Analysis of the Innovation and the Communication in Fast Food Chains with Different Structures
Master's Thesis 2012 84 Pages
Table of contents
1.1. Problem Statement Franchisees and Company-Owned Stores
1.3. Research Questions
2. literature review
2.1. Self Service Technology
2.4. Motivations to Franchise a Company
2.5. Advantages of the Different Structures
2.6. Innovation in the Different Structures
2.8. Literature Conclusions
2.9. Rogers Diffusion of Innovation Model
3. research metodology
3.1. Motivations to Select a Case Study
3.2. Case Selection
3.2.1. Location of Research
3.2.2. Selection of Chains to Analyze
184.108.40.206. Pret a Manger
3.3. Data Collection
3.3.1. Interview Techniques and Guide to Maximize Data
3.4. Data Analysis
3.4.1. Inductive and Deductive Method
3.4.2. Survey (Research Design)
3.4.3. Analysis Data and Results
4. empirical findings
4.1. Company Relationship SST’s
4.1.2. Pret a Manger
4.2.2. Pret a Manger
4.3. Innovation and Power Distribution
4.3.2. Pret a Manger
5. DATA analysis
5.1.2. Processes of Innovation within Subway
5.1.3. Rogers Diffusion of Innovation within Subway
5.1.4. Comparison with Previous Research
5.1.5. Individual Entrepreneur
5.2. Pret a Manger
5.2.3. Rogers Diffusion of Innovation within Pret a Manger
5.2.4. Comparison with Previous Research
OVERALL: Nowadays, most fast food restaurant chains are organized in structure, operating under the principals of mutual communication, cooperation to reduce the overhead cost and a greater operational efficiency (Lozenzoni and Baden, 1995). Thanks this communication, the structure is a powerful tool to promote and develop innovation. Schumpeter (1934), who has defined the innovation as the act of infusing a new component or a mix of components into production, affirmed it is of vital importance for companies to be competitive. Since the early 90s, the technology has become more and more important in our private life, as in the business sector. All this has led to a constant and dramatic increase in the implementation of the technology especially within the public sector and the service industry, where customers now can use “self-service technologies” (SSTs), defined by Natarajan (2010) as technological products that enable the customers to produce their own service. Therefore the SSTs increased the service efficiency and decreased the waiting-time for customers, convincing the author that would be very interesting to investigate how much power local the management has over the innovation technology in the fast food restaurant industry.
PURPOSE: The main purpose of this thesis is to explore the relationship and its degree between the local management and the innovation within the fast food restaurant chains and argue about the communication within the different chains and. Furthermore to analyze the different system structures possible within a fast food chain, comparing the author’s findings with the previous research, to find the more efficient system structure to support and develop the innovation and to understand the motivations which lead the fast food restaurant chains to franchise.
METHOD: The method used in this dissertation will be conducting a cross-case study comparing two fast food restaurant chains, interviewing some managers of both companies in different branches with the scope to explore the effect the local management has into innovation process.
CONCLUSION: The size of the innovation in a fast food chain has a positive relation with the amount of power distributed to the local managers. However, this power differs on depending how the company is structured, with the local management of a company with an high proportion of franchisees (or completely franchised) who achieves their highest amount of power within medium sized innovations and, in the other hand, local management of company with a low percentage of franchisees (or wholly owned) within minor innovations. Although the global communication was perceived as satisfactory and efficient by the store managers of both companies, which present different organizational structures placed to the extreme poles, the author of this thesis believes there are many opportunities for an improvement of the horizontal communication within the local management, which could bring benefits to the entire internal communication. Especially the franchise system would have benefits where an increased local communication and collaboration could lead to more efficient communication throughout the entire organization. After a careful analysis of the two companies under review, located to the extremes of the range “completely franchised – wholly owned” and with the support of the previous research, the author found out the superiority of the plural structure over the unique structure, precisely due to the synergistic combination of the two unique structures, to optimize the management and the logistics of the innovation.
1 . INTRODUCTION
In this first part the author will introduce the reader to the topic and have a brief discussion about the background and problem statement. Then the purpose and research questions will be analyzed and presented.
Since the early 90s most of the companies involved in the service industry have changed the way to provide their products and/or services to the customers. Previously service was understood and seen just as a relation/interaction between customer(s) and employee(s).
