Abstract
The objective for this current study is to propose a conceptual framework investigating the relationship between franchisee and franchisor from franchisee’s perception. Taking its cue from the Agency theory, this study gives an additional value in franchise business industry literature by proposing an extensive approach to understand the role of commitment and compliance to the franchisor from the franchisees’ perspective. Trust acts as an independent variable, compliance as a dependent variable, commitment as mediator variable and environmental uncertainty as a moderator in this study. This is a quantitative study and will adopt a cross-sectional survey research method which the data will be collected at just one-time period throughout this study. The sample of this study would be individual franchisee from various sectors. In addition, this study can contribute to the conceptual understanding on the internal franchise relationship. For instance, this research also can contribute for the added value on the literature review for the future researcher in the same area. The determinant of franchise compliance will promote a healthy and positive working environment in this franchise relationship.
Keywords: Trustcommitmentcomplianceenvironmental uncertainty
Introduction
In Malaysia, franchising has become one more prominent business entity besides sole proprietorships, partnerships and companies or branch offices of foreign companies. Today, franchising strategy is broadly used in business especially for the new entrepreneurs. Since 1950s, franchise industry has been at the top point of business strategy which presenting an incredible profit rates in sales. Franchising is a form of business that duplicates franchisor’s business model which has been established and proven to be successful in term of quality and uniformity of products or services (Davies et al., 2011). According to Ishak (2016), up to this time the franchise industry in Malaysia is in its early stage as most of the local franchisor and franchisee are in the development phase.
There is a judgment that purely contractual forms of governance are not ample to control franchisees’ potential opportunistic behaviour (Davies et al., 2011), whereas the progress of good relationship enables franchisees to cope with uncertainty and unpredictability in their relationships with the franchisors (Dada et al., 2015). Obviously, commitment becomes the link for both franchisor and franchisee in order to build a quality relationship in their business (Amy et al., 2011). Thus, the commitment acts as an alternate for formal knowledge and boosts the spirit of cooperation (Altinay et al., 2014).
In franchising business, it is very important to get both franchisee and franchisor to comply both in formal or non-formal relationship (Eser, 2012). According to O’ Connel (2014), compliance has many definitions but in this study compliance refers to the obedience and fulfilment between two parties which is the franchisor and franchisee in running their franchise business. In fact, the Franchise Act 1998 contribute in the registration stage of franchise business and make use to regulate franchise for incidental matters. By having this enactment, the franchisees have to follow their franchisor’s model by maintaining reputation, and standards determined by their franchisor. Thus, Wang and Yang (2013), stated that this positive interpersonal relations is influenced by the franchisee’s compliance with guidance and advice from the franchisor. So, if the franchisee does not trust their franchisor, this will result in non-compliance and it leads to the failure of the franchise relationship (Davies et al., 2011).
Franchise Industry
The franchise business involves the internal relationship between two parties namely the franchisor (the owner of the brand’s name) and franchisee (person that buys the business model from the franchisor). This relationship occurs when the franchisee is willing to buy the business model from the franchisor including the brand name and product with a legally binding agreement between the two parties (Combs et al., 2004). According to Chiou et al. (2004), franchise is defined as a contractual honour granted by the individual or company (franchisor or owner) to another individual or company (franchisee or buyer) after the franchisor has tested the business products or services successfully in the among customers. Therefore, in the franchising sector involves numerous negotiations between the owners and agents that require good working relationship.
Franchise Business in Malaysia
The starting point of franchise business industry in Malaysia can be track down to the 1940s by the existing of the Singer sewing machine as the start-up franchise company in Malaysia. This company come out with their product such as sewing machines and home electrical appliances by using franchising format. After that, many more franchising companies entered Malaysia with the variety of products and services in different sector such as food and beverages, clothing and accessories, education and childcare, services, beauty and healthcare concepts, information, communication and technology (ICT), convenient stores and others until now. The Malaysian Franchise Association (MFA) was established in 1994 to reinforce the effectuation of government programs and activities to endorse entrepreneurship through franchising and development in Malaysia and it becomes an intermediary between franchise entities. In 2015, Malaysia became the third largest industrialized market economy country in Southeast Asia with a good reputation. As the result, currently the ministry engages the franchise industry by giving support to the local franchisor to enter international market by implementers Franchise Development Programme (FMGG) and Enhanced Franchise Development Programme (EFDP).
