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Franchisee Selection for SocialFranchising SuccessA. Sivakumar a & Jan P. L. Schoormans aa Department of Product Innovation Management , Delft Universityof Technology , Delft, The NetherlandsPublished online: 23 Aug 2011.
To cite this article: A. Sivakumar & Jan P. L. Schoormans (2011) Franchisee Selection forSocial Franchising Success, Journal of Nonprofit & Public Sector Marketing, 23:3, 213-225, DOI:10.1080/10495142.2011.586860
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Journal of Nonprofit & Public Sector Marketing, 23:213–225, 2011Copyright © Taylor & Francis Group, LLCISSN: 1049-5142 print/1540-6997 onlineDOI: 10.1080/10495142.2011.586860
Franchisee Selection for Social FranchisingSuccess
A. SIVAKUMAR and JAN P. L. SCHOORMANSDepartment of Product Innovation Management, Delft University of Technology,
Delft, The Netherlands
Franchisee selection is a major input for franchising success. Inthis article, we argue that franchisee selection criteria do not dif-fer between social and commercial franchising. They may be evenmore relevant for obtaining social franchising success. We discusscriteria for franchisee selection and present details of our multi-ple case study research to support the argument. Our study findsthat evolved social franchisors do adopt similar selection criteriaas commercial franchisees. In addition, constraints faced withfranchisee selection among commercial franchisors are reflectedalso among social franchisors. We contribute to franchising lit-erature by extending commercial franchisee selection criteria tosocial franchisee selection. A major managerial implication ofthis research is that existing franchising professionals could easilyassist new social franchisors in developing their social franchisees.Future research could be study criteria weights and methodol-ogy adopted for making final selection. A new research directioncould involve studying if selection criteria would differ based on(a) social cause and (b) franchisee location.
KEYWORDS social franchising, franchisee selection, commercialfranchising
INTRODUCTION
Franchising is a form of organizational expansion that helps in rapidlymultiplying the spread of an organization. This expansion mostly hap-pens in for-profit organizations for commercial purposes. Several forms of
Address correspondence to A. Sivakumar, Faculty of Industrial Design Engineering,Department of Product Innovation Management, Delft University of Technology, 3A-32,Landbergstraat 15, 2628CE Delft, The Netherlands. E-mail: [email protected]
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franchising exist. Typically, franchising is a relationship (Brown & Dev, 1997)between two organizations, namely the franchisor and the franchisee. Thisrelationship is formalized through a contract. Researchers have attributedvarious reasons and different theories (Combs & Ketchen, 1999, 2003;Windsperger & Dant, 2006; Dant & Kaufmann, 2003; Frazer, 2001) explainwhy such a relationship exists. Success in franchising depends on right fit(Weaven, Grace, & Manning, 2009) between the franchisor and the fran-chisee. In commercial franchising, franchisor’s efforts at better franchiseeselection facilitate success in franchising.
Franchising is now being applied to even social ventures. Socialorganizations that need to expand are seeking to replicate commer-cial modes. Nongovernment organizations (NGOs) run social franchising(Prata, Montagu, & Jefferys, 2005; Gessner & Morisseau, 1980), which isa franchising system that uses commercial franchising principles to attainsocial goals. Social franchising has developed as an important means ofimproving peoples’ lives (e.g., health services provision) through nonstatesector engagement in low- and middle-income countries (Koehlmoos, Gazi,Hossain, & Zaman, 2009). Existing franchising literature is scant on socialfranchising. Thus, it is unclear to what degree different commercial fran-chising factors are relevant to social franchising success. Different authors(Brown & Dev, 1997; Williams, 1999; Combs & Ketchen, 2003; Dant &Kaufmann, 2003; Nair, Tikoo, & Liu, 2009) have identified commercial fran-chising dimensions that enhance success or prevent failure in franchising.One major commercial franchising success factor is franchisee selection(Jambulingam & Nevin, 1999; Brown & Dev, 1997).
