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Business Intelligence Journal
FRANCHISING AND ORGANIZATIONAL PERFORMANCE:
EMPIRICAL INVESTIGATION OF SELECTED FAST FOOD
RESTAURANTS IN NIGERIA
July
Olu Ojo
Department of Business Administration College of Management
and Social Sciences Osun State University
P. M. B. 2008, Okuku
Osun State, Nigeria
Email: [email protected]
I. A. Irefin
Technology Planning And Development Unit Obafemi Awolowo University
Ile-Ife, Osun State, Nigeria
Email: [email protected]
Abstract
This study tries to gain insight into the relationship between franchising and organizational performance using selected fast food
restaurants in Nigeria as case study. It specifically investigates the effects of franchising types and franchising ownership on organizational
performance. This research work was undertaken in order to fill the existing gap in literature with regards to the effects of franchising
types and franchising ownership on organizational performance. Thus, this study will add to the existing level of understanding on
the subject of investigation and add to the existing literature on the subject especially in underdeveloped countries where such study
is not popular. The survey research design was employed. Primary data were used and they were collected through the administration
of question to our respondents. Data collected were analyzed using descriptive method and simple percentage. Three hypotheses were
advanced and tested with the aid of correlation coefficient. The findings show that there is positive relationship between franchising types
and organizational performance and that positive relationship also exists between franchising ownership and organizational performance.
The author concludes by saying that franchising as a business form is fast becoming the in thing in Nigerian business arena and it is
therefore a good investment opportunity for upcoming entrepreneurs. Key words: Franchising, business organizations, franchising
relationships, organizational performance, franchising types, and franchising ownership.
Franchising occupies a prominent position in
contemporary business world and increasingly provides a
common channel for firm growth, entrepreneurial wealth
creation, and national development. In a competitive
market each business organization must strive to sell its
products and/or services by creating a competitive edge
over its competitors via multi product development, price
variation and market segmentation.
The various franchising types have their cost and benefit
owing to product differentiation, creation and affiliation
requirements and therefore, the most suitable type to be
chosen by various interested parties becomes critical.
Therefore people seek to find the most suitable and most
productive for their franchise business that will yield returns
and improve quality and effectiveness in a competitive
environment. The ownership of the franchise relationship
is also very important. Countries with centralized and rigid
organizational system like France and China will prefer
that ownership be given to the franchisee and royalties be
paid to the franchiser periodically and this could lead to
lower quality levels or higher prices in franchised outlets.
The other which is ownership with the agent, will also
increase contracting cost and thus costlier to write contracts
and enforce, than those with employed managers by the
franchiser. Therefore, this conflict in the moderate, total and
even non ownership of the franchise by either the principal
or the agent has become a problem to be solved.
Based on the above research problems, this study is
expected to provide answers to the following questions:
(i) How does franchising types affect the performances of
Business Intelligence Journal - July, 2011 Vol.4 No.2
Olu Ojo, I. A. Irefin
2011
both the franchiser and franchisee? (ii) Does franchising
ownership model have effect on return on investment of
the franchiser and franchisee? And (iii) What is the effect
of franchising relationship on organizational performance?
In order to answer the above research questions, the
general objective of this research is to explore the extent
to which franchising relationship can affect organizational
performance. The specific objectives of this study are
(i) To examine the effect of franchise types on franchise
performance within a highly competitive environment. (ii)
To ascertain ownership models of franchising relationship
towards organizational performance. And (iii) To examine
the effect of franchising relationship on organizations
performance.
Franchising has received a great deal of attention over
the past few years. Despite the plethora of research on
franchising, some important gaps exist in our understanding
of this important organizational form. Although some
studies provide a useful starting point for research, there
are other factors associated with success that are unique to
franchising that should be considered. These include the
effect of franchising types on the performances of both
the franchiser and franchisee, and the effect of franchising
ownership model on the return on investment of the
franchiser and franchisee?
A number of studies provide support for the assumption
of greater franchise success (for example, Castrogiovanni,
Justis, and Julian 1993; Justis, Castrogiovanni, and Chan
1992). However, other recent studies are critical of this
position and argue that franchises exhibit higher rates of
firm discontinuance and lower mean profitability than
independent businesses (Bates 1995). To date the evidence is
mixed. Because of these contradictory results, the question
of whether franchising type and franchising ownership
improves or worsens franchising performance is still worthy
of further research such as the one undertaken in this study.
