Exploring Agency Theory Implications With Franchising

Dean R Manna,David P Synowka,Alan D Smith

doi:10.19030/jber.v4i4.2652

Abstract

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

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