisees) who strive to pursue a common goal, which is the reason why such a system exists.

External and internal elements of a franchise system

The main insight when talking about a franchise system that will be used throughout this study is that a franchise system consists of external and internal elements, which together make up the entire system. As the explanation of the external and internal elements was pretty short, these elements will be further explored using the article of Kaufmann and Eroglu (1999) on business format franchising. In the article of Kaufmann and Eroglu (1999) the authors distinguish four components of a franchise system.

I. Product/service deliverables:

Product/service deliverables are those elements sometimes referred to collectively as the formula and reflects the unique elements of the format that is been franchised.

II. Benefit communicators:

Benefit communicators imply the existence of intangible or unobservable benefits to the customer. They are the aspects of the franchise format that make the intangible advantages of the franchise system more tangible.

III. System identifiers:

System identifiers are according to Kaufmann and Eroglu (1999) the visual- and musical elements that bind an individual establishment of a franchisee to the franchise format and make them part of the franchise system.

IV. Format facilitators:

Format facilitators are the policies and procedures that form the foundation both for the franchise format’s efficient functioning at the individual establishment level and the integration of that establishment into the operation of the total franchise system (Kaufmann and Eroglu, 1999). These format facilitators are not visible for the customer but never the less they are important for them, because they define the policy of franchise format. It entails the internal procedures between the franchisor and his franchisees.

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2.1.2 Franchise organisation

When discussing the description of a franchise organisation the first thing that spring to mind is the organisational theory. According to this theory organisations are seen from two perspectives the macro and the micro view (Jackson et al, 1986). The macro perspective considers the organisation as the unit of analysis. This macro perspective is referred to as organisational theory. A micro perspective on organisations considers the behaviour of humans as the object of study. The way individuals learn, are motivated and give lead in execute strategies might be examined. This micro view and the study of individuals in organisations are referred to as a discipline called organisational behaviour. Now it is clear that there are two different perspectives to look at an organisation, it becomes important to understand how an organisation is formed. In other words how is an organisation structured, to explain this further the macro view will be used.

An organisational structure is formed as found in the literature (Meijaard et al, 2002) by five

contingencies, namely environment, technology, size, strategy and management objectives. These five contingencies form the base for the development of the dimensions that form an organisational structure. An organizational structure consists of (1) work division, which includes the distribution of tasks and activities, and (2) coordination mechanisms, which include standardization and

formalization (Meijaard et al, 2005). Using this broad distinction the following dimensions that form an organisational structure are presented using insights of different authors:

• Specialisation; • Differentiation;

• Centralisation or decentralisation; • Formalisation;

• Coordination (direct control, mutual adjustment and standardisation).

After the general theories concerning organisations are explored briefly a second step is establishing a relationship with franchise. Referring back to the description of the term franchise system and relaying those finding with the ones of the general organisational theories the following description of franchise organisation can be made. The description of an organistion is aimed at the internal relationships within a company. This internal aim can also be found in the explanation of the component format facilitators (internal element) as presented by Kaufmann and Eroglu (1999) when they discuss the term franchise system. This internal element entails the internal procedures and forms the foundation for franchise system through the use of policies and procedures. In other words a franchise organisation is formed by the internal element: format facilitators of Kaufmann and Eroglu (1999) and forms the essence of the franchisor-franchisee relationship.

To conclude, a franchise system is formed by the external and internal elements as identified by Kaufmann and Eroglu (1999), it is the total packet as seen by the customers and by the franchisees (manuals, etc.). A franchise organisation is formed by only the internal element, which influence the franchisor-franchisee relationship.

2.1.3 Franchise system or –organisation?

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between the franchisor and franchisee and only one external element (strategy). When taking these two conditions into account it becomes obvious that the research into the quality of the

franchisor-franchise relationship is foremost aimed at the internal elements (format facilitators) and there is only on external element present. As the descriptions of the terms franchise system and organisation demonstrate the most suited term the use in exploring the relationship between the FAN and performance will be franchise organisation, because the franchise organisation is formed by the internal elements. In other words a FAN is a franchisee that is satisfied with certain internal quality elements of the franchise organisation.