Nowadays innovation and technology are affecting and changing radically the way how services are developed and delivered to the consumers. Innovation is increasingly seen as a powerful way of securing competitive advantage and one of the key factors in a firm’s strategy for survival (Drucker, 1985). Innovation is not easy to manage due to its characteristics of complexity, change and uncertainty. For a chain with a huge amount of geographically dispersed stores, the management of innovation is more complex and thus requires more effort.
Some industries make use of different types of innovation that is lacking in other industries, like self-service technologies (SSTs): technological products that enable customers to produce their own service (Natarajan, 2010). SSTs were found to be common in the banking, traveling and retailing industry. However, based upon his work and consumers’ experiences the author noticed that in the fast food industry there is still a lack of these technologies. Observing some examples from other different industries, which had implemented this kind of new and innovative technologies, there are many interesting and huge opportunities for these technologies to be implemented with great benefits for fast food companies and their customers.
Researching in the past literature review the author detected there is a scarcity of research about the role and the interaction of the local management in the innovation process within the fast food chains.
After some research of relevant literature, the focus shifted from exploring possibilities of SSTs in the service industry to the innovation process itself: even though it happened SSTs will still have an important role in this dissertation. SSTs will work as an example of a major innovation in order to make it easier for the interviewees to imagine the process that will take place. Additionally, a company that already has implemented these types of technologies reports significant increase in profit. Therefore, by using SSTs as an example of a major innovation the author believes that maximum interest from the participants will be obtained and consequently the SSTs served as a good example of a major innovation.
The main purpose of this thesis is to investigate how innovation is made and managed (the role of the local management in the innovation process and their relationship) and how much the communication is efficient within these fast food chains.
Fast food chains may operate as unique structure (completely franchised or wholly owned company) or plural structure (with a different proportion of franchise and wholly owned stores). Overall, this thesis deals with innovation management within a unique corporate structure. Previous research has hypothesized that the plural structure could be a better organizational option for the chains in terms of developing innovation. A brief summary of the past literature on advantages (and drawback) of the different chain structures will help the author to point out difficulties faced by fast food operators in the innovation management; after that, it will be explained, considering the previous research, which structure, unique or plural, could facilitate innovation in a fast food restaurant chain and why. Yet, the past literature has mainly focused how explain the born of the franchising using two major theories: the “Resource-Based Perspective” and the “Agency Theory”, according to which franchising should be a result of scarce resources that limit the company’s growth or a mean to reduce the agency’s costs of company with well known name. This second explanation has gathered more supporters among franchising scholars.
The author’s analysis is based on interviews with store managers of Subway and Pret a Manger and on the results of past research, especially with Bradach (1997; 1998) and Lewin-Solomons (1998). Finally it will be proposed the model of “Rogers Diffusion of Innovation”, which is expected to help the unique structure chains to optimize the local management in their innovation projects.
1.1. Problem Statement Franchisees and Company-Owned Stores
As reported by Bradadach (1997), majority of fast food chains uses two types of establishments: franchisees and company-owned stores. The proportion of these two establishments in a fast food chain will have an impact on allocation of authority, power (Furquim De Azevedo, 2010), innovation process (Lewin-Solomons, 1999) and communication. Dant et al. (1992), Dandridge (1994) and Lewin-Solomons (1999) emphasize the importance of advisory councils as tools to communicate between franchisees and the franchisor. This communication benefits both sides, as franchisors largely depend on franchisees’ feedback and these latter can easily share their thoughts and opinions with the first.
After an exhausting research on the relevant past literature, the author has learned that a number of scholars detected the scarcity of research about the role of the franchisee in the innovation process (Dandridge, 1998; Sundbo, 2010). Dandridge (1998) looked at how organizational variables in franchise such as size, age and growth affected the support of franchisor for franchisee innovation. Lewin-Solomons (1999) had explored how much formal and informal power each stakeholder has in a fast food franchise system. Existing previous research on innovation and entrepreneurship in franchise has concentrated on franchisees, mostly due to the fact that franchisees are properly perceived as entrepreneurs (Dandridge, 1998), even though entrepreneurship by franchisees must comply with the standards and policies imposed by a franchisor (Bradach, 1997).
These results are the starting point for one of the objectives of this research dissertation, which is to explore the effect franchisees have in the innovation process in a fast food restaurant chain. This is obtained by looking at franchisee power and effectiveness of communication between franchisee and franchisor.
