Knowledge that Transforms

This paper reports the findings of a study of the decision to purchase a franchise within the broader context of the decision to become self-employed. The sample is taken from individuals who had indicated an interest in self-employment and franchising three years prior to the current study. In the interim, some had purchased franchises, some had opened or bought independent businesses, and some had remained employed by others. The differences among these groups are examined. Some support was found for the posited relationship between the personal benefits of self-employment and the decision to purchase a franchise or independent business. The importance attached to the financial and business benefits of franchising is positively related to the decision to purchase a franchise. Finally, there was some evidence that franchising offered greater choice of sectors. Franchisees were less likely than independent business owners to operate within sectors where they had previous experience.

In this essay, we explore the relationship between franchising and entrepreneurship in general, and their research domains in particular. We begin by categorizing the focus of various representative definitions of entrepreneurship as: (1) traits, (2) processes, or (3) activities, and adopt the view that identifying the unique research domain of entrepreneurship is a more worthwhile endeavor than attempting to reach definitional consensus. We subsequently discuss the differences between entrepreneurship in the manufacturing and retailing contexts, and the particular features of franchising as it relates to the study of retailing entrepreneurship. Specifically, four areas are examined: the franchisor’s role in creating an innovative concept, the franchisee’s role in bringing the franchisor’s concept to new markets, the franchisee’s acceptance of risk, and the special issues surrounding the pervasive practice of multi-unit franchising. We conclude with a brief discussion of the reasons for including the study of franchising, franchisors, and franchisees as integral areas within the distinctive domain of entrepreneurship research, and similarly exhort franchising researchers to explore the implications of their work for the study of entrepreneurship.

Research on factors influencing performance in new and small companies is extensive. Earlier work found that strategies (e.g. cost, quality, differentiation, etc.) affected performance contingent on industry conditions, the environment, and the entrepreneur’s background. Although this work provides a solid basis for understanding differences in entrepreneurial performance, some firms are limited in their choices of strategy due to size, age, or industry. Often these firms are in industries where entry barriers are low and competitive advantages are easily imitated. Small service and retail businesses operate in sectors where these conditions are apparent. Comprising more than 50% of all small firms, they require minimal start-up investments but face intense competition. Lacking the “glamour” of high innovation/high growth firms, service and retail companies are at the “end” of the value chain, their fortunes rising and falling as a result of the direct influence of the owner-founder. Hence, performance variation may be better explained by the capabilities of the firm or individual competencies of the owner-founder, that is the resource-base and resource combinations, rather than strategy. The strategic importance of an organization’s resources and capabilities is the foundation of resource-based theory. Resources are tangible and intangible assets tied to the firm in a relatively permanent fashion. Their combinations are heterogeneous and form the basis for product/market strategies. Studies of resources, strategies, and performance are emerging in the entrepreneurial area. Research shows that various resources in concert with different strategy types can lead to above average performance over the business life cycle, and that combinations of resources are related to survival. Yet the vast majority of work focuses on high growth, high tech, or manufacturing businesses. Less is known about the relationships of resources to performance in less “glamorous” sectors. In these small service and retail businesses, we speculate that resources, in particular human and organizational resources, may play a greater role in explaining performance than strategy. Further, as other authors have suggested, it is expected that the combinations of these resources will vary across age and size. This study examines the influence of human and organizational resources on performance in a sample of 195 service and retail firms operating in central New Jersey, using a structured questionnaire. All companies utilized a focus strategy (either focused cost or focused differentiation) and employed a minimum of 3 to a maximum of 100 employees. All measures had theoretical and/or empirical precedent and were tested statistically for reliability. We used factor analysis to reduce the independent variables to: two human resource variables (owner resources and commitment), one organizational resource variable (comprised of planning, systems, and staff skills), and one strategy variable (focused cost and focused differentiation). Control variables were business age, business size, environmental benignness, and industry growth. The dependent variable performance was measured in two ways: net cash flow and log of growth in employees over 3 years. The study first examined whether strategy or resources had a greater influence on performance. Results showed that strategy influenced performance less than human and organizational resources both individually and interactively. The influence of owner resources (background and attitudes) on net cash flow was stronger than on growth, where the only significant variable was industry (market) growth. To analyze effects of resources on performance by size, we divided the sample by size groupings, selecting the smallest (maximum five employees) and largest quartiles (minimum 16 employees), which were comprised of 55 and 50 companies, respectively. These analyses showed that owner resources, commitment, and organizational resources contributed positively to net cash flow in very small firms; however, interactive effects of these resource combinations were negative. For instance, owner resources and organizational resources together, and organizational resources and commitment together, resulted in less positive cash flow than when analyzed separately. This implies that different resource combinations can have negative influences in these very small firms. We examined age effects in the same manner as size—dividing the sample into age group quartiles and conducting an analysis only for very young (fewer than 5 years) and very old (minimum 19 years) groups, which comprised 54 and 52 companies, respectively. These analyses showed that although growth was more rapid among the youngest firms, there were no distinctive resource-based correlates to growth in either age group. Substantive increases in formalized systems and procedures were not apparent among the oldest of these companies compared with the youngest, contrary to previous work showing the evolution of these over business life cycles. Results of this study are applicable only in the context of service and retail firms, and, readers should note this sample was nonrandom and geographically concentrated. Our purpose was not to predict, but describe associations between resources and performance. This study shows that, for firms in competitive industries at the end of the value chain, type of strategy is less important than resource combinations for certain types of performance. Human and organizational resources are associated with more positive cash flow, whereas industry and market factors are related to growth. These results imply that firms seeking growth are best served by selecting and entering growth markets and industries. On the other hand, if strong positive cash flows are the primary objective, attention to combinations of resources is more important. For instance, owner-founders having a strong business and managerial background, and industry experience will need less formalized systems, whereas those owner-founders with weaker managerial resources might benefit from more formalized procedures and skilled staff.