Franchising as an eBusiness Growth Strategy in China1
Ye-Sho Chen
Department of Information Systems and Decision Sciences
E.J. Ourso College of Business Administration
Louisiana State University, Baton Rouge, LA 70803
Guoqing Chen
School of Economics and Management
Tsinghua University, Beijing 100084
Robert Justis
Department of Management
E.J. Ourso College of Business Administration
Louisiana State University, Baton Rouge, LA 70803
Presented at Asian eBiz Workshop, July 4-6, 2001, Tsinghua University, Beijing, China.
ABSTRACT
Although various reports indicate that
eBusiness is gaining popularity in China, it still faces
various obstacles with the distribution of goods as the
major concern. Franchising is believed to be the most
feasible solution for the distribution problem. In this
paper we provide a comprehensive framework on the
“marriage” between eBusiness and franchising in China.
1. INTRODUCTION
In a recent article “China Ecommerce &
Franchising: A Heavenly Marriage?” on China Business
[1], it shows the need of using franchising as a “tangible
network” to overcome China’s B2C obstacles. Three
examples are given:



Leyou.com, an online children’s goods store,
uses franchising to “save marketing expanses.”
Jingqi.com, an online bookstore, teams up with
Xi Shu Bookstore, a franchise chain with about
100 stores, to promote its ecommerce.
Sina.com, a well-known web portal, allies with
Yafei Auto Chain, “China’s largest auto
franchise chain”, to market its newly launched
car leasing business.
This “marriage” between eBusiness and
franchising is not limited to traditional retailing only,
even Internet technology companies, e.g., Nihao.net, are
using franchising as a growth strategy to expand their
businesses. In fact, this strategy is not just used in
China, it is a global phenomenon. Entrepreneur.com
recently added a new category, Computer/Technology
Businesses, into its Franchise Zone with three
subcategories: Internet Businesses, Tech Training, and
Miscellaneous Tech Businesses. At the time of the
writing, more than 20 companies are on the list [2].
Recent Jupiter report [3] said it best on the
phenomenon:
"The gap in global Web development will ignite a fierce
battle for leadership in the international Internet
development and service space," said Preston Dodd,
senior analyst at Jupiter Research. "While it is
imperative for sites to gain foothold in these markets,
they need to avoid a `must build' mentality, and enter
these markets through strategic partnerships such as
joint ventures and franchises."
In his best-seller Business @ the Speed of
Thought, Bill Gates [4] wrote: “Information Technology
and business are becoming inextricably interwoven. I
don’t think anybody can talk meaningfully about one
without talking about the other.” Indeed, eBusiness in
Partly supported by “Nation’s Outstanding Young Scientists Funds” of China (No. 79925001) and by Tsinghua’s Soft Science Key Project and 985
Key Project on E-Commerce.
1
China is interwoven with franchising and we can’t talk
about eBusiness without talking about franchising. The
paper is organized as follows. Section 2 discusses what
franchising is and why Franchise China is significant.
Section 3 discusses eBusiness opportunities in the
Franchise China. Section 4 reviews the literature of
franchise survival and growth and points out the
importance of organization learning. Section 5 discusses
the roles of information technology in supporting
organization learning where knowledge management
and application service providers (ASP) are discussed.
Finally, Section 6 concludes with issues for future
research.
In his recent article entitled “Franchise China:
She is ready, are you?”, Chen writes [12]: “Although
various surveys show that ecommerce is gaining
popularity in China, it faces obstacles such as online
payments, relatively small groups of shoppers (mostly
young and educated), an underdeveloped network
infrastructure, and most importantly, the distribution of
goods. Franchising is believed to be the most feasible
solution for the problem of goods distribution.” Thus a
sound eBusiness model in China shall have a Web
present globally and a franchisee/company brick-andmortar store present locally. Business opportunities
under such a model may include:

2. FRANCHISINGAND FRANCHISE CHINA
According to Justis and Judd [5], franchising is
defined as “a business opportunity by which the owner
(producer or distributor) of a service or a trademarked
product grants exclusive rights to an individual for the
local distribution and/or sale of the service or product,
and in return receives a payment or royalty and
conformance to quality standards. The individual or
business granting the business rights is called the
franchisor, and the individual or business granted the
right to operate in accordance with the chosen method
to produce or sell the product or service is called the
franchisee.” Franchising is believed to be an important
form to transfer technology and import entrepreneurial
activity into developing economies [6]. In international
franchising, emerging markets are reported to be among
the fastest growing markets [7, 8].