Besides, most of the existing studies on franchising were
conducted in developed countries using archival data. This
means that there is a major gap in the relevant literature on
developing and underdeveloped countries in which Nigeria
rightly belongs to that has to be covered by research. This
research tries to fill this gap by studying the situation of
Nigerian fast food industry and providing more empirical
evidence on franchising performance.
Literature Review
A number of strategies are available to the entrepreneur
for the expansion of his venture. However, one of these
321
strategies that are commonly ignored by entrepreneurs
in the new venture expansion is franchising (Ojo, 2008).
Although, franchising is a remarkable organizational
form, in the common economic parlance, it is a hybrid
organizational form of business ownership (Ojo, 2009).
Different definitions have been given to franchising by
different people over time. Hisrich, Peters and Shepherd
(2005) see franchise as a form of new entry that can
reduce the risk of downward loss for the franchise. They
see franchising as an alternative means by which an
entrepreneur may expand his or her business by having
others pay for the use of the name, process, service etc. It
can be used as a growth mechanism by the organization
(i.e. franchiser).
Franchising dates back to at least 1850’s; when Isaac
Singer, who made improvements to an existing model of a
sewing machine, wanted to increase the distribution of his
sewing machines. His efforts, though unsuccessful in the
long run, was among the first franchising effort in the United
States. Slightly later, yet much more successful, example
of franchising was John Pemberton’s franchising of Cocacola. Early American examples include the telegraph
system, which was operated by various railroad companies
but controlled by western union, an exclusive agreement
between automobile manufactures and operators of local
dealership. Modern franchise came to prominence with the
rise of franchised-based food service establishments. This
trend started as early as 1919 with quick service restaurants
such as A&W Root Beer. In 1935, Howard Deering
Johnson teamed up with Reginald Sprague to establish
the first modern restaurant franchise. The idea was to let
independent operators use the same name, food, supplies,
logo and even building design in exchange for a fee. The
growth in franchises picked up steam in the 1930”s when
such chains as Howard Johnson started franchising motels.
The 1950”s saw a boom of franchise chains in conjunction
with the development of Americans interstate highway
system. Fast food restaurant, motel chains exploded. In
regards to contemporary franchise chains, Mc Donald’s
is arguably the most successful worldwide with more
restaurant units than any other franchise network (IkeOkoh, 2006).
Business format franchising, a type of franchise in 19th
century, took off in 1850’s.
Business format franchising is the form of franchising
most commonly associated with the franchise concept
(Alon, 2004). A franchiser licenses an entire way of doing
business under a brand name. This variety of franchising
is prevalent in accounting services, auto accessories, auto
Ojo O., Irefin I. A. - Franchising and Organizational Performance: Empirical Investigation of Selected Fast Food Restaurants in Nigeria
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Business Intelligence Journal
rentals, campgrounds, cleaning systems, fast food, food
retailing, motels/hotels, real estate, and schools. Business
format franchising involves packaging a mode of business,
attracting a supply of capable and dedicated entrepreneurs,
selecting superior prospects, training them in the minute
details of the business operations, providing assistance in
setting up the business at specific outlets, and maintaining
an ongoing business that is profitable for the franchisor and
the collective franchises. The relationship entails continued
provision of beneficial services such as advertising and
new product development by the franchises and continued
provision of royalties from the franchisees to the franchisors.
Business format franchising represents a complete
package that allows the franchisee to use the format
provided by the franchiser, while retaining independence
as a business. The franchiser typically sells the franchisee
a right to use his intellectual property in return for a lump
sum payment and an annual royalty fee based on sales
for a specified period of time (Miller and Grossman,
1990). In addition, the franchisee usually agrees to adhere
to franchiser requirements for product mix, operating
procedures and site selection (Rubin, 1978). Business
format franchising is a popular example of a hybrid
organizational format that incorporates elements of both
markets and hierarchies (Williamson, 1991). It is a hybrid
alternative since the franchiser and franchisee both retain a
degree of ownership and authority over the use of the trade
name, operating procedures and the location of outlets and
contracts with independent entrepreneurs to operate the
units (Child, 1987).
Franchising as a business seems to have achieved more
respectability in the fast food industry than ever before as
some franchised brands command noticeable lead today in
terms of awareness, product strength and value. The growth
of the fast food industry in Nigeria has been energetic with
Tantalizer, Captain Cook, Sweet Sensation and Mr. Biggs
are among the most recognized franchise chains featuring
more up from market local menu. It is important to note that
the Nigerian fast food market is still in its infant stage, far
from maturity.