2.2 Franchise relationships

This second paragraph looks into the Fan concept by exploring franchise relationship quality. First there will be a short explanation of franchise relationship. Secondly, as it is obvious that quality is a closely related element to the Fan concept this paragraph will explore quality more thoroughly. The aim is to create method that makes it possible to evaluate quality and the quality of a franchise organisation. The last part of this paragraph consists of defining franchise relationship quality by looking at the fan quality dimensions and relationship quality.

When talking about being Fan of a franchise organisation the actual main issue is franchise

relationships. A franchisee will be seen as being fan when he or she is satisfied with certain elements and this case it is the satisfaction of the franchisee with the franchise relationships. Franchise

relationships consist of the relationship between the franchisor and its franchisees.

According to Lee (1999) the franchise relationship can be conceptualized as having four phases. The first is the introduction, where mutual interdependence and a shared motivation for success and profits is fostered (Justis and Judd, 1989). The second phase can be characterized by growth, beginning when the business is functioning. During this phase, the franchisor is offering support to the new franchisee and the relationship is growing and developing. When each participant is able to understand what is expected from each other, it can be said that the maturity (third) phase has been reached. At this point, the franchisee has an accurate impression of the competence and expertise of the franchisor and may either value or question the franchisor’s contributions to the relationship (Justis and Judd, 1989). The last stage in the relationship can be characterized by decline. In this phase, either one or both of the following situations prevail. Either the business is not doing well and the franchisee is motivated to end the relationship or the business is thriving and the relationship with the franchisor is solidified (Justis and Judd, 1989).

2.2.1 Quality definition, approaches related to franchising

Quality is a concept that is described using different points of view and the purpose of quality depends of the context in which it is used. Also quality can be judged using different methods. Quality can be judged using an objective method (making use of preset quality standards and then judging quality, economical) or a subjective method (people describe how they judge quality, psychological) (Blauw, 1992). To choose the way quality will be judged first the different insights of quality will be explored.

The concept of quality is used in different contexts and by this given different meanings. First attention for the description given by the Dutch dictionary (Van Dale, 2008) there are two meanings:

• “certain ability, capability, degree of capability to be used for a certain cause, the sustainability”;

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These definitions present the essence of the confusion concerning the concept of quality (Blauw, 1992). The first definition sees quality as the ability to be used for a certain cause and acknowledges the appreciation of certain important characteristics. Using this first definition quality is seen from the subjective and relative perspective. With the second definition quality is used in relationship to the characteristics of the object and it judged how well the object complies with the characteristics and specifications that stand for good quality. In accordance to this definition quality is objective and absolutely measurable.

Approaches

As seen above a dictionary will give a definition of quality and some handles to work with, but that is not enough to qualify quality so it is useable for measuring quality. That is where the theory of Garvin (1988) becomes useful; his research into quality has identified five approaches to look at the concept quality. Below each approach will be described briefly.

(1) The transcendent approach

According to the transcendent view quality is synonymous with innate excellence. Quality is absolute and universally recognizable and can be seen as a mark unsurpassed standards and high achievement (Garvin, 1988). Problem with this view is that quality cannot be precisely defined, instead people need to learn to recognize quality through experience.

(2) The product-based approach

The product-based approach defines quality quite different, according to the economists quality is a precise and measurable variable. Differences is quality between objects is reflected by differences in attributes possessed by the object, this happens when an object does not comply with the standards of that object. This approach lends a hierarchical dimension to quality, so objects can be ranked

according to the amount of desired attribute that they possess (Garvin, 1988).

(3) The user-based approach

This is the second approach developed by economists and measures quality using the user’s point of view. Customers are assumed to have different tastes or needs and the goods that seem to satisfy their preferences the best are those that they regard to have the highest quality. The view uses a personal and highly subjective method to establish quality. Quality is party related to your experience with an object or product, so a subjective measurement is important to establish quality in the sense of the user based approach.