The importance of franchising in the Asian
economy can be found in the recent APEC report [9]:
“Franchising warrants continued attention by the APEC
Member Economics and the Policy Level Group (PLG).
Many of the projects undertaken to help small and
medium enterprises under PLG auspices could and
should include a franchising element or dimension.”
English and Xau’s [10] study on KFC and McDonald’s
is probably the first paper on franchising in China.
Alon’s [11] study on Kodak in China represents a more
recent update of the franchising activities in China. The
quotation from Kodak’s chairman in Alon’s paper
shows how important China is to some leading U.S.based franchise companies: “To be the leader in the
world, you have to be the leader in China.” Chen [12]
has the following six recommendations for those
franchisors seeking to venture into China: (1) register
the brand early, (2) beware of the pre-existing law in
seeking franchisees, (3) understand the regional
preferences before you select a site, (4) adapt the
franchise system to the Chinese needs, (5) pay attention
to guanxi, the Chinese version of customer relationship
management, and (6) participate in the community.
3. EBUSINESS IN FRANCHISE CHINA



Internet service providers (ISP), providing the
Web present and ecommerce solutions for the
franchise companies such as Xi Shu Bookstore.
In order to grow the business quickly, the ISP
may use franchising as a way to expand the
market. Nihao.net serves as a good example
for using such a strategy. Mehta, etc [13]
provide a comprehensive study on the
franchising industry’s use of Internet
technology, which may help ISP plan what
services they can provide to their franchise
clients.
Web portals such as Sina.com, serving as a
one-stop-shopping hub for various franchise
chains. Based on the allied franchise systems,
the portals may create value-added services to
the targeted customers. For example, the
alliance with Yafei Auto Chain enables
Sina.com to create a new car leasing business.
Paswan, etc [14] investigate franchising as a
network organization.
They incorporate
ecommerce systems, e.g., Intra, Extra, and
Internet, as a catalyst of franchise system’s
movement towards network organization.
Their work may help web portals plan the
network solutions to their franchise customers.
Franchise solutions providers, providing
education, marketing, and problem solving for
franchise companies.
For example,
www.franchise.com.cn
provides
training
courses on franchising and online marketing
for various franchise companies. Terry [15]
addresses legal and commercial issues arising
from the influence eBusiness on franchising.
Terry’s work will prevent forward-looking
franchise companies from misstepping in
eBusiness. As franchising gets more popular
and mature in China, there will be consulting
companies helping franchise systems develop
strategies to survive and grow. Section 4
summaries the literature on franchise
survivability and growth.
Application
Service
Providers
(ASP),
providing information technology applications
on a subscription basis. The concept of
subscribing information technologies through
ASP has special appeal in the franchising
industry because an ASP can duplicate success
for other similar franchises quickly and
inexpensively. For example, wecoo.com is an
ASP offering comprehensive operational and
management services to small and mediumsized companies [16], which may include
franchise chains. Section 5 summaries the
opportunities and issues of ASP in franchising
by Chen, etc [17].
4. SURVIVING AND GROWING THROUGH
ORGANIZATION LEARNING
In their recent article on US franchisor entry
and survival, Lafontaine and Sun [18] identified the
following four important factors in the literature on
franchisor survival: (1) business experience, i.e., the
number of years of experience of a firm before it
becomes involved in franchising; (2) corporate units,
i.e., the number of company-owned outlets in the chain
when it begins franchising; (3) franchisee units, i.e., the
number of franchised units it established in its first year;
and (4) capital, i.e., the amount of capital required to
open an outlet. They also enriched the literature by
suggesting “mostly that firms significantly increase their
chances of being successful in franchising if they face
good post-entry macroeconomic conditions. Thus firms
may want to use forecasts of GDP growth from wellestablished sources to adjust the timing of their entry
and maximize their likelihood of success.” Other
factors on franchisor survival in the literature also
include contract design, especially the provision of
exclusive territories [19], and media certification [20].