Research work has identified that store managers in company-owned stores are less independent than those within franchise system and also less interested with sales or profit outcomes (Boyle, 1994; Lewin-Solomons, 1999). This is due to the fact that store managers are more concerned about stable job and internal promotions. Thus it would be expected from the store managers to obey the authority rather than being independent and creative (Lewin-Solomons, 1999). In addition Williams (1985) argues that managers in company-owned stores tend to shirk and deliver worse results than franchisees because a part of their salary is fixed and independent of the unit performance. This leads to a lack of motivations and does not provide an incentive to increase performances and results. Therefore, company headquarters that hires managers would be willing to impose more control on them than on independent franchisees.
However, in most research papers, companies being analyzed had either a lot of franchisees and few owned stores, or somewhat similar proportion of both establishments.
Therefore, it would be interesting to see if the same arguments hold in a company, where every store is owned by the company. Thus, another objective of this thesis was to explore the effect local management has in the innovation process within a fast food restaurant chain. This is obtained by looking at power and effectiveness of communication among company-owned stores and headquarters.
1. explore the relationship and its degree between local management and innovation within fast food restaurant chains
2. argue about the communication, and its efficiency, within the fast food restaurant chains under review
3. analyze and compare the different system structures possible within the fast food restaurant chains to find out which one is the best option in terms of supporting and developing innovation.
1.3. Research Questions
1. How does power distribution affect the role of the local management in the innovation process within fast food restaurant chains?
2. How effective is the internal communication within fast food restaurant chains?
3. Which is the most efficient structure to utilize in a fast food restaurant chains to promote and develop innovation?
The main focus of this research dissertation is to explore the effect of local management in the innovation process. This latter is obviously affected by other participants, such as headquarters and area/regional managers, and therefore the author must include these other layers of the fast food restaurant chains in his study. However, it will not be the intention of the author of this dissertation to investigate these fast food chains’ layers in depth. Further, the intention of this thesis is not just to compare two selected cases as Subway and Pret a Manger, but rather treat them as separate study units, linking them to the theoretical constructs and see if they comply or contradict them.
2. LITERATURE REVIEW
“We want fast transportation, fast communication, fast computers, fast photos, fast music, fast repairs, and fast service from the businesses we patronize… …It is from the last of these that we got fast food”
2.1. Self Service Technology
Self Service Technologies (SSTs) are “technological interfaces that enable customers to produce a service independent of direct service-employee involvement” (Meuter et al., 2000, p. 50). These types of SSTs firms currently employed include kiosks, internet, interactive voice response, and mobile services (Castro et al., 2010). Examples of SSTs are ATMs, automated ticketing and check-in machines, telephone banking and services through websites. Customers who take advantage of SSTs enjoy services within more flexible timeframes and more channels (Meuter et al., 2000, 2005). Service providers also increase their effectiveness and efficiency through SSTs (Bitner et al., 2010).
Starting from the definition of Natarajan (2010) for the SSTs, who describes them as all the technological products that enable customers to produce their own service reducing the waiting time, the author has considered as fast food restaurants all those places where usually customers do not spend long time to eat and rest. Examples of these places are TGI Friday’s, GBK, McDonald’s, Pret A Manger, Subway and Burger King (the author has mentioned just few of the many fast food present in UK considering some of these have table service or else when the food is served to the customers' table by waiters and waitressess, also known as "servers". Table service is the norm in most restaurants, while for some fast food restaurants counter service is the common structure. For pubs and bars, table service is the norm in the USA whereas counter service is the norm in the UK. With table service, the customers generally pay at the end of meal).
SSTs are used across a variety of sectors from education, retail, banking and more and it can be easy to concentrate on a specific category and analyze it individually.
While management skills can improve service systems, a manager is better off if he or she first has a clear understanding of the operating characteristics that set one service system apart from another (Chase, 1978). Chase (1978) offers one view of services, which, if followed, results in a "rational approach to the rationalization" of services. His view is that the less direct contact the customers have with the service system, the greater the potential of the system to operate at peak efficiency. And, conversely, where the direct customers contact is high, the less the potential that exists to achieve high levels of efficiency. This distinction between high and low contact systems enables the managers to develop a more effective service operation and the service companies to make their operations as efficient as possible.
Since Chase wrote this in the 1978, technology development and an incremented labour cost, (due to a more highly skilled personnel, which was brought into use a more developed technology) led most service companies to implement and develop the SSTs to deliver their services (Chase, 2008).
