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• An Interview with
Peter Birkeland Ph.D.
• Publishers Weekly
• Library Journal
• amazon.com
• Wallstreet Journal
An Interview with Peter
Birkeland
Question:
Franchising has become an ever-present feature of the American economic
landscape. One-third of the U.S. gross domestic product flows through
franchises, and they employ one out of every sixteen workers. How
did franchising come to play such a dominant role in the American
economy?
Birkeland:
I think three factors have fueled the growth of franchising. First,
there are people who have some sort of business on a small scale,
say, a restaurant or a bakery, and they have designs to expand to
a national market. Franchising affords an opportunity for the aspiring
entrepreneur to reach a national market in relatively short order,
with little capital outlay, and with minimal risk. While there have
probably always been people with grandiose ideas, the business owner
today can work with a specialist franchise consulting company to
take his or her idea or product and make it "franchiseable." These
franchise consulting companies essentially sell a "franchise package"
that includes the legal requirements to franchise, marketing plans
to sell franchises, and business format plans that take an idiosyncratic
and unique business and standardize it. Even services that seem
to be impossible to standardize, like a haircut, are widely franchised
through essentially this process of desire on the part of the entrepreneur,
and means through a consulting specialist.
A second factor that increases the dominance of franchising is demand
by individuals to operate a business, to be their own boss, or to
otherwise work independently. These people believe that owning a
franchise will allow them to achieve that goal. The idea of owning
a business seems to be a fairly persistent demand in the American
economy, and there is a rich sociological tradition, from Eli Chinoy's
Automobile Workers and The American Dream to Nicole Biggart's Charismatic
Capitalism, that documents the aspirations and realization of that
demand. Franchising Dreams follows within that broader sociological
tradition. Also, it is interesting to note that demand for franchise
units increases in inverse proportion to the health of the economy.
When the economy is roaring franchise demand is down, but when the
economy languishes-because of corporate layoffs, corporate downsizing,
or other factors--franchising becomes more attractive.
A third factor that drives franchising is consumers who either prefer
to purchase goods and services from franchised outlets, or are at
least not averse to doing so. Franchised outlets are ubiquitous
in the economy-they are located in the strip malls, in small towns,
suburbs, urban areas, in fact, one can hardly escape franchising.
As long as these three factors exist and remain strong, franchising
will continue to grow.
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Question:
In your book, you argue that opening up a Subway or Blockbuster
Video isn't necessarily as easy as it looks. In fact, for many entrepreneurs
out there, having a franchise can lead to financial insolvency,
or at least instability. What challenges and pitfalls await people
when they take on a store or shop of their own?
Birkeland:
There are two major challenges that await each aspiring franchisee.
First, there are challenges that all business owners face in operating
a small business such as managing employees, keeping costs down,
selling products and services people want to buy, and all the other
challenges associated with business ownership. But the owner of
a franchise unit has additional challenges in working with the franchiser,
because there are constraints on how he or she may operate their
unit. In the book I relate a story told to me by a franchisee who
had owned a unit in a fast-food franchise. He was African-American
and mentioned that the franchiser had standard operating hours of
11:00am to 11:00 pm, or something like that, but in his urban market
those hours were inappropriate and his sales suffered. It took quite
a bit of work to convince the franchiser to allow franchisees in
urban markets to alter the standard operating hours. If you owned
your own business you would just change the hours to fit your market,
but in a franchise system you have to operate according to the franchiser's
standards, and this may impact your sales and profits.
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Question:
Even more interesting is the array of frustrating logistics and
contractual technicalities that franchisees face when they go into
business. The myth of owning and running your own business, is,
well, a myth, right?
Birkeland:
Absolutely. If you enter into franchising you're buying a license
to operate under a trademark and all that it implies. The trademark
may dictate certain business practices, operating procedures, employee
relations, warranties, hours of operation, capital improvements,
and so on that impact one's business. In the best-case scenario
you may gain greater sales and profits because of the trademark,
but there are also externalities over which you have no control.
Franchisees in the Denney's chain were negatively impacted when
one franchisee discriminated against certain customers. For better
or worse, the trademark limits a franchisee's independence, and
also binds all franchisees together.
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Question:
What's interesting about your new book is you amassed this wealth
of information about franchising by actually working at franchise
units for three different companies. How would you describe this
experience? And the folks for whom you worked?
Birkeland:
I was surprised. I didn't realize how difficult it was to be successful,
the amount of time and resources that had to be devoted to these
enterprises in order to make a decent living, much less survive.
