Title

Does multi-unit franchising aid differentiation? An exposition

Document Type

Article

Publication Date

2013

Abstract

Given the proliferation of franchising all over the world, it is crucial that franchisors pay significant attention to gaining competitive advantage in order to achieve and maintain success. Porter's work on differentiation is very useful in this respect. The following important drivers of differentiation are considered in this paper based on their links recognized in franchising literature to brand name capital: quality, consistency, advertising and promotion, innovation, and location. The exposition developed here suggests that the differentiation advantage will be facilitated more in multi-unit franchising than in single-unit franchising, even when each of the above drivers is considered separately. More fine grained arguments suggest that area development franchising leads to higher differentiation driven by quality, consistency, advertising and promotion, and location, but differentiation based on innovation is higher in incremental franchising. This exposition has important implications for practitioners. Since differentiating the franchised format is crucial to charging premium that would increase profitability, franchisors need to look for many drivers of differentiation beyond innovation. Of particular significance is organizational design. Using multi-unit franchising would attract those independent entrepreneurs that have both adequate resources and compelling incentives to make continual investments in the drivers of differentiation, and in turn, would increase the value of the franchisor's format. Although there is a risk that large franchisees may try to bargain for concessions that single-unit franchisees may not ask for, that risk has to be taken in stride by the franchisor in order to compete more effectively with other chains. Further analysis suggests that within multi-unit franchising, area development franchisees should be generally preferred in order to achieve differentiation driven by quality, consistency, advertising, and location. However, when the business concept depends on innovation related to customer-specific situations such as home decoration, a franchisor should use incremental franchisees. Their first-hand experience will be a very important resource to tap. Given the greater impact on the success of a franchising system, higher rigor is warranted in screening area developers on the basis of their willingness to invest in the above drivers of differentiation. The potential entrepreneurs, in turn, should avoid exaggerating their intentions, lest they fall short on delivering planned growth and get into tedious conflict with the franchisor. Caution is also advised to incremental franchisees. Their rewards from joining the franchise system will be small, if they lack creativity or passion to grow their sub-system, since a dissatisfied franchisor may be then forced to launch corporate units or other franchisees in that market.

Recommended Citation

Garg, Vinay K. Does multi-unit franchising aid differentiation? An exposition." Journal of Applied Management and Entrepreneurship 18, no. 1 (2013): 3."

Department

Management and Information Systems

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