(4) The manufacturing-based approach

The manufacturing-based approach focuses on the supply side and is primarily concerned with engineering and manufacturing practice (Garvin, 1988). This approach is one of the two approaches that spun from the operations management’s point of view and focuses on the manufacturer and his view of quality. Whereby quality is defined by the specification of the master designs of a product and any deviation in the reproducing implies a reduction in quality. Excellence in quality is the same as meeting with the specifications of the master design and with making it right the first time. This method of defining quality happens in an objective way, meeting specifications with can be easily measured.

(5) value-based approaches

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a certain price of a product one customer will value the product as having high quality while another will value the product as having medium quality.

Below in box I an overview of the definitions of the different approaches to quality as presented by Garvin (1988).

First of all it is important to understand that the five approaches of Garvin (1988) are developed to measure product quality and the crucial relationship is the one between producer and customer. This study looks at the franchisor-franchisee relationship and whether quality differences in this

relationship have any effect on the performance of the franchise organisation. It is important to understand that the theoretical product quality-relationship that is created by Garvin (1988) between the producer and customer is copied to the relationship between the franchisor and franchisee

(relationship quality). That makes it possible to use the five approaches to measure how much a FAN a franchisee actually is. All of the five approaches imply that quality of an object is established by evaluating that object using certain dimensions that are crucial for the quality of the object. But each approach to quality uses a different method to measure quality. On the one hand the product-based and manufacturing-based approach choose to measure quality by using the objective method, the

dimensions that are identified can be objectively measured. Predetermined quality standards are crucial. On the other the transcendent, user-based and value-based approach choose to measure quality using the subjective method; the quality dimensions that are identified can be subjectively measured. People’s opinion about quality is one of the best ways of looking at the concept of quality, because this study uses franchisees opinions to establish them being FAN of the franchise organisation. That is why the most suitable way to evaluate the franchise relationships within a franchise organisation is using the subjective method. What will mean that for the measurement either the transcendent, user-based or value-user-based approach can be used.

2.2.2 Franchise relationship quality (FAN concept)

The study of Lambers (2008) forms its research around three approaches towards the quality of a franchise organisation. These three approaches are: the quality relation between franchisor and franchisee, franchisor and franchisee as strategic partners and quality of a franchise organisation from

Box I: Definitions as presented by Garvin (1988)

I. Transcendent Definition:

Quality is neither mind nor matter, but a third entity independent of the two… Quality is achieving or reaching for the highest standard. (H.W. Tuchman)

II. Product-based Definition:

Differences in quality amount to differences in the quantity of some desired ingredient or attribute. (I. Abbott)

III. User-based Definition:

Quality is the degree to which a specific product satisfies the wants of a consumer… Quality is any aspect of a product, including the services included in the contract of sales, which influence the demand curve. (R. Dortman and P.O. Steiner)

IV. Manufacturing-based Definition:

Quality is the degree to which a specific product conforms to a design or specification. (Gilmore) V. Value-based Definition:

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societal point of view. The following graphical overview was presented (figure 2.1). The model states that when using one of these three approaches to evaluate the quality of a franchise organisation it becomes possible to identify the quality level of that franchise organisation. This research focuses on and uses the approach quality relation between franchisor and franchisee to investigate the franchise relationship quality and to establish the fan-level of the franchisees.

Figure 2.1: approaches on quality of a franchise organisation (Lambers, 2008)

The quality of a franchise organisation as presented in the study of Lambers (2008) consists of six dimensions, which when measured will determine the quality of the franchise organisation. As the six dimensions of the quality of a franchise organisation are almost all (except social responsibility) aimed at the relationship between the franchisor and the franchisee you can say that the quality question is internally focussed. These fan quality dimensions are one way of investigate franchise relationship quality, but to ensure thorough research a second method is included which looks at relationship quality. These two methods towards franchise relationship quality will be discussed below.

Fan quality dimensions

As mentioned before, the franchise relationship has to do with the quality of that relationship. Certain elements of that relationship play a crucial role when talking about being FAN of a franchise

organisation. The Fan-scan as developed by Lambers (2008) and adapted by FANchise explores this quality relationship and uses six quality dimensions to evaluate the quality of the franchise

relationship. But before presenting the relevant quality dimensions that will be used to describe the quality of the franchise relationship first a short explanation of the theories upon which the quality dimensions are build. For more information I refer to the study of Lambers (2008), in which the quality of a franchise organisation is described and qualified. The theories and insights that play a crucial role are the quality relationship theory by Dant et al. (1995), the alliance partner approach by Croonen (2005), the social responsibility approach by Kok et al. (2001), the European code of honour of franchise and finally the quality mark Dutch Franchise Association (DFA) by the DFA.

