It is a common view that managers of company-owned businesses are likely to shirk their responsibilities because their compensation is fixed. This shirking results in high monitoring costs for the firm, to ensure that managers act in the firm’s best interest (Elango & Fried 1997). Principals hire middle managers to ensure agents are acting in the principal’s best interests (Jensen & Meckling 1976). If firms can keep these monitoring costs down, it is more likely they will open company-owned outlets (Gills & Castrogiovanni 2012).
The direct correlation between a franchisee’s earnings and the profitability of the business is said to explain the motivation for franchisees to work hard. This, in turn, potentially eliminates any agent ignoring problems the owner may face or shirking their responsibilities.
This study investigated whether there were important concerns about responsibility avoidance and how this might influence the expansion mode choice.
5.11.1 Analysis of the factor of in-built disincentives with agency relationships for franchising cases
For the owner of case 1F, one of the main reasons in selecting the franchising growth strategy was to address concerns of agent shirking. This entrepreneur could not see how they were going to manage staff in multiple regional locations. The owner worried whether they would have staff who shared the same passion and enthusiasm for the business. The owner believed that hired staff would naturally have a different mindset that might not be good for the business.
Case 2F knew that franchising was the way forward for his organisation. He knew such a growth strategy would provide the business with independent owner-operators, caring about
their business and making sure members got the best service. Franchisees would become involved in the local community, something that the entrepreneur believed staff within a company-owned environment would not do. This was because, effectively, the owner-operator would receive a return that was directly based upon how much they were putting into their business.
Table 5.17 indicates the level of concern the entrepreneur had about agent shirking, as well as the importance placed on this criterion in deciding to grow the business through the franchising growth mode.
Table 5.17: Dant factor - disincentives with agency relationships and companies that expanded by franchising
Case Importance to decision to franchise
1F Knew they needed committed operators and therefore saw franchising as a solution.
2F Knew the business would perform better with franchisees as independent owners.
5.11.2 Analysis of the factor of in-built disincentives with agency relationships for company cases
For the owner of case study 1C, the thought of agents shirking responsibility did not figure highly in selecting a method of expansion for the business. With each new site acquisition, the owner had a manager or business partner who had to invest financially into the business. Thus, through this strategy the owner was comfortable to expand their operations, knowing that the agent shirking problems that motivated many franchisors would not be present.
In considering expansion plans, the case 2C owner worried about the need for monitoring sites and staff across the country. Initially with only a small management team, the owner of case study 2C knew managing sites throughout multiple states and regional locations would be exceptionally challenging. Additionally, he believed his business model relied on the manager of the business being a strong personality within the centre. It was paramount, the entrepreneur believed, for the manager to have a stake or some ownership of the business. This would give them the extra incentive that would make the difference between people joining the centre or not.
For the owner of case study 3C, growth of the business came through staff of his existing business wanting to get involved in their own fitness centres. These staff members were satisfied with having a small ownership share and to run their own centre. This entrepreneur likened his ownership structure to franchising, saying:
“they have invested financially, so they have the passion”.
Agent shirking was a definite consideration for the entrepreneur of case study 2C. He knew the importance of having a manager who was as committed to the business as he was. With significant distance between the sites, this entrepreneur knew the challenges and high costs of monitoring an agent. The entrepreneur knew if the new business acquisition was to be a success, he needed a financially invested manager running each business outlet. Thus, he negotiated and settled on a minority partnership model that he believed would alleviate any agent shirking issues.
Table 5.18 provides a summary of the level of concern about agent shirking, together with its degree of importance in influencing the decision to stay with company ownership as a mode of growth.
Table 5.18: Dant factor - disincentives pertaining to agency relationships and companies that expanded through company-owned outlets
Case Importance to decision to stay with company ownership
1C Factor was neutralised through a partnership model that
established a financial investment from the new outlet manager. 2C The minority ownership structure was employed to avoid any
shirking issues.
3C Part ownership model offered security against shirking by outlet manager.
5.11.3 Summarising the relevance of the in-built disincentives with agency relationships factor
The ownership structure establishing a minority interest for the outlet manager was common with the company-owned sites. By offering a share of the business and establishing a partnership with each outlet manager, all the owners in the company-owned cases group were confident that shirking would be minimised. This eliminated the need to appoint any additional staff or intermediary to monitor manager behaviour and performance. As with franchised outlets, the manager would be driven by the success of the organisation as they would consider the outlet business as their own. These managers / partial owners could also be expected to work hard in maintaining quality standards to protect the group brand and overall business.
With the franchised businesses, the principal-agent challenges were an important consideration, although they may not have been the primary motivating factor for choosing the organisational form. Similarly, with the company-owned cases, it was an important enough factor that part ownership was offered to appointed outlet managers.