Literature Review
Trust
According to (Barney & Hansen, 2010), trust is a component of confidence that is critical in the exchange relationship. Davies et al. (2011) stated that franchisee will be confident of their franchisors when they know the level of risk involved in the business. In fact, in franchise industry, trust is important as it is the link to the operational standards and uniformity across franchise networking. Thus, trust is a psychological phase that comprises of the intention based on the expectations of the intentions or behaviour of another party.
Trust may also expedite social interchange in relationship because it has been speculated as one factor that forms cognitive appraisal of threat or vulnerable situations (Altinay et al., 2014). For instance, trust performs as the mechanism that assists in the cooperation between franchisors and franchisees (Hunt & Morgan, 1996). To trust one another, both parties must feel comfortable between each other’s (Sanzo et al., 2003). Thus, the most important values in trust is to determines the extent to which one party can rely on the both verbal and non-verbal of the others (Eser, 2012).
Commitment
Commitment is defined as a key determinant of excellent relationships between two parties where each party have execute their responsibility to each other (De Dreu, 2015). According to Wright and Grace (2011), commitment is the willingness of two parties to comply with the agreed franchise practices and both parties is required to fulfil their respective obligations to each other. Hence, commitment leads to confidence that is needed to stabilise the relationship for both parties (Ferro et al., 2016).
According to Affes (2016), commitment is critical in continuous relationship where the communication with the other partner is very important and it requires maximum effort to maintain the relationship. For this reason, commitment should be established to control the relationship between two or more parties because it is useful for them in adapting the new situation or unexpected circumstances (Wright & Grace, 2011). Therefore, commitment helps to improve the relationship and can be seen as a foundation in forming a relationship.
Compliance
Compliance refers to the concept of cooperation between two or more individuals that involve of certain agreement between them (Davies et al., 2011). According to Tikoo (2005), in the compliance relationship, an written agreement is important to prove the relationship establish between two parties. Due to this, the successful of franchise system required constant product and standard services from both franchisor and franchisee to make it profitable (Lee, 2017).
Environmental Uncertainty as Moderator
Environmental uncertainty refers to the changes in the business environment that is beyond the firm’s control (Wang et al., 2013). It arises when the organization lack of factual or information regarding their business operation internally or externally (Geyskens et al., 2006). More importantly, this environmental uncertainty is about how well the companies adapt to external environmental changes in their internal relationship especially for franchise system (Bstieler, 2018). Thus, environmental uncertainty should be seriously considered because it can result in conflict in the franchisee-franchisor relationship.
Underpinning Theory
During the 1960s and early 1970s, economists studied and explored with regard to the risk and conflicts among the individuals or groups when working together (Eisenhardt, 1989b). In fact, it is not easy to comply with another individual especially in an on-going business relationship (Dickey et al., 2008). Thus, the Agency theory is used as the basis understanding the complexities of the internal relationship between franchisor-franchisee (Lafontaine & Slade, 2018) because it is focused at a universal business relationship, in which one party (the principle) delegates work to other party (the agent), who performs the task (Eisenhardt, 1989a).
Traditionally, the Agency Theory has two streams which are positivist and principle-agent (Jensen, 1983) and both streams share the same unit of analysis (principle and agent). According to Eisenhardt (1985), principle here refers to the franchisor and the agent refers to franchisee, therefore, this theory is still relevant to be used until today in any business sector. In the business context, the definition of principal and agent are not specifically directed to the franchisor and franchisee but it may also refer to supplier, customer or partnership depending on the what type of relationship is involved (Combs, 2003). Hence, this study takes into consideration where the principal (franchisor) and agent (franchisee) will be the unit of analysis linked by trust to commitment that can affect compliance in the franchisor-franchisee relationship.
Problem Statement
In Malaysia, most franchisees have come a cross complication in their business and some of them time off from the industry due to poor business performance or termination by the franchisor (Ishak, 2016). The franchisee feels pressured and burdened by the franchisor and perceive that the agreement is not advantageous to them (Davies et al., 2011). In addition, 30 franchisees filed for bankruptcy due to profit loss when they had to shut down their operations and met difficulties in repaying their loan instalments to Perbadanan Nasional Berhad (PNS) (Affes, 2016). Thus, this shows that franchisees have problems with their franchisor and this might lead to the strained relationship between franchisor and franchisee.