The literature above provides the readers the
understanding of franchisor survival at the macro level.
Justis and Judd [5], on the other hand, examined the
issues at the micro level, i.e., specific franchise systems
at different levels of growth in various industries. They
identified the franchisor-franchisee relationship as a
vital key for a franchise system to survive and grow.
The key for developing this relationship is in
organization learning and this learning process of the
franchisor consists of five stages [21]:
 Beginner – learning how to do it.
 Novice – practicing doing it.
 Advanced – doing it.
 Master – teaching others to do it.
 Professional – becoming the best that you can
be.
Through the organization learning process,
both the franchisor and the franchisee gradually build a
“family” relationship composed of five crucial
elements: (1) Knowledge – proven abilities to solve
business problems; (2) Attitude – positive and
constructive ways of presenting and sharing the working
knowledge; (3) Motivation – providing incentives for
learning the working knowledge; (4) Individual
Behavior – understanding and leveraging the strengths
of the participants to learn and enhance the working
knowledge; (5) Group Behavior – finding the best
collaborative way to collect, dissimilate, and manage
the hard-earned working knowledge. There are various
stages of the “family” relationship development for
franchisor and franchisees, which can be summarized as
follows:
 Franchisees
 Startup: Beginner and Novice; focusing on
operations in the first two years
 Multi-units: Professional; focusing on
growth of units
 Franchisor
 Startup: Beginner and Novice; focusing on
operations in the first two years
 Mid-size: Advanced and Master; focusing
on balancing operations and growth of
units
 Large: Professional; focusing on growth of
units and product/service innovation
5. KNOWLEDGE MANAGEMENT AND
APPLICATION SERVICE PROVIDERS
From the discussion above, it is clear that
working knowledge is the base of the “family”
relationship, and through the process of learning
working knowledge is disseminated throughout the
franchise system. Working knowledge is generally
accumulated from information obtained from data
analyses. A franchise system generates volumes data
every day from various applications systems [22,23], for
example, the point-of-sale system at the franchisee unit.
At the end of each business transaction, billing,
customer tracking, inventory control, and labor all
generate enormous amount of data. At the end of day, a
report is sent through the communication system to the
franchisor headquarter to summarize the daily business
transactions such as total sale, total cost of raw
materials, and total cost of labor. If the report is not
received after a pre-determined time, a message is
triggered to request prompt actions by the franchisee.
Once the daily sale reports are received from
all the business units, they are converted into
information using a variety of analytical methods such
as (1) statistical data modeling including regression
analysis, correlation analysis, time series analysis,
forecasting, Pareto analysis, and quality assurance; (2)
data mining modeling including decision tree analysis,
cluster analysis, market segmentation analysis, crosssell analysis, and association analysis. These statistical
data analyses also help generate many business
intelligence reports. For example, a business unit will
typically receive its performance ranking report with
respect to the franchise system along with the top 10
business units having the best sale reports. Some kind
of reward program can be built into the information
generation process [24]. For example, the owner of a
business unit may receive a free trip to Hawaii if he/she
has been among the top 10 lists for a number of
consecutive time periods.
The information contained in the daily business
intelligence reports becomes the foundation upon which
the working knowledge of the franchise system may be
built. Consider the three very important sets of working
knowledge for a typical franchise system [25]:
 Site Profiles. Selecting a good site is perhaps the
most important decision in the franchise business.
A well-run franchise system will have the working
knowledge, e.g., Sites Profiles, on how to choose a
good site for its prospective franchisees. The
Profiles enlist vital elements of value and risk for
sites, which are identified based on several years'
experiences. For example, sales data at each site is
pulled daily and analyzed. The information on the
best and worst performers on the previous day is
identified immediately. The analyses over the
years will exhibit the vital value and risk elements
of sites, which will become the working knowledge
of site selection of the franchise.