The quality relationship theory by Dant et al. (2005) presents three approaches, these are: the contractual approach, the behavioural/processual approach and the relational approach. The contractual approach is aimed at the contracts that are formed between franchisor and franchisee to secure important relational aspects. The behavioural/processual approach is aimed at the interactions between the franchisor and franchisee. And the relational approach is aimed at the relationship

between the franchisor and franchisee when dealing with internal transactions. The second theory used is that of the alliance partner approach (Croonen, 2005), in which two important variables are

distinguished: strategic compatibility and operational compatibility. Strategic compatibility entails the question: do we have to work together? (strategic fit) and operational compatibility: can we let it work? (operational fit). Different elements are presented. The third theory used is that of the social

Franchisor and franchisee as strategic partners

Quality of the franchise organisation

Quality from societal point of view Quality relation

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responsibility approach by Kok, et al. (2001), this theory says that social responsible behaviour of a franchise organisation results in benefits for that organisation. Fourteen dimensions of social responsible behaviour are indentified that make social responsibility useable in practice. The fourth insight comes from the European code of honour, which consist of a list of conditions that try to enhance fair behaviour between the parties that are active with franchising in Europe. Their goal is to encourage healthy and equal franchising. The last insight comes from the quality mark Dutch

Franchise Association, this quality mark is awarded to members of the DFA who meet a certain set of standards set by the association.

Each of these theories and insights contributed to construction of the six dimensions of the quality of a franchise organisation and resulted in the following quality dimensions: relation, contract, strategy, social responsibility, selection franchisee and finance. A broader explanation of these dimensions can be found in appendix 1.

Relationship quality

The fan quality dimensions are not the only way to look at franchise relationship quality. It is also possible to explore relationship quality (RQ) by itself. Authors that look into this subject with a focus on the value of this relationship are Harmon, et al. (2008). They look at the relationship using the franchisee’s point (the franchisee’s satisfaction with the franchisor) of view and describe the franchisor-franchisee relationship as a system of interdependent relationships, leading to relational exchanges bounded by contractual agreement between both parties. The role of each party is essential to achieving sustainable profitability (Harmon, et al. 2008). Franchisees must contend with restraints of the franchisor controls, and contractual specifications associated with the franchise system (Baucus et al., 1993). Harmon, et al. (2008) also conceptualize franchisee relationship value as the trade-off between the perceived net worth of the tangible and intangible benefits and costs to be derived over the lifetime of the franchisor-franchisee relationship, as perceived by the franchisee, taking into consideration the available alternative franchise relationships. By trying to conceptualize the franchisor-franchisee relationship and its value Harmon et al. (2008) have drawn the following two conclusions. First, the presented theories are effective in conceptualizing franchisee perceived relationship value, and direct attention towards unanswered questions surrounding the franchisor-franchisee relationship. Second, by recognizing the franchisor-franchisee's perspective in the relationship, they show that inter organisational relationships are perceived as valuable. To sum up Harmon et al. (2008) recognize the value of a good franchisor-franchisee relationship. A good relationship is addressed by investigating the quality of the franchisor-franchisee relationship by looking at their satisfaction with the franchisor.

To conclude, franchise relationship quality can be approached by looking at the six dimensions of the quality of a franchise organisation or at the relationship quality of the franchisor-franchise

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Chapter 3 Performance of a franchise organisation

This chapter will explore the theoretical aspects of the performance concept. The aim will be to explore and qualify the performance concept. This chapter will discuss performance in general, the performance of the franchisor and the variables that influence performance of the franchisee.