The Innovation Technology, basically, helps customers to replace employees and produce services themselves (Natarajan et al, 2010). In the other hand, the company, which implements SST, will obtain benefits such as increased productivity, efficiency, and a probable abatement of the costs (Lovelock and Young, 1979); (Sathye, 1999); (Kelley, 1994).
Today, using SSTs to replace the traditional Human Service Agent (HSA) is becoming more and more a trend and changing the way people live their life. As stated by Ong (2010), “This evolution of services is somewhat similar to the past experience in the agricultural and manufacturing industry where human labour has been relentlessly replaced by automation. Before this kind of technological revolution, people used to get the tickets (train tickets, airfares, movie tickets, concert tickets, discount coupons, etc.) from the human operator; nowadays, most people get those tickets on line or through self service kiosks. Before, when a customer used to call a company, he or she could talk to an employee directly; now, people might have to go through automatic phone service before they can talk to a human official”.
Nowadays, any “user service” person is literally surrounded by many and many SSTs during the daily life (ATM, online banking, library kiosks, price scanners at the grocery store, self check-in kiosks in the airport, self check-out or system in the hotel, etc.), becoming more and more familiar and open-minded with these type of SSTs and, due to improved security system (particularly regarding the online transactions and information sharing), more confident.
Many people are turning their preference from HSA to SST, due to the fact the latter has advantages in usage, involvement confidence, speed, time and location flexibility, and price are the largest satisfaction factors from consumers’ perspective (Sur, 2008) and sense of control (Shamdasani et al., 2008).
As stated by Holman (2010), there are some obstacles regarding the implementation of SSTs by fast food restaurants, due to the fact most of them are organized as franchisees and financial resources not beneficial for implementation of this type of new technology.
Contrary to this trend, some of these fast food restaurants have already implemented some type of SSTs, mainly touch screen ordering systems, and enjoyed financial benefits (such as Subway which has installed a self-service kiosks since the 2005 in Atlanta with chip and PIN payment, which reduces customer walk-away and increases overall spend by over 25%).
Due to some researches and successful practical examples from business life, in the fast food system and in different retails from that, surprises that most of the fast food service companies are reluctant to implement this kind of SST in an immediate future.
Schumpeter (1934) was one of the first to develop a theory about innovation. He argued that innovations – new ways of doing things or better combinations of production factors – are part of the entrepreneur’s work. Schumpeter distinguished five areas in which companies can introduce innovations:
(1) generation of new and/or improved products
(2) introduction of new production processes
(3) development of new sales markets
(4) development of new supply markets
(5) reorganization or restructuring of the company.
The innovation could be of two different types: (1) radical, when there is a deep and complete change in the idea itself of product or service and (2) incremental, when the product or service is lightly modified to meet new needs (Liebmann et al., 2003).
According to Drucker (1985), innovation is radical when it is viewed and implemented as an opportunity that results in the creation of a new product, service or a change to a different one. An innovation can be an idea, practice, process or product perceived as new by an individual who then transforms a new problem-solving idea into an application. Innovations are thus “the outcome of the innovation process, which can be defined as the combined activities leading to new, marketable products and services and/or new production and delivery systems” (Burgelmann et al., 1996).
Regarding the incremental innovation, Sundbo (2010) states there is an adaptation of existing products or a new way of delivering products. This type of innovation is the most common in franchisees, as they, as well as owned company stores, are briefed from the headquarters, according to company standards, how they have to conduct the business, which constrains them to implement radical innovations on their own. Deviations from this instruction can have unpleasing consequences, for example, termination of a franchise contract.
According to Miller (1983) the innovation, and its promotion, can be pursued and obtained by different ways and means, commonly defined entrepreneurial strategies.
The word 'franchise' is of Anglo-French derivation - from franc - meaning free, and is used both as a noun and as a (transitive) verb.
Franchise is an organizational structure in which a company grants an individual or another company the right to do business in a prescribed manner over a certain period of time in a specified place in return for royalties or the payment of other fees, or simply defined as the practice of using another firm's successful business model. The company which grants the right is the franchisor, the receiver of the right is the franchisee and the right is the franchise (Hisrich and Peters, 1989).
