Paper presented at the EMNet-Conference on
"Economics and Management of Franchising Networks"
Vienna, Austria, June 26 – 28, 2003
Performance of Franchising Networks:
Conceptual Framework
(Second version)
Nina Gorovaia
Frederick Institute of Technology
Nicosia, Cyprus
Tel: 00357-99651709
E-mail: ninagorovaia@yahoo.com
Abstract:
This paper works out a conceptual framework for studying the performance of franchising networks. Franchising
networks, which originally developed in the context of Western economies, are currently operating in transition
economies as well. Some franchising networks fail and some succeed. The paper views performance of networks
as a complex process of adaptation to the environment. Characteristics of networks, which appear due to the
environment, influence the drivers of performance, i.e. the factors that are responsible for the networks’ success
or failure. The paper is theoretical and makes use of different sources of evidence: empirical and theoretical
studies on franchising and inter-organisational networks. The conceptual framework is finally tested on a small
case study of two franchising networks operating in Russia.
JEL-code: Franchising Networks, Performance, Flexibility, Information Exchange, Innovation and Learning
Outline
I.
Introduction ............................................................................................................................. 3
II.
Definition of franchising networks ......................................................................................... 5
III. Institutional environment of a transition economy ................................................................. 5
IV. Performance of franchising networks ..................................................................................... 7
A. Flexibility ............................................................................................................................... 7
B. Information exchange ............................................................................................................. 9
C. Innovation and learning ........................................................................................................ 11
IV. Conceptual Framework ......................................................................................................... 14
A. Sociological and Economic Traditions of Network Research ............................................. 14
B. Economic Theories for the Study of Networks .................................................................... 16
C. Sociological Theories for the Study of Networks ................................................................ 17
D. Conceptual Framework for the study of Performance of Franchising Networks ................ 19
V.
Empirical case study ............................................................................................................. 22
VI. Conclusions ........................................................................................................................... 23
VII.
Bibliography ..................................................................................................................... 25
I. Introduction
With people waiting in line for three hours to get into the first McDonald’s restaurant opened
in Moscow in 1990, the concept of franchising was brought to Russia. After almost a decade
this concept does not sound unfamiliar any more. Lots of Western companies like
McDonald’s, Alphagraphics, Pizza Hut and MicroAge Computers as well as local Russian
companies are using franchising to enter new markets and distribute their products. Forming
franchising networks is considered to be a promising business strategy for the development of
small and medium enterprises. However, this strategy has not been fully exploited yet
(Sanghavi, 1998: 37).
The reason franchising has not been explored yet is that the operating environment of a
transition economy is significantly different from that of the Western countries. Specific
contexts of transition economies represent certain challenges for operating franchising
networks. Some of those challenges are “incompatible business practices, infrastructural
deficiencies, underestimated costs of imported ingredients, tariff barriers for input
components, the absence or misjudgement of the required demand, lower purchasing power of
the target groups etc.” (Sanghavi, 1998: 38). Another aspect is protection of industrial and
intellectual property rights which are of critical importance to franchising. Institutional and
legal environment of transition economies does not provide enough support to franchising
networks from this point of view.
We need to understand the obstacles for development of franchising networks in a
transition economy and the mechanisms adopted by franchising networks in order to
overcome those obstacles. What do franchising networks do to compensate for the lack of
legal protection? In other words, what are the characteristics the networks adopt to succeed in
the context of transition economy and how they become successful?
The objective of this paper is to elaborate conceptual framework for the study of
performance of franchising networks in different environments. This conceptual framework
should be able to explain real cases of success and failure of franchising networks operating in
different environments and offer managerial solutions how to make the network fit to operate
in a given context. Furthermore, the paper aims to suggest how to test conceptual framework
on empirical cases. In general the objective of this paper is to prepare a solid ground for the
empirical analysis of the performance of franchising networks. Although the conceptual
framework is not limited to the analysis of franchising networks in transition economies,
Russia has been chosen as an example.
The paper is organized as follows: first, the institutional environment of Russia is
reviewed. Second, the performance of networks is analysed. Factors such as flexibility,
information exchange and innovation, and learning which are responsible for the network’s
success are outlined. Finally, a conceptual framework, which combines arguments from the
economic rationalism and social embeddedness theory, is formulated. A small empirical case
study is conducted to test the conceptual framework.