Commercial franchisors typically use financial qualification, experienceand management ability, formal education, and attitude and personality asmajor franchisee selection criteria. We believe that social franchisee selec-tion is also an important step in obtaining social franchising success. Wecan expect a partly different emphasis on franchisee selection in socialfranchising given the noncommercial nature of franchising. Thus, a keyquestion is if commercial franchisee selection criteria would fit in thesocial franchising context. This article’s objective is to analyze whethercommercial franchisee selection criteria (Tatham, Douglass, & Bush, 1972;Jambulingam & Nevin, 1999; Wang & Altinay, 2008; Yang, Qiao, & Guo,2008; Doherty, 2009; Altinay, 2006) could be applicable to social fran-chisee selection too. Our research will try to provide some evidence forthis expectation.
The article is structured as follows. We first describe differences betweencommercial and social franchising. Next, we discuss the importance offranchisee selection and various common franchisee selection criteria. Inthe succeeding sections, the study methodology is described and findingsdetailed. Finally, we end with managerial implications for social franchisingand directions for further research.
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DIFFERENTIATING SOCIAL AND COMMERCIAL FRANCHISING
Social franchising (Tracey & Jarvis, 2007) stresses on social impact, whilecommercial franchising emphasizes on maximizing profitability. In socialfranchising therefore, while surpluses are not discouraged, the major empha-sis is on societal benefit. A social franchisee does not share investment riskunlike commercial franchising. Franchisor income generation from initialpayment and periodic royalty payments cannot be a major feature in socialfranchising. Social rather than economic or commercial contract thereforedominates franchisor-franchisee relationships in social franchising. Withoutan economic control mechanism and difficulty in assessing or monitoringshort-term social impacts, franchisee’s probability in adhering to franchis-ing contract is minimal (Lonnroth, Aung, Maung, Kluge, & Uplekar, 2007).Consumers (or beneficiaries) may not be able to pay for products or servicesin social franchising regularly (Peters, Mirchandani, & Hansen, 2004).
Donors (Tracey & Jarvis, 2007) are a third entity in social franchisingcontext. Donors finance (parts of) franchisee activities. Franchisees in somelocal areas face competition in fundraising from the same donor pool. Here,franchisee capability in attracting donors becomes crucial (Fiedler & Wight,2003). Given this situation, it is clear that franchisee plays a vital role insocial franchising success. Unlike commercial franchising where the fran-chisor’s brand franchise is a major draw, social franchising crucially dependson franchisee performance (Gessner & Morisseau, 1980). Thus, franchiseeselection becomes significant.
IMPORTANCE OF FRANCHISEE SELECTION
Agency theory explains how best to organize relationships in which oneparty (the principal) determines the work, which another party (the agent)undertakes (Combs, Michael, & Castrogiovanni, 2004; Lafontaine, 1992).Under conditions of incomplete information and uncertainty, which char-acterize most business settings, at least three agency problems can arise:adverse selection, moral hazard, and holdup (Holmberg & Morgan, 2003).Adverse selection occurs when the principal cannot ascertain if the agentaccurately represents his ability to do the work for which he is being paid.Moral hazard occurs when the principal cannot be sure if the agent hasput forth maximal effort (Eisenhardt, 1989; Kidwell, Nygaard, & Silkoset,2007). Holdup occurs when at least one of the parties will act opportunisti-cally to renegotiate an agreement after a relationship-specific investment hasbeen made (Leblebici & Shalley, 1996). In each of these situations, the fran-chisor’s assessment of the prospective franchisee during franchisee selectionbecomes crucial. Without strong monetary incentives, free riding, shirking,and moral hazard may not pose major issues for social franchisors. Adverse
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selection, however, could lead to franchisor reputation loss. Thus, franchiseeselection is crucial for a social franchisor.