The first franchise began in the 1850's when Isaac Singer invented the sewing machine. In order to distribute his machines outside of his geographical area, and also provide training to customers, Mr. Singer began selling licenses to entrepreneurs in different parts of the country. In 1955 Ray Kroc took over a small chain of food franchises and built it into today's most successful fast food franchise in the world, now known as McDonald's. McDonald's currently has the most franchise units worldwide of any franchise system.
Many people associate only fast food businesses with franchise as most of the well established fast food chains are franchises with a large international presence such as Subway, McDonald’s, KFC, Burger King, Pret a Manger and Pizza Hut.
A franchise is a right granted to an individual or group to market a company's goods or services within a certain territory or location and in its agreement and an alternative to building chain stores to distribute goods and avoid the need for investments and liability for a chain.
The franchisor, or parent company, gives the right and power to the franchisee, an independent entrepreneur, to market and sell branded products and services of a franchisor (Furquim De Azevedo, 2010). The success of the franchisor depends on the success of the franchisees, so these latter have a greater incentive than a direct employee because they have a direct stake in the business. In return, the franchisee pays fees such as royalties, advertising fees, franchise fee and a development fee (if a franchisee decides to open an additional unit) (Mihoubi, 2011).
The franchisor, which has several interests to protect and is involved in securing protection for the trademark and brand (Rubin, 1978), puts serious limits within the franchisee can operate, regarding the choice of establishment location and design, services and products offered; the franchisor also supports product development, training management, and promotion of the franchisee (Dandridge, 1994). Due all these constrains, the franchisees are not in full control of the business, as they would be in retailing, and sometimes, for different reasons, as stated by Rubin (1978) they provide a lower quality on a product or service than required by the franchisor (the so-called misusing of the brand).
2.4. Motivations to Franchise a Company
According to Oxenfeldt and Kelly (1968), the franchising is a faster way to grow and gives access to financial as well as human resources and Minkler (1990) added that franchising also provides an understanding of local markets. Also, Oxenfeldt and Kelly (1968) stated that franchise systems tend to rely more on company ownership instead of franchising when maturity is reached. This occurs for three main reasons: franchisor tries to increase its profit by taking control over the most profitable stores, franchisor acquires local knowledge of site when acquiring stores and franchisor increases the managerial skills of the company.
Some of the major questions that have been debated in the franchising literature are the reasons for its creation itself and the reasons behind the choice between franchising and keep (or buy back) company-owned stores. The two main theories used to explain this phenomenon are the “Resource-Based Perspective” and the “Agency Theory”: the first justifies the franchising as the response to a lack of financial resources for the growth of a company, and the second involves the costs of resolving conflicts between the principals and agents and aligning interests of the two groups. Even though it seems there are consents regarding the second proposal, according to Norton (2003), there still exist some issues and limitations regarding both theories. First, according to the “Resource-Based Perspective”, to protect a new brand, a company must grow fast; however it may face a lack of resource, especially in an immature company, which slows its required fast growth and leads this company to franchise to overcome those restraints (Caves and Murphy 1976). Secondly, the “Agency-Theory”, which assumes that the parent company has a well recognised brand, argues that a company has some issues monitoring its agencies (company-owned stores in our case), which might damage the reputation of the brand itself. In short, the franchise contracts reduce the agencies’ costs by solving some incentive issues (Rubin 1978; Brickley and Dark 1987). However, empirical evidence does not support both theories: (1) the franchising is not just used by small companies with short resources (Brickley et al., 1991; Lafontaine, 1992) and some mature companies, like McDonald’s or Subway, intensively use franchising (Love 1986); (2) the franchising is also adopted by start-up/entrepreneurial firms which do not yet have a strong brand (Carney and Gedajlovic 1991; Marnoto 2000).
Some authors have combined those theories: in the earlier life cycle the companies adopt the franchising to raise financial resources, and then they franchise to reduce the agencies’ costs (Martin and Justis 1993). This last “mix” theory seems to be supported empirically by the next online article reported by the website Trefis: “McDonald’s, the leading global food-service retailer, has achieved dramatic growth using the franchise business model. We estimate that franchised stores currently contribute around 92% of McDonald’s stock value. The remaining 8% comes from company-owned stores”.
