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Measuring Performance

Companies generally have two ways of evaluating people: measuring the level of their effort and measuring the level of their performance. Franchising works best in industries such as retail, in which measuring the level of people's performance can be done easily and effectively, but measuring their effort is more difficult. For example, franchising works well in fast food because sales, which are easy to measure, tend to increase when people work harder at advertising and promoting a business and when they maintain efficiency and cleanliness in outlets, even though things such as the effort that they expended to clean the outlets or promote the products are hard to measure.

On the other hand, in industries in which the level of people's performance is hard to measure, franchising is a less valuable form of business. When measures of performance are not instantaneous or are unclear, company ownership of outlets is better because the profit motive is not very effective at motivating people to work hard. For example, suppose that developing a new production process would benefit a business, but its effect on increasing sales or cutting costs is unclear. Franchising would not be a very good mode of business in this example because the incentives of franchisees to develop the new production process would be low. Their compensation from franchising would not be affected much by the thing the franchisor was trying to motivate them to do: develop a new production process.

Measures of performance are more effective with businesses that operate in more markets. As a result, franchising works better in industries that are found in a wider range of geographic locations than in ones found in a narrow range of places. For example, franchising works extremely well in the restaurant and fast food industries because these businesses can be located anywhere—inside malls, strip centers, stadiums, universities, hospitals, and so on. The more geographically dispersed industries are, the greater the variation in business environments firms in those industries face. This variation in the external environment helps the entity measuring performance—in this case, the franchisor—to separate the effect of the environment from the effect of the performer, allowing more accurate measurement of the effect of the performer. Thus, in industries in which outlets are found in all locations in the world—say, ice cream parlors—the value of franchising is greater than in ones found only in a few places—say, apartment rental services.

Stop! Don't Do It!

  1. Don't franchise in a capital intensive industry; you will achieve few benefits from it.

  2. Don't ignore the value of franchising as a way to keep costs down.

  3. Don't franchise in industries in which measures of effort are better indicators than measures of output.

  4. Don't franchise in industries that operate in only narrow geographic environments; the narrowness will hinder the measurement of performance.

Questions to Ask Yourself

  1. Is my industry appropriate for franchising?

  2. Are the production and distribution processes in my industry favorable to franchising?

  3. Are the operations of businesses in my industry easily standardized, codified, and learned by others?

  4. Is my industry labor or capital intensive?

  5. Are brand names an important competitive advantage in my industry?

  6. Are outlets in my industry too expensive and too risky to operate for me to franchise?

  7. Can performance of outlet operators be measured effectively in my industry?

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