II. Definition of franchising networks
Organisational networks can be defined as
“as form of economic activities that aims to achieve competitive advantages, it is
characterised by complex – reciprocal, more co-operative than competitive,
relatively stable relationships between juridically independent but economically
dependent companies” (Sydow 1992:79, trans. NG).
Under the following requirements organisational networks can be defined more precisely as
strategic networks: a network has clearly formulated strategic objectives, it is designed to
achieve competitive advantages and is managed by one or several focal companies (Sydow
1992: 81). Franchising networks belong to strategic network type, because they appear as an
outcome of intentional strategy, they consist of juridically independent companies and all the
companies have common economic objectives. These companies are usually managed by
franchisor or master franchisee. Franchising can be broadly defined, including all inter-firm
agreements in which a firm [Firm A] authorised another firm [firm B] to conduct business
using its [i.e. Firm A’s] trade or service marks as their [Firm B’s] primary means of
identification to its clients. Also included are firms with company-owned operations as a
prelude to expansion through franchising (Beilock et al, 1998).
III.
Institutional environment of a transition economy
Recent studies on franchising in Russia have indicated that the environment in Russia is
characterized by high political risks, government instability, monetary instability,
underdeveloped infrastructure, crime and corruption (Alon and Banai, 2000). Regulations in
respect to franchising are considered to be “the strongest disincentives to the establishment of
franchises in Russia possible”(Mendelsohn: 1996).
On the other hand a huge market potential, vast pool of educated, skilled labour, and an
unsaturated market are very favourable factors that attract Western companies. Alon and
Banai point out that
“…Russian market is simply too large to be ignored, but it is not without problems.
Where some see threats, others see opportunities… Political and economic risks are
attractive because they deter competition. A preemptive move into the market can
lock the competitors out in future” (2000).
Sanghavi argues that “a difficulty of importing foreign franchise systems is in their
compatibility with the local environment” (1998: 38). Franchising networks have to make
organisational, cultural, legal and other types of adaptations. With all the opportunities and
obstacles for development, franchising networks develop their own ways of doing business
and either become successful or leave the market. E.g. Pizza Hut, KFC and Dunkin’ Donuts
decided to scale back or leave the Russian market (Alon and Banai, 2000). Companies like
McDonald’s found their own way to cope with the unfriendly environment by investing in
ancillary industries, including food processing facilities, a meat plant, a bakery, a potato plant,
a dairy, and quality assurance labs (Alon and Banai, 2000). Also McDonald’s entered into a
joint venture agreement with the City of Moscow that smoothed out lots of domestic
challenges, such as strict regulatory requirements and adverse social conditions (Alon and
Banai, 2000).
Therefore, the context of transition economy pushes franchising networks in finding
innovative ways to cope with obstacles, and form specific relationships between franchisors
and franchisees in order to compensate for lack of institutional support.
IV.
Performance of franchising networks
To perform successfully franchising networks need to adjust to the specific context of a
transition economy and their market conditions. Carlsson describes a case of McDonald’s
opening its restaurants in the environment of a transition economy: “Working the system is the
only way to get things done in Russia…Western companies will never change the system. They
can only be successful if they learn how to "work the system" as McDonald's did” (1995).
The literature on networks gives account of the following factors that are responsible
for the networks’ success: flexibility in management of the network, building trust with
partners, regular information exchange with partners, constructive management of conflict,
managing partner expectation (Gulati, 1998: 306). This paper investigates in greater detail the
following factors that are responsible for the performance of the network: flexibility,
information exchange, learning and innovation.
A. Flexibility
Many organisational studies have indicated flexibility as a major property of networks.
Increasing uncertainty of the environment requires organisations to be flexible. Flexibility in
this context does not only mean capacity to change network’s output according to
contingencies but also capacity to change the organisational arrangement itself. In this sense,
networks are hypothesized to entail lower transaction costs with respect to internal
organisation – and some forms of network of being more conductive to self-change than
others.
Franchising can be a flexible form of network especially as regarding to expansion to
large territories. Since the franchisor does not have to manage franchised stores itself but
leaves that for the franchisee, it is easier to expand, especially over a large territory. Maylor
and Read (1998: 581) analyse total quality management in franchising networks and make a
point that “flatter organisational structure” contributes to better performance. When managers
experience directly capital and market pressures and when they have a personal stake in the
profitability of the firm, it is considered to be an “ideal structure for achieving excellence in
quality performance”.
