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PATRICK J. KAUFMANN
Boston University
RAJIV P. DANT
Boston University
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 denitions 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 denitional 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. Specically, four areas are examined: the franchisors role in creating an innovative concept, the franchisees role in bringing the franchisors concept to new markets, the franchisees 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. 1998 Elsevier Science Inc.
EXECUTIVE SUMMARY
INTRODUCTION
When the premier entrepreneurship journal devotes three successive special issues to franchising, it begs the question: What is it about franchising that uniquely qualies it
Address correspondence to Patrick J. Kaufmann, Boston University, School of Management, Boston, MA 02215. The authors thank Candida G. Brush (Boston University), Scott Shane (Massachusetts Institute of Technology), and S. Venkataraman (Rensselaer Polytechnic Institute) for providing helpful suggestions on earlier drafts of this article. Patrick J. Kaufmann is a Professor of Marketing, and Rajiv P. Dant is an Associate Professor of Marketing at Boston University and currently a Visiting Associate Professor of Marketing at Sloan School of Management, Massachusetts Institute of Technology. This essay was written while Patrick Kaufmann was on the faculty of Georgia State University.
Journal of Business Venturing 14, 516 1998 Elsevier Science Inc. All rights reserved. 655 Avenue of the Americas, New York, NY 10010
as an entrepreneurial activity? To some, the connection seems so natural that the association between franchising and entrepreneurship is often formally institutionalized within universities by placing franchising centers within entrepreneurship centers or institutes. To others, franchising is the antithesis of innovation, represents the lamented homogenization of our commercial culture, and is singularly responsible for the lack of variety in a number of retail sectors. In fact, the efciency and scale economies of the competing franchise chain are sometimes seen as the instruments of destruction for budding retail entrepreneurs. Clearly, these opposing viewpoints reect a divergence of denitions, as well as values. Unfortunately, the literature provides a somewhat contradictory set of denitions of entrepreneurship. This is not surprising. Entrepreneurship is a multifaceted phenomenon and cuts across many disciplinary boundaries (e.g., management, economics, sociology, marketing, finance, history, psychology, social anthropology, etc.). Consequently, entrepreneurship researchers have pursued a wide range of goals, adopted different units of analysis, and espoused diverse theoretical perspectives and methodologies (Low and MacMillan 1988). Further, entrepreneurship entails a complex set of contiguous and overlapping constructs like management of change, innovation, technological and environmental turbulence, new product development, small business management, individualism, and industry evolution (Low and MacMillan 1988). Needless to say, the above have rendered denitional consistency and conciseness an elusive goal. In this essay, we review and categorize some of the more familiar denitions of entrepreneurship. We then describe the specic domain of franchising research and relate it to those various perspectives on entrepreneurship. We end by suggesting some questions and issues in entrepreneurship that might be uniquely explored within the franchising context.
been complicated by two other developments. First, denitions of entrepreneurship have been expanded to include noncommercial endeavors. For instance, Amit, Glosten, and Muller (1993) note that entrepreneurs are often categorized into those who are prot-seeking, either working individually or in a corporate setting, and those who are not prot seeking, working in charitable, government and other not-for-prot organizations (e.g., universities). Second, new denitions have been offered for entrepreneurs that do not include the creation of a new and innovative enterprise. For example, Shane and Cable (1997) dene entrepreneurs as individuals who receive their compensation in the form of residual claimancy on the proceeds of a rm and who also have operating control of an organization. Relatedly, the construct of corporate entrepreneurship has been introduced in the literature to capture entrepreneur-like activities or traits of ongoing rms (e.g., aggressive pursuit of opportunity, capacity for renewal and change through exibility and adaptation, promotion of innovation and creativity, and risk-taking propensity; cf. Lumpkin and Dess 1996). However, it can be argued that the construct of corporate entrepreneurship is not particularly helpful because it merely underscores the signicance and relevance of managerial proactiveness in an increasingly competitive marketplace and does not add any new dimension to managerial responsibilities. Nonetheless, the implication of these changes is the breakdown of the traditional demarcation between ownership, professional management, and entrepreneurship.
