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Franchising as organizational form in business and political organizations.


Franchising has long been a part of everyday life through its seeming ubiquitous presence in business characterised by the fast food restaurant and services sectors, the motor industry etc, and through its impact on many facets of society (Sunday Star Times, 2008). It has been reported to be one of the fastest growing areas in business (Anwar, 2011; Campbell, Datar, & Sandino, 2009). While the term, franchising, is often used to describe the provision of branded products or services, it also describes a form of organization design. However, there have been few attempts to theorise franchising as organizational form (Shane & Foo, 1999; Shane, 1998; Bradach, 1998; Brickley & Dark, 1987; Norton, 1995).

Indeed, despite much of the research on franchising being theoretically informed, or guided by a particular theoretical lens, it can be labelled as descriptive, empirical, and piecemeal. It is not surprising then, that the extension of franchising into a variety of settings within the private and public sectors has appeared to reflect mimetic behaviour and empiricism rather than theoretically informed reasoning (Boyd, 1995; Demb & Neubauer, 1992). Consequently, some have claimed a greater need for franchising research to interface with other research domains, and to engage in longitudinal, sectorial and cross-border studies (Wright & McAuley, 2012).

Amongst the varying rationales used to justify franchising is that it can embody a form of growth strategy (Shane, 2005). It occurs in sectors where revenue/profit growth or market coverage can arise from the addition of extra outlets rather than the market expansion of existing outlets (Shane, Shankar, & Aravindakshan, 2006). As such, it is not surprising that franchising-related approaches have also emerged in the sporting and social venture sectors (Tracey & Owen, 2007), and that notions of franchising have been associated with political organization in the manner described in this study.

For example, in early 2015, the success of Queensland's Australian Labor Party (QLP) in State parliamentary elections in growing its vote via its Local Electoral Divisions (LEDs) and growing its seats in the State parliament, prompted academic comment. Such comment has suggested that a de facto franchise system involving the QLP as franchisor, and its LEDs and groupings from the union movement as franchisees (Stewart, 2015), contributed in a significant way to turning around the 2012 election defeat of the QLP. In that election, the QLP won only 8 out of 89 seats in a record loss to the Liberal National coalition (LNP--77 seats) (ABC News, 2012). Indeed, the LNP won a record majority with 77 of the 89 seats, to just 7 for the QLP. In 2015, the QLP grew its share to 45 out of 89 seats (Beaumont, 2015).

Stewart (2015) has suggested that the QLP relied heavily on community organizing and decision-making reflecting the new politics of 21st century Australia. In particular, Stewart (2015) suggested that the new politics encompassed the franchise business model applied to political party processes; the community development model applied to political and policy decisions; and gender politics playing a more central role than 'the class and interest-group politics of ... old'. It is the former business format franchise model applied to political party processes that is examined in this study.

Notwithstanding such views and occurrences, the equivocal findings that have emerged from the literature may have a common origin. For example, despite there being empirical evidence corroborating agency theory predictions about franchising as an appropriate organizational form to fund and facilitate growth (Shane, 2005; Shane & Spell, 1998), criticisms have also been made of resource-based (scarcity) and agency theories for their one-sided focus on the franchisor, and for their narrow assumptions about human behaviour (Tracey & Jarvis, 2007). The question may then be posed whether such equivocality may be linked to the appropriateness of the theoretical framework in use; the lack of rigor in its use; or both. Indeed, as some authors have indicated, an important prelude to the evolution of appropriate rigour in empirical studies is the development of a theoretical framework to guide such work (Cornwell & Maigan, 1996; McDaniel & Kinney, 1996).

In this study, the author seeks to respond to a view that there has been little theoretically grounded research examining franchises and franchising as organizational systems. So, whilst accepting that agency theory has provided a useful framework for examining aspects of franchisor/franchisee behaviour, no such framework has provided a platform for research examining franchising as a form of organization.

However, in other settings, and in order to better understand organizations, organizational structure, and processes of organizational change, researchers have employed a variety of theoretical frameworks to build insights from different perspectives (Hinings et al., 1996). Research undertaken within the frameworks of organizational culture, institutional theory, and organizational archetypes, has sought particularly to explore the relationship between organizational structure and values.

Indeed, it has been argued that much can be gained from conceptualising organizational structures, that is, the systems of roles and responsibilities, as manifestations or representations of the values and interests of organizational and institutional actors within and without the organization (Ranson et al., 1980). In keeping with this view, Combs et al. (2004) have argued that research on franchising could benefit from similar additional theoretical diversity.

