Strategic franchising decision and pricing of franchise rights by Philippine franchisors

Franchising has gained such an important foothold in Philippine business that a study on franchising behavior of Philippine franchisors is warranted. Because of its unique dual distribution (Alchian & Demstez, 1972 Blair & Kaserman, 1983) and principal-agent business structures ((Rubin, 1978 Norton 1988 Lafontaine & Shaw, 1992 Jensen & Meckling, 1976 Bergen, Dutta & Walker 1992), franchisors have to confront dual objectives to maximize profits and sustain the franchisor-franchisee relationship. To achieve these business objectives, franchisors have to deal with obstacles, specifically franchisee shirking (Norton, 1988 Rubin, 1978) and business uncertainties arising from information asymmetry and a changing business environment (Casson, 1982 Shane & Cable, 2002). These objectives and obstacles define the strategic behavior of franchisors in two areas: (1) the strategic franchising decision, or managing a portfolio of company-owned and franchised outlets (Scott, 1995 Bradach, 1998 Lafontaine & Shaw, 1999) and (2) pricing of franchise rights ((Lafontaine & Shaw, 1999 Kaufman & Dant, 2001). To maximize profits, reduce uncertainty, and minimize shirking, the strategic franchising decision can involve one or a combination of considerations: resource acquisition (Oxendeldt & Kelly, 1969 Hunt, 1973), achievement of scale efficiencies, and reduction of transaction costs (Caves and Murphy, 1976 Dant, 1995) and agencyrelated costs (Norton, 1988 Rubin, 1978 Marnburg, Larsen & Ogaard, 2004), specifically monitoring and organizational costs. In pricing franchise rights, franchisors consider pro-competitive pricing (Alchian & Demsetz, 1972 Kaufman & Dant, 2001) and exploitation of demand externalities (Lafontaine & Blair, 2005 Shane, Shankar, & Aravindakshan, 2006), brand equity valuation, indicative value signaling (Lafontaine & Kaufman, 1994 Lafontaine & Shaw, 1999 Shane, Shankar, & Aravindakshan, 2006), and extraction of downstream rents (Rubin, 1978 Mathewson & Winter, 1985 Lal, 1990). Out of 266 franchisors in the country, a survey of 86 franchisors representing the membership status of the companies (i.e., PFA, AFFI and non-members) and their iv De La Salle University Strategic Franchising Decision and Pricing of Franchise Rights by Philippine Franchisors sectoral representations (i.e., food, retail and services) was conducted. Cross tabular analysis was used, as well as statistical regressions using ordinary least squares and, where heteroskedasticity and non-normality in error distribution were present, weighted generalized least squares. Statistical tests were used to evaluate the regressions robustness in terms of their consistency with the operational framework of the study and the collinearity and characteristics of the errors or variances. The study showed that Philippine franchisors exhibit an integrative approach in making their franchising decision, and that the franchising decision is most frequently directed toward resource acquisition, achievement of scale economies, and reduction of transaction and agency costs. The study also specifically revealed that sampled firms expand concentrically starting in areas close to their existing center of operation. Moreover, the study indicated that international expansion by Philippine franchisors may be due to saturation in the domestic market. The study further showed that, together with pro-competitive pricing and exploitation of demand externalities, Philippine franchisors also take into account the valuation of their brand equity and value-signaling factors in pricing their franchise rights. In the course of the survey, an interesting profile of Philippine franchisors was formed, showing that: most franchisors belong to the food sector; franchising is adopted by firms of various sizes, even micro-enterprises; regardless of asset size, franchisors tend to own less than half of their outlets; small-scale firms tend to franchise earlier than larger firms and have less experience in franchising than larger companies; and that charging of franchise rights or fees is the dominant practice over charging of royalty rates. The study recommends the study of other motives behind the franchising behavior of Philippine firms like considering the role the franchisees motivations, ownership or control modes of the firms and the simultaneity of price and non price factors in franchising decisions