TABLE 3

Balance Sheet and Market Valuations

 

Variable Label Mean ($) Std Dev($) Min($) Max($) N
Balance Sheet 110,795 168,633 -12000 1250000 207
Market 177,795 294,002 -10000 2000000 190

 

 

Surprisingly, there were no exit cost predictor variables which correlate to market or balance sheet valuation of the trade mark. It is clear that franchisees do not directly link exit cost with trade mark value. It may be that expense factor components are sufficiently prohibitive to preclude exit as a realistic alternative to the franchise arrangement. Also, the scoring of legal expense as clearly high may indicate a recognition of the contractually binding nature of the agreement. We now look to exit costs as a predictor of conflict cluster membership.

 

 

EXIT COST AS AN ANTECEDENT OF CONFLICT

The accumulation of knowledge which is necessarily internal to the franchise system constitutes the bundle of resources which are firm specific (Wernerfelt, 1984). Partners in an inter-organizational form like franchising continually reconsider the strategic accumulation and implementation of these resources and thus create a dynamic assessment of the value of the relationship (Dierickx and Cool, 1989). Zajac and Olsen (1993) emphasize that the value of transaction-cost analysis as a theoretical tool is enhanced when a view to long term value, as well as cost, of the transactions which form the alliance.

 

EXIT COSTS PREDICTORS OF CONFLICT IN FRANCHISING

Exit cost variables were subjected to Chi-square Automatic Interaction Detector (CHAID) to assess which variables correlate with conflict in franchising. The dependent conflict variable was taken from the literature (Kaufmann and Stern, 1988; Spinelli and Birley, 1995). Eight of the eleven exit cost variables correlate to conflict in franchising.

 

TABLE 4

Exit Costs Which Correlate to Conflict Cluster Membership

 

Factor p-value component variable Label
business format 1.40e-08* exiting costly in finding alternative suppliers
business format 1.40e-08* exiting will increase training cost
business format 4.00e-06* exiting will require operating procedures changes
asset 2.20e-04* exiting costly in store conversion
expense 4.40e-04* exiting will increase the marketing budget
business format 3.70e-03* exiting costly in lost goodwill
psychic 7.70e-03* company investment unique to the relationship
expense 3.20e-02* exiting costly in legal expense
psychic 0.069 company invested time and effort in the relationship
expense 0.270 exiting costs would probably be high
psychic 1.000 franchisee invested personally in the relationship
*=Sig. at .05    

 

Components of the business format factor dominate the exit cost variables that correlate with conflict. The top three exit cost predictors are all business format factor components and all four business format factor components are represented in the predictor list. Conversely, only two expense factor components and one of the three psychic factor components are exit cost predictors of conflict. We would expect that the transactions undertaken to support the alliance engender the highest level of conflict in a commercial relationship (Pondy and Huff, 1985). The business format component exit costs are clearly the focus of the franchise relationship. CHAID analysis will allow us to review the nature and manifestation of the exit cost related conflict.

 

 

SUMMARY

Our research question asks: Do exit and switching costs as perceived by the franchisee, reflect trade mark valuation and influence inter-organizational conflict? While it is clear that franchisees have a strong sense of personal investment in the franchise relationship, there is little ability to quantify the overall value of the investment. Clearly, a principle reason for utilizing franchising as a growth mechanism is to build brand equity. Franchisees do not equate the relationship with an equity building exercise. However, franchisees view those activities which are most directly associated with the business format as influencing conflict in the relationship. These assets are less transferable than other assets and therefore if the franchise relationship is ended, these assets are lost (or diminished more than other assets which are more transferable).

 

Franchisors are advised to better communicate the value building activities of both parties to the license agreement. Anecdotal evidence indicates that franchisors are concerned that acknowledgment of franchisee ownership of brand equity may inhibit their ability to end the relationship (either through default or end of the contract) without economic impact. The alternative view would be to suggest that an understanding of trade mark building activities will help focus franchisee energies and resources and increase value for both franchisee and franchisor.

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