Additionally, when the number of franchisees increases with the same franchisor, there will be intense competition among them because the franchise outlets will be in same state or nearby with the same business model (Asad Sadi & Henderson, 2011). Similarly, the franchisor will have problems to regulate a growing network of franchisees as well as providing support services and management team as fair as possible while mitigating remaining agency issues (Chiou et al., 2004). Therefore, despite the growth at the industry in Malaysia, the relationship between franchisor and franchisee has remained contentious.
Research Questions
Based on the research objectives, this study accordingly pursues to explore and answer the following research questions:
Does franchisee’s trust positively and significantly affect commitment?
Does the commitment positively and significantly affect compliance?
Does the commitment mediate the relationship between trust and compliance?
Does the environmental uncertainty moderate the relationship between commitment and compliance?
Purpose of the Study
Based on the previous discussion, this study aims to examine the commitment and compliance of franchisee towards their franchisor. The expectation of this study is to explore the extent to which trust effect will boost and enhance franchisees’ commitment. Therefore, this study attempts to meet the following research objectives:
To examine the relationship between franchisee’s trust and commitment.
To examine the relationship between franchisee’s commitment and compliance.
To examine the extent to which commitment mediate the relationship between trust and compliance.
To study the moderating effect of the environmental uncertainty in strengthening the relationship between commitment and compliance.
Research Methods
This research is designed as quantitative approach that will utilize a quantitative research method to examine the relationship between dependent and independent variables. This study is a correlational study which has two or more variables from the same group of participants and determines relationship between variables. This current study adopted a cross-sectional survey research and the data will be collected at just one-point at a period of time. Thus, self-administered questionnaire survey will be used as a technique for data collection which the sample or respondent have to answer the questions. Researcher will use drop-off and pick-up method in this current study. The sample for this study is individual franchisee in Malaysia who registers under the Registrar of Franchise, Ministry of Domestic Trade and Consumer Affairs (MDTCA). Then, the unit of analysis in this study is the individual which referring to the franchisee as an individual unit. This study will utilise non-probability sampling to obtain information from those who are readily available or from target groups. Thus, purposive sampling is used in this study because the franchisee is the only ones who can respond to the survey, or they can comply with some criteria set by the researcher. The minimum sample size in this study will be determined by the G-Power technique.
Findings
The conceptual framework for this study is designed based on literature review above. There are 4 hypotheses build in this study to show the relationship between the variables.
Research Framework
The conceptual framework for this study is designed as below (Figure
![Conceptual Framework](https://www.europeanproceedings.com/files/data/article/1023/11146/AAMC2019F43.fig.001.jpg)
Hypotheses
Trust and Commitment
While the franchising business concept has become popular and can be accepted worldwide as a strategy to gain more profit, franchisor has to manage their business properly in order to elicit commitment from their franchisee (Croonen, 2010). For instance, the franchisor should be able to guide and help their franchisee especially to preserve the integrity and reputation of their brand name (Ernst & Young, 2008). Although commitment seems like the most important factor in building a good relationship, the franchisor also need to consider trust issues on the part of their franchisees (Ishak, 2016). According to Dickey et al. (2008), commitment has been identified to be directly influenced by trust in both short or long term business relationship. Thus, when both parties trusted each other, they will be committed to maintain their relationship within the scope of their business environment (Hunt & Morgan, 1996). Therefore, the study hypothesizes that:
Commitment and Compliance
Franchisee’s compliance refers to the extent which a franchisee obeys to franchisor directives, instructive, policies and procedures regardless of the reason for agreement (Dickey et al., 2008). The franchisee must follow the rules and regulations determined by the franchisor without changes to specifications or selling substitute product to gain profit (Wang et al., 2013). Furthermore, Davies et al. (2011) stated that franchisee’s compliance is a consequence of commitment between franchisee and franchisor in the franchise relationship. According to Meyer and Allen (1997) the franchisor who is committed with their task and responsibility is the one who can guide their franchisee successfully in the business. Thus, by having a committed franchisor, the franchisee will also put their commitment in the relationship and try to comply together as a strong team (Lee, 2017).
