The Role of Trust 58
The Role of Trust in Franchise Organizations
Michael H. Dickey
Dickey Analytics, LLC
D. Harrison McKnight
Michigan State University
Joey F. George
Florida State University
Abstract
Purpose – This study examines how two types of trust affect five key franchisee attitudes/behaviors within a setting where franchisees have strong contractual ties to the franchisor. The five attitudes/behaviors are: identification and satisfaction with the franchisor, compliance and non-compliance with franchisor directives, and perceived relationship quality. These attitudes/behaviors were chosen because research has found each to affect franchise performance.
Design/Methodology/Approach – Our model features two trusting beliefs which influence attitudes/behaviors. The study gathers US franchisee questionnaire data then analyzes the model using partial least squares techniques.
Findings – Trusting belief-competence was found to reduce non-compliance with the franchisor, and also increase identification with the franchisor. Both trusting belief-competence and trusting belief-honesty were found to enhance satisfaction with the franchisor and perceived relationship quality. Neither of these two trusting beliefs was found to influence compliance with franchisor directives. Perceived mutual commitment appears to strongly influence both trusting beliefs, whereas length of time as a franchisee does not.
Research Limitations/Implications – The findings support relational contracting theory, showing that even within a contract, trust exerts a significant influence on vital franchisee attitudes. Other research shows these attitudes/behaviors influence franchise performance, though the present study does not measure performance.
Practical Implications – The results suggest franchisee trust is key to the ongoing franchise relationship. Hence, franchisors should try to build franchisee trust. They can do so by enhancing mutual commitment and by supplying well-conceived new products and marketing campaigns.
Originality/Value – This study clearly shows the value of franchisee trust and suggests several ways to build it.
Paper type – Research
Keywords – Trust, Commitment, Compliance, Franchise organizations, Identification, Intra-firm relationships, Relational, Contract
The viability of franchising as an organizational form has been called into question by a number of researchers. On average, franchise organizations deliver poorer product quality (Michael, 2000), are less successful at coordinating marketing strategies (Michael, 2002), and advertise less (Michael, 1999) than their wholly company-owned competitors. The theoretical explanation offered is that franchisees have more incentive to “free ride.” In other words, to take advantage of the positive effects of others’ investments, such as product quality and advertising, while minimizing investments of their own (Brickley et al., 1991). “[T]he investment of any given franchisee ‘spills over’ to other franchisees across the chain, as mobile customers take their experience from one unit to another. In the presence of such spillovers, franchisees have an incentive to underinvest in advertising and quality” (Michael, 2002, p. 326). Despite franchisor efforts to monitor and control franchisee operations, such as inspection audits and contractually mandated financial and marketing reporting, free riding continues to be a threat to the competitive advantage offered by the franchise organizational form (Michael, 2000).
Franchisees are not the only ones with an incentive to behave opportunistically. Some franchisors are purported to engage in questionable practices such as encroaching on franchisee territories (Schneider et al., 1998), misusing cooperative advertising funds (Luxenberg, 1986), using discriminatory product pricing (Emerson, 1998), and employing unfair contract terminations (Rau, 1992). Typically, franchisors possess substantially more bargaining power than their franchisee partners (Klein, 1980), which makes it possible for franchisors to “extract unfair concessions” from franchisees (Kumar, 1996, p. 92).
Thus, we see that despite the use of contracts to safeguard exchanges, incentives for opportunism are high on both sides of the franchisee-franchisor equation. Not only are these incentives high, but opportunistic behavior appears to reduce long-term performance. For example, when a franchisor tries to encroach on a franchisee territory, the satisfaction of the franchisee will drop, leading to franchisee acts of non-compliance with franchisor directives and a franchisee perception that the quality of their relationship is deteriorating. An explanation for such situations may be grounded in relational contract theory (Macneil, 1980), which asserts that because some contracts (like franchise contracts) cannot fully articulate the obligations of the exchange, these contracts are inherently relational in nature (Corones, 2000). According to Macneil (1980), relational contracts involve ongoing relationships between the parties that define informally what parties expect aside from formal contract terms. Relational components of contracts must be informally defined because they cannot typically be codified into well-defined obligations (Goetz and Scott, 1981). Inability to capture all contingencies in the contract may result from complexity and/or uncertainty in the exchange (Goetz and Scott, 1981). For instance, uncertainty in long-term market conditions over a ten-year franchise contract period may not permit a franchisor to fully specify its obligation to the franchisee to provide marketing support. Likewise, the ambiguity implied in terms such as “high quality customer service” impedes full definition of franchisee obligations in this area. So the relationship between the exchange partners becomes more salient than in conventional discrete transaction contracts in which contract terms are less ambiguous. As an example, company A purchases ten computers from company B, at a stated price, to be delivered by a certain date (Macneil, 1980),.