 Personality Profiles. A successful franchise knows
well what franchisees must have strong work ethic,
self esteem, relationship extension (the desire to
become friends with the customers), a commitment
to service, team orientation, and exactness and
cleanliness [26]. The information on the best and
worst franchisees can be identified through
comprehensive analysis comparing these traits with
the sales and performance reports. The analyses
over the years will exhibit the vital value and risk
elements of personality, which will become the
working knowledge for franchisee recruitment.
 Customer/Product Profiles. According to the 80/20
Principle, we may observe that (1) 80% of sales
come from 20% of total products; and (2) 80% of
business comes from 20% of customers. We can
see immediately that in order to be successful, we
need to: (1) Be market-led in those few right
products, and (2) Be customer-centered for those
few right customers. Thus, we need to build
product profiles that focus on the vital few product
groups, i.e., 20% of the total products that generate
80% of product sales, and customer profiles that
focus on the vital few customer groups, i.e., 20% of
customers generating 80% of total sales.
Based on the discussion above, franchise
software applications can be classified into data,
information, and knowledge. We recommend franchise
systems to outsource data and information applications
to ASP because of the following four major reasons
[17]:
(1)
They are not core processes in a franchise
business, activities related to the working
knowledge of the franchise are.
(2)
They are routines and time-consuming. For
example, a point-of-sale system gathers daily
sales data and places them in a designated
(3)
(4)
server for data analyses. The information
generated from the data analysis, e.g., the top
ten units that had the most sales in the previous
day, is then emailed to all the franchise units as
a part of the rewarding process.
It is cost-effective. A franchise business
typically has similar data and information
applications to other franchise businesses in the
same industry. By outsourcing the similar data
and information applications to an ASP in
Franchising, the cost of running and managing
the applications is reduced through the cost
sharing.
It is more professional. An ASP focusing on
specific franchise data and information
applications will do a better job than the typical
information technology group at the franchisor
headquarters.
Keeping working knowledge applications inhouse makes good sense, but a major challenge is to find
ways to preserve and share the working knowledge
learned over the years over the company’s intranet. A
“learning family” is where attitude, motivation,
individual behavior, and group behavior can be
improved.
Chen, etc [27] propose a Franchise
Knowledge Repository framework with the goal of
accumulating working knowledge in the intranet of the
franchise system and allow easier access by franchisees
or employees, thus reduce the barrier of knowledge
acquisition.
6. FUTURE RESEARCH
The comprehensive framework discussed in
this paper on the “marriage” between eBusiness and
franchising in China is based on the literature of
franchising with the majority of it drawn from the
practices of U.S.-based franchisors. Future research is
needed to refine the framework with respect to the
eBusiness environment in China.
7. REFERENCES
[1] China Business, “China Ecommerce & Franchising:
A Heavenly Marriage?”, April 25, 2000. It is also
available online at China Online May 1, 2000:
http://www.chinaonline.com/topstories/email/B1000425
40.asp.
[2]
Entrepreneur.com,
Computer/Technology
Businesses,
http://www.entrepreneurmag.com/Your_Business/YB_S
egArticle/0,1314,285322----3-,00.html.
[3] Jupiter Report (2001) Asia Pacific to Outpace US
Online Population by 2005, But US Sites Turn Blind
Eye Toward Globalization,
January 11, 2001,
http://www.businesswire.com/cgi-
bin/f_headline.cgi?bw.011101/210112033&ticker=JMX
I.
[4] Gates, W. (1999). Business @ the Speed of
Thought. Warner Books, 1999.
[5] Justis, R.T. and Judd, R.J. Franchising, DAME,
1998.
[6] Stanworth, J, Price, S, and Purdy, D., “Franchising
as a Source of Technology-Transfer to Developing
Economies”, Proceedings of the 15th Annual
International Society of Franchising Conference, Las
Vegas, Nevada, February 24-25, 2001.
[7] Welsh, D. and Alon, I., “International Franchising in
Emerging Markets: A Review and Summary”,
Proceedings of the 15th Annual International Society of
Franchising Conference, Las Vegas, Nevada, February
24-25, 2001.
[8] Paswan, A.K., Young, J.A., and Kantamneni, S.P.,
“Public Opinion About Franchising in an Emerging
Market: An Exploratory Investigation Involving Indian
Cosumers,” Proceedings of the 15th Annual
International Society of Franchising Conference, Las
Vegas, Nevada, February 24-25, 2001.
