How a Franchisor can Enhance Franchisee Satisfaction (Essay Sample)

How a Franchisor can Enhance Franchisee Satisfaction.
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Introduction
Franchise business system is a very attractive business for both the small and medium enterprises (SMEs). The format of this business requires relation between franchisees and franchisors, as well informed entrepreneurs taking up the problems of self-employment. In other countries for instance Thailand, the franchise business was initiated in the year 1983, and it is the key contributor of potential economy and income. In the economic environment, both franchisee and franchisors can provide different benefits to their business. There are some sectors that have been highly competitive in the franchise business, for instance, food industry.
However, firms rely heavily on expansion by a mix of franchising, and company-owned outlets instead of expanding company owned outlets. Explanations are offered by most of the literature in the agency theory. Due to the significance of self-interest for both franchisees and franchisors, franchising is the only best mechanism that motivates both parties for the similar objectives (Huang, 2004). However, there might be unfairness in the franchise contract, and this means agency problems would arise. Therefore, franchisors need to manage and monitor franchisees and ensure the franchisee is satisfied. Thus, the franchisee satisfaction has the greatest predictor on whether a franchisee would recommend their franchisor to the prospective franchisee (Hnuchek, Ismail & Haron, 2013). The paper explains how franchisors can enhance franchisee satisfaction.
Franchisor ownership Patterns and Agency Theory
In franchising, the patterns ownership can vary from company to another company as well as industry to industry. Firms can open company-owned stores, and then franchising some newly established locations later. However, this is best for firms willing to grow steadily and gradually. The best part of this approach is that the franchisor can test the products mix or even the business in the company-owned so that it can prevent potential conflict with franchisees after that (Huang, 2004).
In addition, a firm can establish both company-owned outlets and franchise simultaneously. This approach provides a way of combining the advantages of any other option available. Convenience store can be the plural system; the franchisor supervises operations in a company owned outlets before being franchised, and then franchised profitable company-owned outlets or new locations to franchisees. Because of the combined ownership of the store equipment and outlets, the relationship between the franchisees and franchisors is linked. However, in contrast with estate agency that is a purely franchised system whereby franchisees own the store outlets, and the ownership is purely independent of the franchisor (Huang, 2004).
In the agency theory, the widely and most accepted explanation is based on Robin’s argument of the year 1978. However, according to this theory, company-owned units’ managers can neither bear the full costs nor receive the benefits in full of their efforts due to the weak link between their compensation and performance of their outlets. They might shirk the responsibility of the work. However, the agency theory is relating the perception that franchising is an effective solution to the challenges of low levels of productivity and employee motivation, and there is no cost incurred for supervising and monitoring employees. However, it is due to franchisees bearing more of the costs of their shirking because franchisees are compensated from their residual claims of individual units (Huang, 2004).
Another plausible explanation for franchising is agency consideration of franchising that stresses organizational efficiency. Based on the works of Jensen and Meckling (1976) provided the underpinning theoretical for any agency franchising perspective, particularly in relation to the cost to monitor unit managers of a company-owned. Under an agency theory perspective, company-owned unit managers would be susceptible to excessive perk consumption and shirking behaviour because it is costly to monitor and control managers’ behaviour. However, shirking and perk consumption should be minimized under franchising arrangements because the franchisee, a residual owner, would suffer the negative consequences of inefficiencies and shirking. In other words, franchisees’ status of an owner-manager is a somehow substitution that is direct to monitor the manager of the owned company. These arguments suggest that franchising is an efficient form of organization when agency costs associated with selecting, motivating, assimilating, and monitoring hired labour are high. As such, franchising is an alternative way for firms to select the most entrepreneurial managers to minimize these adjustment costs.
A critical aspect of a franchising agreement is the franchisee’s right to use the franchisor’s established national brand name in exchange for a share of the profits through royalties on revenue or output. Stated differently, franchising is akin to leasing intangible assets (i.e. a brand name) (Brickley and Dark, 1987). Franchisees enter into franchise system for a variety of reasons. Among those, a franchisor’s proven business format and easy start-up allow franchisees to minimize the risks of operation if they are unfamiliar with the business (Lundberg, 1994). When a franchisor possesses a robust brand name, franchisees feel that there is greater potential for their operation to be a success. Franchisees rely on a franchisor’s established business format, which enhances the likelihood of the survival and eventual success of the franchisee’s business.
The relationship between franchisee and franchisor is unique in its nature because they have to work together long before the franchisee is engaged in actual franchise establishments. As a prelude, the franchisor reviews the proposed plans and specifications for a franchised unit and grants or withholds the franchise agreement. Once the plan is approved, the franchisor provides an opening team of trainers to assist in a smooth transition for the franchisee, followed by ongoing services (Dugan, 1998).
There is considerable theoretical support for the notion that the franchisor is interested in the franchisee’s satisfaction. When the franchisees are satisfied with the franchisor, they are more cooperative and more likely to contribute to the success of the overall franchise system. The franchisee’s satisfaction may reduce the franchisor’s agency cost by promoting collaboration between two parties (Jambulingam and Nevin, 1999). In the hotel industry, Brown and Dev (1997) argued that franchisors with a strong partnership with their franchisees outperformed competing hotels and other hotels in the chain in terms of occupancy rates, room rates, and gross profit.
The relationship between franchisee’s satisfaction and their retention rate is of particular interest to the franchising industry because franchisees’ satisfaction can be used as a leading indicator of franchisees’ commitment to the organization. Intuitively, the likelihood of remaining in the existing franchise system is high for satisfied franchisees. Morrison (1997) found that performance, organizational commitment, congeniality of franchisor relations and intention to remain had significant positive correlations with satisfaction. In short, franchisees’ satisfaction is a key variable for their intention to remain and thus it leads to the survival in long-term of the network franchise (Gauzente, 2003).
Franchisors’ Performance Perceived by Franchisee Satisfaction
Organizations have applied the performance measurement in order to implement the system in the management cooperation between parties. It always includes problems that are related to satisfaction of stakeholder and customer. In addition, Franchisor Performance refers to the satisfaction of the franchisee with the services provided by its franchisor. In addition, franchisee satisfaction is to the extent that a franchisee is satisfied with the franchisor as it affects her or his function in the franchise organization (Pekkola&Ukko, 2011). However, the satisfaction with the franchisor would affect franchise performance positively. Moreover, the implications of the managerial on franchise system indicate the efficiency customer and operation satisfaction as the indicating factor of franchisor’s performance (Hnuchek, Ismail & Haron, 2013).
The franchisee distribution of response for the items satisfaction that are associated with operating and purchasing an outlet of franchised, the franchisee satisfaction measurement needed the appraisal of given benefits and costs and on-going as well as initial franchisee support services that are provided by the franchisors. However, being satisfied as the franchise relationship behaviour, satisfaction franchisees’ is most contingent upon the expectations of franchisee. Therefore, franchisors need to focus on a specific dimensions which contribute to dissatisfaction of the franchisees’ and emphasizing specified dimension of carrying forward the service to improve relationship of both the parties to fulfil the responsibilities and contractual duties. In addition, franchisors should design a proper system of distributing goods and services that would assist the franchisees in marketing their products. However, this would result to improvement in satisfaction of franchisees with respect to services that are provided by the franchisor (Hnuchek, Ismail & Haron, 2013).
Relationship Marketing and Franchisors’ Performance
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