In the same online article they explained in detail the expectations regarding the company-owned stores contribute relatively little to the value of McDonald’s:
1. Decline in company-owned stores as McDonald’s re-franchises them: the number of McDonald’s own-operated stores has declined by nearly 24% in the past three years, from more than 8,100 stores at year-end in 2006 to around 6,200 stores at the end of 2009. Most of the reduction in company-operated stores came from converting them to franchised stores, which generate more profit for McDonald’s with fewer operating hurdles. Going forward we expect re-franchising to continue at slower than historical rates and eventually stop. Because McDonald’s is focused on growing its emerging market penetration through franchisees, we do not expect new company-owned stores to open in significant numbers going forward. Net: We forecast the total number of McDonald’s operated stores to decline over the next 3-4 years and then level out at around 5,500 stores.
2. McDonald’s franchisee profit margins are 4x times those of company operated restaurants: franchising is an extremely profitable business, which largely explains why food-service retailers such as McDonald’s, Subway, Burger King and Dunkin Donuts prefer franchising their stores to owning them. McDonald’s own-operated stores had EBITDA margins of around 23% in 2009 as compared to around 88% of franchised stores. The difference in margins results mainly from the extra operating costs incurred by company operated restaurants, such as payroll and rent. As a result, having more franchised stores increases McDonald’s overall profitability.
3. Company-owned stores still important to maintain standards and retain branding: that said company-owned restaurants remain important because McDonald’s uses them to set operating standards for the much larger population of franchised stores. Company-owned stores also help McDonald’s maintain control over its product lines and introduce new menu offerings in time to keep itself strongly positioned against competitors. All this helps McDonald’s maintain the integrity of its brand and popularize its franchise business. (http://seekingalpha.com/article/211457-how-important-are-company-owned-stores-to-mcdonalds)
2.5. Advantages of the Different Structures
A franchise system is not solely composed of the franchisor and the franchisees, since there are the franchisor, the single unit franchisees, the multi unit franchisees, the master franchisees with their sub-franchisees and (probably) the company-owned stores and their managers.
Bradach (1998) has proposed three different systems: a centralized company-owned system, a decentralized franchise system and a plural structure that associates both franchisees and company-owned stores. The first system is the basic hierarchical one where there is a center (operator) with dependent units. Managers of these units are employees of the chain operator and they work under the instructions of that operator (wholly-owned company). On the opposite side, the franchise system is a decentralized company, which incorporates elements of both market and hierarchy (Williamson, 1991) and was called by Shane (1996) the hybrid organization, where the franchisor retains the ownership and authority over the use of a trade name, the know-how in contracting with independent franchisees (franchised company). Last one is the plural structure system associates the strictly hierarchical mechanism of the company-owned system and the hybrid market/ hierarchy of business format franchising.
According to Lewin-Solomons (1999) and Srinivasan (2006), most franchise chains adopt the last system, also referred to as dual distribution strategy, meaning that the chain is made up of both franchisees and company-owned stores.
Today, many retail chains adopt the dual distribution strategy because this system provides a significant number of advantages in terms of marketing (Cliquet, 2002), of management (Bradach, 1997, 1998), of performance (Sorenson & Sørensen, 2001) and survival ability (Cliquet, Perrigot, 2002).
Bradach (1997) finds that in spite of the differing control strategies of franchisees and company-owned stores, they share several performance measures. These can cause a ratcheting effect enhancing the ability to manage the performance of both types of units: the high performance of each one sets a benchmark or performance standard for the other one to pursue and puts pressure on the other one. Similarly, the players within the chain can use detailed information about the company-owned stores to persuade franchisees to change certain behavior.
Sorenson and Sørensen (2001) also stated that company-owned stores and franchisees complement each other because they provide different types of organizational learning: managers of company-owned stores exploit more, while franchisees explore more.
Shelton (1967) showed that fast food franchisees are more efficient than company-owned stores. This is due to the fact that franchisees were more concerned about resources, costs and conditions of the local market.
Brickley and Dark (1987), emphasize that managers of company-owned stores tend to shirk because their income is fixed, while franchisees possess an high powered incentives as their variable income depends on their stores’ performance, with the consequence the cost of risk and controlling franchisees explain the varying proportion of franchisees and company-owned stores (Bürkle and Posselt, 2008).
In general, company ownership gives more operating credibility to the franchise organization, whereas franchisees are more a source of creativity (Dant, 1992).
Cliquet (2011) found a tendency among companies to group franchisees together in order to smooth the progress of innovation and new product development. They also found that franchisees experienced demotivation and anxiety if the number of company-owned stores were too high.