Dunkin’s Donuts decided to close all the four outlets in Moscow because of its inability
to find potential franchisees and spread the network. Another example of an effect of
flexibility on performance is Baskin Robbins that is doing well in Russia because of its wellspread network of franchisees (Alon and Banai, 2000).
What characteristics of networks contribute to higher flexibility?
Authority structure - decreasing of hierarchical levels, assignment of all control tasks to the
lowest organisational levels, less control by the owners, decentralisation, concentration of
decision making in a small group of top-executive directors contribute to higher flexibility.
Longevity of co-operation - Long-term contracts and long-term relationships with suppliers
can achieve many of the same cost benefits as backward integration without calling into
company’s ability to innovate or respond to innovation. Long-term contracts with independent
companies ensure continuous production/distribution process, while the focal company enjoys
cost benefits, higher flexibility and runs less risks. On the other hand, in the environments
characterised by high uncertainty, backward integration provides more security.
Size of the companies - Empirical investigations have shown that large enterprises, organised
as alliances of smaller companies can achieve higher flexibility and efficiency than singleplant enterprises. Semlinger (1993:166) explains this phenomenon by the fact that larger firms
are often unable to turn higher efficiency into greater profitability. Big companies usually
have higher wage and non-wage labour costs, higher administrative costs, more social
obligations.
Also the size of franchise fees and start up costs influences the ability of a franchising network
to spread. “Most Western franchisors have franchise fees and start-up costs that are beyond
the reach of the average Russian investor”. Allied Domecq waived the franchise fees for its
initial Baskin-Robbins investors in Russia but will eventually charge some as it develops
greater brand name recognition and acceptance by consumers (Alon and Banai, 2000). In this
way, Baskin-Robbins has royalties as a main source of revenues. Therefore, the strategy of a
franchisor regarding royalties and franchise fees is likely to influence the flexibility of the
network.
B. Information exchange
Since most of the important information transmitted between the parties is of tacit rather than
codified character, information exchange represents a factor that contributes to better
performance. Wolfe (2000:7) makes a point that “easier and cheaper access to information
reduces the economic value of more codified forms of knowledge and information”.
Therefore, the forms of knowledge that cannot be codified and transmitted electronically (tacit
knowledge) increase in value, as well as ability to acquire and access both codified and tacit
forms of knowledge. While discussing how information exchange contributes to better
economic performance it is important to note that only exchange of unique/novel information
as well as exchange of tacit knowledge often in combination with codified knowledge
contributes to better performance.
Windsperger (2002:129) refers to the knowledge transfer as “intangible assets between the
franchisor and the franchisee, i.e., the brand name of the franchisor and the local know-how
of the franchisee”. Since the intangible assets, and returns from them are difficult to stipulate
in the contract, difficult to control and difficult to monitor, the ownership of the assets
becomes a critical factor for the success of the franchising network. Windsperger (2002: 129)
argues that “ownership should be given to the franchisee when he has to make intangible
investments that generate a large fraction of residual income”. He goes on explaining that
ownership increases the bargaining power concerning the division of residual income and
therefore gives incentives to make intangible ex ante investments. The fact that the franchising
network of McDonald’s in Russia represents a network of corporate-owned rather than
franchises supports the argument, that when high returns from intangible assets are involved,
the preferred form of networks structure will be based on ownership.
Granovetter in his well-known article The strength of the weak ties (1982) has proposed
that strength of the ties is a decisive factor for information exchange. Weak ties are extremely
important because they give access to novel information and connect people to social groups
they are not familiar with. In contrast to strong ties weak ties are likely to give new and
possibly useful information from the new spheres. Though participants with strong ties are
likely to be strongly motivated to assist, since they have common aims, interests, backgrounds
etc., they will most likely produce redundant information, whereas weak ties can transfer
information from one social milieu to another.