What May be Bought in A Franchise
According to Hisrich et al. (2005), what you may buy in
a franchise as a franchisee includes:
•
•
A product or service with established market ad
favorable market,
A patented formula or design,
•
•
•
•
•
•
July
Trade name or trade marks
Financial management system for controlling the
financial revenue
Managerial advice from experts in the field
Economies of scale for advertising and purchasing
Head office services
A tested business concept
Methods and Materials
This section describes the research methodology used
in the study. Survey research design was utilized in this
study. The theoretical population of study consists of all the
franchised fast food restaurants in Lagos State. The choice
of Lagos State stems from the fact that it is the commercial
centre of Nigeria and that overwhelming majority of
franchised fast food restaurants were concentrated in Lagos
State. The office in charge of regulating franchise business
in Lagos State reveals that there are about twenty five
(25) franchised outlets existing in Lagos State. Therefore
these franchised outlets were the theoretical population.
Our study population consists of the entire staff of 25
registered franchised fast food restaurants in Lagos State.
Both probability and nonprobability sampling methods
were used. Stratified probability sampling method was
used to classify the staff of the franchised restaurants
into three groups: lower level management, middle level
management, and top level management. Combination
of convenience and judgmental nonpropability sampling
methods were used to select our sample elements. These
methods allow a large number of respondents to participate
in the research over a short period of time (Ojo, 2003).
Primary method of data collection was used in this study.
The data consists of a number of items in structured
questionnaire that was administered to the respondents. We
also utilized 5-point Likert scale in our questionnaire. The
decision to structure the questionnaire is predicated on the
need to reduce variability in the meanings possessed by the
questions as a way of ensuring comparability of responses.
The questionnaire is titled “Franchising and Organizational
Performance Questionnaire.” Two hundred and seventyfive (275) respondents were selected for the study. However,
only 230 of them filled their questionnaire and returned it
and were used for final analysis in the study. This means
that the return rate of completed questionnaire was 83.6%.
To ensure the validity and reliability of the questionnaire
used for the study, even numbers of experts were consulted
to look at the questionnaire items in relations to its ability
to achieve the research objectives, level of coverage,
Business Intelligence Journal - July, 2011 Vol.4 No.2
Olu Ojo, I. A. Irefin
Table 3: This type of Franchising Relationship Increases profits
Cumulative
Percent
All the items in the questionnaire were analyzed.
However, only the key ones featured in this section.
Valid
Percent
Data Presentation, Analysis and Results
Table two above presents the position of the respondents
on the organizational hierarchy. The table reveals that 17.4
of the respondents are at the lower level management. The
bulk of the respondents (78.3%) are in the middle level
management, while the remaining 4.3% of the respondents
are in the top level rung of the organization. This shows the
highest responses came from the middle level managers in
the organization.
Percent
comprehensibility, logicality, and suitability for prospective
respondents. Data collected from the questionnaire were
analyzed with the aid of descriptive statistical techniques
such as total score and simple percentage, while inferential
statistics such as correlation coefficients was used to proof
the level of significance in testing stated hypotheses.
323
Frequency
2011
SD
10
4.3
4.3
4.3
D
40
17.4
17.4
21.7
U
10
4.3
4.3
26.0
100
43.5
43.5
69.5
100.0
Frequency
Percent
Valid
Percent
Cumulative
Percent
Table 1: Age Distribution of Respondents
Below 20 Years
20
8.7
8.7
8.7
A
21- 40 Years
180
78.3
78.3
87.0
SA
41 - 60 Years
30
13.0
13.0
100.0
Total
230
100.0
100.0
Age of
Respondents
Valid
Total
Valid
70
30.4
30.4
230
100.0
100.0
Source: Field Survey, 2009.
Source: Field Survey, 2009.
From the above table it can be observed that 8.7% of the
respondents fell within the age bracket of less than 20years.
Overwhelming majority of the respondents (78.3%) are in
the age bracket of 21 to 40 years. The remaining 13.0%
of the respondents are within the age bracket of 41 – 60
years. This clearly shows that the larger percentages of the
respondents are young persons in the middle of their career.