One example of such diversity involves the conceptualization of franchises as strategic networks (Sydow, 1998; Sydow & Windeler, 1998). Framed in this way, Uzzi (1997) has drawn attention to the nature of the interrelationships between franchise members, and to the corresponding shading of the narrower economic objectives and contractual arrangements that characterize resource scarcity and agency theories. In particular, such framing also surfaces notions of mutual dependency and related trust between franchisor and franchisees, and how they may impact the effectiveness of the franchise system. As implied by Tracey & Jarvis (2007), these notions seem especially relevant for those franchise systems where trade-offs between social, political and commercial values and priorities impact on franchise stakeholders in different ways. Nevertheless, these approaches focus on features of the franchise system rather than the franchise organization as a systemic whole.

In considering the totality of organization design and organizational structure, there is evidence that some organizations have sought to legitimise their form through adoption of identifiable and 'desirable' or 'ideal' organizational forms (Mintzberg, 1979). However, such descriptors of desirable form do not provide an adequate conceptual framework with which to assess the effectiveness of the different forms, although they may represent ideal types that work best in different circumstances. The question, therefore, for those involved in assessment of organizational design or organizational effectiveness, for franchise or other organizations, is whether mere taxonomic comparison of organizational design to the ideal type for the identified circumstances, constitutes a sufficient basis for analysis. Stafford Beer would suggest otherwise (Beer, 1959).

In the first section of this study, the author provides a brief description of franchising in its differing forms; of commonly accepted views of the rationale underpinning franchising; and of empirical research outlining factors critical to the success of franchising from the perspective of franchisor and franchisee. The following section then outlines a theoretical framework and embedded methodology for examining the effectiveness of organizational design, and for examining the systemic roles, purpose and systemic effectiveness of franchising, as a form of organization.

While the use of systems methodologies to explore organizational issues is relatively common, the application of systems-based frameworks to explore franchising has not been reported in the literature. The study seeks to develop systems perspectives and to conceptualise franchising using the theoretical framework associated with the Viable Systems Model (VSM) of Stafford Beer (1974, 1975, 1979, 1981, 1984, 1985). In particular, the author uses the VSM to reinterpret, and build understanding of, the systemic nature and effects of franchising.


The Nature of Business Franchising

A franchise is generally a form of business organization in which a franchisor as owner of a trademark or trade name conveys to one or more independent entities, the franchisees, the right to market a product or service, usually within a specified geographic area and subject to a number of franchisor-imposed constraints. The wider franchise system is essentially a virtual organization comprising franchisor, the independent franchisee organizations, and the various ways in which they interact (Premner & Hatch, 2001). There are two major forms of franchising: product format franchising and business format franchising. Product format franchising is an arrangement whereby the franchisor, often a manufacturer, develops a product and/or a trade name and licenses a franchisee to market its products and to use the specific trademarks or trade name of the franchisor/manufacturer (Sherman, 1991). That is the product franchisee contracts for use of the name to deliver products or services to end customers for a fixed time at a defined location.

Business format franchising is an arrangement whereby the franchisor develops a brand identity/name and a business operating system, and licenses them to a franchisee to carry on a business, to deliver products or services to end customers for an agreed period at a defined location. An example would be the McDonald's franchise system (Shane, 2005). Product franchisors do not license an operating system, but allow franchisees to operate in different ways, that is, they do not seek uniformity in the operations of their franchisees. They gain income from product sales to franchisees. By contrast, business format franchisors gain income from royalties as a proportion of final gross sales to retail customers.

While the above forms of franchising may be differentiated by a focus on income and on how income is earned by franchisors and franchisees, De Castro et al. (2008) suggest that the prevailing explanations for propensity to franchise, and insights about franchise performance, are mostly drawn from contiguous literatures in strategy, organizational theory or economics, using lenses and frameworks such as the resource-based view (RBV) of the firm, or agency theory (Combs, Michael, & Castrogiovanni, 2004; Michael, 2000). The former may be interpreted as highlighting matters of competence/resource availability or scarcity; and the latter as relating to matters arising from the need to align franchisor and franchisee interests, objectives and incentives.

Drawing on empirical research, Premner and Hatch (2001) suggest that franchising is one of several growth strategies that an organization, a potential franchisor, can employ to grow its business, to gain market base or revenue as a resource. In comparison with expansion of company branches, or entering into joint ventures, growth can be funded predominantly by the financial and human capital of franchisees, not the franchisor--possibly at lower risk to the franchisor. This view accords with the agency theory supposition that franchisee owner-operators have significant self-serving incentives to grow activities, revenue and profits, in comparison with the fewer incentives available to outlet managers employed within a divisionalized organizational structure, and therefore more incentive to commit their own resources.

