Journal of Hospitality Financial Management The Professional Refereed Journal of the Association of Hospitality Financial Management Educators

Volume 25 | Issue 1 Article 6

7-13-2017 The Lodging Franchise Relational Model: A Model of Trust, Commitment, and Resource Exchanges Leonard A. Jackson J. Mack Robinson College of Business, Georgia State University, Atlanta, GA

Hayun Jung J. Mack Robinson College of Business, Georgia State University, Atlanta, GA

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Recommended Citation Jackson, Leonard A. and Jung, Hayun (2017) "The Lodging Franchise Relational Model: A Model of Trust, Commitment, and Resource Exchanges," Journal of Hospitality Financial Management: Vol. 25 : Iss. 1 , Article 6. DOI: https://doi.org/10.1080/10913211.2017.1314125 Available at: https://scholarworks.umass.edu/jhfm/vol25/iss1/6

This Refereed Article is brought to you for free and open access by ScholarWorks@UMass Amherst. It has been accepted for inclusion in Journal of Hospitality Financial Management by an authorized editor of ScholarWorks@UMass Amherst. For more information, please contact [email protected]. THE JOURNAL OF HOSPITALITY FINANCIAL MANAGEMENT 2017, VOL. 25, NO. 1, 56–73 https://doi.org/10.1080/10913211.2017.1314125

The Lodging Franchise Relational Model: A Model of Trust, Commitment, and Resource Exchanges Leonard A. Jackson and Hayun Jung J. Mack Robinson College of Business, Georgia State University, Atlanta, GA

ABSTRACT Franchising is the most dominant mode of operation for U.S.-domiciled lodging companies. This mode of operation has grown significantly as a result of the benefits received by franchisors and franchisees. Using a foundation of trust and commitment theory, this research developed a model that illustrates and explains the components of the lodging franchise relationship. The model suggests that the lodging franchise relational model is a bi-directional, value driven, mutually beneficial, symbiotic relationship of resource exchange and success is contingent on trust and commitment by both parties.

Introduction independent operation (–0.74). In fact, franchising growth has outpaced the industry (1.21%). These Over the past two decades, franchising has emerged growth rates and changes in the operating structure as a dominant component of lodging firms’ busi- of the U.S. lodging industry are illustrated in ness operating model. This is especially the case for Table 1 and Figures 1 and 2. several U.S.-domiciled lodging parent companies Franchising is not a new phenomenon in the and their chains, many of which have shifted away lodging industry. This business strategy has been from property ownership and property manage- used widely by hospitality firms as a major vehi- ment to a business model driven largely by fran- cle for corporate expansion for more than six chising. For some of these firms, their entire decades. Although the exact date of its use in revenue model is largely dependent on streams of the hospitality industry is opaque, it is widely income generated from franchise-related services accepted that the first significant use of this fran- and activities. The bourgeoning dominance of this chising in the lodging segment of the industry mode of operation is illustrated by the growth in datestothe1950swhenKemmonsWilsonused the numbers of properties and rooms operated it to franchise the concept. Ray Kroc under this business mode over the past 20 years. and the McDonald’sCorporationarewidely During the period, the number of franchise oper- accepted as the individual who and company ated in the United States grew from an that, respectively, contributed significantly to the Downloaded by [University of Massachusetts, Amherst] at 15:03 29 December 2017 annual average of 15,000 properties in 1997 to commercial use of the concept in the restaurant more than 27,000 properties at the end of 2016. segment of the industry in the 1950s. However, in During this period, the annual average number of recent years, the franchise business format has rooms under franchise operation grew from more gained in popularity because of the actual and than one-and-a-half million (1,583,897) rooms ostensible benefits of this business arrangement in 1997 to more than two-and-a-half million for both parties involved in the franchise relation- (2,684,313) rooms by the end of 2016 (Smith ship: the franchisor and the franchisee. As a result Travel Research, 2016). Franchising is also the fast- of these value-driven benefits, the franchise est growing operation type, growing at an annual arrangement has become the most widely used rate of 3.26% compared with managed (2.75%) and

CONTACT Leonard A. Jackson [email protected] J. Mack Robinson College of Business, Georgia State University, 35 Broad Street, 210, Atlanta, GA 30302, USA. © 2017 International Association of Hospitality Financial Management Education THE JOURNAL OF HOSPITALITY FINANCIAL MANAGEMENT 57

