You Gotta Have Faith – the impact of trust on multi-unit franchises

Franchises come in several shapes and sizes but the basic business interest remains much the same – the opportunity to build up a brand, product and/or service on a grander scale and the possibility of accessing venture capital without losing control of the whole chain. Where things can become more complex is the dynamic between the franchisor and the franchisees. The choice of ownership strategy by the franchisor can have a determining effect from the outset. At present, two main options are in common practice – the single-unit franchise and the multi-unit franchise. The latter has proven the more successful model of the two, but why? In addition, is this success guaranteed and, if not, why is trust deemed to have such an impact on operations?

Lower risk, less time wasted, greater team spirit

On the face of it, you might expect the more multi-layered approach to be more complex to manage than delegating to one single franchisee. To start with, the franchisor has to make sure they make the right choice of franchisees, so screening is a crucial early part of the process. However, research into the area, as well as actual business practice, show that delegating a degree of responsibility to several franchisees is a less risky scenario than having one, all-powerful franchisor (in the guise of an area manager) overseeing all operations.
The multi-unit approach reduces the burden of constant monitoring and performance measurement for the main franchisor as the various franchisees are under a healthy pressure to perform, in everyone’s interest. Add to this the fact that the multi-layered approach requires a less top-down hierarchical structure and it makes sense that sharing responsibility amongst a whole network of partners is far likelier to build up trust and better results. However, trust comes in two crucial forms in this kind of set-up….

Trust your instincts or learn from experience?

Focussing on the multi-unit franchise business model, it is important to see on what criteria some franchisors take decisions about who to work with (screening) and how to manage them (control). Some franchisors will act on instinct, placing innate trust in their chosen franchisees without necessarily having prior collaboration to go on. This trend is based on the (mis)perception that such an inter-firm relationship will carry fewer risks.
The alternative approach is driven by “knowledge-based trust”, meaning drawing upon previous successful experience with and accumulated information about the partner firms in the network. The approach is ultimately less arbitrary, lower-risk and, in the eyes of all, far more credible and fair. Consequently, there is far less a need to “control” in the old-fashioned, hierarchical sense as the franchisor can be much more comfortable in their choice of partners, freeing up essential time and costs that would otherwise be frittered away on excess monitoring.

Pitfalls and selling points

Whilst the trust issue is key to the success of multi-unit franchises, this is not to say that they operate in an entirely risk-free climate, nor are all such franchises as attractive as one another. Recent research has pinpointed the possibility for some franchisees to shirk responsibility or “free-ride” if they are not suitably committed to the cause of delivering a quality service and/or product. However, factors such as the brand reputation of the franchisor, the number of years during which it has already been successful and its overall size are likely to attract franchisees keen to operate smoothly and professionally within the multi-unit set-up. Whilst it has been established that the multi-unit approach requires less strict monitoring than the single-unit alternative, this is not to say that behavioural uncertainty from partners may not occur – for a franchise to truly deliver the goods, true commitment to the business cause is essential.

What next for practitioners and researchers?

On the practical side, the multi-unit approach and the increased sense of responsibility it instils within franchisees has to be the way forward – it makes basic cost sense. Above all, selecting partners based on pure gut instinct rather than previous experience will actually increase the risks of under-performance and result in time and money being wasted on extra monitoring.
On the theoretical side, there remains plenty of scope for extra investigation. The notion of “free-riding” within a franchise needs to be measured more precisely and not merely conceptualised, whilst multi-unit franchises cannot possibly resemble one another in reality, so some differentiation of types is necessary. For starters, the organisational capabilities and bargaining power of the main franchisor may vary from one franchise to another and have an impact on the eventual, relative success of such networks.
What is clear, both practically and conceptually speaking, is that a franchise is only going to create extra risks and pressures for itself by acting on pure instinct and without previous results and knowledge to back up its choice and subsequent management of its network partners.

This article draws inspiration from the paper Trust and the tendency towards multi-unit franchising: A relational governance view, written by Dildar Hussain, Assistant professor at ESC Rennes, Michele Griessmair and Josef Windsperger and published in The Journal of Business Research 67 (2014).

Dildar Hussain, PhD is an assistant professor of Marketing and the programme manager for the MSc in International Luxury and Brand Management at ESC Rennes School of Business, France. His research interests include franchising, strategic networks, entrepreneurship, and luxury and brand management.