Franchising has been recognized as a successful business model leading to accelerated expansion of the new store with local control of the franchise owners assuring lesser financial risks with rewards associated with local ownership which requires lower level of supervision and economies of scale. "The most widely accepted definition of a franchise refers to a contractual relationship between a franchisee (usually taking form of a small business) and a franchisor (usually a larger business) in which the former agrees to produce or market a product or service in accordance with the blueprint devised by the franchisor"(Stanworth et al. 1995)
Management Structures: Franchising is primarily defined in terms of the legal business agreement between two partners, the franchisor and the franchisee. The franchisor, who has previously established a market-tested business package of products or services, enters into a continuing contractual relationship with a number of franchisees, typically small business owners, who must operate their businesses according to the franchisor's specified format (Curran and Stanworth, 1983). The franchisor provides a proven method of operation, support, and advice on the setting up of the new franchisees, and also guarantees continuing support to the franchisee. In return, the franchisee pays a lump sum entrant fee and other charges for regular services (that is, royalty on sales, advertising fees, marketing levy) (Fulop and Forward, 1997). Franchising has been adopted a growth strategy for many firms in business with the advent of globalization. It is a different from other form of business. A franchise is a hybrid form of business characterized by complex contractual arrangements (Eisenhardt, 1989). Though many franchises operate between hybrid and the hierarchy (centralized or organizational) firm and incorporate both the franchised units as well as the company owned outlets (Brickley and Dark, 1987)
In a hybrid operation, the franchisor monitors and controls the franchisee within the limits specified in the franchise agreement. In contrast, the franchisor operates company-owned outlets through his or her authority over a centralized bureaucracy or as a hierarchical organization. The resource scarcity theory and the agency theory explained the theory of franchising around the hybrid and hierarchy forms of franchise organization.
Support for the agency theory as a rationale behind franchising was substantial. Research found that the franchisee motivation as an agent was perceived to be the most important strategy of the franchise firms (Oxenfelt and Kelly, 1968-69) while the capital advantage of franchising, which was proposed by the resource scarcity theory, had a low acknowledgement by the franchisors (Lillis, Narayana and Gilman, 1976). The franchisee's high motivation was probably derived from the nature of the franchise relationship. Franchising involves an exchange relationship between franchisor and franchisee which was sometimes described as a partnership or strategic alliance (Stanworth and Kaufmann, 1996). The franchisee is simply managing an outlet featuring the corporate strategy of the franchisor and to a certain extent possesses a degree of autonomy in managing the outlet (Dant and Gundlach, 1998). Unlike the company-owned manager, the franchisee enjoys more dependency in running the day-to-day business
Franchisee and Franchisor: The