Franchising as a viable business concept is considered to require a product or service, and brand, that is unique; an identity that is protected by a registered trademark and that has high sales potential. Furthermore, a prevailing view is that franchising requires a set of business operations that can be standardised or codified so that the franchisee "can operate with minimal franchisor involvement"; a set of business skills that can be acquired through minimal training; business success factors that can be replicated readily; and a track record of franchisee success, or model business outlets, that can demonstrate viability to potential franchisees and operators (Premner & Hatch, 2001).

However, and by contrast, De Castro et al. (2008) offer a different view on such matters of standardization and codification, perhaps more appropriately referred to as technology transfer and organizational learning. They develop a relational perspective focusing on the nature and dynamics of relationships within the franchise network or system, and how those relationships may highlight the need for organizational learning--responsiveness, adaptability and increasing capability embracing not only what they call variety preservation--but also the capability for variety engineering defined by Beer (1985).

For individuals as potential franchisees, empirical evidence indicates that involvement in a franchise business offers them higher survival rates, based on a proven business concept; economies of scale based on, for example, franchisor-wide purchasing and procurement systems; the reputational benefits of a well-known brand; and, in the case of product franchising, access to franchisor product. However, for De Castro et al. (2008), it is the nature of the relationship between franchisor and franchisee that is important, in so much as it can impact whether the franchisee can be motivated, and whether franchisee behaviour can be modified to act in the interests of the franchisor by say contractual or other arrangements.

Nevertheless, franchisors and franchisees remain independent entities with different objectives. Although franchise agreements/contracts may seek to align objectives of the franchisee with that of the franchisor, they also generate transaction and compliance costs that do not exist to the same extent within divisionalized organizations. Indeed, given that franchisor-driven change from the centre can often be difficult to achieve, given inherently different objectives, then this may be one factor contributing to empirical research findings that shows franchisor profits arising from franchising are lower than parent organization profits from divisionalized outlets (Shane, 2005).

Even so, divisionalized and franchised organizations have a deceptive similarity in terms of organizational structure and design, especially when presented as an organizational tree. Both organizational forms represent attempts to balance autonomy, flexibility, responsiveness and control, and, both reflect the notion that to be effective, an organization must be structured to respond to environmental context (Slack & Amis, 1996), and the relationships that need to be managed. It is the nature of these relationships that Premner and Hatch (2001) claim as an important component of what contributes to franchise success.

In light of this claim, we now overview what empirical research has identified as factors critical to the success of a franchising system. Not surprisingly, the potential franchisor must first assess whether the business concept has features that make it amenable to franchising. If so, the franchisor must assess whether operations or processes can be standardised and codified; whether values and objectives can be codified, diffused and shared; and whether the franchise operations have an end-value to customers that is, of course, apparent to any potential franchisees.

Research has also suggested that franchisors must develop effective selection processes to ensure their franchisee partners are motivated to perform, to make "profit", to be a success. A related requirement is that the franchisor is able to motivate franchisee involvement in longer term business development, by whatever means--contractual or shared values (Anwar, 2011); to influence or control franchisee behaviour; to provide detailed advice, guidelines or contract provisions, penalty/termination clauses, minimum investment and promotional requirements etc; to provide appropriate training and operations evaluation programmes; and also to provide appropriate financial, territory and expansion incentives.

As a corollary, other areas that appear critical to successful franchising (Anwar, 2011; Shane, 2008), and avoiding franchise failure (Bordonaba-Juste, Lucia-Palacios, & Polo-Redondo, 2011), include a recognition by franchisor and franchisees of the mutual dependence they share, a commitment to the franchise relationship, trust, meaningful communication and information exchange, collaborative behaviours, and rate of growth of the franchise operations.

The Relevance to Political Organization

In the Australian political system, we can conceptualise the franchise as a form of political organization in which the franchisor, say the QLP as owner of a 'trademark' or 'trade name', conveys to one or more independent entities, the Local Electoral Divisions (LEDs) as franchisees, the right to market a product/service, the Labour Party, its ideals and policies, within a defined geographical electorate and subject to a number of QLP franchisor-imposed constraints (Premner & Hatch, 2001). The wider political franchise system is another example of a virtual organization comprising the QLP as franchisor, the independent LEDs as franchisee organizations, and the various ways in which they interact.