And I most certainly did not expect to find franchisees working
with their spouse, children, parents, and extended kinship network
in order to make a go of it. I suppose part of my naïveté stems
from an academic approach that, up to the point where I conducted
the fieldwork, was quite theoretical. Nearly all of organizational
theory, management, and strategy, operates on an abstract level.
Even when case studies are used, it is usually the exceptional,
world-class leader or company that is used to illustrate a point.
If you read enough of that material you can easily come to believe
that the world operates much like these outliers, but that would
be a mistake.
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Question:
You also met with countless CEOs and executives from some pretty
prominent companies. Given the challenges and difficulties that
your new book exposes, you would think that they too would have
a vested interest in reading it. If there is discontent on the frontlines,
it has to be hurting business for the mother corporation, right?
Birkeland:
Yes, you would think that companies where people are aligned to
a common purpose with relatively little discord have a competitive
advantage over the contentious, politicized, internally-focused
company. One difference between a franchised company and a typical
corporation is that franchisers have a nearly ironclad contract
that can be used to control franchisees, so the problem of discontent
may not really enter in to the locus of most decisions. Also, the
source of that discontent could be internal to the franchisee, it
could be a result of economic conditions, or it could be a result
of franchiser management practices. Despite the difficulties associated
with discontent on the frontlines, however, those companies that
are able to pinpoint the source of that discontent and address it
effectively, will be better able to compete. I believe the best
companies do address the tensions within their system and that impacts
their ability to retain key managers on the franchiser side as well
as to attract high-quality franchisees in a competitive market for
talent.
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Question:
We've talked quite a bit about the pitfalls that franchisees face
when they embark on their new businesses. What solutions would you
propose for improving the system?
Birkeland:
One of the first steps needed to change any system is knowledge
of the existing reality and I believe that Franchising Dreams provides
a candid view of these systems that can become the impetus for change.
There is a tendency within franchising to view these systems from
one of two perspectives: you either look at things from the franchiser's
perspective or from the franchisee's perspective. Principal agent
economics views franchising from the principal (franchiser) perspective,
as do many consultants and lawyers, yet there are academics, lawyers
and consultants who view it from the franchisee perspective. The
bifurcation ultimately leads to sub-optimal solutions and to enormous
expenditures of time, effort, and resources on "winning."
For instance, I asked franchisees and franchisers how valuable the
trademark was to them and the responses were consistent and divergent:
franchisers believed the trademark was extremely valuable, while
franchisees believed it had no value, or only a little value. This
is a beautiful finding because knowledge of that inconsistency in
perception can provide a foundation through which franchisees and
franchisers can address the unstated tensions that they live with
on a daily basis.
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Question:
What do you foresee to be the future for franchising in this country?
Will it continue to grow? Or, for lack of better words, have we
reached a point of possible saturation?
Birkeland:
Although I think franchising is, for the foreseeable future, a permanent
fixture in the American economy, there may be changes in business
practices by both franchisees and franchisers that lead to greater
success, to more stability, and to more collaboration across these
very diverse systems. I would hope that Franchising Dreams might
be able to provide people with a reality check on what they might
encounter in franchising. One of the factors that perpetuates franchising
is demand by people to operate a franchise unit and perhaps after
reading the book these potential franchisees may ask tougher questions
of franchisers and spurn those who have unscrupulous business practices.
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PUBLISHERS WEEKLY:
Business professor Birkeland finds ample evidence that franchisers and those who purchase an outlet from them both believe in the American dream of entrepreneurship, with its promise of independence and wealth. His research into everyday franchise operations, though, reveals a slew of differences between the two sides that can cloud that dream. Studying King Cleaners, Sign Masters and Star Muffler (three large pseudonymous franchises) over a four-year period, Birkeland interviewed franchisers and franchisees and worked at individual shops for hands-on experience. The problem, he says, arises when franchises confuse ownership with entrepreneurship. Since delivery of a uniform service or product under a franchise license creates an overriding interest for control in franchisers, owners of franchises are not free to run their businesses as they wish; in fact, the last thing franchisers want is people tinkering with their formula. When an owner later bristles at corporate control and insists on independence, Birkeland states, the relationship between franchiser and franchisee can become a "battle of wills." Birkeland found limited freedom in the franchises he studied; often, hopes for wealth and financial security dissolved as owners worked long hours simply to survive. Despite these challenges, the number of franchises is expanding (Birkeland estimates that one out of every 16 people employed in the U.S. works for a franchise, and approximately one-third of the gross domestic product flows through franchises.) He discerns a pattern to franchisee success: those adept at sales and networking thrive and the most successful franchises are those that manage to build trust between franchiser and franchisee. This is an articulate, illuminating and lively work.