Trust not only enables greater exchange of information, it also promotes ease of interaction
and a flexible orientation on the part of each partner. Trust encourages the disclosure of useful
information. In many network approaches trust has been found to be “the glue that keeps the
partners together” (Osterloh, Weibel: 2001). This can create enabling conditions under which
the success of a network is more likely. Finding the right partner is considered to be one of the
key success factors in the Russian market. A local partner can help sorting out the operational
problems. Alon and Banai point out that a government official or agency is often preferred
because of access to key resources and additional protection from mafia (2000). McDonald’s
and Vision Express managed to overcome many problems due to the right contacts with
Moscow officials, while Blue Kristal and Subway failed because of having wrong partners
(Alon and Banai, 2000).
C. Innovation and learning
Both practitioners and academics have identified organisational learning as perhaps the key
factor in achieving competitive advantages and superior performance. Lundvall and Borrás
(1997a; 1997b) underline that in a context of increased market competition a given set of
competencies is no longer the most important for individual firms, but rather the capacity to
acquire effectively new ones. A rich literature on organisational learning (Kogut 1993, 2000
etc.) suggests that the firm’s ability to continually learn, adapt and upgrade its capabilities and
competencies is key to competitive success.
It is important to note, however, the distinction between two drivers of performance:
information exchange and learning/innovation. Exchange of novel relevant information is a
complex social process, as compared to easy information transfer, for example, through
computer networks. Only access to unique information can enhance the overall performance
of the network. Competitive advantage is no longer limited to acquisition of codified
knowledge that is available world wide. It is more dependent on the acquisition of unique and
tacit knowledge as well as utilisation of knowledge. Learning includes both possessing of
knowledge as well as ability to utilise it. Lundvall and Borrás (1997a: 29) point out that
learning includes also intuitive elements:
“the capability to interpret and act intelligently when confronted with complex
patterns and different kinds of know-how are knowledge elements which are crucial
for economic performance and which are essentially tacit in nature”.
Many studies have indicated that the ability of the firms to innovate is critical to their
performance. However, not all the individual companies can develop innovative products
internally. Therefore, they try to adopt knowledge through other companies and form
innovative networks. The modern term of innovation does not include scientific research
alone, but all the different steps of the process until a new product or production process has
been launched in the market (Lundvall and Borrás, 1997a). The ability of an organisational
network to innovate enhances the overall performance, although the contribution of individual
members can differ significantly.
Franchising includes transfer of management skills to countries, which are culturally
different. Potential franchisees often lack business experience. This is not a big problem, since
franchisors often favour relatively inexperienced people to run a store, since they are going to
train them anyway. However, the success of the network depends on how well the system
knowledge about the business and the brand will be transferred from the franchisor to the
franchisee and how well the knowledge of local market conditions and country specific
knowledge will be transferred from the franchisee back to the franchisor.
Strength of the ties: Augier and Vendelø (1999) suggest that organisational learning is
enhanced when, technically skilled employees are encouraged to collaborate with like-minded
individuals elsewhere. This leads us to assume that exchange of tacit knowledge improves the
results of learning processes. Turning to the concepts of tacit and explicit knowledge Augier
and Vendelø (1999) point out that tacit knowledge is best transferred through strong ties,
whereas when weak ties exist between two parties involved then the transfer of tacit or noncodified knowledge is difficult. This happens because strong ties allow face-to-face
interaction between the two parties involved in transfer, and thus, the environment used is
suited better for transfer of tacit knowledge. Also the existence of strong ties makes
knowledge transfer easier because the parties are likely to understand each other well, because
they share common backgrounds. In contrast, codified knowledge is equally well transferred
through weak and strong ties and in both cases knowledge is most easily searched through
weak ties (1999: 255). The efficiency of strong and weak ties for knowledge sharing depends
on the tacitness of the knowledge to be shared. Strong ties are best if the knowledge to be
shared is tacit and non-codified, whereas the opposite is true for weak ties.
Ownership patterns: Lazonick (1993) points out that knowledge critical to running the
enterprise is to be in the hands of professional managers rather than legal owners. To avoid
knowledge spill-overs as well as to guarantee smooth supplies franchisors prefer build
supporting infrastructure and own plants that supply inputs for their products (Alon and Banai,
2000). Sanghavi points out that “in some cases investments into the local manufacture of input
components used in their operations or their own production and even training of local
suppliers have been critical” (1998: 38).
Trust: Due to the social nature of learning and innovation the establishment of trustful
relations among network members contributes to better performance (Wolfe, 2000:4).