Of the two major forms of franchising: product format franchising and business format franchising, it is the latter which perhaps better reflects the circumstances that have been noted. For example, the QLP has an established brand name and 'business' operating system and authorises them to be licensed/used by a franchisee to carry on their political 'business', to develop and deliver policies and messages (as products or services) to voters (end customers) in defined constituencies/electoral divisions. The QLP as a business format franchisor then gains seats in parliament (profit) from votes as a proportion of final votes cast by voters (retail customers).

According to Premner and Hatch (2001), franchising has been used as a strategy by the QLP to grow awareness of its ideals, values and policies, and to grow electorate votes and seats in State parliament. Growth in political support can be funded predominantly by the human capital of franchisees, the LED members, not the central QLP as franchisor. Invoking Agency Theory, it may be assumed that franchisees, with psychological ownership of their LEDs, have 'significant self-serving incentives' to grow their activities, spread their messages, and build their membership and voting base, perhaps more so than QLP political staffers.

Drawing on the above, one may expect that for a political franchise system to be a viable form of organization, it must be associated with a recognizable political identity, a brand with attractive features or brand equity; and be protected by trademark which has appeal for potential voters. One may also expect, to some extent, that aspects of the political machinery and processes can be systematised and standardised allowing the LED/franchisee to operate with minimal franchisor involvement; that the skills required of the LED political activists can be developed through minimal training; that political success factors can be duplicated; and, over time, a successful track record can be demonstrated to other potential CLP franchisees (Premner & Hatch, 2001).

Drawing parallels from research on business franchise systems, one notes that LEDs, considering life as potential franchisees, may see (1) maintaining their relative independence in conducting franchise operations, together with (2) support gained from the QLP, as offering higher political survival rates, that is, electoral success. The nature of the relationship between the QLP as franchisor and the LEDs, as franchisees--for example, agreeing on preferred outcomes strengthens a view that franchisee motivation and franchisee behaviour will coincide.

However, as in other franchise systems, the QLP as franchisor and LEDs as franchisees still remain independent entities with different motivations, and perhaps political objectives and scope. Although political agreements may seek to align these objectives, these agreements can take time and effort, generating those transaction and compliance costs that do not exist in situations where the QLP party machine would be controlling campaigns in a centre-driven divisionalized system or organization (Shane, 2005). However, in such situations, the absence of transactional costs may be accompanied by a lack of motivation, commitment and the human resource necessary to bring about success.

Empirical Evidence on Requirements for Effective Franchising Systems

As mentioned earlier, empirical research has identified a number of factors critical to the success of a franchising system. Table 1 displays Shane's (2005) summary of such research findings, identifying those factors critical to the success of business-related franchising, and interpreting those findings in the context of political franchising. Given such an extensive set of empirically determined success factors, the challenge for theoretical development is to develop alternative perspectives on the findings that may generate theoretical coherence, and an understanding of any underpinning systemic coherence and systems behaviour.

The subsequent section explores how Beer's Viable Systems Model (VSM) and framework may contribute to such understanding, and attempts to inter-weave a description of the VSM with the development of a systems perspective and re-interpretation of the empirical findings as they relate to political organization.


An Overview of Beer's Viable Systems Model (VSM)

Beer's cybernetic framework (1981, 1984, 1985) can be used to shed light on the design and effectiveness of purposeful organization--virtual or real. Beer focuses on the systemic functions that enhance organizational viability, and which provide a basis for adaptive learning about what are effective organizational behaviours and goals in a climate of complexity and change (Davies, 1999).

The sub-systems, whose effective functioning and communication links are necessary to any system's viability, comprise an operational system, S1, of autonomous operational units that act out the very identity and purpose of the overall system; and a meta-system comprising four other sub-systemic functions.

These four sub-systemic functions are: S2--effecting beneficial coordination of the autonomous units, reducing conflict, providing guidance to reduce the complexity of choice; S3 operational planning, resourcing, regulating, guiding, monitoring--for and relating to the autonomous units; S4--intelligence and strategy development serving the whole organization's future; and S5--the creation and promulgation of identity, vision, direction, purpose and mission, throughout the organization and its wider environment (Brocklesby, Cummings, & Davies, 1995; Brocklesby & Cummings, 1996).

In essence, the S1 unit carries out the Dasic purpose of the organization, interacting with its local environment; and the Meta-System decides, resources and supports the carrying out of purpose, taking account of the wider environment. Figure 1 shows the organization in schematic form, with the S1 operational unit as a circle, interacting with the meta-system, as a rectangle, both interacting with the environment in different ways.

