Exploring the connection between ethical issues in franchising business success and franchisees' demographic characteristics.

• Author: McCuddy, Michael K.
• Position: Report

1. INTRODUCTION

   Franchising started in United States commerce during the 19th century when Singer Corporation used this channel to distribute sewing machines (Storholm and Scheuing, 1994). Modern franchising has enjoyed tremendous growth since the 1950s, with companies such as McDonald's, Coca-Cola, Dunkin' Donuts, Pizza Hut, Midas Mufflers, Holiday Inn, and others relying on this system to fuel their growth (Hall and Dixon, 1988; Storholm and Scheuing, 1994). In fact, during the last four decades, franchising has become a very popular means for rapid organizational growth in the USA and has been widely recognized as an important source of entrepreneurial activity for USA businesses. Also, recent developments and changes in the global business environment have created new opportunities for firms in numerous industries to grow and expand their operations domestically and globally. In this regard, franchising seems to be best suited to take advantage of the growth opportunities in domestic and global markets. As a result of recent domestic and global growth, franchising has become a major channel in retail marketing, exerting a significant impact upon consumer buying decisions. The major business sectors for growth globally are reported to be in the restaurant and fast food industry, miscellaneous services, and non-food retailing (Hoffman and Preble, 2004).

   While franchising is well established in developed nations, it also works advantageously in transitional economies, such as the Czech Republic, Hungary, and Slovenia (Hoffman and Preble, 2004). Franchising also can be advantageous in Turkey--wherein a long history of entrepreneurship is lacking --because it provides the necessary structure and support that otherwise would not be available (Chapman, 1997). In Turkey, franchising began with intercity passenger transportation during the 1960s, wherein gasoline stations were used to sell bus tickets for travel to different cities. Today, Turkish franchising applications can be seen in various sectors such as skin care products, apparel, fast food, cleaning, car rental, chocolate, office stationary products, real estate, publishing, communication, music markets, cargo, do-it-yourself stores, cosmetics, and automotive products (Kumkale, 2006). Although franchising is a fairly new business concept in Turkey, it has been growing very fast (Aydin, 2008).

   Amos (2001) sees franchising as a "transferable" concept enabling any business to adapt to different cultures and business regulations around the globe, but it takes a different set of capabilities to be successful (Shane, 1996). Research shows that royalty taxes, contract laws, and the lack of specific franchise legislation are major issues about which franchisors and franchisees must be aware (Hoffman and Preble, 2004). Also, Larson (2002) points out the importance of legal, socio-cultural, and ethical issues for companies when expanding franchising internationally. The above issues indicate that franchisees may not be guaranteed success when they enter into an agreement with the franchisor; nor are franchisors guaranteed ongoing success because they have developed a concept that has been accepted in the marketplace and has potential for expansion through the development of a franchisee network.

   Many ethical issues can arise within the franchisor/franchisee relationship that, if effectively resolved, can help both parties operate successfully, and if not effectively resolved, could destroy the franchising business. Storholm and Scheuing (1994) state that there are fundamental areas of conflicts that could undermine the success of the franchising system; therefore, these conflicts need to be resolved to the mutual satisfaction of both franchisors and franchisees. Otherwise, these conflicts could manifest themselves in unethical behaviors that could harm the franchising system. Moreover, franchising as a major form of business relationship imposes ethical obligations upon the two major participants--the franchisor and the franchisee--toward each other in order to maintain a successful long-term franchising system and partnership. We believe that understanding the major ethical issues that are essential for creating a successful franchising system not only could minimize the potential conflicts between the franchisors and franchisees, but also could help to create a mutually beneficial business partnership. Therefore, the thrust of this study is to identify and explore the various ethical issues that are important for the long-term success of a franchising system.