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LIBRARY JOURNAL:
Birkeland, who is the CEO of his own institute as well as a professor and lecturer (at the Universities of Minnesota and Chicago, respectively), tells the story of franchising by engaging us through dialog. Though he uses pseudonyms for company names, his book is based on extensive research culled from interviews, attendance at seminars, and participation in the day-to-day operations of three different franchises. After a brief history of the franchise system, he gets down to the nitty-gritty of this entrepreneurial endeavor. Birkeland offers a balanced perspective as he teaches us about the risks, pitfalls, and challenges for both franchisee and franchiser. In addition, the reader gets an overview of the different types of franchise systems, the components of franchise fundamentals (royalties, trademarks, and long-term contracts), social profiles of franchisees, and for the franchiser, consideration of the question, "Who controls?" This is a useful, readable book, especially for those considering the idea of entering the franchise system for the first time. Recommended for marketing and business collections in both academic and public libraries.
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amazon.com:
Five Star Review submitted by Robert Morris
On a recent Saturday morning, I stopped to pick up laundry and dry
cleaning; then drove a short distance to purchase new wiper blades
for my car which was then washed elsewhere after its tank had been
filled; next stop at a donut shop. Minutes later, I ate two glazed
donuts while my car had a "quick lube" change. Afterward, I rented
two DVDs and purchased two boxes of DOTS candy at the same place
before returning home. Later that day, before our son and his family
arrived, I purchased take-out chicken with mashed potatoes, gravy,
coleslaw, and rolls. I am one of countless Americans who are actively
involved in franchising almost every day (if only as a consumer)
and have become dependent on others to provide various goods and
services. In most instances, the emphasis is on speed and convenience.
Others do for me and my family either what we cannot do (e.g. dry
clean clothes) or would prefer not to do (e.g. install and balance
new tires). Almost all of the franchises with which we do business
are privately-owned.
Until I read Birkeland's book, I knew almost nothing about franchising
except as a consumer. And frankly, I never thought about franchising.
I simply assumed that all of those who work for various "quick"
whatevers, for example, are employees of the same company. Not true.
In the year 2000, in the U.S. alone, more than 2,000 companies in
75 industries will manage approximately 400,000 franchisees. "In
turn, these franchisees collectively manage nearly 8 million workers,
or approximately 1 out of every 16 employed persons in the U.S.
economy." Hmmm. What impact has all this had on the so-called "Mom
and Pop" (family-owned) business? According to Birkeland, the retail
sales that flow through franchise companies is about $1 trillion
or one-third of the entire (repeat, entire) U.S. gross domestic
product. The corporate parents of most major chains (e.g. hotel
and motel, fast food, and donuts) own few of the local businesses
which bear their "brand" name.
So, who owns most of them? Why do they own them? How does it work?
What's involved? And also, have these local (or perhaps regional)
owners made a shrewd investment? Birkeland answers these and countless
other questions, most of which I hadn't even thought to ask. For
me, this book was an eye-opener in many ways beyond educating me
to the extent and impact of franchising within the national economy.
I was also surprised to learn the "nuts and bolts" of franchising
as an ever-increasing number of people pursue the American Dream
which, in essence, combines both the excitement and the terror of
entrepreneurship.
Here in a single volume, Birkeland provides a wealth of information
about franchise fundamentals, examines three chains (King Cleaners,
Sign Masters, and Star Muffler), presents a "social profile" of
franchisees, explains correlations between networks and alliances
with survival, notes various franchisor "uncertainties, analyzes
the nature and extent of control from various perspectives, and
concludes with an Epilogue in which he observes, "The critical problem
of controlling geographically dispersed workers is tractable for
those franchisors who establish high levels of trust with franchisees.
For those who cannot achieve that, the problem of control is a never-ending
battle." Those who lose that battle experience what is, in various
forms, the American Nightmare.
I rate this book so highly for two reasons. (Were I thinking about
becoming a franchisee, I would have a third reason.) First, I learned
a great deal about a segment of society in which I continue to be
actively involved as a consumer. The information and insights Birkeland
provides enable me to appreciate how important that segment is to
the national economy. Second, while reading his book, I also gained
a better understanding of the sociological, indeed anthropological
implications of that segment, just as I did when reading Eric Schlosser's
Fast Food Nation and Barbara Ehrenreich's Nickel and Dimed in America:
On (Not) Getting By in America. I highly recommend all three, especially
to those who are now considering an investment in a fast food franchise.
