Executive summary of “Franchising and value signaling”

Citation

(2014), "Executive summary of “Franchising and value signaling”", Journal of Services Marketing, Vol. 28 No. 2. https://doi.org/10.1108/JSM-02-2014-0066

Executive summary of “Franchising and value signaling”

Article Type: Executive summary and implications for managers and executives From: Journal of Services Marketing, Volume 28, Issue 2

This summary has been provided to allow managers and executives a rapid appreciation of the content of the article. Those with a particular interest in the topic covered may then read the article in toto to take advantage of the more comprehensive description of the research undertaken and its results to get the full benefit of the material present.

When franchisors want to grow their business they emphasize the advantages of increasing network size using franchised units instead of company-owned units. In the process they have to decide what strategies will attract prospective franchisees. Since potential franchisees may consider a number of different franchise networks, franchisors usually offer prospects a variety of services and contractual arrangements they will consider valuable once they become part of the chain. Because current franchisees value often costly support services, the franchisor may deploy the same support services to attract prospects.

As Dr Laura Lucia-Palacios et al. point out in “Franchising and value signaling”, franchisors must know what contractual arrangements are important in attracting prospective franchisees. The authors attempt to identify and evaluate factors that help to attract new partners using a data panel of US franchise chains to analyze the influence of initial support and business assistance, earnings claims disclosure, sub-franchising and restriction of passive ownership on chain growth.

The findings indicate that although the services covered in this paper improve relationship value for current franchisees, not all services and contractual arrangements attract prospective franchisees equally. Training and financial assistance emerge as two initial support services that franchisors can offer to new partners. The paper indicates that a long training period has the following benefits:

• Training enables franchisees to acquire valuable knowledge about the business and what is necessary to run the outlet efficiently.

• Training also increases the value that the franchisee provides to the network.

Therefore, franchisors should consider training support an investment instead of only an initial cost.

Potential franchisees should be considered entrepreneurs who choose franchising because of risk-sharing advantages connected with using a reputable brand in the marketplace. Franchisors should keep in mind that some potential franchisees may think about long-term results and have an entrepreneurial orientation. Such franchisees may provide value to the network by seeking chain improvements, innovations or market analysis. In this sense, the franchisor should consider offering a sub-franchising option to reduce the likelihood of losing those valuable partners.

Relationship development has become important in franchisor-franchisee arrangements and has implications for chain attractiveness. A franchisor has to invest time and effort in the management of current franchised units since this is one of the most important quality signals that prospective franchisees value. The number of franchised units signals a franchisor’s reputation and viability. Not allowing passive ownership also signals a franchisor’s commitment to the network. This restriction implies that franchisees have to manage the outlet actively and it restricts the attraction to those partners who want to be business managers, not just passive investors.

Signaling, based on economic contracting theory, focuses on the externalities of market imperfections and informational asymmetries. In general, a firm that has relevant information to close a transaction must decide whether and how to provide that information. The party at the other end of the transaction has to analyze the credibility and its level of trust in both the offering firm and the provided information. Signaling is used in many businesses, such as industrial organizations, as well as in finance and management. CEOs signal the quality of a firm to attract investors via financial statements and employees try to signal their value in the recruitment process.

For franchisors, quality signaling helps attract future franchisees. Based on services and contractual arrangements that increase the value of the franchise relationship with current franchisees, franchisors send quality signals that help franchisors create a competitive advantage in the marketplace. Franchisors must invest time and managerial attention to their current outlets to demonstrate quality and value. The quality of the system can be signaled through different support services.

Franchisors should offer initial support services to differentiate their firms from their competitors and to signal that they aim to take care of the whole system and the brand name, without a myopic emphasis on rapid expansion. To signal this concern, the franchisor can use the restrictions and controls on passive ownership and area developing agreements and sub-franchising to enter international markets. Instead of hiring managers to run the establishments in the system, franchisors should expand through owners/franchisees to reduce organizational uncertainty.

Franchising firms have to consider the cost of signaling methods as well as the relative impact of each method since not all signals are created equal. Executives should maintain close contact with potential franchisees by regularly asking, by distributing formal questionnaires, what tools and assistance prospective franchisees consider valuable. Franchisors should also consider the strength, frequency, and environment of the signal.

Prospective franchisees should exercise due diligence in interpreting signals and evaluating the long-term viability of the chains. They must seek detailed information about the type of multi-unit ownership opportunities offered in order to understand the franchisor’s concern about the whole system. This can help prospective franchisees make wise business decisions during periods of financial turbulence.

To read the full article enter 10.1108/JSM-09-2013-0253 into your search engine.

(A précis of the article “Franchising and value signaling”. Supplied by Marketing Consultants for Emerald.)