Franchising is often seen as an effective method of governance, which minimises the cost of maintaining standards and quality control. While risks are present in any new business venture,
franchising often limits some of the concerns independent businesses carry. The established
brand awareness, franchisor operating procedures, and ongoing support assist franchisees in
establishing their business under a successful business model. The appeal of buying an
established system and operational procedures means franchisees are less likely to change or
divert from the franchise system. This reduces any coordination costs for head office.
5.10.1 Analysis of the economies of coordination factor for franchising cases
Maintaining standards and quality control was not seen as an important factor for case 1F in the initial expansion of the business. Referring to the first group of franchisees as ‘the Dirty Dozen’, this entrepreneur wanted quick market expansion without much thought of potential risks. Thus
coordination (to govern properly) was not a priority. The entrepreneur recognised that the first of the group’s franchisees were not necessarily the best operators, but he wanted to reach critical mass as soon as possible to ward off new entrants into the fitness market. Following the initial expansion, the entrepreneur knew that branding guidelines, quality control and compliance needed to become a critical focus for the group moving forward. This period of company growth saw the introduction and monitoring of a standards manual and a non-negotiable set of standards for individual operators. During this period, many sites changed hands, with several of the first 12 franchisees being bought out by head office.
With case 2F, the franchisees operated in more of a licence arrangement rather than a typical franchise system in terms of branding, systems and standards. Within the group there was no national blanket marketing, co-ordinated promotional campaigns or consistent pricing across each of the centres. Taking into account localisation, the individual owner operators were given a level of flexibility by the franchisor, to run the centre and their operation without any rigid protocols or compliance standards. Thus, coordination was not intensive and was not a great cost burden in the 2F system.
Table 5.15: Dant factor - achieving economies of promotion and companies that expanded by franchising
Case Importance to decision to franchise
1F Knew the benefits economies of coordination would bring the business, but was not a factor in decision to franchise.
2F Factor was not a consideration in determining business growth mode.
5.10.2 Analysis of economies of coordination for company cases
The business owner of case 3C knew that having qualified, experienced staff in their centres would help maintain their expected level of quality. With each of their managers making a small financial investment into the business, these franchisors knew that high monitoring costs, time- consuming centre visits, and ongoing management would not be necessary. For this business owner, the consideration of economies, while beneficial, was not an important factor in selecting their method of expansion.
Integrity of the brand drove the decision behind case 2C’s choice of growth strategy. Not wanting to put ‘strangers’ into a club as a franchisee, control of the brand has been and remains one of the most critical factors behind all decisions regarding the business. With consistency of the brand being of such importance, this entrepreneur insisted that each manager not only had a financial stake in the new site but also served an induction or extensive training period under the entrepreneur’s guidance. For this owner, maintaining control of the brand was paramount. Thus, economies of coordination were not a consideration or driving factor.
With no specific strategy behind expansion of the business, the entrepreneur of case 1C never directly considered the benefits of economies of coordination. Growth of the business came about through altruism and the development of partnerships and investments to assist those in need. While many years later the entrepreneur unsuccessfully attempted to establish the business as a franchise, economies of coordination were never realised or capitalised upon.
Table 5.16: Dant factor - achieving economies of coordination and companies that expanded through company-owned outlets
Case Importance to decision to stay with company ownership
Case 1C Coordination economies were not a consideration and were overlooked at the time of expansion.
Case 2C Was aware of the factor but was not seen as important.
Case 3C Did not play a part in the decision process.
5.10.3 Summarising the relevance of the economies of coordination factor
Economies of coordination did not play an important role in selecting the method of growth mode for any of the company-owned cases. Coordination costs arise from coordinating outlet activities. For the company-owned outlets, each operated as a stand-alone business with an invested manager. This eliminated any need for ongoing quality control or managerial coordination.
For case 1F, as the organisation grew and the number of franchised units increased, the coordination by the franchisor also amplified. Head office ultimately oversaw the membership, IT and direct debit departments of the franchisees. The centralising of these key areas was made possible by the economies of coordination the business offered.
The owner of case 2F was content to let franchisees run their businesses like they would in a licence arrangement. Without any stringent compliance or branding requirements there was no need for head office to incur any high coordination costs.