Yin and Zajac (2004) found that franchised stores, with their more decentralized structures, are more likely to pursue strategies that emphasize flexibility, whereas company-owned stores tend to emphasize predictability.
Furquim De Azevedo (2010) debated that the formal power (the right to decide) of the franchisor will be greater if the number of company-owned stores increases; and this increase will deliver more real power (the effective control over decisions) to the franchisor due to the information collected from the franchisees, gathers important knowledge about them.
In the same research Furquim De Azevedo (2010) also sustains that if the franchisor keeps too much authority over the franchisees, they will be straiten to utilize specific local knowledge. In his studies he found that higher is the brand value, lower will be the allocation of authority among franchisees.
2.6. Innovation in the Different Structures
Usually the franchisor is seen as entrepreneur, as he has the freedom to act independently of the others’ will and without restrictions; the same cannot be said about the franchisee, who is leaded by the franchisor itself and can be seen (Bradach, 1997) as a “controlled self-employed”. Due to this unequal distribution of decision-making power, the franchisor decides to avoid eventual non authorized changes in some store, a deep and accurate selection of the managers rather than employees, with the aim of obtaining a large amount of benefits deriving from the innovation decided by the franchisor, and these benefits are positively related to the will of the franchisor to be innovative (Dandridge, 1998).
A study conducted by Lewin-Solomons (1999) on innovation and authority in franchise systems investigated five major fast food chains: Burger King, Pizza Hut, Denny’s, Subway and KFC. They found that the innovation process in a fast food chain differs depending on the proportion of franchisees compared to company-owned stores. If the proportion of franchisees is large, like in Burger King and Subway, the innovation and creativity usually comes from the franchisees. In chains like Denny´s, where there are more company-owned stores than franchisees, the innovation usually comes from the company headquarters and is often implemented in company-owned stores first. In these cases, where there exist a large number of company-owned stores, franchisees are generally more confident about the company’s decisions. They believe that they will not implement something that will be unprofitable, since the losses will be significant for the company. Company headquarters are also mostly responsible for evaluating the idea and deciding whether to implement it or not. An additional finding by Lewin-Solomons (1999) was that most of the product testing takes place in franchisees, especially within Burger King and Subway where the proportion of franchisees is high. The companies then also depend on the constructive feedback of franchisees in order to solve any problem. And also (Lewin-Solomons, 1999) all major innovations, such as implementing a SST, obviously must be approved by the franchisor.
Falbe et al. (1998) found that franchisor size, franchisor age, franchisor growth and time in franchise (ergo the time between the establishment of the company and the establishment of a franchise system) have an impact on the entrepreneurial strategies and innovation efforts of franchisors and their support of entrepreneurial activities by franchisees. The study conducted by Dandridge (1998) found that company size had positive impact on franchisor support on franchisee’s innovation.
Following the theory of Kaufmann and Dant (1996), the franchisees enter into the market to be self employed, although as mentioned above controlled (Bradach, 1997), and to be sure of a work activity, and do not look at the innovation as an important factor of the business itself (Weaven in a study conducted on McDonald’s unit franchisees, 2004). In any case, major ideas can be born from franchisees, the company-owned stores or the company headquarters. However, franchisee or a company-owned store would need to contact the headquarters in order to present the idea and get the approval for it (Wilson, 2009).
The franchising management is completely different from the management of a single store, as a franchise system expects a large number of geographically dispersed stores: the franchisor hardly knows what happens in every single store, losing control on them, especially in those very far. When an innovation comes, the major challenge for the company, to survive in competitive circumstances, is how to implement the innovation itself keeping the uniformity, defined by Bradach (1998) as the key element of the business format chain. The objective of every chain is to build the good image of its concept and keep it identical across all units (Lafontaine & Shaw, 1999). It is a hard challenge for the franchisor to have this concept evolved in depth in a completely franchised chain where this evolution needs an important investment of franchisees. The franchisor cannot impose everything on the franchisees but can persuade them to implement innovation. The innovation implementation in a company-owned store does not cause problem, contrary to diffuse the some degree of innovation in a franchised store, due to the fact the franchisor cannot impose everything on the franchisees but can persuade them to implement innovation and be very flexible. So, in chains with a rigid concept and where uniformity is highly required, there should maintain the right proportion of franchised and company-owned stores, which can influence the chain performance (Sorenson & Sørensen, 2001).