System 1-S1 Operations Units

In order to determine what constitutes S1, Beer contends that it is necessary to consider the identity and purpose of the SIF, its raison d'etre. There may be a number of S1 units related to a variety of activities that reflect the multi-purposes of the organization. In general, they may not reflect what is found on the traditional organizational chart, and may span existing departmental or functional boundaries (Davies, 1997).

Figure 2 shows two S1 sub-units, say, franchisee organizations, linked to their local environments, the "v 's" reflecting complexity and variety in the environment, being matched by a requisite variety of response measures, the "v's", in the S1 unit, with communication channels conveying both requisite 'hard and 'soft' information between the sub-systems, and to and from the local and wider environments. As such, System 1, and consequently, the SIF, the wider franchise system, should be better able to match current requirements, and to anticipate future requirements for survival. The wider franchise system, effectively a virtual organization, comprises the franchisor organization fulfilling S5, S4, S3, S3* and S2 functions, and the independent S1 franchisee organizations.

VSM thinking leads to a conclusion that S1 units need to be effective at adaptive learning if the SIF is to remain viable, meaning that S1 units need to understand and respond appropriately to local environmental change. If so, S1 franchisee units should be allowed to operate with sufficient autonomy to do their jobs, unconfined--except of course, by the SIF's or franchisor's purpose.

Beer argues that in such circumstances, S1 units should be capable of independent viable existence, and in many cases, the franchisees are. The alternative to this bounded autonomy would require a greater knowledge of, and involvement in, specialist S1 operational activities by those staff from the management meta-system of the franchisor.

Systems 2, 3 & 3*--Co-ordination, Control and Audit Functions

The VSM based argument of conceding responsibilities, control and autonomy to the S1 units, that is, the S1 franchisee units, stills begs several questions of how an organization maintains control, avoids chaos, yet gives franchisees the freedom and autonomy they need to be effective in their work (Covey, 1992). In VSM terms, it is the relationship between the S1 franchisee units and Systems 2, 3 and 3* in the franchisor management meta-system, that can prevent both an overwhelming loss of autonomy for S1 franchisee units, and a debilitating disharmony amongst S1 units pursuing what may be well-intended self-interests.

System 2 (S2) performs a co-ordination function that ensures the S1 units maintain appropriate levels of cooperation, competition and synergy, and adhere to wider franchise system policy; and that any attempts at local optimization do not detract from global optimization of the SIF. As a corollary, S2 seeks to minimise conflict by communicating requirements clearly through the business format manual by 'controlling' and modifying franchise behaviour through franchise agreement provision and policy guidelines; by having a disputes resolution process; and of course, by generating value for franchisees, who become more ready to continue to embrace wider S5 values and to follow S2 guidelines.

The System 3 (S3) functions include elements of 'control' through direction and instruction -including those of a legal, contractual nature, through operational, resource and budgetary planning; through resourcing in many guises; and through monitoring and 'auditing' activities. The negotiated and agreed resourcing of S1 franchisee organizations by S3 can provide appropriate autonomy at the S1 franchisee level, but minimise the financial risk exposure for the wider franchisor system. Other examples of S3 resourcing of S1 units or franchisee organizations would include use of the franchisor's brand name, and the provision of specific centralised services that facilitate sales and revenue growth at the franchisee level.

S2 policy guidelines would serve a similar function, ensuring compatibility of activities and expenditure with wider franchise system objectives. S3's functions might also include making the S1 franchisee units accountable for the resources that they are provided with, and S3 may require the S1 units to formally report on their activities.

The S3* auditing function represents an additional performance and policy monitoring function. It does not equate solely with auditing as a formal accounting process, but includes a variety of formal and semi-formal processes, including regular surveys, less frequent appraisals and ad hoc reviews. A casual 'management by exception' watching brief over an S1 unit's activities and performance might also assure the SIF that its S1 franchisee units are meeting agreed performance objectives, and that they are not engaging in inappropriate behaviour out of line with SIF policy. In many systemically sound organizations, S2 might represent company or franchise-wide norms; and S3, S3* might reflect self-control and self-monitoring rather than formal mechanisms. VSM analysis, then, goes beyond the formal organization to understand the systemic influence of organizational culture, ethos and norms.

Just as S1 franchisee units need to build capability for adaptive learning to contend with the variety and complexity in their local environments, so too, do the S2, S3 and S3* franchisor meta-system functions in order to cope with the complexity involved in the planning, resourcing, monitoring and co-ordinating of the S1 franchisee units. These functions are 'internal' functions, addressing the 'here and now' of the wider organization, interpreting but not developing policy, producing policy guidelines etc, with communication channels acting as conduits for policy to be implemented by S1 units.