Commercial franchising serves in organizational expansion(Kaufmann & Dant, 1996). Organization expansion needs capital andmanagement inputs. Between these two inputs, commercial franchisees inmany cases provide financial capital to the franchisor. In addition, they offerbetter business management skills and this helps in reducing agency costs(Leblebici & Shalley, 1996). Franchisee expansion represents successfulfranchising. Choosing the right franchisee enables this expansion. Thefranchisor in a commercial franchising system owns the business conceptand implementation expertise. We can expect therefore that franchisors takeinformed decisions on franchisee selection.
A prospective commercial franchisee too can decide (Z. Huang, 1997)on whether to be part of the franchise or not. This represents self-selectionas put forth in agency theory. The relational view of franchising (Tikoo,2002), however, posits that franchisors spend a lot of time, money, and efforton deciding the right fit (Dyer & Chu, 2003; Dyer & Singh, 1998) betweenthem and franchisees. This is to reduce risk, franchisee turnover, and liti-gation costs, and help achieve better overall franchise performance. Hence,franchisor needs to use appropriate selection criteria in choosing (Doherty,2009) right franchisees as partners for efficient functioning. Franchisee fail-ures in spite of selection can be attributed to inadequate franchisee selectionprocedures (Frazer, 2001). Holmberg and Morgan (2003) listed adequatefranchisee selection by the franchisor as one finding to lower franchisefailure rates.
Prospective social franchisees in rural areas in most cases either havelimited competencies or are seeking franchisor partnership. Thus, fran-chisor’s selection of franchisee (Vaishnav & Altinay, 2009) rather thanself-selection operates in social franchising. Among various social franchis-ing forms (Win, Wilder-Smith, Salim, & Minn, 2009), clinical health carefranchising is the most common form. In this franchising form at the villagelevel, health workers and independent private medical practitioners seekestablished franchisors for obtaining additional knowledge, skills, and brandreputation. Thus, key responsibilities of franchising concept proposal andfranchisee selection lie with the social franchisor.
FRANCHISEE SELECTION CRITERIA
Empirical studies on franchisee selection criteria deal with several fac-tors like age and business or industry experience, personality, or financialstrength (Altinay, 2006; Clarkin & Swavely, 2006; Jambulingam & Nevin,1999; Wang & Altinay, 2008). Using various criteria (Choo, Mazzarol, &
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Soutar, 2007; Doherty, 2009) to evaluate potential franchisees is a franchisor’sinput control strategy. Franchisors use these criteria to select potential wellperforming franchisees. Commercial franchisors typically use criteria likefinancial net worth, general business experience, formal education, localmarket knowledge, ties to local community, and psychological profile. Weshall discuss these criteria and indicate their relevance in social franchiseeselection.
Financial Net Worth
In commercial franchising, financial net worth (Combs & Ketchen, 1999)is a very significant factor. It decides franchisee investment capability andcontinuance profitably. Commercial viability is crucial for the franchisor andthe franchisee. Financial net worth is an indicator of the ability to manage abusiness. In addition, it reflects the risk taking ability and an understandingof cost management. Monitoring of financial net worth (Doherty, 2009) offranchisees is crucial for sustaining the franchise business. Thus, financialnet worth is a key component of self-sustainable business operation.
Initial investment may not be a major criterion for social franchisee. Afranchisor or donor emphasizes self-sustainability. In such cases, a socialfranchisee must demonstrate capability for attracting donor funding tosustain services provision. In addition, she might be required to con-vince consumers to accept a minimum service fee. This would be ableto recover at least service operating costs. A fee could ensure a revenuesource other than donor dependence for securing a franchisee’s financialnet worth.
Business Experience
A commercial franchisor expects a franchisee to have at least some busi-ness experience (Williams, 1999; Kalnins & Mayer, 2004). Without businessexperience, the franchisor will find it tough to train this franchisee in busi-ness operations. Business experience ensures that the franchisee starts herbusiness as soon as she signs a franchising contract. Moreover, exposure tobusiness or being a business owner helps appreciate the uncertainty inherentin business. It also helps in reducing a greater dependence on the fran-chisor for sustaining the business. Many researchers (Yang et al., 2008; Xiao,O’Neill, & Wang, 2008; Wang & Altinay, 2008) have found the most impor-tant factors in the selection process to be general management knowledgeand previous work experience.