IV. Conceptual Framework
A. Sociological and Economic Traditions of Network Research
Scholars in social and economic sciences have worked on the structure of economic
organisations from wide-ranging perspectives. Many different approaches attempt to explain
this complex phenomenon from different viewpoints. However, they do not form yet a
consistent theory. The fact that all those approaches take into consideration either economic
aspects and ignore social, or vice versa, brings an idea that some kind of a combined approach
is needed to be able to gain a full insight into this complex phenomenon. This paper elaborates
a conceptual framework that combines both economic and social aspects relevant for network
studies. This conceptual framework establishes an important link between the embeddedness
of networks and their characteristics – the questions that social theories are especially
interested in - and performance of networks – the problem widely discussed in economic
approaches.
Economic theories draw our attention to market development, industrial policies and
entrepreneurial responses. However, they underestimate the fact that networks adopt in
different environments and work out different mechanisms to be fit and successful in different
contexts. For example, franchising networks in transition economies can work out special
mechanisms to compensate for the lack of legal protection. Therefore, the market explanation
is not always an appropriate theory to explain performance of networks in different cultural
and institutional contexts.
Sociological approaches on the other hand enable us to see organisational practices in
relation to corporate culture issues, but underestimate the fact that organisations are
competitive and have to be profitable and effective. Furthermore, social variables such as, for
example, trust, commitment, quality of information flows, authority relations are difficult to
standardise and quantify, and also they are differently understood in various countries. Thus, a
very important task is to understand how different organisational structures that exhibit
diverse characteristics due to different environmental factors, become effective and successful
in distinct institutional contexts encountered in different countries.
B. Economic Theories for the Study of Networks
This conceptual framework synthesises two strands of literature as they apply to the study of
networks: economic rationalism and social embeddedness perspective. Economic rationalism
encompasses neo-classical economic tradition, transaction costs theory, population ecology
etc. Despite considerable differences among them, these theories believe that competitive
markets select efficient forms of business networks and destroy inefficient ones. While these
theories accept that patterns of industrialisation and social environments vary considerably
across different societies they none the less claim that market pressures ensure that only those
organisations that establish efficient structures, practices and strategic decisions survive and
compete successfully. Firms are constrained to follow the same basic recipe if they are to
survive, because efficient structures will drive out inefficient ones. Neo-classical and
transaction costs traditions also consider transactions between the organisations to be
independent events. Thus, such variables like mutual obligations, trust, loyalty, solidarity,
involvement and commitment are alien to market theories.
Transaction cost theory (Williamson 1975, 1985) does not explain many strategic
advantages of alliances and networks as forms of co-operation and information exchange,
mechanisms of entry to new markets etc. Explanations of different organisational structures
across different countries relying solely on competitive mechanisms have limited explanatory
power. They must be justified further by larger social and political contexts in each society
where these structures operate (Orrù et al 1991:365).
C. Sociological Theories for the Study of Networks
Another strand of literature relies on social theories that share a commitment to the social
embeddedness of economic activities and socially constructed nature of markets and firms.
Economic efficiency in this view is socially constructed and varies across different social
contexts. Thus, asocial, general economic or managerial rationality, which determines
efficient structures and practices for co-ordination of economic activities irrespective of
institutional differences, is strongly rejected by social embeddedness theorists.
From the social embeddedness perspective economic relations are seen as a product of
contemporary social structures and institutions which influence the conduct of economic
affairs. As social environments and historical experiences vary, the form that business
relations take is expected to be highly variable. This contrasts the emphasis on universal
behaviours and institutional arrangements placed by the transaction cost economics. The main
critique of the embeddedness perspective is directed against classical and neo-classical
traditions, that assume “rational, self-interested behaviour affected minimally by social
relations” (Granovetter, 1985). The basic claim of the embeddedness perspective is that
economic actors “do not behave or decide as atoms outside a social context, nor do they
adhere slavishly to a script written for them by a particular intersection of social categories
that they happen to occupy” (Granovetter 1985: 489). Rather, they are influenced by an
ongoing system of social relations and institutions. Embeddedness theorists believe that
networks in different countries exhibit peculiar characteristics as compared to one another.
The embeddedness perspective was originally developed in studies of sociologists and
political scientists such as Granovetter (1985), Grabher (1993a), Swedberg and Granovetter
(1992).