One governance mechanism that may serve as an alternative to contracts in inter-organizational relationships is trust (Alvarez et al., 2003). Because franchise contracts are inherently relational (Goetz and Scott, 1981), we believe trust may play a crucial role in minimizing opportunistic behavior such as free riding. While contract terms and franchisor hierarchical control mechanisms also govern franchisee-franchisor exchanges, trust is central to almost any relationship (Golembiewski and McConkie, 1975; Mishra, 1996), and becomes particularly important in situations of risk, uncertainty, or high likelihood of opportunism (Cummings and Bromiley, 1996). In general, trust has been found to be very helpful in cooperative endeavors (Axelrod, 1984; Fukuyama, 1995) and plays an important role in helping parties work through conflict productively (Anderson and Narus, 1990; Deutsch, 1973). This study examines the effects of franchisee trust in the franchisor (i.e., from the perspective of the franchisee).
We view trust more as a utilitarian concept rather than as an end in itself. Trust is not an end in itself because too much trust can cause as many problems as too little trust. For example, abuses may occur when one party acts with unquestioning trust of the other. However, within reasonable bounds, and accompanied by other governance mechanisms, trust can produce favorable franchisee perceptions.
Despite the seeming salience of trust in franchise organizations, to our knowledge it has not been explored in the extant literature. Thus, we examine the role of trust in franchise organizations. We argue that the degree to which a franchisee trusts his or her franchisor plays a critical role in (1) reducing opportunistic behavior such as non-compliant free riding, and (2) shaping franchisee attitudes vital to the franchisor-franchisee relationship. We look at the relationship of trust to two franchisee behaviors – franchisee compliance and franchisee non-compliance – which we use as proxies for (non-)opportunistic behavior. Such behavior can negatively impact franchise performance. We examine the relationship of trust to three attitudes – identification with and franchisee satisfaction with the franchisor, and perceived franchisor-franchisee relationship quality – which have been theorized as positively influencing the performance of franchise organizations. Finally, we look at the relative strength of two possible drivers of trust – length of time as a franchisee, and perceived mutual commitment to the franchisor.
By determining the extent to which trust reduces opportunistic behavior and helps develop positive franchisee perceptions of the franchisor, we contribute to research in such relationships. Specifically, our contribution consists of examining how trust, a relational governance mechanism, works within the context of long-term contracts and hierarchical controls that are also intended to minimize free riding and nurture franchisee-franchisor relationships. We examine the effects of two types of trust. This article will determine the extent to which trust affects important variables when contractual agreements already govern the relationship. In franchising, commitment is already formalized by a long-term contract. This article also contributes by showing the extent to which franchisee perceived mutual commitment influences trust in the franchisor.
Arguably, trust does not work in a vacuum (Bennett and Robson, 2004), but operates in conjunction with other control mechanisms that manage risk. Indeed, Poppo and Zenger (2002) demonstrate that contractual governance and relational governance affect each other. For this study, we decided to address the effects of trust within a contractual setting, in order to see whether or not trust has any impact when contracts are used. Thus, we do not argue that trust substitutes for contractual mechanisms, but we show that trust still has an effect within a setting where contracts already address significant risks within the relationship but in which opportunism is still quite possible.
This article is organized as follows. First, we present a conceptual model that delineates two antecedents and five consequences of trust. We argue that the five consequences are key to franchise performance. Second, we outline the research methodology used for a study of food service industry franchisees, followed by a presentation of the results. Finally, we discuss the implications of the findings.
Conceptual Model
A conceptual model (Figure 1) shows that trust may be positively influenced by duration of franchisee experience and franchisee commitment to the franchise relationship. Other antecedents of trust could also be pursued, such as distributive and procedural justice (Kumar, 1996; Mayer and Davis, 1999) or structural guarantees (Zucker, 1986). However, we chose to examine only two antecedents of trust in this study. The model also shows that trust in turn may positively influence the two franchisee behaviors and the three franchisee attitudes specified above. These five behaviors and attitudes influence franchise performance. Though we briefly review past research that links these to performance, we do not test these links. Hence, they are shown as dotted line linkages. Sutton and Staw (1995) suggest that it is acceptable for researchers to propose more extensive models than they test in a single study. In the next section, we discuss the relevance of trust to the franchise context, the viability of the franchisee behaviors as proxies for opportunistic behavior, and the importance of the five franchisee behaviors and attitudes to the performance of franchise organizations. We then develop the hypotheses shown in Figure 1.