2. THE NATURE OF FRANCHISING AND ETHICAL CONSIDERATIONS

   Generally, franchising is described as a business opportunity wherein the owner (producer or distributor) of a service or a trademarked product grants exclusive rights to an individual for local distribution and/or sale of the service or product, and receives, in return, a royalty payment and conformance to certain quality standards and standardized levels of service to customers (Storholm and Scheuing, 1994). While franchising is an attractive organizational form for franchisors to pursue growth strategies (Cochet et al., 2008), franchisees often choose the franchise option in order to become their own boss and run a business according to their own decisions while profiting from a proven business concept (Elango and Fried, 1997; Peterson and Dant, 1990). Although a number of benefits of franchising exist for both the franchisor and the franchisee, Storholm and Scheuing (1994) assert that there are fundamental areas of conflict and that how these conflicts are resolved determines the success or failure of the franchise operation.

   The recent growth of franchising is also reflected in a surge in the number of academic studies of franchising. Substantial academic research on franchising has a long history, dating back at least to the late 1960s (Oxenfeldt and Kelly, 1969). Prior franchising studies that have examined various franchising issues include research on: system growth (Kaufmann and Dant, 1996; Sen, 1998), resource scarcity as a motivator to engage in franchising (Castrogiovanni et al., 2006; Rubin, 1978), franchise system control and cooperation (Brickley and Dark, 1987; Lal, 1990), franchise failure (Frazer, 2001; Grunhagen et al., 2008; Michael and Combs, 2008), and the ownership redirection of franchised units into corporate units (Dant et al., 1996; Oxenfeldt and Kelly, 1969). Interestingly, most franchising research has focused primarily on the concerns of franchisors (Dant, 2008), whereas the franchisees' perspectives have just recently received increased attention (Grunhagen and Mittelstaedt, 2005; Weaven and Frazer, 2003). Understanding franchising issues--including those that are ethics-related--from the franchisees' perspective could provide different insights into the success of franchising systems.

   A study by Storholm and Scheuing (1994) indicates that the proliferation of franchise operations can best be appreciated by analyzing both the franchisor's and franchisee's motives. For example, while most franchisees seem to be concerned with the inequality of power in the franchise agreement, which is drawn up by the franchisor, franchisors complain most frequently of the tendency of many franchisees to operate on a continuing basis in violation of various stipulations in the franchise agreement (Storholm and Scheuing, 1994). Moreover, according to Storholm and Scheuing (1994), since the franchisor prepares the franchise agreement to serve as the basis of the relationship, an asymmetrical distribution of power exists, resulting in opportunistic behavior by the franchisor. They also claim that, in other cases, questionable or unethical practices by franchisees likewise result in conflict.

   According to Storholm and Scheuing (1994), franchisees perceive franchisors to be responsible for generating the following major sources of conflict: dual distribution implications; redirection/termination of the franchise agreement; full-line forcing or the requirement to purchase standardized products from the franchisor; questionable use of advertising revenues; and the asymmetrical nature of the franchise agreement. On the other hand, franchisors perceive that franchisees generate the following major sources of conflict: release of proprietary information to outside parties; non-payment or 'short' payment of royalties; and refusal of franchisees to adhere to standardized conditions in the franchise agreement. There is no doubt that any of the above areas could cause a conflict between franchisors and franchisees --and if not resolved effectively, they could potentially destroy the franchising business.

   As franchising has become a global phenomenon in a rapidly evolving environment, Preble and Hoffman (1999) assert that there is a great need to control the franchising relationship with ethical codes. Although a governmental regulatory approach could provide a solution to these issues, Preble and Hoffman (1999) suggest that a code of ethics developed by a franchise association would be preferable for more closely controlling the manner in which franchise relationships are established. In a study of 13 ethical policy areas in international ethical codes covering 21 franchising activities in 21 countries, Preble and Hoffman (1999) identified several ethical themes that should be included in a franchising association code of ethics. These ethical themes are good faith behavior, full disclosure, maintaining system integrity, avoiding deception, fairness, open communication, and safeguarding the public interest. Since franchising grows by attracting other entrepreneurs to join the system and to provide goods/services in their local market area, the ethical policies of "full disclosure" and "avoiding deception" are directed at efforts to attract franchisees. Given that the franchise system must build trust between franchisor and franchisees...