3.1 Performance

Performance is a concept that describes how well an organisation is doing, it explains in relative terms the difference between the turnover that is created and costs that are made by an organisation. For this study this concept is interesting, because by using performance as measuring concept it becomes possible to identify possible differences between a FAN and no FAN. Performance can be measured by looking into turnover, profitability figures or even by measuring the success of an organisation (lee, 1999). Performance can be measured at different levels within a franchise organisation, it can be addressed by looking at the performance of the entire franchise organisation (franchisor and franchisee), by looking at the franchisor’s performance or by looking at the performance of the franchisees. This study will investigate the performance of the franchisee, but in which way does a franchisee’s performance influence the performance the franchisor? That is why there is first attention for the performance of the franchisor. After it becomes clear in which way the franchisor’s

performance in influenced by the performance of the franchisee, the franchisee’s performance will be addressed in two ways. First of all performance of a franchisee is influenced by certain quality gains which are obtained by an increase in quality. Secondly performance can be judged by looking at the hard turnover figures and by measuring a franchisee’s opinion about their own results. This second method is aimed at the financial performance of the franchisee.

3.1.1 Performance of the franchisor

The performance of the franchisor is addressed by looking into the division of the profits between the franchisee and its franchisor. This division is determined by a franchise organisation’s fee structures. As the franchisee is the one who does the selling of the products and/or services and produces the turnover, how does the franchisor make his turnover? First of all it is important to understand that the role of the franchisor usually is not just that of providing the franchise (business) format. In some cases the franchisor provides the building in which the franchisee starts his business, or the franchisor provides the start-up capital. But in most cases it is the franchisor his job to deliver the products that are being sold, support its franchisees to accomplish their activities as good as possible, advertise for the whole organisation, etc. Obviously, this support that is been given by the franchisor is not free. That is why it is important to remember that in fact the franchisor is the owner of the franchise concept (business format) and wants to make a profit by selling this concept to its franchisees. An author that explains the financial relationship between the franchisor and his franchisees is Mendelsohn (1985). In his book he presents a guide to franchising, which includes the identification of seven ways in which a franchisor can create turnover. These seven ways are:

• Selling of start-up cit; • Selling of equipment; • Rent of property; • Rent of equipment; • Financing the franchisee; • Entry Fee;

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As fees are a method to generate variable and frequent turnover, it is smart to investigate these fee structures some more. Also, fee structures are the most logical way for a franchisor to generate turnover. An entry fee is a preset amount of money that is paid at the beginning of the franchise contract and helps the franchisor to select good and willing franchisees (a paying person is more motivated). Interested franchisees are motivated to earn their invested money back and franchisees with low capacity will be scared away (Sen, 1993). Secondly, this way the franchisor will earn its invested capital back and get paid for its invested effort (Beeftink, 2007). Finally, an entry fee will create some interdependence between the franchisor and franchisee. This because they invested in each other and the franchisor gets a return on its development and relationship specific investments (Dnes, 1992). Continuous fees are the amount of money the franchisee needs to pay every time unit (week, month or year) to the franchisor (Mendelsohn, 1985). The height of the continuous fee is determined by the costs that the franchisor makes, the fees that are being used by the competitors, the amount of money the franchisee is willing to pay, etc (Beeftink, 2007). The continuous fees are calculated using different methods, the three most important are:

• Fee is paid over the products that are being bought by the franchisee from the franchisor. The products are bought exclusively from the franchisor;

• The franchisee pays a variable continuous fee. This fee is in most cases a preset percentage of the turnover;

• The franchisee pays a preset continuous fee. The franchisee pays the franchisor a certain amount of money every year.

To conclude, the performance of the franchisor is formed by the fee structure that is being used. The franchisee pays the franchisor for its services, etc. through the use of a specific fee structure a predetermined or variable amount per year or per month.