In social franchising, for example, a health care franchisee needs expe-rience serving the local population’s health care needs. Such a requirementensures experience in serving a social cause but not in a business setting.
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Formal Education
A commercial franchisor also looks out for a franchisee with (some) formaleducation. Formal education (Jambulingam & Nevin, 1999) helps the fran-chisee to face uncertain market environments and be a continuous learner.Absence of higher-level formal education can result in susceptibility to fail-ure among franchisees. Tertiary education of the franchisee is important sothat she understands the implications of a franchise contract. The rights,responsibilities, and clarity of roles are aided with education. These help inavoiding potential conflicts in franchising.
Similarly, in social franchising, a qualified social worker with formaleducation will provide better expertise in counseling and treatment. Shecan apply learning to the specific social cause that she serves. Thus, for-mal education is a requirement for both social and commercial franchisingentities.
Local Market Knowledge
Franchisees are agents of franchisors serving local geographical areas. Localmarket knowledge (Jambulingam & Nevin, 1999; Killion, 2008) can bean important reason for a commercial franchisor to select a franchisee.Franchisee’s local market knowledge helps the franchisor in popularizingthe franchise through acquisition of economical local inputs, best local pro-cesses, and superior local marketing strategy (Choo et al., 2007). Franchiseescan exercise entrepreneurial initiative and adopt their own standards ofquality and conduct. Local market knowledge helps in site selection, localadvertising, and local consumer behavior.
For a social franchisee, understanding of local social context is animportant requirement. In health care franchising, knowledge on diseasesthat are present in the local community ensures better communication(Wilson et al., 2009). It also helps in communication with franchisors ordonors about franchisee contribution to the community. Franchising as aretailing form depends greatly on community involvement in the enterprise.Thus, better franchisee social standing in local community and franchiseeinvolvement in supporting community activities are significant in commer-cial franchising. They become even more important therefore in socialfranchising.
Personal Profile
In commercial franchising, franchisors accord a high degree of importanceto franchisee personal characteristics (Clarkin & Swavely, 2006; Y. Huang &Phau, 2008). Franchisee cooperation with the franchisor depends greatlyon the franchisee’s attitude. While the franchisor can transfer business or
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process skills to the franchisee, the franchisee’s attitude (Harmon & Griffiths,2008) is an inherent trait that significantly determines franchising success.Therefore, franchisors typically interview potential candidates and adminis-ter tests to gauge commitment level, risk-taking ability, and innovativeness.Conflict in channel management avoided with a fit between the franchisorand franchisee personal profiles (Zhang, 2007; Kidwell et al., 2007). Effectivefranchisees should be dedicated entrepreneurs, good team-players, and ableto work within the system (Vazquez, 2008).
In social franchising, personal integrity, persuasiveness, entrepreneur-ship, confidence, enthusiasm, and commitment to social causes are keyingredients for success. These franchisee traits are important even if shedoes not possess strong financial background or experience in social sec-tor. Thus, personality related factors are significant in both commercial andsocial franchising.
METHODOLOGY
The study followed the qualitative case research methodology (Ragin &Becker, 1992; Yin, 1994; Stake, 1995), as it is a new research area. Generalcontext independent knowledge is available for established phenomena.However, initial concrete context dependent knowledge is crucial in car-rying forward research on new phenomena (Gummesson, 2000). In suchsituations, case study research acts as a better methodology for research.Information-oriented selection of cases was made for in-depth understand-ing of the role of franchisee selection criteria. Thus, while initially the ideawas to conduct a survey among all the health care NGOs in Karnataka stateIndia, given the response and understanding of respondent’s awareness lev-els, the two NGOs that had greater experience in social franchising wereprobed in depth.