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Model Constructs and Their Relationship to Franchise Performance
Trust. Trust has been defined in many ways. Some psychologists defined trust as a personality trait (Rotter, 1971) or as a trusting behavior that leaves one vulnerable to the other (Kee and Knox, 1970; Zand, 1972). More recently, trust has tended to be defined in one of two ways: (1) as a confident belief or expectation (i.e., a trusting belief), and (2) as a willingness or intention to depend on the trustee (i.e., a trusting intention). Trusting beliefs involve perceptions that the other party will act in ways favorable to the trustor (Boone and Holmes, 1991; see also Gambetta, 1988; McEvily et al., 2003), or that the other party has ethical, efficacious, or favorable characteristics (Hagen and Choe, 1998; Lewicki et al., 1998).
By contrast, trusting intention involves a willingness to become vulnerable to the other or a willingness or intention to depend on the other (Baier, 1986; Currall and Judge, 1995). Currall and Judge (1995, p. 153) suggest that their trust construct “corresponds to the behavioral intention construct” in the Fishbein and Ajzen (1980) theory of reasoned action. Trusting beliefs is similar to the Fishbein and Ajzen belief construct.
Interestingly, Mishra (1996) and Rousseau et al. (1998) include both trusting intention and trusting beliefs in their more comprehensive trust definitions. By contrast, Mayer et al. (1995) set forth separate definitions for trusting intention and trusting beliefs, suggesting that trusting beliefs lead to trusting intention. They delineate three trusting beliefs – ability, benevolence, and integrity. Other beliefs exist, such as dependability (Kumar, 1996), reliability, predictability (Rempel et al., 1985), competence (similar to ability), judgment, and openness (Gabarro, 1978; Mishra, 1996). We choose to call these two types of trust, respectively, “trusting intention” and “trusting beliefs,” following the trust concept typology of McKnight et al. (1998; 2001). Some evidence that trusting beliefs predict trusting intention has been found in studies on trust in leaders (Mayer and Davis, 1999).
This study focuses on trusting beliefs rather than on trusting intention for several reasons. First, franchisee trusting intention may arise because of structural or situational issues rather than because of franchisee beliefs in the franchisor, and we wanted to focus directly on the relational aspects of governance. Second, in a franchise environment, trusting intention is indicated contractually. By signing the franchise agreement, the franchisee indicates his/her willingness to depend on the franchisor. In fact, signing the agreement makes the franchisee dependent on the franchisor in many ways, such as depending upon the franchisor to provide a quality product. At the same time, the franchisee becomes a much less powerful partner (Kumar, 1996). Hence, trusting intention should exist for nearly all franchisees, which led us to believe that variance in trusting intention might be minimal. Third, specific trusting beliefs about the franchisor are likely to be more varied and may have more to do with the day-to-day relationship between the franchisee and franchisor, which is very likely to affect franchisee behaviors and attitudes toward the franchisor.
The conceptual model includes two trusting belief constructs: trusting belief in franchisor competence and trusting belief in franchisor honesty. Trusting belief-competence is the degree to which the franchisee believes that the franchisor is capable of performing its duties. Trusting belief-honesty is the degree to which the franchisee believes in the franchisor’s truthfulness. Trusting belief-honesty is narrower than integrity, which includes devotion to other ethical principles besides truthfulness (Mayer et al., 1995). It is similar to one aspect of the type of trust Kumar (1996) called dependability – that the trustee “would honor their word” (Kumar, 1996, p. 95). Although other trusting beliefs exist (as listed above), these two constructs were selected because honesty and competence beliefs about the franchisor give the franchisee assurance that the franchisor meets basic criteria for doing business together. Unless the franchisor is honest and able to perform its duties well, the franchisee will feel insecure in the relationship, and will resort to control measures for protection. Trusting beliefs are measured from the point of view of the franchisee because we are interested in how they view the franchising relationship, recognizing that their trusting beliefs in the franchisor are likely to differ from the franchisor’s trusting beliefs in them because franchisors, like manufacturers, often have blind spots about their retail associates (Kumar, 1996). We use the unmodified term “trust” to refer to the above two trusting beliefs in general and to convey information from the literature on trust.