Through the franchisor’s commitment, the franchisee will feel pleasure and ease to stay with the franchisor in the business rather than just putting the rules and regulation as a gap between their relationship (Dant et al., 2013). Franchisee will put their commitment towards franchisor if the franchisor give feedback and action in any issues raise along the business period (Cheng, 2014). For instance, the franchisee may feel disappointed or betrayed when the franchisor is not committed to them especially on critical issues, resulting in animosity between both parties, the conflict may result in the franchisee terminating their relationship with the franchisor (Ernst & Young, 2008). Furthermore, to get a strong relationship in a long period is not easy especially when one party have to follow all rules and regulation from another party without hesitate (Dean, 2006). Thus, obtaining the compliance in franchise relationship is the most important goal in the franchise business strategy (Davies et al., 2011).
Commitment as mediator
Commitment is the consequence of trust and it entails confidence from two parties to provide the stability in the relationship (Dwyer & Oh, 1987). Based on Ouedraogo and Ouakouak (2018), commitment is like a cornerstone to enhance the relationship between franchisor and franchisee in franchising. In fact, commitment is the outcome of trust (Eser, 2012) and as a driving force towards compliance in order to support the relationship (Hackel, 2014). According to Ernst and Young (2008), commitment is an important aspect of trust in all types of business relationship but it is rarely study especially in franchise context. Thus, when both parties are committed by contract, especially agreements that are more relational in nature, the relationship will be better in order to get trust and comply with agreement (Hunt & Morgan, 1996).
Environmental Uncertainty as a moderator between Commitment and Compliance
An organization might face difficulties when their business is disrupted by environmental uncertainty that may impact on their internal and external relationships (Cannon et al., 2007; Zhang et al., 2015). Previous studies have shown that the franchisee will still commit to their franchisor if their franchisor understands their situation especially for the unexpected business risk such as market volatility, economic crisis and customer demanding (Wang & Yang, 2013). Nevertheless, franchisee may not comply with their franchisors although they are willing to commit because of environmental uncertainty causing franchisee resorting to the usage of substitute raw material due to religious, and economic requirements (Jiang & Tornikoski, 2018). Thus, environmental uncertainty influences the relationship between the franchisor and franchisee. Therefore this study hypothesizes that:
Conclusion
The main objective of this research is to establish the relationship between the trust, commitment as mediator, compliance and environmental uncertainty as moderator. From the academic perspective, this study is to review current literature which is to evaluate whether or not commitment leads to compliance in the franchise partnership. Previously, Dickey et al. (2008) had investigated on compliance and performance between franchisee and franchisor and Ishak (2016) investigated on relationship between quality and loyalty. Hence, this study will be focusing on trust, commitment and compliance with environmental uncertainty as the moderator.
For the practical perspective, both franchisor and franchisee can apply the results of the study in their daily business as it may assist the franchisor in understanding the importance of building a committed relationship between the franchisor and the franchisee. In fact, the result can be used for the future franchisee training programme based on the feedback given in this study. Thus, this study also indirectly contributes to the existing literature on franchising business relationship in the Malaysian context.
The franchising sector is a complicated sector because it involves numerous negotiations between the owners and the agents (Tikoo, 2005). The franchisor also plays an important role with regard to networking for and on behalf of the franchisees. Nowadays, the ministry engages the franchise industry by giving support to the local franchisor to enter international market by implementers FMGG and EFDP. Thus, the franchisor should strengthen their relationship with their franchisee to solidify the foundation for international forays with prospective franchisees from other country (Hizam-Hanafiah & Li, 2014). As in international marketing, if a company is going international, they should conduct a country analysis about the country that they want to enter because of different rules and norms (Rahatullah & Raeside, 2008). Thus, the perception of franchisee towards their franchisor is very important to strengthen the franchising relationship and more successful.
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Abd Halim, S. N. B., Ibrahim, H. I., Zulkafli, A. H., & Isa, A. (2020). Trust, Commitment And Compliance: A Study Of Franchisee’S Perception Towards The Franchisor. In Z. Ahmad (Ed.), Progressing Beyond and Better: Leading Businesses for a Sustainable Future, vol 88. European Proceedings of Social and Behavioural Sciences (pp. 483-492). European Publisher. https://doi.org/10.15405/epsbs.2020.10.43