The purpose of this dissertation is to focus on franchising and to examine, if franchising is a good strategy for a company operating throughout Europe. In order to find an answer to this question further sub-tasks have to be researched. It will identify the characteristics of the franchise system and its advantages and disadvantages. Furthermore, why franchising is a useful hybrid organisational form for organisations to entry, be in business and to expand without enormous financial resources. Moreover, criteria in terms of transaction costs and resource scarcity will be explained.
Once a company decides to go abroad and to target a certain European country, it has to develop and determine a strategy to enter the new market. There are several methods a company can use, for example indirect, exporting, direct exporting, licensing, franchising, joint ventures, direct investment and informal networks. Considering as a case study the corporate strategy of the Italian company Benetton, it will be analysed, if franchising is a successful mode to be used in business and to expand throughout Europe. Here is to be added that the analysis of the franchise system of Benetton will occur exclusively through the selection of the most important characteristics of a franchising strategy highlighted in chapter three. An extension of this selection would go beyond the scope of this project.
The dissertation consists of (including this introduction chapter one) six chapters. Chapter two encompasses the theoretical framework. Here, agency theory and transaction costs analysis will be explained. The agency theory will be used to explain the business relationship between franchisor and franchisee. Coase developed in 1937 the transaction costs analysis which was further developed by Williamson (Williamson and Masten 1999, p.181), however, this approach could explain the importance for organisations to find the suitable coordination structures, whether be it vertical integration, non-vertical integration, or a hybrid form that includes elements of both. Furthermore, the agency theory and the transaction costs analysis will be applied to franchising. Accordingly, franchising as a hybrid organisational form will be explained in detail.
In chapter three the trend of franchising in Europe will be analysed and the international franchise concept with its advantages and disadvantages will be explained. This involves the master franchising.
Table of Contents
1 Introduction
2 Agency theory and transaction costs theory
2.1 Agency theory
2.2 Information asymmetry
2.2.1 Adverse selection
2.2.2 Moral hazard
2.2.3 Moral hazard with hidden action
2.2.4 Moral hazard with hidden information
2.2.5 Moral hazard in teams
2.3 Agency theory and franchising
2.4 Transaction costs theory
2.4.1 Dimensions of transactions
2.4.3.1 Uncertainty/complexity
2.4.3.2 Asset specificity
2.4.3.3 Frequency
2.4.2 Hierarchy, market and hybrid forms
2.4.3 Transaction costs and franchising
3 International franchising
3.1 Cooperative international strategy through the basis of contracts
3.2 Advantages of international franchising
3.3 Disadvantages and problems of international franchising
3.4 Master franchising
3.5 Franchising in Europe
4 Case study – Benetton
5 Analysis and evaluation
6 Conclusion
7 Appendix
7.1 Appendix 1: Utility curve for the cost of symmetric information
7.2 Appendix 2: Asset specificity and uncertainty/complexity determine governance structure
7.3 Appendix 3: European Franchising Statistic 1994 and 1997
8 References and Bibliography
Research Objectives and Core Themes
This project examines whether franchising constitutes an effective strategic model for companies expanding throughout Europe, using the Benetton Group as a focal case study to evaluate theoretical implications in real-world business environments.
- Theoretical application of Agency Theory and Transaction Costs analysis.
- Benefits and challenges of international franchising as a hybrid organizational form.
- Analysis of Benetton's international expansion and distribution strategies.
- Evaluation of franchising as a tool for managing market entry and brand reputation.
Excerpt from the Book
2.1 Agency theory
Agency theory describes the relationship of at least two parties who agree to work together. One party called the principal (e.g. manager) who delegates work to another party naming agent (e.g. subordinate). The relationship of the principal and agent can be both explained in mathematical models or it can be descriptive. (Jensen and Meckling 1976) This dissertation will focus on a descriptive explanation. It should be taken into account that because of the numerous agency relations within an organisation, it depends on who is principal and who is an agent (e.g. between shareholder and manager, voters and politicians, shareholder and management, and patients and physicians, etc.). (Douma, S., Schreuder, H. 2002, p.109) Because of the divergent preferences and objectives it is attempted to form contracts to stimulate the parties to yield commonly results. However, there is still a definition problem due to the law of incomplete contracts. (Jensen and Meckling 1976), (Sashi, Karuppur, 2001, p.509) and (Brousseau, Glachant, 2002, p.251)
Summary of Chapters
1 Introduction: Outlines the research purpose, focusing on the viability of franchising as an international expansion strategy.
2 Agency theory and transaction costs theory: Explores the theoretical framework regarding principal-agent relations and transaction cost economics.
3 International franchising: Analyzes the concepts, benefits, and drawbacks of franchise models within a European context.
4 Case study – Benetton: Provides an overview of the Benetton Group's profile and its specific approach to the casual clothing retail market.
5 Analysis and evaluation: Evaluates Benetton’s strategic use of franchising and its shift toward corporate-owned mega stores.
6 Conclusion: Synthesizes the findings, confirming that while franchising is useful, firms often require multiple organizational strategies for success.
Keywords
Franchising, Agency Theory, Transaction Costs, Benetton, Europe, Internationalization, Hybrid Organizational Form, Market Entry, Information Asymmetry, Moral Hazard, Opportunism, Vertical Integration, Brand Management, Retail Industry.
Frequently Asked Questions
What is the core focus of this dissertation?
The dissertation investigates whether franchising is a suitable and successful strategic approach for companies looking to expand their operations throughout European markets.
What are the primary theoretical frameworks applied?
The work primarily employs Agency Theory to address principal-agent relationships and Transaction Cost Theory to explain the choice of different organizational structures.
What is the main research question?
The research asks if franchising is a robust strategy for a company operating throughout Europe, specifically evaluating how this mode influences growth, costs, and control.
Which research methodology is utilized?
The author uses a qualitative research approach, integrating theoretical literature reviews with a specific case study of the Benetton Group to evaluate strategic efficacy.
What is discussed in the main body of the work?
The main body explores the theoretical underpinnings of contracts, the general advantages and risks of international franchising, and a detailed analysis of Benetton's evolution from a pure franchise model to a more diversified retail approach.
Which keywords best describe the paper?
Key terms include Franchising, Agency Theory, Transaction Costs, Benetton, Internationalization, Market Entry, and Brand Reputation.
Why did Benetton incorporate mega stores into their strategy?
Benetton shifted toward self-owned mega stores to maintain better control over brand image, protect against franchisee opportunistic behavior, and ensure direct presence in major metropolitan markets.
What role does information asymmetry play in the franchise relationship?
Information asymmetry leads to potential "free riding" and goal conflicts between franchisors and franchisees, necessitating well-designed incentive structures and rigorous monitoring to minimize transaction costs.
- Quote paper
- Christine Klock (Author), 2004, Franchising a good strategy for a company operating throughout Europe - Case study Benetton -, Munich, GRIN Verlag, https://www.grin.com/document/32010