Case studies favor qualitative methods because they help in intensivecase examination (Yin, 2009). A case study can furthermore contain morethan a single case. A multiple-case design helps to improve theory build-ing. Case study research does not favor a particular data collection method.The possibility of using several data collection methods is a major advan-tage of case study research (Yin, 2009). This allows the researcher to studythe research problem from several perspectives. Use of in-depth interviewsand observations in such a context helps in unraveling details in a scantilyresearched area. The study reported in this article therefore aptly describedthe situation required for case study research.
The present study was based in India (a developing country).International agencies like World Health Organization (WHO) increasinglyview social franchising as means to complement government efforts in espe-cially rural health care services. This could be either through a public–private
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partnership or through NGO initiatives. India, Manipal, and Bangalorewere the chosen places for the study. Karnataka is a large Indian statethat has been a pioneer in social franchising in health care with uniqueschemes like Yashaswini. Yashaswini provides health insurance and cashlesshospitalization for the poor at an affordable cost through private partner-ship. For selecting organizations, first we did an Internet search to obtaindifferent databases that listed NGOs operating from in/around Manipal,Udupi, Mangalore, and Bangalore. Next, we contacted a larger numberof organizations using e-mail and telephone. Based on the final responsewe visited eight organizations—Citizens Alliance for Rural Developmentand Training Society (CARDTS), Preethi Neethi Trust, Population ServicesInternational (PSI), Enable India, The Association of People with Disability(APD), Foundation for Action, Motivation, and Empowerment (FAME) India,Belaku, and Vaatsalya—and conducted in-depth interviews with organiza-tion heads. Interviews lasted for about two hours each. To prevent languageproblems, the interviewer was a trained Indian speaking market researcher.
FINDINGS
All eight organizations had a direct and indirect operations relating to healthcare. Other than PSI, which is an international organization, and Vaatsalyathat had promoters with international experience, none of them were awareof social franchising. The typical response for the term social franchisingwas, “What is that?” When we explained the concept in detail to these sixorganizations, all of them expressed their interest in it. They felt that it couldbe a new way to replicate their organizational efforts and have an impacton a larger geographical area. One of the organization’s heads said, “Thisseems a good idea of expanding footprint of our services.” After the initialconcept explanation, the interviews shifted to detailing operational aspectsof social franchising. One organization’s head said, “Our main difficulty isfinding potential franchisees.” As we discussed difficulties in operationalizingthe concept during the interview, the organization heads expressed twomain apprehensions. The major apprehension was monitoring and control.Typical responses were, “How do we know if quality is maintained at alltimes?”; “We do not have resources to do monitoring on a regular basis”;and “We do not know if they would misuse our name for their own benefitand not for the social benefit.” All organizations felt that social franchisingsuccess depends on two key factors namely maintaining the service qualityand retaining organizational reputation.
Another major apprehension was franchisee availability. The head ofone organization stated, “we cannot afford commercial sector salaries.” Inorganizations that required specialist expertise, like working with cerebralpalsy-afflicted persons, there is a severe shortage of appropriately qualifiedpersonnel. In addition, organizations were not sure about testing franchisee
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passion and commitment for a franchisor’s social cause. One organizationalhead said, “we cannot have psychometric testing of potential franchiseesto find out their real aptitude for serving social causes. This is the trickypart of social franchising.” Interestingly, none of the organizations wereapprehensive of funding compared to other issues regarding franchiseeselection.
Between two organizations that use social franchising, PSI was clearabout it. PSI had specific criteria for choosing doctor’s (private practitioner)clinics for branding as KEY clinics. These included (a) clinic location,(b) patient profile, (c) doctor’s interest in HIV/AIDS counseling and con-traception services (PSI’s area of interest), (d) patient load, (e) doctor’swillingness to get training from PSI and follow its protocol for service pro-vision, and (f) doctor’s willingness to maintain service quality and pricing asper contract.