3.1.2 Quality gains that influence the franchisee’s performance

The performance of a franchisee’s organisation can be influenced by different variables. An author that investigates if there are variables which can influence the performance of an organisation is Garvin (1988). In his study Garvin (1988) identifies two variables that form the link between quality improvements and profits. A third variable is identified by Entrialgo et al. (2000), this is achievement motivation. By improving quality the motivation to achieve will increase which will have positive influences upon profits. These variables form the step between the quality of the franchise relationship and performance. Within this study these variables will be called quality gains and the following three will be taken into account: (1) improved efficiency that leads to cost savings, (2) improved reputation that leads to improved market gains and (3) improved motivation that leads to improved

entrepreneurial and managerial behaviour. The first two quality gains are being explored together. An author who looked into the relationship between quality and profitability is Garvin (1988). He

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Figure 3.1: quality and profitability (Garvin, 1988) I. Market Gains

II. Cost Cavings

The first route emphasizes that through quality improvements an organisation can improve its turnover/sale, by that increasing its market gains and market share and increase its profits. This increase in market gains is accomplished by improving an organisation’s performance, features, reliability or other quality dimensions, thereby improving its reputation for the production and selling of quality products (creations of a name as the organisation that sells quality products). This will result in the increased sales and market share, or the organisation could increase its prices and realize a larger margin between costs- and sales price. This will result into increased profits and higher profitability. Overall, if the cost of achieving these gains is outweighed by the increases in contribution received by the firm, profitability will improve (Garvin, 1988). The second route emphasizes that quality improvement also affect profitability through the cost side. The

accomplishment of cost savings also starts by improving the internal quality of an organisation, than specially its reliability or conformance. These quality improvements will result on the one hand in increased productivity or lower rework and scrap costs (lower manufacturing costs) and in the other hand in lower warranty and product liability costs (lower service costs). When the manufacturing and service costs are lowered the margin of the product produced will increase which results in increased profits and a better financial performance. Overall, as long as these gains exceed any increase in expenditures by the firm on defect prevention, financial performance will improve (Garvin, 1988).

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These two variables are also identified by studies the studies of Zeithaml (2000) and Rust et al. (2002). The study of Zeithaml (2000) looks at service quality improvements. The study’s goal is identifying the service quality and profitability relationship by looking into previous studies on this subject. A conceptual model is created which, according to the author, needs to be analysed in an effort to clarify where research is needed (Zeithaml, 2000). The relevant bit of this study is the conceptual model, which also identifies the two variables: cost reduction (margins) and market gain (sales). They call it the offensive and defensive effects of (service) quality (figure 3.2). The study of Zeithaml (2000) emphasizes that when there is attention for service quality costs will lower or market share will increase and by that insuring growth in sales and margins. The other study of Rust et al. (2002) investigated how to get return on general quality investments. This study’s initial statement said: ‘Financial benefits from quality may be derived from revenue expansion, cost reduction, or both simultaneously.’ The literature on both market orientation and customer satisfaction provides

considerable support for the effectiveness of the revenue expansion perspective. Also the literature on both quality and operations provides equally impressive support for the effectiveness of the cost reduction perspective. There is, however, little evidence for the effectiveness of attempting both revenue expansion and cost reduction simultaneously. Besides, the empirical and theoretical literature that is available suggests that emphasizing both simultaneously may not work (Rust et al., 2002).

Figure 3.2: Conceptual model of Service quality and performance (Zeithaml, 2000)

The third quality gain that can influence profits is motivation of the franchisee. Motivation is

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of Nathan (2008) a franchisee will work better if he/she is driven by motivation which results in success. The motivation of the franchisee is important for a franchise organisation to work properly, because when a motivated franchisee tries to become better in performing their entrepreneurial and managerial activities the franchise organisation will run smother. The importance of motivated

franchisees is supported by the study of Lillis (1976) on the competitive advantage variation within the life cycle of a franchise. Accordance to this study franchise motivation is perceived as the most

important advantage within a franchise organisation at all stages of the franchise life cycle (Lillis, 1976). In short, a motivated franchisee can make a franchise organisation perform better.

To conclude, quality improvements lead to three separate quality gains which can create and increase profits. These quality gains that will be used are: (1) improved efficiency that leads to cost savings, (2) improved reputation that leads to improved market gains and (3) improved motivation that leads to improved entrepreneurial and managerial behaviour.