Addressing future issues, assessing environmental and competitive forces, developing strategy and policy, and deciding strategic directions, are meta-system functions carried out by S4 and 5. Together, S3, 4, 5 should provide a integrated overview of the franchise organization and environment to underpin its current/future direction (Davies, 1999).

System 4--Intelligence and Strategy Development

S4's primary role is to build an understanding of the franchise organization's global environment, building scenarios for the future, linking environmental trends and changes to possible strategic developments in the franchisor organization's operational capabilities amongst the franchisees. S4 functions, as such, usually include market research, financial and policy modelling, forecasting and other intelligence building activities that can then be provided as S3 resources to the S1 franchisee units.

Franchisor S4 recognition of the importance of influencing franchisee behaviour is critical, as is influencing such behaviour through S3 mechanisms such as binding franchisee contracts, enforcing promotion and advertising commitments, or setting penalty/termination clauses for inappropriate behaviour. Influencing franchisee behaviour by providing information as a resource, is complemented by the provision of formal reporting guidelines or compliance requirements that relate to KPIs that have impact beyond the S1 franchisee level. Similarly, S4 franchisor recognition of the value of franchising as a means of obtaining capital and human resources is critical, as is recognising the importance of motivated franchisees, of local knowledge, and of contracts that signal the importance of long-term commitments.

System 5--Identity, Vision, Mission and Policy Setting

S5 has responsibility for the creation and promulgation of identity, vision, direction, purpose and mission, throughout the organization and its wider environment. That is, S5 is responsible for developing and building acceptance of the organization's raison d'etre, and of course, the franchise brand. S5 also needs to be able to cope with, and to balance the competing demands arising from S3 and S4 activities, reflecting current and future strengths and capabilities, needs and opportunities, and the systems' overall purpose, and then to be able to determine in what direction, and in what way, the organization should develop.


Beer (1985) has argued that S1 units of viable systems should be capable of independent existence, as viable systems themselves. Each S1 unit or franchisee organization, therefore, conceptualised as a viable system, will be comprised of the five VSM sub-systems, at one logical level of recursion lower than the original SIF. In summary, all sub-systems are part of a larger system. Similarly, since the SIF can be considered as a S1 unit of a larger system, the VSM framework allows one to conceptualize an organization as being within a hierarchy of logically linked systems, not merely as a stand-alone entity


One may now summarise the reinterpretation of Shane's rules (2005) for effective franchising in terms of their contribution to effective systems functioning. For example, selecting the right industry would be the consequence of effective S4 intelligence and strategic analysis, and S5 choice of strategic direction.

Similarly critical to the effectiveness of the franchise organization is the S4 recognition that business and political operations and processes best suited to franchise arrangements require human capital; are often labour intensive; are capable of standardization or codification; and also that S1 franchisee autonomy and discretion to exercise local knowledge in the market (here, the political LED market) is also necessary. In addition, S4 franchisor understanding of the advantages of franchising that arise from the selection and harnessing of motivated franchisee outlet operators as owner operators (here, the LED party officials and members) will likely lead to the de facto effective S3 resourcing of S1 franchisee units. Such resourcing would include both appropriate human capital, and sufficient financial capital. Furthermore, there would be necessary S4 recognition that all such franchise arrangements are best suited to exclusive territorial markets (here, LEDs and constituencies) if they are to facilitate franchisor growth (here the LED voting base), and enhance financial returns (or in this case, parliamentary seats) at relatively low risk.

As a corollary, S4 awareness of an inherent disadvantage of franchising--that franchisors and franchisees can be independent entities with different goals--leads to the franchisor metasystem S3 development of contractual arrangements/agreements and S2 guidelines/policies that promote (i) franchisee behaviour that is congruent with the aims of the wider franchise system, and (ii) recognition of exclusive territories for franchisees/LEDs which minimise conflict/dissonance between franchisee outlets/constituencies.

As such, the aim within the franchise system is to create the right balance of autonomy and control, without adversely impacting on the S2 values of competence trust and goodwill trust that binds the wider franchise business/political organization together, or without undermining the goodwill trust that is necessary for the franchise organization to be viable long term (Davenport, Grimes, & Davies, 1999). S4 understanding of the legal and institutional/political environment of franchising is also critical in such circumstances.

