An Empirically Based Theoretical Approach towards the Definitions of
Entrepreneurship and its Relationship with the Franchisee

Ansprechpartner: Dipl.-Kfm. Patrick Saßmannshausen, Research-Assistent: Christoph Flohr & Stefan Gladbach

Would Schumpeter and Stevenson ever have Lunch together at McDonald´s?
An Empirically Based Theoretical Approach towards the Definitions of
Entrepreneurship and its Relationship with the Franchisee

SEAN PATRICK SASSMANNSHAUSEN, CHRISTOPH FLOHR & STEFAN GLADBACH
IGIF – Institut für Gründungs- und Innovationsforschung
University of Wuppertal, Germany

Contact to the authors: sassmannshausen@wiwi.uni-wuppertal.de

In its September 2007 volume, “brand eins”, a leading German business journal, brought up a thought provoking headline:
“Entrepreneurs without Freedom:
Letting yourself be ruled in every respect and even pay money for this incapacitation –
it is simply called franchising!”

This paper deals with franchising and entrepreneurship. More precisely, it searches for answers to one central research question: Are franchisees entrepreneurs? Some literature has dealt with this question, but failed to offer any satisfying solution so far. Entrepreneurship is not only an economic activity but also a broad theoretical concept, whereas franchising is a practical activity of a permanent establishment character which has not been thoroughly looked into from a theoretical point of view. Thus, our considerations are of theoretical and practical relevance. The theoretical relevance seems to be obvious: It contributes to the categorical discussion of the concepts of entrepreneurship and franchising. The main practical relevance lies in the field of business law: In recent years, the discussion on franchising became more and more critical, not only in the media but also at high courts. In Germany, courts rescinded franchise contracts in quite a number of cases, assuming that some contracts had been designed in an immoral or even illegal way: The start-up of franchise outlets is compared to the opening of chain stores. Franchisors are imputed not only to outsource the branch managers´ jobs, but also the subsidiaries´ economical risk of failure. In some cases, franchise systems were also accused of shifting their corporate responsibility for the subsidiaries´ employees on to branch managers (i.e. franchisees). Moreover, there is a debate if franchising is in line with § 81 (1) a-c Treaty on European Community and if good reasons are shown for any reference to exceptions described in § 81 (3). Therefore, the findings of our paper contribute to a public and legal dispute.
However, our paper is not based on single legal cases or a survey of legal progress. Our contribution is based on the results of entrepreneurship research rather than on a legal discussion. It is based on theoretical definitions of entrepreneurship combined with qualitative and quantitative empirical data on franchising and entrepreneurship that has been collected by the authors throughout the first half of the year 2007. The fact that our discussion of theoretical concepts rests upon empirical data helped us to overcome the liabilities of prior papers dedicated to this subject. For qualitative data, we analysed standardised franchise contracts as well as job descriptions given by franchisors in order to provide vocational orientation for potential franchisees. In addition, we conducted interviews with actual franchisees who described their everyday tasks and limitations in running a legally independent company under the boundaries of a franchise contract. For quantitative data, we used data sets collected via two internet based questionnaires. The sample we used in order to sound our findings and implications includes 800 answers. Data sets were collected from 435 individuals who have shown a strong interest in franchising, but have not become franchisees yet, 156 individuals who have eventually started a franchise outlet, and 208 entrepreneurs who initially showed a great interest in franchising but finally decided to start their new venture without being part of a franchise system.
As our results show, the answer to the question whether franchisees can be regarded as entrepreneurs or not does only to some extent contingent upon the characteristics in the data sets and the functions of franchisees in business life. Instead, the answer is strongly related to the definition of “entrepreneurship” the researchers are in favour to apply. Three kinds of definitions on entrepreneurship can be distinguished. First, there are functional approaches; such are e.g. the concepts by Josef A. Schumpeter, Richard Cantillon, and Jean Baptiste Say. The most famous functional definitions stem from economic masterminds living in the 19th and early 20th century. The later decades of the 20th century have seen tremendous endeavours in the second line of definitions, the traits approach. On the one hand, the traits approach asks for personal characteristics of entrepreneurs, such as need for achievement, perceived locus of control, and risk taking personality. On the other hand it also focuses on ontogenetic influences such as threat of childhood deprivation and early adolescent experiences. When taken as a whole, the findings of studies into the traits approach are inconclusive and often in conflict. Both approaches focus on some aspects of entrepreneurship but they both do not cover entrepreneurship as a whole. Therefore, at the start of the 21st century, Howard Stevenson and Harvard Business School introduced a third concept, defining entrepreneurship as a behavioural phenomenon. We will discuss the outlines of this behavioural approach later in full depth. For in this paper, our answer to the given research question will be demonstrated by the use of two of the divergent concepts of entrepreneurship: the definitions from Josef A. Schumpeter and from Howard Stevenson.
We first demonstrate – using mostly qualitative data – that franchisees can hardly ever be regarded as entrepreneurs when the definition by Josef A. Schumpeter with his distinction between entrepreneurs and imitators is applied. According to Schumpeter, an entrepreneur is a person who functions as an innovator, i.e. he or she successfully introduces new combinations to the market forces. A franchisee in his function fulfils roughly none of the five major categories of new combinations defined by Schumpeter. To add insult to injury, in many cases creativity and innovativeness are even prohibited by the franchise contract. Nevertheless, to some surprise, we still would not conclude with a suggestion to look upon franchisees as nothing more but branch managers. Instead, we believe that Schumpeter’s theory has much more to offer: From a Schumpeterian point of view, franchising can be understood as a legal business solution to the economical stress ratio which emerges from the competition for entrepreneurial profits between entrepreneurs and imitators. This agreement on a solution to the stress ratio between entrepreneurs and imitators becomes possible by the initiative of entrepreneurs who function as franchisors. The entrepreneur’s decision to grow and transform business into a franchise system is in line with at least two definitions of “new categories” by Schumpeter: to introduce products to new regional markets and to introduce new organization of industry. The solution is created under private law, thus it should be expected to be in line with any institutional framework of whichever given free market system, and hence needs little intervention from high courts. To sum up our findings according to Schumpeter’s definition of entrepreneurship, we conclude that franchisees are not to be seen as entrepreneurs, nor are they simply branch mangers. They are a kind of their own: franchisees are imitators who decided to cooperate with entrepreneurs instead to compete against them.