[9] APEC, Consultative Survey on Franchising in the
APEC Member Economies, by the U.S. Department of
Commerce,
August
1997.
Available
at
http://strategis.ic.gc.ca/SSG/ae00272e.html.
[10] English, W. and Xau, C., “Franchising in China:
KFC & McDonald’s,” Proceedings of the 8th Annual
International Society of Franchising Conference, Las
Vegas, Nevada, February, 1994.
[11] Alon, I., “International Franchising in China: An
Interview with Kodak”, Proceedings of the 15th Annual
International Society of Franchising Conference, Las
Vegas, Nevada, February 24-25, 2001.
[12] Chen, Y.S., “Franchise China: She is ready, are
you?”,
available
at
http://www.english.franchisechina.com/MARKET/YE.
HTM.
[13] Mehta, S.S., Stewart, W.T., Kline, D.M., and
Maniam, B., “The Franchising Industry’s Use of
Internet Technology,” Proceedings of the 15th Annual
International Society of Franchising Conference, Las
Vegas, Nevada, February 24-25, 2001.
[14] Paswan, A.K., Loustau, J., and Young, J.A.,
“Modeling
Franchise
Network
Organization,”
Proceedings of the 15th Annual International Society of
Franchising Conference, Las Vegas, Nevada, February
24-25, 2001.
[15] Terry, A., “The E-Business Challenge to
Franchising”, Proceedings of the 15th Annual
International Society of Franchising Conference, Las
Vegas, Nevada, February 24-25, 2001.
[16] China Online, “China’s Ufsoft Establishes
Wecoo.com ASP Web Site”, May 10, 2000. Available
at
http://www.chinaonline.com/issues/internet_policy/New
sArchive/Secure/2000/may/B200050912.asp.
[17] Chen, Y., Ford, C., Justis, R.T, and Chong, P.,
“Application Service Providers (ASP) in Franchising:
Opportunities and Issues”, Proceedings of the 15th
Annual
International
Society
of
Franchising
Conference, Las Vegas, Nevada, February 24-25, 2001.
[18] Lafontaine, F. and Sun, S., “The Effect of
Macroeconomic Conditions on US Franchisor Entry and
Survival”, Proceedings of the 15th Annual International
Society of Franchising Conference, Las Vegas, Nevada,
February 24-25, 2001.
[19] Azoulay, P. and Shane, S., “Entrepreneurs,
Contracts, and the Failure of Young Firms”,
Management Science, Vol. 47, No. 3, March 2001.
[20] Shane, S. and Foo, M., “New Firm Survival:
Institutional Explanations for New Franchisor
Mortality”, Management Science, Vol. 45, No.2,
February, 1999.
[21] Cormack,C., Hammerstein, S.B., and Justis, R.T.
(2001). Franchisor: The Professional Guidebook,
available
at
www.bus.lsu.edu/ei/franchiseclass/pages/ForBook/title.
html.
[22] Chen, Y., “Information Systems in Franchising”, to
appear in Franchising, Justis, R.T., and Judd, R.J., 3 rd
Edition, 2001.
[23] Chen, Y., “Information Systems for Prospective
Franchisees”, to appear in Basic of Franchising, edited
by Justis, R.T. 2001.
[24] Chen, Y., “Building a Site Selection Profile in
Franchising”, Working Paper, 2001.
[25] Chen, Y., Chong, P., and Justis, R.T., “Information
Technology Solutions to Increase Franchise Efficiency
and Productivity”, Proceedings of the 2000 Franchise
China Conference and Exhibition, Beijing (November
6-7), Guangzhou (November 9-10), and Shanghai
(November 13-14), China, 2000. The Conference web
site is located at www.franchise.globalsources.com.
[26] Webb, W., “Personality Profiles: Next Best Thing
to “Cloning”,” Franchise Times, September 1999, p.24.
[27] Chen, Y., Chong, P., and Justis, R.T., “Franchising
Knowledge Repository: A Structure for Learning
Organizations”, Proceedings of the 14th Annual
International Society of Franchising Conference, San
Diego, California, February 19-20, 2000.