Similarly critical is the need to identify the right balance of franchisor S3 support and assistance to franchisees--in the form of training and centralised marketing, or purchasing and inventory systems--in order that franchisees can operate their businesses effectively without undermining their (S1) independence or autonomy. An additional requirement would also include developing the right S4 strategies towards individual franchisee territorial expansion (only in the case of business); and/or to expansion of the franchisor system to new markets (or constituencies), that provide additional motivation, incentives and confidence to existing and potential franchisees (LEDs).

By contrast, franchisor S4 deliberations on the financial/investment value of franchise outlets and the S4-derived pricing for the purchase of a franchise license in a business setting (or the corresponding political value of LEDs) are vital to ensure the maintenance of S2 values that bind the S1 franchisees (and LEDs)--happy and motivated by potential rewards--to one another and to the franchise organization for the longer term. In a similar way, effective franchisor S3 recruitment and selection of franchisees, and appropriate franchisor S3 contributions to the operational management of franchisees/LEDs, will contribute to overall franchise system success for the franchisor. In return, franchisees (LEDs) gain access to S3 resources provided by the franchisor that include a proven business format (or political model); a transparent business/earnings (political disclosure system)--and in as much as appropriate franchisor/franchisee match ups can be made, the risk of misunderstanding the business (or political system) and its virtues or vested interests etc, will be minimised.


The ubiquity of franchising as organizational form is without question. It is especially prevalent where business and marketing-related goals--for example, seeking sales, revenue or market growth--can be facilitated by an organizational form that accommodates a growth strategy related to additional organizational units in new territorial markets rather than the market expansion of existing units (Shane, Shankar, & Aravindakshan, 2006). The nature and effectiveness of franchising as organizational form is therefore worthy of exploration.

This study has sought to explore franchising as organizational form, using a systems approach. It has demonstrated how empirical findings and insights about franchising and franchising success (Shane, 2005; Premner & Hatch, 2001) can be reinterpreted using the cybernetic systems concepts embedded in Beer's Viable Systems Model (VSM), and by so doing, identifying the systemic requirements for franchise organization effectiveness and viability. The study has also drawn on such empirical findings to effect comparison of franchising as organizational form in business and political organizations.

In conclusion, the empirical findings of Shane, Premner and Hatch, for franchise success, are shown to accord with the systemic requirements for viability articulated in Beer's VSM. The study also shows that the systemic structure of effective franchise organization, business or political, also accords with the VSM, and in addition, provides explanation for the contribution of organizational form to franchise system success, and to the success of the business/market growth strategies or electorate vote/parliamentary seat winning strategies associated with franchising.


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John Davies

Victoria University of Wellington

John Davies is Professor of Management Studies & Associate Dean (International) at Victoria Business School, Wellington, New Zealand. He graduated from the Universities of Wales and Lancaster with a background in operational research, and has research interests within the decision and systems sciences. He has published in journals spanning the decision sciences, technology management and systems, for example, Decision Science, Omega--The International Journal of Management Science, Journal of the Operational Research Society, International Journal of Production Research, R&D Management, European Journal of Marketing, Long Range Planning etc.

Table 1 Shane's Rules for Developing an Effective Franchise System

Business                            Politics

* Selecting the right industry,     Selecting the right opportunities
in as much as the right             or projects to address with a
industries are ones that involve    franchising-like approach, for
"local production and               example, an election campaign.
distribution in limited             That is, a state political party
geographic markets" ...             needs to recognise the benefits
                                    of an organizational relationship
                                    with local electoral divisions
                                    (LEDs) when engaging with
                                    distinct political markets ...

--where, on the one hand, the       --where, on the one hand, the
business operations and processes   political activities, operations
are labour intensive, but can be    and processes are labour
"standardized and                   intensive, the community-
codified",---and on the other       grassroots origins of political
hand, management discretion to      values, ideals and policy in LEDs
exercise local knowledge is         are recognised, but overall set
encouraged.                         of goals and values must be
                                    agreed and shared with the State
                                    party,---and on the other hand,
                                    the political and management
                                    discretion to exercise local
                                    knowledge, underpinned by those
                                    grassroots origins of LED
                                    political values and ideals, is
                                    accepted and encouraged.