Reflecting on franchising in the light of Howard H. Stevenson’s behavioural definition of entrepreneurship is different, simply because the definition given by Stevenson is distinguished from Schumpeter’s theory. As one consequence, when we try to apply Stevenson’s definition to our research question, we use qualitative as well as quantitative data. To Stevenson, “entrepreneurship is an approach to management” that is defined by “the pursuit of opportunity without regard to resources currently controlled.” The range of managerial behaviour lies between two extremes: “At one extreme is the promoter who feels confident of his or her ability to seize opportunity regardless of the resources under current control. At the opposite extreme is the trustee who emphasizes the efficient utilization of existing resources.” The ideal typical promoter and trustee define the two opposite end points of this range. Real life behaviour is expected to be somewhere within the range, not always at its extremes. Entrepreneurial behaviour consistently falls in the spectrum at the promoter’s end of the range, whereas administrative behaviour is to be found at the trustee’s end of the spectrum. The total spectrum can be sub-classified into six dimensions. These are strategic orientation, commitment to opportunity, commitment of resources, control of resources, management structure, and compensation respectively reward philosophy. Specific factors are associated with each dimension. Having combined each of these factors with our empirical findings, we can classify real behaviour shown by franchisees and thereby find out if it is more in line with entrepreneurial or with administrative behaviour. The details will be provided by the full paper. Here, we can only present a short summary of our findings.
When applying Stevenson’s definition, a dynamic approach towards the definition of franchising becomes necessary. Results from our empirical work show that over time, franchisees’ scores are critically changing in some of the six dimensions. A distinction needs to be made between the early process of franchise decision and start-up of the franchise outlet on the one hand and later outlet management on the other hand. In the beginning of the franchise process, franchisees act within the promoter’s range of the spectrum in two dimensions: strategic orientation and commitment to opportunity. In three dimensions – control of resources, management structure, and compensation respectively reward philosophy – the situation is not so clear because sometimes franchisees score on the promoter’s side of the range and sometimes on the trustee’s side. Only in one dimension, the franchisees’ behaviour shown by our data was clearly in the trustees´ range: commitment of resources. Therefore, looking at the spectrum as a whole, franchisees seem to be stuck somewhere in the middle between the promoter’s and the trustee’s end of the range, but with a very strong leaning towards entrepreneurial action. However, this evaluation shifts when the outlet’s start-up is completed and the establishment process ends. Ironically, the shift can be monitored especially in those dimensions where franchisees had proven entrepreneurial behaviour in the first place: After completion of start-up and establishment process, when managing a franchise outlet turns into day-to-day business, franchisees no longer score on the entrepreneurial side of the range in the two dimensions of strategic orientation and commitment to opportunity. From this point of time on, franchisees clearly are to be located on the trustee’s side of the range. This observation is due to the fact that regulatory from the franchise contract more and more apply, after the singularity of start-up is completed. We interpreted this result in a way that we recommend franchising to persons with some leadership experience but an administrative mind set, who have only a little twist towards entrepreneurial behaviour. They desire to make an entrepreneurial experience at least once in their life but at the same time wish to be backed up by a trustee’s security. In this case, a careful selection of a successful and reliable franchise system is essential. To sum up our conclusion according to Stevenson’s definition, we argue that being a franchisee may be entrepreneurial at first, but in total, it is more administrative or at best managerial.
Finally, what are the “takeaways” offered by our paper on the classification of franchising? First, Schumpeter’s categorical approach is more static in its findings on franchising. This is because Schumpeter’s point of view leads us to consider the economic function of entrepreneurs, whereas Stevenson’s definition emphasizes the managerial tasks related to
franchisees. With an analysis of franchising based on Schumpeter, we can discuss its economical meaning but can give only little advice to individuals. The individual focus is brought in by Stevenson’s approach. It can provide much more tools for vocational orientation and self-evaluation in the decision-making process to potential franchisees than could ever be based on Schumpeter. In addition, the perspective brought in by Stevenson is more dynamic. It is process orientated and allows adjusting our results to the changing role which franchisees play from start-up through management. Potential franchisees should be aware of this changing role to avoid feeling trapped in a miserable job. On the other hand, for an entrepreneurially twisted trustee who knows and accepts how his role will change throughout the process, franchising can be a very rewarding experience. Franchising offers risks and rewards not only on the individual level, as just demonstrated via of Stevenson’s approach. With Schumpeter, we can also show risks and rewards on the aggregated level of economy. Is franchising a danger to free market forces because it abrogates competition between innovators and imitators in the Schumpeterian market model? Or is it rewarding because it provides us with demanded goods in a stable and reliable quality and quantity beyond almost all geographical boundaries? To discuss this matter in depth certainly goes beyond the scope of this paper. But in addition to the benefits of our paper mentioned above, our empirically based categorical research can help to identify and ask the right questions which future research on franchising should emphasise. Moreover, our research may ring alarm bells for court lawyers. Our research provides insights on franchising, showing a dynamic shift towards the concerns which are in line with § 81 (1) a-c Treaty on European Community. Some franchise systems should consider a business re design to make it more clearly on which incidents the entrepreneurial tasks of outlet managers are based on.