The innovation process is divided in three main aspects: innovation generation, innovation evaluation and innovation implementation.
According to Bradach (1997), company-owned store managers, as a franchisor’s employee, rarely came up with innovative ideas. In contrast, most scholars agreed that franchisees are an important source of ideas, regarding quantity and quality of information. It can be explained analyzing the two fundamental differences between franchisees and company-owned store managers: incentives and initiatives (Lewin-Solomons, 1998). The franchisees have strong incentives to manage their own businesses as well as possible because they keep profits produced by themselves, once the royalty and payment fees are made. They are the only responsible for the performance of their stores and take part in the management and innovation activities. In an opposite situation, the company managers have low incentives, due to the fact they are simply employees of a corporate hierarchy. Same situation regarding the initiatives, as franchisees are much more independent than company managers and they exercise a lot of initiatives to have a successful business. Company managers have to obey to authority, they do not like taking risk and depend on the parent company’s decisions, franchisees have freedom in acting on their own. Therefore, through a mutual learning process, due to the presence of franchisees within the system, company-owned stores will be aware of their responsibility to daily develop the chain and become more dynamic and motivated. The plural structure, a mix of company managers (with expert staff) and franchisees (with their business experience in local markets), benefits from two possible sources of information and seems to produce a greater range of ideas than either single structure could do by itself. To summarize, within a plural structure system, the franchisees positively affects the entire system development. After this brief analysis the author had demonstrated that a franchised store could have major performances than company-owned store in generating innovations. Ideas from franchisees, after proposal and once accepted by the franchisor, will be converted into actual projects.
After the innovation generation, it is important for the parent company to evaluate if this innovation can work as predicted. Most of the times franchisees do not participate in the formal innovation evaluation (unless the company is completely franchised), due to the fact the franchise contract do not expect the field testing and the franchisees cannot support the risks of this evaluation in their stores. Therefore, it is easier to work with company-owned stores. Innovation project are designed by the parent company before being realized actually in the company-owned stores and in the franchised stores. In this stage the franchisees, although not participating in the realization of the innovation project, play a certain role in testing and evaluating the ideas regarding the innovation. The franchisor has a high regard about the independent thinking of the franchisees and their feedbacks, who tend to say exactly what they think, considering them very valuable to adjust the project and make good decisions. In a plural structure the reciprocal influence among the players positively affects the behaviour of the players themselves toward innovation.
As said above the franchisor cannot impose everything on the franchisees but can persuade them to adopt an innovation, in order implementing it in some company-owned stores, demonstrating the opportunities offered by the proposed innovations. The plural structure can encourage the acceptance of the franchisees (who also provide feedback) and with their performance help the parent company to put pressure on company-owned stores or create some reference points for them.
The analysis of the three main stages of the innovation process has revealed the weaknesses of a wholly owned company, due to the fact there are low incentives to innovate, the complete absence of initiatives, a lack of experience and pressure on the company managers to develop their performances. The presence of franchisees provides an important source for the innovation due to their strong incentives and initiatives to generate new ideas for their advantage, good intuitions based on their experience and strong motivations for the company managers and the entire system to be more dynamic and to generate more ideas. Yet, the franchisees feedback is valuable for the franchisor to check and adjust an innovation project, even though the franchisees are not involved in the field testing. The speed how the innovation is implemented obviously varies depending on the system: very high in wholly owned company, low in completely franchised chain and considered medium in the plural structure systems. This result comes from the fact the plural structure gives to the franchisor more opportunities to persuade the franchisees to implement the innovation in their stores. Overall, the plural structure seems to be the best option regarding the introduction of the innovation in a system, in comparison with the completely franchised and wholly owned company.
According to March (1991), a correct proportion must be found between the exploitation and the exploration: franchisees are more prone to explore than company-owned managers, company managers have more incentives to explore (Sorenson and Sørensen 2001).
Cliquet (2002) suggested the plural structure is preferred concerning the innovation process: franchisees are seen as sources in generating ideas, the company-owned stores as fields to test and implement the innovations. Yet, the franchisees may lack the incentive to adopt the franchisor’s innovations, either because they do not want to take the risk or because they do not want to make the required investments (Cliquet, 2002) and when a franchisee produces a local innovation, which is adequate to its specific context, it may not interest other franchisees or it will not easily spread through the chain because the innovative franchisee may not want to support the spreading costs (Sorenson and Sørensen, 2001).