An entrepreneur is an individual who possesses qualities of risk-taking, leadership, motivation, and the ability to resolve crises (Leibenstein 1968). Entrepreneurs are leaders and major contributors to the process of creative destruction (Schumpeter 1942). An entrepreneur is an individual who undertakes uncertain investments and possesses an unusually low level of uncertainty aversion (Knight 1921).
Although some scholars have suggested psychological proling as a useful tool in entrepreneurial research (Brockhaus 1982; Perry 1990; Shaver and Scott 1991), as Amit, Glosten, and Muller (1993) point out, it is simply not known at the present time whether there is an essential set of entrepreneurial characteristics and, if so, what that set may be. Other traits like creativity, adaptivity, technical know-how, vision and leadership ability, managerial and organizational skills, ability to make decisions quickly and to act in a rapidly changing and uncertain environment, personal integrity, a range of cognitive decision-making biases, specic categories of cultural characteristics, and educational background may also be associated with successful entrepreneurs. It would appear that
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there is a tendency in this literature to personify entrepreneurs as embodiments of all that may be desirable in a business person, and almost deify entrepreneurs in the process. Further, these traits may not be observable ex ante and may be impossible to separate from luck and other extraneous factors post hoc (Amit, Glosten, and Muller (1993). Similarly, a post hoc approach is problematic from a self-selection perspective (i.e., only the successful and the survivors may be available for observation, creating, by analogy, a sort of a Type II error). Finally, some of these traits may not be unique to entrepreneurs (e.g., risk-taking propensity is likely to exist in proactive managers as well), raising a demarcation problem (Amit, Glosten, and Muller 1993).
Process Perspective
Entrepreneurship is the creation of new enterprise (Low and MacMillan 1988). Entrepreneurship is the creation of new organizations (Gartner 1985). Entrepreneurs introduce new combinations of the factors of production (land and labor) that, when combined with credit, breaks into the static equilibrium of the circular ow of economic life and raises it to a new level (Schumpeter 1934). Entrepreneurship is the process of extracting prots from new, unique, and valuable combinations of resources in an uncertain and ambiguous environment (Amit, Glosten, and Muller 1993).
However, if indeed entrepreneurship is an exceptional and discontinuous changeinducing activity in the Schumpeterian sense of the term, the goal of predicting, packaging, and specifying that process is necessarily an illogical exercise. In effect, entrepreneurs may pursue essentially idiosyncratic paths to the creation of new enterprise. Hence, under this view, research into entrepreneurship would, by necessity, be conned to retrospective anecdotal analysis of the results of that process.
Activities Perspective
An entrepreneur performs one or more of the following activities: (1) connects different markets, (2) meets/overcomes market deciencies, (3) creates and manages time-binding implicit or explicit contractual arrangements and input-transforming organizational structures, and (4) supplies inputs/resources lacking in the marketplace (Leibenstein 1968; Amit, Glosten, and Muller 1993). Entrepreneurship is the purposeful activity to initiate, maintain, and develop a prot-oriented business (Cole 1968). Entrepreneurs perceive prot opportunities and initiate actions to ll currently unsatised needs or to do more efciently what is already being done (Kirzner 1985). Entrepreneurs are residual claimants with operational control of the organization (Shane and Cable 1997).