3.1.3 Financial performance

Financial performance of a franchisee can be judged by looking at their individual turnover figures, but that is not the only possibility. Another possibility to judge a franchisee’s financial performance is by investigating it indirect and asking them about their opinion about the turnover. A study that investigates the franchisor-franchisee relationship and measures the variable performance is Lee et al. (1999). In his study performance is measured by looking at the job performance of an individual franchisee. An overall measure of job performance is obtained through self-ratings of performance by the franchisee; the performance is obtained using a subjective method. Another study that looks into the performance of a franchisee by identifying performance by looking at a franchisee’s success is the study of Nathan (2008). In this study franchisee success is seen as a relative term. Franchisees might measure their success in terms of the financial performance of their businesses, their standard of living or the level of independence they feel they have. While franchisors may measure success based on the sales performance of their franchisees (financial performance), how easy franchisees are to deal with or how well they comply with operational standards (Nathan, 2008). Taken this into account Nathan (2008) defines franchisee success as the ability of a franchisee to demonstrate competence in three areas:

1. Optimising the profit potential of their business. This requires building strong sales while also controlling costs.

2. Ensuring high levels of customer satisfaction. The long-term profitability of the franchisee’s business and the goodwill of the franchise brand depend on the franchisee building a base of loyal, satisfied customers.

3. Engaging constructively with the franchise culture. The franchisee needs to be prepared to participate constructively in the franchise program, attend meetings and behave consistently with the brand and culture. In other word to be or have a good “cultural fit”.

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Chapter 4 Conceptual framework

This chapter forms the final piece of the theoretical framework and presents in the first half the theoretical relationship between relationship quality and performance. The second part of the chapter consists of the presentation of the conceptual framework, as developed using the theoretical insights. This conceptual framework will relate the different theoretical elements and concepts as explained and defined in the theoretical framework and clarify underlying assumptions that make up the relationships.

4.1 Relationship quality and performance

After investigating the FAN and performance concepts it is important to investigate the link between these two concepts some more. A direct link between these concepts is not investigated yet. The first part of this paragraph presents the studies that have investigated this link directly or indirectly. The second part will discuss the visa versa relationship between performance and quality.

By acknowledging that there are certain quality gains which are influenced by quality improvements it becomes clear that there should by a relationship between relationship quality and performance. Empirical studies confirm this positive association between quality and performance. First of all, according to Garvin (1988) there are empirical studies that confirm a strong positive association between quality and performance. High quality produces a higher return of investment (ROI) for any given market share, this mostly results in an increase of market share. The effects of quality

improvements to produce costs savings and thereby higher profitability are less supported by empirical research. Nevertheless, the inventorying study of Garvin (1988) identifies the link between quality and performance, although he acknowledges that further research is necessary. Extra research is necessary, because the research on quality has produced mixed results with few clear directions.

A second author that has looked into research on the relationship between (service) quality and performance is Zeithaml (2000). The first stream of research was aimed at the Profit Impact of

Marketing Strategies (PIMS) cross-sectional company database, which resulted in the identification of the impact of service quality on financial outcomes. The second stream and more rigorous academic studies soon followed in the early nineties, documenting both negative and positive relationships. Studies showing negative or no effects were typically not focused solely on service quality but examined TQM in general. Service quality improvements themselves did in fact lead to increase in performance (Zeithaml, 2000). The exploration of Zeithaml (2000) on the relationship between service quality and performance has formed the base for the development of the conceptual model as

presented in figure 4.1. In short, Zeithaml acknowledges that there is a relationship between quality and performance and gives through his conceptual model directions for further research.

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emphasis exceed those arising from a focus on costs alone or from attempts to balance a dual emphasis on both revenues and costs (Rust et al., 2002). Although some other elements were studied during this research the main connection between quality and performance is also acknowledged by this research.

Other researches that do not directly study the quality performance relationship, but have nevertheless some interesting points to make are Kaynak (2003) and Adams (2008). Based on a comprehensive literature review, the study of Kaynak (2003) identifies the relationships among TQM practices and examines the direct and indirect effects of these practices on various performance levels. In other words, the study of Kaynak (2003) also acknowledges that attending the quality aspect will influence the performance of an organisation. The study of Adams (2008) studies the effect of strategic alliances on performance. He concludes that when an international strategic alliance has a positive (qualitative) internal relationship the efficiency of that alliance will improve. He also concludes that a positive relationship between partners will result in the efficient working of those partners. The quality of in internal relationship needs to be good to ensure efficiency gains by an alliance. As these alliances can be seen as a relationship between different parties a connection can be made with the quality of the franchisor-franchisee relationship.