In return, PSI provided marketing support. Reference to nearest KEYclinics in advertisements ensured that the doctor benefits from increasedpatients and the fees he earns. PSI adopts retailing techniques (like mysteryclients) to monitor and control doctor services. PSI also has a surprise expert(reputed PSI doctor panel) check on the doctor’s services to ensure fran-chisee quality. As in business format franchising, PSI (the franchisor here)takes decisions on franchisee recruitment, selection, monitoring, appraisal,and continuation or termination using objective measures. PSI uses criteriathat relate to commercial franchisee selection, namely financial net worth(patient load and fees charged), general business experience (an existingdoctor), formal education (a doctor), local market knowledge and localcommunity ties (location), and psychological profile (interested in partic-ular disease treatment, quality maintenance, contract, and willingness to betrained).
Vaatsalya manages a rural-semi-urban hospital chain through socialfranchising. Its typical hospital is one that has 30 beds, two operatingtheatres for general surgery, and one pharmacy. It has found this as aneconomically viable business model with a lower pricing while operat-ing in rural-semi-urban areas through experimentation. It focuses on fourmajor specializations—namely pediatrics, gynecology, general surgery, andmedicine. Transparency in pricing and low price is its focus. Its aim is tohave simple but clean clinics and a complete breakdown of the billing com-ponents for pricing. There would be no charge for extra service within 30days of first treatment. Different doctors would charge different prices butwith prior customer knowledge. Hospitals would not charge any commissionor referral fees when it refers patients to secondary or tertiary hospitals.
Vaatsalya has standard operating procedures for the health care service.Its franchising model relies on leasing space, buying and installing medicalequipment, and starting each hospital. It could be buying an existing hospitalor building a new one. The model is of partnership and not obtaining a com-plete stake. Vaatsalya and the doctor-entrepreneur share hospital revenues.
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A key reason for this franchising model is that existing doctors who operaterural or semi-urban clinics want to get away from day-to-day management.While choosing nonprofessional (from the hospital management viewpoint)doctors, Vaatsalya in its franchisee selection already factors in financial networth, business experience, local market knowledge, and local communityties. The key judgment is whether a doctor’s personal profile would facili-tate Vaatsalya to bring in professionalism in hospital management. Vaatsalyaachieves professionalism through branding, pricing transparency, and otherstandard operating procedures. This assures health care quality, affordability,and access to needy in rural-semi-urban areas.
CONCLUSIONS AND FUTURE RESEARCH
The case studies seem to emphasize that for social franchising success, fran-chisee selection plays a major role. Among the various franchising elements,franchisee selection seems to be crucial for social franchisors. Moreover,commercial franchising selection criteria seem equally applicable for socialfranchising. Thus, theoretically commercial and social franchising need notbe looked at as different forms in spite of their differences. In franchiseeselection criteria, personal profile seems the most difficult aspect to assess.These findings match similar issues (Harmon & Griffiths, 2008; Brown & Dev,1997; Cochet, Dormann, & Ehrmann, 2008; Kidwell et al., 2007) commercialfranchisors face in their operations. In addition, apprehensions on qualityand control match commercial franchising fears on these counts. Targeting,screening, and recruiting potential franchisees can be tough given difficul-ties in finding and recruiting qualified franchisees. Incidentally, commercialfranchisors too perceive lack of proper candidates as the most severe factorrestraining the growth of franchising (Tuunanen, 2004).
One major managerial implication of this research is that existing fran-chising professionals could easily assist new social franchisors in developingtheir social franchisees. Greater awareness of the various forms of franchis-ing and its knowledge can significantly help develop social franchising as aconcept for replicating social enterprises.
We expect this article to stimulate researchers to work in this newarea of franchising. One immediate research area that emerges is to ver-ify empirically results with franchisee selection criteria, social franchisorsacross various countries. An extension to this research could be studyingcriteria weights and methodology adopted for making final selection. A newresearch direction could be if selection criteria would differ based on (a)social cause and (b) franchisee location. Franchisors’ selection process with-out sufficient number of prospective franchisees could also be an area forresearch. One could also study if social enterprises use explicit selectioncriteria for expanding through social franchising.
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