This group of denitions suffers from the same problem associated with the process perspective denitions, i.e., if entrepreneurs are true mavericks and their activity truly novel, it may be impossible to specify and predict even the general categories of activities that comprise the phenomenon, either as it relates to the creation of, or the operational control of, an enterprise. Certainly, one could not specify a mandatory list of such behaviors. Without such specicity of trait, process, or behavior, however, we seem to be reduced to dening entrepreneurship as a personal quality that is manifested by an individual engaging in entrepreneurial activity, which in turn is dened as the activities of a unique individual we call an entrepreneur. Even if the act of engaging in entrepreneurial activity is adopted as the basis for labeling a person an entrepreneur, it would still be necessary to specify the time horizon implied by that label. In other words, is being an entrepreneur more like being a current student or like being a college graduate? Should the status be dependent on current
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activity or on past accomplishment? Was Ray Kroc an entrepreneur for his entire career at McDonalds or did he eventually become a manager (albeit a very good one)? What can we say about a once entrepreneurial rm when the traits of so-called corporate entrepreneurship begin to diminish? In other words, even if we accept the notion of corporate entrepreneurship as analogous to the notion of individual entrepreneurship (which is by no means a settled issue), for how long should a rm be termed entrepreneurial if its corporate culture has begun to change signicantly? Pragmatically, the precise specication of that critical breaking point may itself be an impossible exercise. To summarize, although some common themes are discernible in these denitions (i.e., acts of innovation and risk-taking behaviors or the willingness to engage in those acts appear central to most conceptualizations of entrepreneurship), consensus about the construct of entrepreneurship remains elusive. The diversity of conceptualizations of entrepreneurship used by various scholars has led some to suggest that, like leadership, the term entrepreneurship may be too imprecise a concept to dene tightly (Low and MacMillan 1988). Recently, Venkataraman (1998) has argued for consciously and overtly abandoning the pursuit of denitional standardization as a futile endeavor. Instead, he advocates reaching a consensus on the distinctive domain of entrepreneurship research (i.e., the subject matter or the ontology that would set the entrepreneurship eld distinct from other elds of management). His own prescription is that entrepreneurship as a scholarly eld should seek to understand how opportunities for prot are discovered and exploited, by whom, and with what consequences. Interestingly, his suggestion can be viewed as accommodating all three categories of denitions discussed above: how (action), by whom (traits), and consequences (process). In this essay, we adopt Venkataramans approach to understanding entrepreneurship and examine the distinctive domain of entrepreneurial research that is contributed uniquely by franchising. In doing so, it becomes clear that all three of his questions take on unique meaning within a franchising context. We also adopt a dynamic perspective to entrepreneurship that suggests a temporal limit on entrepreneurship and distinguishes its research domain from that of management. In other words, we see entrepreneurship focusing on the creation of a new enterprise, not to the ongoing process of proactively managing the extant organization.
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presents a unique domain for the study of retailing entrepreneurship in general, and franchising entrepreneurship in particular.
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are more likely to be conned to local areas, distance matters for both destination oriented and impulse purchases (Ghosh and McLafferty 1987). The rubric of location, location, location reects the most consistent truth in retailing: the demand that can be attracted and satised by any one site is nite. To grow, retailers must open new outlets. The geographical dispersion implicit in retail growth creates pressure on the entrepreneurs capacity to control his or her organization (Norton 1988). It also suggests that unlike manufacturing where expansion may occur within the same production concept, retail expansion occurs in a constantly changing environment. As much as the retail entrepreneur may try to nd analogous locations to successful sites, all locations are ultimately unique on some dimension. Retail expansion, therefore, is by its nature a continuous entrepreneurial activity. Long after the initial creation of the retail concept, each new location offers unique challenges, each new outlet creates unique risks. To complicate the issue, the risk associated with successfully opening and operating each outlet is not separable, but is borne in part by all of the other outlets in the system. This interdependence of risk is due to the generalization of the systems image from one unit to the others and the detrimental impact of an obviously unsuccessful (possibly boarded-up) outlet on that image. When retailing entrepreneurs reach the limits of their capacity to efciently monitor and control the increasing number of geographically dispersed retail outlets, they often turn to franchising to create the incentives necessary to align the new store managers (i.e., franchisees) interests with their own (Rubin 1978). Franchisees become the engines of expansion for the chain, opening new markets, nding new pockets of demand, and assuming the risk associated with that activity (i.e., becoming the operating residual claimants envisioned by Shane and Cable 1997). In this way, franchisees become partners in the entrepreneurship of the retail franchisor, creating a distinct form of entrepreneurship (typically an individual-based concept) that can be labeled entrepreneurial partnership. This entrepreneurial partnership is another unique feature of franchising worthy of investigation within the distinctive research domain of entrepreneurship.