17.4
Middle Level
Management
180
78.3
78.3
95.7
Top Level
Management
10
4.3
4.3
230
100.0
100.0
Total
Valid
100.0
Cumulative
Percent
17.4
Valid
Percent
Cumulative
Percent
17.4
Percent
Valid
Percent
40
Frequency
Percent
Valid Lower Level
Management
Respondents’ Position in the
Organization
Valid
Table 4: Type of Franchising has Effect on Money Invested in
the Business
Frequency
Table 2: Respondents’ Position in the Organization
According to the table 3 above, 4.3% of the respondents
strongly disagree with the statement. 17.4% of the
respondents disagree with the statement, and 4.3% of the
respondents are undecided about the statement. Of the
remaining 73.9% of the respondents, 43.5% of them agree
with the statement and 30.4% of them strongly agree with
the statement. This indicates that majority of the respondents
are either agree of strongly agree with the statement.
SD
30
13.0
13.0
13.0
D
20
8.7
8.7
21.7
U
20
8.7
8.7
30.4
A
100
43.5
43.5
73.9
100.0
SA
Total
Source: Field Survey, 2009.
60
26.1
26.1
230
100.0
100.0
Source: Field Survey, 2009.
Ojo O., Irefin I. A. - Franchising and Organizational Performance: Empirical Investigation of Selected Fast Food Restaurants in Nigeria
4.3
4.3
D
20
8.7
8.7
13.0
U
40
17.4
17.4
30.4
A
100
43.5
43.5
73.9
SA
60
26.1
26.1
100.0
230
100.0
100.0
Total
Source: Field Survey, 2009.
Percent
Valid
Percent
Cumulative
Percent
Valid
Frequency
Table 6: Profit is Maximized when Higher Ownership is with the
Franchisee
SD
10
4.3
4.3
4.3
D
10
4.3
4.3
8.6
U
30
13.0
13.0
21.6
A
120
52.2
52.2
73.8
Cumulative
Percent
100.0
Percent
26.1
100.0
Source: Field Survey, 2009.
According to the table 6 above, 4.3% of the respondents
strongly disagree that profit is maximized when higher
ownership is vested with the franchisee. In addition,
another 4.3% of the respondents disagree with the
statement. 13% of the respondents are undecided about the
statement. However, overwhelming majority (52.2%) of the
respondents agree with the statement while the remaining
26.1% of the remaining respondents strongly agree with the
statement. Thus, we can conclude that profit is maximized
when higher ownership is with the franchisee.
Table 7: Franchising Leads to Positive Corporate Performance
Valid
In table 5 above, 4.3% of the respondents strongly
disagree that ownership by franchise agent’s increases return
on capital employed. A total of 8.7% of the respondents
disagree with the statement. 17.4% of the respondents are
undecided about the statement. 43.5% of the respondents
agree with the statement. The remaining 26.1% strongly
agree with the statement. Based on the above data, we
can confidently say that ownership by franchise agents
increases return on capital employed.
26.1
100.0
Cumulative
Percent
4.3
Total
Valid
Percent
Cumulative
Percent
10
SA
Percent
Valid
Percent
SD
Percent
Valid
Frequency
Table 5: The Ownership by Franchisee Agents Increases Return
on Capital Employed
60
230
Frequency
Table 4 above reveals that 13% of the respondents
strongly disagree that the type of franchising has effect on
money invested in the business, 8.7% of the respondents
disagree with the statement, while another 8.7% of the
respondents are undecided about the statement. Majority
of the respondents (43.5%) agree with the statement while
additional 26.1% of the respondents strongly agree with
the statement. The inference that can be drawn here is that
the type of franchising has effect on money invested in the
business if we go by the respondents’ opinion.
July
Valid
Percent
Business Intelligence Journal
Frequency
324
SD
30
13.0
13.0
13.0
D
20
8.7
8.7
21.7
U
20
8.7
8.7
30.4
A
100
43.5
43.5
73.9
SA
60
26.1
26.1
100.0
230
100.0
100.0
Total
Source: Field Survey, 2009.
Table 7 above presents the respondents feedback to the
effect of franchising on corporate performance. 13.0% of
the respondents strongly disagree that franchising leads
to corporate performance, while another 8.7% of the
respondents disagree with the statement. Another 8.7% of
the respondents are undecided about the statement. Among
the remaining respondents, 43.5% of them agree with the
statement while 26.1% of them strongly agree. Thus, we
can inferred that franchising leads to positive corporate
performance.