Another very important factor that has been shown to affect and shape inter-firm relations
can be defined as institutional embeddedness. The relative effectiveness and ease of formation
of various inter-firm co-operative structures is contingent on the larger social institutions in
which these relationships are embedded. These social institutions include the legal system, the
banking system, the structure of labour markets and the political system. This argument was
developed in the works of Whitley (1992), Grabher (1993a). Institutional influences on
organisations can be seen as one of the aspects of various environmental influences that affect
formation of organisational structures. “The social context in which firms are embedded
includes a whole array of elements that can be classified broadly as structural, cognitive,
institutional and cultural” (Zukin and DiMaggio, 1990). Institutional environment has a direct
affect on the organisational arrangements that firms develop, on the management of those
organisational arrangements and on organisational strategies in general.
To summarise the above, economic rationalists consider competitive pressures to be so
strong that efficient forms of business organisation and rational strategic choices quickly
dominate market economies irrespective of cultural and institutional variations. Thus,
differences in structures and approaches are essentially irrelevant to economic outcomes in
this view. Conversely, social embeddedness theorists regard differences in social conventions,
rationalities and moral codes to be so strong across societies that they generate highly
distinctive forms of successful business organisation and practices which are specific to this
context. Variations in environments are seen as directly affecting the nature of market
processes and how economic success is achieved.
D. Conceptual Framework for the Study of Performance of Franchising
Networks
The conceptual framework I propose argues that these two strands of literature are not
necessarily at odds with each other, rather they supplement one another. This paper is
committed to the embeddedness theory arguments that organisations are shaped by
environmental influences and display specific characteristics. These characteristics vary
considerably if major institutions differ significantly between the societies. There are no
uniformly successful network structures that would perform well in various environments.
Structures of business organisations vary depending on the institutional environments,
but their aim is to be effective and perform successfully in a given environment. Networks
adopt specific characteristics required by the environment they operate in and these
characteristics contribute to the factors that drive their performance. In order to achieve
superior performance organisations have to adopt specific features that make them fit for a
given environment. Thus, networks that have adopted specific characteristics required by the
environment will survive, while those who have not adapted to the environment are likely to
fail. Networks’ characteristics determine economic outcomes the same way the character of
strategic decisions affects organisations’ success.
This conceptual framework establishes a link between institutional embeddedness of
networks and their performance. As far as performance of networks is concerned, I believe
that no universal claims about good performance of networks can be made. Good performance
of networks can be evaluated only in combination with specific environments and the
appropriateness of this form for achieving strategic objectives.
The performance of networks can not be evaluated outside the context they operate in.
Perry (1999) makes a point that the advantages of networking are so self-evident to many
researchers and they fail to evaluate appropriateness of this form of business organisation in a
specific context. His argument is that “networks … function within specific time-space
economies which must be considered prior to any claim about desirability or feasibility of
transferring the organisational form beyond its region of origin” (Perry, 1999: 23).
Evaluation of network performance should encompass an analysis of whether networking is
an appropriate form for these particular settings and this specific environment. Therefore,
performance of networks is not a result of universal success recipes, but is a result of
development of specific characteristics that make organisations fit for a given environment.
Perry (1999:47) writes that:
“The value of business system insights lies in identifying influences on business
organisation that stress links to historic and environmental conditions. In so doing, it is
necessary to emphasise that the effectiveness of any particular form of business
organisation is explained by the supporting environmental conditions which enable that
system to operate, not by reference to some universal economic logic”.
Having discussed performance of networks, it is necessary to investigate what factors drive
the performance and which characteristics of networks contribute to a better economic
performance. Unfortunately there are relatively few studies that question what factors drive
the performance of networks. Several researchers have tried to identify a magic formula for
alliance success (see Gulati 1998). Among other factors Gulati mentions flexibility in
management of the network, building trust with partners, regular information exchange with
partners, constructive management of conflict, continuity of boundary personnel responsible
for the interface between the firm and the network, managing partner expectation (1998: 306).
As far as this study is concerned three main factors that drive the performance of
networks are outlined: (1) flexibility, (2) information exchange and (3) innovation and
learning. The surrounding institutional environment shapes the network. Such institutional
factors like financial and banking systems, legal framework, state policy, industrial
associations, chambers of commerce affect the network. As a result the network acquires
specific characteristics. The adoption of specific characteristics contributes to the factors
which drive performance. If networking is an appropriate organisational form for this
particular environment and the network also posses all the characteristics to be fit and
legitimate in this particular environment its performance is likely to be successful.