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theory (Rubin 1978). Franchising solves the problem of shirking that exists because the franchisor cannot directly and efciently monitor the widely dispersed retail outlets that comprise the chain. By providing the franchisee with claims to the prots and having the franchisee post a forfeitable fee, the incentives of both parties come into alignment. It is this quasi-independence that allows the franchisee to claim a share in the title of entrepreneur. Whereas franchisees are expected to be proactive in taking advantage of local opportunities, employee store managers with similar local market expertise face much more severe hierarchical constraints on their activity. Are franchisees unconstrained in their entrepreneurial activity? No, but then no entrepreneur is unconstrained. All environments constrain entrepreneurship. In franchising, because of each franchisees potential impact on the investment of the other franchisees and the franchisor, maintenance of the franchisors core concept is critical. Nevertheless, franchisees often have wide latitude in developing unique ways of marketing that concept in their particular location. One last point, the franchising literature suggests that although partners with very different roles in the process of retailing entrepreneurship, franchisors and franchisees may have a great deal in common. Research has demonstrated that franchisees are very similar in orientation and background to those entrepreneurs who start their own independent business, and that they often consider both courses before doing one or the other (Kaufmann and Stanworth 1995; Peterson and Dant 1990). In fact, there are a number of examples of franchisees who eventually become franchisors by developing other concepts (e.g., Apple South). The study of the franchisees decision process and why franchising is chosen over the creation of an independent enterprise, therefore, represents an additional unique franchising-related research topic within the general domain of entrepreneurship research.
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unit ownership for just that reason (Kaufmann and Lafontaine 1994). Other studies indicate that multi-unit operators are surprisingly content to concede to franchisors requests and accept their advice, perhaps because they encounter the same management issues as their principals (i.e., franchisors), which serves to further strengthen their incentives alignment (Dant and Gundlach 1998; Dant and Nasr 1998). At any rate, when local market innovation is particularly important to the success of the system, franchisors are more likely to seek this type of partner. This preference is especially seen in the prevalence of this form of organization in international franchising (Dant and Nasr 1998). The franchisors choice of particular types of partners in the entrepreneurial process, therefore, is another area in which franchising research can provide more useful insight into entrepreneurship. On the other side of the equation, as a franchisee, committing oneself to a (sometimes) onerous area development contract involves signicantly more risk than buying the franchise rights to a single unit. Who these area developers are and how they analyze the prot potential of various types of franchise offerings is another avenue of inquiry that also should be interesting to mainstream entrepreneurship researchers.
CONCLUSIONS
Like entrepreneurship in general, franchising is a vital sector of the U.S. economy. Franchising accounts for about one-third of all U.S. retail dollars (U.S. Department of Commerce 1988) and is one of the best sources of data on new business ventures. Franchising is also an area of entrepreneurial activity with strong public policy benets. It does not export American jobs. It does not create future overseas competitors (i.e., parties that export back to the United States, contributing to the trade decit). Hence, revenues generated by overseas franchising royalties are a great source of foreign exchange earnings with no strings attached. Finally, franchising is increasingly evident in nontraditional sectors; for example:
In telecommunications (e.g., franchise systems of National Telecommunications of Bloomeld, NJ; Voice-Tel Enterprises of Cleveland, OH), In nancial planning, business consulting, and entrepreneurial advising (e.g., franchise systems of Creative Asset Management of Iselin, NJ; International Mergers & Acquisitions out of Scottsdale, AZ; American Institute of Small Business of Minneapolis, MN), In medical and dental products and services (e.g., franchise systems of Miracle Ear of Golden Valley, MN; Americare Dental Centers USA of Phoenix, AZ; American Vision Centers of NY, NY), In travel and transportation services (e.g., franchise systems of Cruise Holidays International of San Diego, CA; TPI Travel Services of Tampa, FL; Air Brook Limousine of Rochelle Park, NJ), and On the Internet (e.g., franchise systems of Z Land of Santa Anna, CA; and First Internet Franchise Corp of San Clamente, CA.)
In sum, franchising provides a unique and fertile setting for research in entrepreneurship: franchisor as entrepreneur, franchisee as entrepreneur, and the franchise relationship as an entrepreneurial partnership. In particular, the who, how, and with what result domain of entrepreneurial research applied to franchising reveals a myriad of
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unique research possibilities. It is our hope that both entrepreneurship scholars and franchising scholars increasingly will see the benets of this intersection.
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