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WALLSTREET JOURNAL:
June 18, 2002
Pathos at the Muffler Shop
by DANIEL AKST
Franchises are a big deal in this country. Would
you believe that one out of 16 workers is employed at one, or that
franchising accounts for $1 trillion in retail spending? Most of
us probably spend a few bucks in a franchise every day, not that
we pause to think about it.
Such facts are all the more astonishing given the portrait in Peter
M. Birkeland's weirdly interesting "Franchising Dreams" (Chicago,
186 pages, $22.50). An ethnographer turned business consultant,
Mr. Birkeland donned his pith helmet to sojourn among the low-rent
franchises of the Midwest. Like Margaret Mead among the Samoans,
he spent time with his subjects -- hanging around shops, attending
trade shows, conducting interviews. His findings suggest that buying
one of these hardscrabble businesses is like volunteering for serfdom
and paying for the privilege.
Franchise owners typically buy from their chains the right to sell
products under a certain retail name in a certain retail area. The
theory is that the name and products and marketing, all coming from
a single, proven source, will pave the way for local commercial
success.
That's the theory, but it's not proved in "Franchising
Dreams." The outfits Mr. Birkeland places under anthropological
scrutiny aren't like McDonald's, a chain that requires considerable
wherewithal to buy into and that has, despite its uniquely flavorless
cuisine, a record of success around the world. Rather he looked
at a chain of muffler and brake shops, a cleaning service and a
benighted enterprise devoted to computerized signs. These are tough
businesses offering products no one much cares about, resulting
in fierce price competition and low profit margins.
Why do people buy this sort of business? The short
answer is ignorance. If Mr. Birkeland's franchise-owner subjects
had investigated more carefully, they would have found that they
were in for long hours, low returns on investment and an awful lot
of selling to make a buck. Most of the time the company offering
the franchises -- known as the franchisor -- holds all the cards.
"Lawyers that are unfamiliar with franchising just can't believe
these contracts," an attorney tells the author. A CEO adds helpfully:
"Once a person signs the contract -- and honestly, I don't know
why anyone would -- that's it. We've got him."
But the signers have their reasons. A few hope
to get rich. Many want to own a business yet fear going out on their
own and believe what they've heard about the lower failure rate
of franchises compared with independent businesses. (Mr. Birkeland
notes that while individual franchises seem to endure, plenty of
individual franchisees don't.) Some owners are eager to escape a
cycle of dead-end jobs. A few, forcibly retired from corporate life,
figure no one else will hire them.
One of the main ideas behind franchising -- for
the corporate honchos who sell the individual businesses in the
chain -- is that, instead of having to rely on a paid manager, they
have a person on the scene who is invested body and soul in his
shop. This is the worried-looking middle-aged guy you've probably
seen behind the counter. Franchisees also provide capital and permit
rapid expansion across far-flung territories.
By yoking the capital and labor of franchisees
to the marketing muscle and expertise of the franchisor, the system
is supposed to align the interests of both. But in the cases Mr.
Birkeland looked at the two sides seem to hate being chained to
one another. The franchise owners think of themselves as entrepreneurs
somehow indentured into peonage, while the franchising company often
feels that it can't control the only people who carry its brands
into the marketplace.
Mr. Birkeland has a keen eye, asks good questions
and gets some of his sources to speak with brutal honesty. The result,
at least sometimes, is a colorful portrait of characters you might
meet only in a David Mamet play. "They got a 'turnkey' operation
here," one foul-mouthed franchisee says of his chain. "They turn
the key and walk away. . . . I had to learn the [expletive] business
from a competitor down the street, a Midas guy of all things."
Franchising companies have their strong opinions,
too. If they're smart, they avoid entrepreneurs. "You don't want
any creative thinkers," says a franchising consultant. It's better
to go after corporate veterans and people with good credit, good
grades and good driving records. "Women make outstanding franchisees
because they do what they're told," he adds, evidently without embarrassment.
"Plus they're well organized, more motivated, and better at supervising
and training."
This is not to say that "Franchising Dreams" is
written like a dream. Surely an author as insightful as Mr. Birkeland
had to labor to maintain the leaden academic style that prevails.
And while his legwork is admirable, the book might have been improved
by more context. It would be interesting to know, say, the extent
to which initial franchise investment is related to returns. It
is possible that spending big bucks up front -- as for a McDonald's
outlet -- leads to a happier outcome. One wonders as well about
the resale value of franchises.
But there is nothing like being there, and the
author was there, unlike so many writers on subjects such as this.
He has managed to capture not just the business dilemmas of his
subjects but their aspirations and even their pathos. It may make
your next stop at the muffler shop an unusually poignant experience.
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