Can you imagine trying to lead 120 Managing Directors? The phrase “like herding cats” comes to mind. The key to success in this, in our experience, is fostering a strong organisational culture based on mutual respect and the interdependent nature of the franchise relationship.  

The problem many franchisors have with this is that they may have been brilliant at starting and building their own business, but being a franchisor isn't about that. Being a franchisor takes a different skillset. Being a franchisor is about being a leader’s leader, helping franchisees to work with the systems, the brand and each other to build their own business. More like a coach, a mentor, a consultant and a diplomat than a traditional corporate leader.

The difference is spelled out in a neat sentence from Joe Mathews and Thomas Scott in their article Why do Franchisors Fail?

“To succeed as a franchisor, the [business] must successfully transition its culture from that of a strong central authority where all decisions are made at the top to a more decentralized and empowerment culture where more decisions are made at street-level by the franchisee.”

An example of a franchise which has forgotten this principle, to its detriment, is McDonald’s. The global fast-food chain evidently tightened up its central authority in an effort to counter the effects of the global recession, greater competition and more health-conscious customers. In the face of the backlash from its franchisees, McDonald’s has been forced to hastily replace its CEO and promise to “listen more and assume less”.

 

In McDonald’s early days, things were different. Founder Ray Kroc may have been a dictator in his insistence on the highest standards of quality, service and cleanliness at McDonald’s restaurants – more than once when visiting franchisees, he got down on his knees in the carpark to scrape gum up with a putty knife – but he was also famous for listening to his franchisees – and acting on good ideas. Both the Big Mac and Egg McMuffin – still McDonald’s staples to this day – originated from franchisees.

Kroc has been described as “a leader driven by vision, but one willing to nurture talent and ideas not his own, a rare combination for an entrepreneur” by leadership coach John Baldoni in his case study Ray Kroc – A Salesman’s Leader.

Could Kroc’s success as a franchisor be partly attributed to the fact that he came from a background as a salesman, not a corporate leader?

 

Writers on franchise leadership almost always talk about the importance of having a vision, but even seasoned franchise experts such as consultant Mark Siebert and attorney Nicola Broadhurst sometimes neglect to mention that, in franchising, having the vision isn’t enough. You need to be able to instil that vision in others, to get them to believe in your business almost as much as you do.

 

Franchising is different from many other business models in that it’s about relationships, specifically franchisor-franchisee relationships. The key to maintaining these relationships – apart from mutual respect – is mutual gain. It’s an old adage in franchising that the franchisor can’t be successful unless the franchisees are successful, but it’s also true that a franchisor’s definition of success is different from a franchisee’s. Because the franchisor’s income comes from a percentage of the franchisee’s revenue, success for the franchisor is about maximising that revenue. But for the franchisee, strong revenue doesn’t necessarily mean strong profitability, so success is very much about how much of their revenue they get to keep – in other words, what their net profitability is. The economics of franchising can create tension between the franchisor and franchisee.

The solution is for the franchisor to focus on mutual gain – that is, the franchisee’s profitability as well as the franchisor’s profitability. Underpinning this in best-practice franchises is a strong understanding of the key value drivers at all levels of their industries. These franchisors simply understand their franchisees’ businesses better than their franchisees do, using company-owned stores, real-time franchisee performance monitoring, customer satisfaction surveys and an array of other tools to build their understanding.

Ray Kroc took this a step further. He truly believed in the philosophy of putting franchisees’ profits first. He originally started out by charging franchise royalties of just 1½% and refusing to charge any markup on equipment and supplies provided to franchisees, then wondered why he wasn’t making any money after selling his first 18 franchises. The business was only saved by the timely hiring of Harry Sonneborn, who came up with the idea of building McDonald’s restaurants and leasing them back to franchisees. The idea provided McDonald’s with the extra income it desperately needed to survive.

 

A while back I wrote an article entitled Is Conflict Inevitable In Franchising? I talked about the economics of franchising and the tension created by the different ways franchisors and franchisees make money. I talked about the tension created by the dichotomy of franchisees being required, on the one hand, to be independent entrepreneurs but on the other, to comply with the franchisors’ systems. As you’d expect, these tensions have the potential to cause a fair amount of conflict. In fact, one in five New Zealand franchisors reported in a recent survey that they were involved in disputes with franchisees.

It may never be possible to completely eliminate conflict from franchising but franchisors can go a long way toward reducing it by working in a spirit of collaboration with franchisees and actively managing the tensions that naturally exist.

 

Nicola Broadhurst of law firm Stevens & Bolton in her article What Makes a Great Franchise Leader? claims that franchisors need to embrace change. Yes, they do. But we like Ed Teixeira’s phrase in his article What Makes an Effective Franchise Leader? better: “Innovate with franchisee buy-in”. Just as vision is useless in a franchise unless the franchisees share it, change is useless unless the franchisees buy in. Or better still, drive some of it themselves, as in the case of the invention of the Big Mac and Egg McMuffin.