* Recruiting, selecting and         * Recruiting and selecting takes
managing franchisees effectively,   a different form, as potential
in as much those franchisees ...    'franchisees' already exist as
almost exclusively individuals      formal organizations (LEDs) or
... gain access to a proven         virtual organizations (informal
business through a transparent      Trade Union groupings) /with
business/earning disclosure         their own values and
system, and in as much, as          organizational norms. As such,
appropriate franchisor/franchisee   the State party has to decide
match ups are made that reduce      whether it should develop
the risk of misunderstanding the    relationships with all LEDs
business and its virtues,           within the state, or just those
conflict, conflicting objectives    where it believes that votes and
etc.                                Parliamentary seats can be gained
                                    with efficient and effective use
                                    of existing resources. Developing
                                    and managing effective
                                    relationships with organizations,
                                    ie the LEDs as franchisees, can
                                    then take different form or have
                                    different purposes compared with
                                    traditional business format
                                    franchising. It may involve
                                    ensuring that LEDs gain
                                    appropriate and relevant access
                                    to the party machine, or that
                                    state/LED relationships are
                                    developed to ensure that the risk
                                    of misunderstanding political
                                    goals and values, conflicting
                                    interests and values, conflicting
                                    goals and objectives etc., are

* Understanding the advantages of   Understanding the advantages of
franchising as they relate to the   franchising as they relate to the
selection and harnessing of         harnessing of motivated LED
motivated franchisee outlet         members as leaders, and of LED
operators as owner operators, who   and Trade Union volunteers, who
provide ready capital and human     provide ready human capital and
resource to facilitate growth and   human resource to facilitate
financial returns at relatively     dissemination of political
low risk.                           ideals, values and policies and
                                    to grow political support and
                                    constituency-LED votes and State-
                                    level parliamentary seats.

* Awareness of the inherent         * Awareness of the inherent
disadvantages of franchising        disadvantages of franchising
which include franchisors and       which may arise from the State
franchisees being independent       party and the LEDs being quasi-
business with often different       independent entities, with LED
goals, impacting adversely (1) on   expectation of being able to
contractual arrangements that       operate with relative autonomy,
often generate considerable         and therefore sometimes different
transaction costs, (2) on the       goals. Such autonomy and goals
ease of implementing franchisor     may then impact adversely on: (1)
led change at franchisee level,     political relationships and
(3) on franchisor profits from      arrangements often generating
franchising being lower than        considerable political friction,
those from operating outlets.       disharmony, unhealthy and
                                    unnecessary competition and
                                    transaction costs; (2) the ease
                                    of implementing State
                                    parliamentary party led change at
                                    LED level; and ... (3) overall
                                    State-level Parliamentary seats
                                    and votes being lower than the
                                    number of Parliamentary seats and
                                    votes gained from central control
                                    of LEDs, their operations and

* Recognising the right policies    * Recognising the right policies
to manage a franchise system are    to manage a franchise system in
different to those used in          the LEDs are different to those
divisionalized company-owned        based on centralised campaigns
outlets, in as much as              enforced at LED level, in as much
franchising is based on contracts   as franchising is based on agreed
with franchisee owner-operators     outcomes with LED members and
that involves, on the one hand,     trade unions that are based on
imposing detailed provisions that   cooperation and trust. As such,
control/direct franchisee           we see a necessary reliance on
behaviour, perhaps as an            competence and goodwill trust
indication of lack of trust,        rather than contractual trust
whilst also favouring long-term     (Davenport et al., 1999).
contracts that imply trust in the
franchisee. As such, we see an
initial reliance on contractual
trust rather goodwill trust
(Davenport et al., 1999).

* Identifying the right balance     * Identifying the right balance
of support to individual            of support to LEDs, in the form
franchisees, in the form of         of training and centralised
training and centralised            marketing, logistics and
marketing, purchasing and           communication systems, to operate
inventory systems, to operate       effectively without building
their businesses effectively        dependence or incurring
without building dependence or      unnecessary costs.
incurring unnecessary costs.

* Developing the right strategies   * Developing the right strategies
towards franchisee territorial      towards extending autonomy to
expansion and to franchisor         other LEDs within the State, and
system expansion.                   expansion to other States.

* Pricing the franchises            * Valuing the LEDs appropriately
appropriately to ensure             to ensure LEDs and Trade Unions
franchisees are motivated by        are motivated by potential
rewards, and that the franchisor    rewards, ie votes and
remains viable.                     parliamentary seats, and then
                                    political influence and power.

* Understanding the legal and       * Understanding the political and
institutional environment of        institutional consequences of
franchising.                        granting relative autonomy to
                                    affiliated LEDs.

Derived substantially and adapted from Shane (2005)
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Author:Davies, John
Publication:International Journal of Business, Marketing, and Decision Sciences (IJBMDS)
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Date:Sep 22, 2015
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