To conclude, different studies that explore the relationship between (relation) quality and performance theoretically or empirically acknowledge the link between the concepts. This means it is theoretically plausible that there is link between quality improvements and a performance. Quality improvements directly influence performance by increasing an organisation’s financial performance or indirectly by increasing an organisation’s quality gains.

4.1.1 Visa versa relationship performance and quality

As this study looks into the relationship between being FAN and performance by looking at the quality of the franchisor-franchisee relationship and performance it is partially expects that being FAN equals better performance. Nevertheless, it is important to understand that this relationship may also exist vice versa. It is possible that a better performance makes a franchisee more of a FAN. An issue that is acknowledged by the research of Morrison (1997) that looks at how franchise job satisfaction and personality affects performance. Satisfaction of a franchisee within the study of Morrison (1997) can be seen as another view to being FAN, a franchisee that is FAN is satisfied with certain elements of a franchise organisation. According to the study of Morrison (1997) the issue whether satisfaction causes good performance or vice versa is a strongly debated one and remains unclear (Lancly, 1989; Lawler et al.,1967; Schnake, 1991). These studies acknowledge that there is some form of vice versa influence, but one study confirms this relationship whiles another one declines this relationship. The fact remains, that there is a possibility that this vice versa relationship also exists within this study.

4.2 Conceptual framework

The aim of this conceptual model is explaining the relationship between being a FAN of a franchise organisation and the effect this has on performance. Important to understand is that the theoretical framework explored this relationship by looking at the quality of a franchisor-franchisee relationship and performance. The FAN concept is formed by the variables fan quality dimensions and relationship quality and the performance concept is formed by quality gains and financial performance. The relationship between FAN and performance is investigated in more detail by looking at the relationship at system and organisational level. These models can be found in appendix 2.

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gained by increasing the fan-level of the franchisee. Finally, the third part is formed by the financial performance. Together the second and third part form the performance concept. The first part of the conceptual model is formed by the six fan quality dimensions and relationship quality. When a franchisee’s satisfaction with the fan quality dimensions or the relationship quality increases an influence is noticeable in the performance of the franchise organisation. The second part consists of the relationship between franchise relationship quality improvements and their influence upon the quality gains. These quality gains are formed by local efficiency, local reputation and the motivation of the franchisee. Garvin’s (1988) study on the link between quality and its advantages forms the theoretical base for the connection between quality with local cost savings, and local market gains. When a franchise organisation does his work as efficient as possible it will influence the costs that need to be made. These will become less (local cost saving). Also, when a franchise organisation is known for the quality products it produces, customers are more willing to buy them. This will result in a growth of market share (market gains). Motivation is seen as a need to achieve of the franchisee, in other words achievement motivation (Entrialgo et al., 2000). The assumption will state that a

motivated franchisee will perform its activities well, which results in the improvement of a

franchisee’s entrepreneurial and managerial activities. The third and final part of the conceptual model consists of the financial performance of the franchise organisation. The assumption is that when local cost savings and market gains increase and the franchisee improves its entrepreneurial and managerial behaviour this will result in increasing financial performance. In other words there is a positive link between quality improvements and improved performance of an organisation, a link that is

acknowledged by the studies of Garvin (1988), Rust (2002) en Zeithaml (2000). Further explanation of theoretical beckground can be found in chapter two and tree.

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Figure 4.1: Conceptual model

To conclude, this research model forms the base for the empirical study of the two main concepts FAN and performance. This model conceptualises the assumption that satisfaction with the franchisor by the franchisee leads to quality gains which leads to a better financial performance and this relationship is exposed to environmental influences. The model is build using the following five variables: fan quality dimensions, relationship quality, quality gains, financial performance and general information and environmental influences, which will be used to measure and test the conceptual model. The FAN concept is measured by the variables fan quality dimensions and relationship quality. The

performances concept is measured by the variables quality gains and financial performance.

Fan quality dimensions

Relationship quality