Exploring Agency Theory Implications With Franchising

Abstract

The franchiser-franchisee relationship (FFR) can be examined from two theoretical perspectives, Agency Theory and Exchange Theory.  Strategic management of demands that the leadership makes decisions on what the company should do and what the company should not do.  This type of decision-making is called making trade-offs and has much to do with Agency Theory’s applications to FFR.  One reason that operational effectiveness is the preferred way is that it has inherently little risks during the short term.  Managers would be willing to make decisions if the risks were not so high on the long term.  From the Agency Theory viewpoint, dual distribution can be analyzed in a cost versus cost trade-off schema.  The approach argues that both franchising and company ownership have costs associated with them.  Dual distribution is considered an internal solution to the cost tradeoff.  Some of the costs in question are inefficiency of client risk sharing, franchisees that are free riding and the legal costs of terminating a franchise.  Under dual distribution the mix of company ownership and franchising minimizes the sum of these total costs.  When looking at market demand and the impact strategic decisions may influence it several factors come into play, including point of sale service.  The components include the impact of outlet level services provided to the consumer enhancing value via the shopping experience, the franchiser’s level of effort to streamline the supply chain to all retail outlets, which enhances the image and reputation of the brand with the customer.  Aspects of Agency Theory can be extended to include credible communication of franchise brand equity.