This conceptual framework views performance of networks as an outcome of a complex
process of adopting specific features, i.e. characteristics of the network, imposed by
institutional influences that lead to networks possessing the required drivers of performance.
This process leads to efficient and effective structures. Successful performance of networks is
viewed as a primary objective of business organisations in order to be competitive in the
market environment. Successful performance can be achieved not as a result of minimisation
of transaction costs or self-interested behaviour, but as a result of fulfilling the requirements
imposed by the environment. To achieve successful performance a network must possess
characteristics that allow it to innovate its products and services, to exchange valuable
information about market conditions, competitors, new products, etc, and finally to be flexible
enough to react promptly to the market changes and to be able to re-organise its structure.
Furthermore, this conceptual framework argues that there are no universal recipes for
the network success. Success depends on how well the network fits a given environment and
is able to operate in it. Since the institutional environments of organisations are very diverse,
successful network structures are expected to be diverse too.
V. Empirical Case Study
To test the conceptual framework on the empirical data two small case studies of franchising
networks operating in Russia were conducted. Baskin Robins and Subway were chosen as
examples of a successful network and a network that failed. The data were collected through
personal interviews and with the help of the Russian Association of Franchising. Preliminary
results suggest that Subway was unable to form a franchising network in Russia when it first
entered the Russian market in 1993. The first restaurant was opened in St. Petersburg but the
initial effort failed because of a conflict with a local partner. Subway was unable to maintain
quality standards, to ensure proper information exchange due to the lack of trust with the local
partner and to secure the transfer of know-how. Also the lack of “useful connections” with
local authorities resulted in a long court trial and inability to protect the business from
criminals. As a result the only restaurant in St. Petersburg was closed. However, after the
financial crisis of 1998 Subway repeated its attempt to work on the Russian market and
nowadays it has 9 franchises in Moscow.
Success of the franchising network Baskin Robbins can be attributed to its flexibility. The
franchisor managed to spread the network to 100 franchisees in different regions of Russia. A
flexible strategy in respect to royalties, flat organisational structure, encouragement of
franchisees to exchange information about market conditions with the franchisor and transfer
of knowledge about products, quality standards and marketing know-how from franchisor to
the franchisees ensured the spread of the network in the unstable economic environment.
Special attention can be given to the measures taken by the franchisor to make the brand name
known in Russia. As far as special characteristics adopted by a Russian network are
concerned, one could mention: flexible system of royalties and different ownership structure
of the network. Suppliers of the food products are corporate-owned subsidiaries, that allows
the franchisor to ensure quality control and prevent knowledge spill-overs.
VI. Conclusions
This paper elaborated a conceptual framework for the study of the networks’ performance.
The conceptual framework combines economic rationalism with the arguments of social
embeddedness perspective. Successful performance of networks is viewed as a primary
objective of business organisations in order to be competitive in the market environment.
Successful performance can be achieved not as a result of minimisation of transaction costs or
self-interested behaviour, but as a result of fulfilling the requirements imposed by the
environment. To achieve successful performance a network must possess characteristics that
allow it to innovate its products and services, to exchange valuable information about market
conditions, competitors, new products, etc, and finally to be flexible enough to react promptly
to the market changes and to be able to re-organise its structure. This conceptual framework
was developed for the study of performance of franchising networks in different environments
including that of transition economies.
Performance of networks can be analysed both with qualitative and quantitative data. For
example, qualitative data can give an insight whether a network is flexible to react to
environmental changes, what information and knowledge-sharing routines are developed in
the network. Furthermore, the analysis of the learning processes and innovative activities
within the network can give an insight on how they contribute to the overall performance.
Quantitative assessment can provide additional evidence on network’s performance using the
such indicators as sales through the network, number of network’s participants, network’s
density, collected royalties.
This paper offered a small case study of two franchising networks operating in Russia:
Subway and Baskin Robbins. Subway’s initial efforts to enter the Russian market failed due to
the inability to cope with the hostile environment. Baskin Robbins was more successful due to
adoption of special characteristics that made the network fit for the Russian market. This case
study is a part of a bigger research project that will involve case studies of other Western
franchising networks operating in Russia.
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