Testing of Hypothesis
Our three hypotheses were tested using correlation
coefficient.
Business Intelligence Journal - July, 2011 Vol.4 No.2
Olu Ojo, I. A. Irefin
2011
Hypothesis 1
H1: There is a significant relationship between franchise
types and organizational performance.
Table 8: Correlation Between Franchising Types and
Organizational Performance
Types
Pearson
Correlation
Types
Performance
1
.363(**)
Sig. (2-tailed)
N
Performance
Pearson
Correlation
.089
230
230
.363(**)
1
Sig. (2-tailed)
.089
N
230
230
(**) Correlation is significant at the 0.01 level (2-tailed).
The analysis above shows that there is a positive
correlation between the two variables: franchising types
and organizational performance [r = .363(**); N = 230],
meaning that the relationship between them is positive.
Table 9: Correlation Between Franchisee Ownership and
Organizational Performance.
Types
Performance
1
.570(**)
Sig. (2-tailed)
N
Performance
Pearson
Correlation
Hypothesis 3
H1: Franchising relationship has effect on organizational
performance.
In order to test the significant relationship between
franchising relationship and organizational performance
the Pearson product moment correlation was used. Our
data were combined and analyzed to check the relationship
and strength of the relationship between franchising and
organizational performance. The analysis is as presented
below:
Table 10: Correlation Between Franchising Relationship and
Organizational Performance
Franchising
Relationship
Pearson
Correlation
.005
230
230
.570(**)
1
Sig. (2-tailed)
.005
N
230
(**) Correlation is significant at the 0.01 level (2-tailed).
230
Types
Performance
1
.535(**)
Sig. (2-tailed)
Performance
H1: The franchisee ownership has effect on organizational
performance.
Here franchisee ownership was correlated against
corporate performance. The outcome is presented in table
9 below.
Pearson
Correlation
The analysis above shows that there is a positive
correlation between the two variables, franchisee ownership
and organizational performance [r = .570(**); N = 23],
meaning that the relationship is positively related.
N
Hypothesis 2
Owners hip
325
Pearson
Correlation
.009
230
230
.535(**)
1
Sig. (2-tailed)
.009
N
230
230
(**) Correlation is significant at the 0.01 level (2-tailed).
From the above table, the analysis shows that there is a
positive correlation between the two variables, franchising
and organizational performance [r = .535(**); N = 230),
meaning that franchising and organizational performance
are positively correlated.
In all the three instances, we accept our hypotheses.
Discussion of Findings
As said earlier, this study focused on a research into
franchising and how it affects the profits of an organization
operating it. Based on analyzed data, the findings in this
study include the followings:
i. The larger percentage (78.3) of the respondents
are young persons in the middle of their career. Their age
bracket is 21to 40 years.
ii. The bulk of the respondents (78.3%) are in the
middle level management of the organization..
Ojo O., Irefin I. A. - Franchising and Organizational Performance: Empirical Investigation of Selected Fast Food Restaurants in Nigeria
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Business Intelligence Journal
iii. Majority of the respondents either agree (43.5%)
or strongly agree (30.4%) with the statement that business
format type of franchising relationship has effect on money
invested in the business and also increases profits.
iv. In addition, 43.5% of the respondents agree while
another 26.1% of the respondents strongly agree that
ownership by franchisee agent’s increases return on capital
employed.
v. It is also discovered that 52.2% of the respondents
agree and 26.1% of the respondents strongly agree that
profit is maximized when higher ownership is with the
franchisee.
vi. Besides, 43.5% of the respondents agree and
another 26.1% of the respondents strongly agree that
franchising leads to positive corporate performance.
vii. Finally, all the three hypotheses tested reveal
positive correlation between business format type of
franchising and organizational performance, ownership
type and organizational performance, and franchising
relationship and organizational performance.
Conclusion
Recent trends in the business environment have brought
about innovative ways in which firms can take the lead
in their industry even in the face of great competitors.
The conclusion that is drawn from this study is that
organizations that are currently operating franchising
as a business arrangement are making large profits and
are gaining even stronger brand names through it. By
maintaining the same standards operated in the parent
company, in all their franchises they stand a greater chance
of maintaining their customer loyalties. Franchising is fast
becoming the thing in the business arena in Nigeria as more
and more companies are being drawn to it as a good strategy
for distributing their products and raising better awareness
for their companies.
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