Table 1. U.S. Hotels, by Operation Type and Growth Rate, 1997–2016. Number of Chain-managed Number of Franchise Number of Independent Total Total chain-managed operations’ growth franchise operations’ independent operations’ number of growth Year operations rate (%) operations growth rate (%) operations growth rate (%) properties rate (%) 1997 2,519 — 15,000 — 25,078 — 42,597 — 1998 2,876 14.18 16,069 7.13 25,289 0.84 44,234 3.84 1999 3,198 11.22 17,127 6.58 25,350 0.24 45,675 3.26 2000 3,357 4.96 18,123 5.82 25,380 0.12 46,860 2.59 2001 3,483 3.74 18,990 4.78 25,294 –0.34 47,766 1.94 2002 3,584 2.91 19,634 3.39 25,166 –0.51 48,383 1.29 2003 3,649 1.81 20,107 2.41 24,970 –0.78 48,726 0.71 2004 3,696 1.29 20,484 1.87 24,575 –1.58 48,755 0.06 2005 3,716 0.55 20,910 2.08 24,011 –2.29 48,637 –0.24 2006 3,735 0.50 21,405 2.37 23,501 –2.12 48,641 0.01 2007 3,782 1.26 22,108 3.28 23,187 –1.34 49,076 0.90 2008 3,848 1.76 23,051 4.26 23,014 –0.74 49,913 1.71 2009 3,941 2.40 24,253 5.22 22,781 –1.01 50,974 2.13 2010 4,001 1.53 25,066 3.35 22,509 –1.19 51,576 1.18 2011 4,024 0.57 25,373 1.22 22,229 –1.24 51,626 0.10 2012 4,042 0.47 25,614 0.95 22,082 –0.66 51,739 0.22 2013 4,061 0.47 25,959 1.35 22,001 –0.37 52,022 0.55 2014 4,093 0.77 26,320 1.39 21,878 –0.56 52,290 0.52 2015 4,124 0.76 26,855 2.04 21,791 –0.40 52,770 0.92 2016 4,172 1.18 27,507 2.43 21,786 –0.02 53,465 1.32 Average — 2.75 — 3.26 —–0.74 — 1.21

30,000 20%

25,000 15% 20,000 10% 15,000 5% 10,000 5,000 0% 0 -5%

Chain Managed Franchise Census Props Independent Hotels Chain Managed Growth Rate Franchise Growth Rate Independent Hotels Growth Rate Linear (Chain Managed Growth Rate) Linear (Franchise Growth Rate) Linear (Independent Hotels Growth Rate)

Figure 1. Number of properties and growth rate, by operation type, 1997–2016. Downloaded by [University of Massachusetts, Amherst] at 15:03 29 December 2017 Yearly Number of Properties by Operation Type in US

60,000

Chain Managed 50,000

40,000 Franchise 30,000

20,000 Independent Number of Properties 10,000

Total 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Figure 2. Annual operation trend, by property type, 1997–2016. 58 L. A. JACKSON AND H. JUNG

business organization and ownership structure in scale and group purchasing; (e) assistance with site the lodging and restaurant industries. selection, market and feasibility analysis, develop- ment, design, and construction of the physical plant; (f) advice on purchasing furnishings and fixtures; Factors facilitating lodging franchise growth (g) use of a valuable protected trade name, which Lodging firms that include the franchising model allows the franchisee to acquire an established as a component of their business model have gen- brand name with regional or national brand recog- erally experienced growth in revenue, and number nition at the inception of the business; (h) national of system units locally and internationally. The and international market research, marketing, and model has also enabled these firms to expand advertising; (i) tie-in and access to existing reserva- their product-service distribution networks. In tion systems; (j) immediate access to tried and pro- sum, these factors have resulted in increased use ven strategic and operational systems and methods; of this operation mode as a vehicle for unit and (k) access and assistance with relevant technology revenue growth. Furthermore, for several lodging and prosperity software such as point-of-sale or firms, the shift away from an ownership or asset property management systems; (l) inclusion in a heavy model toward a franchising model is driven network that includes referrals between properties; by the fact that franchising lends itself to a much (m) financial assistance where appropriate; (n) leaner operation (than do ownership or manage- immediate access to proven; (o) operational and ment contracts), given that there is little or no structural controls, which helps the franchisee with capital expenditures and other expenditures asso- administrative controls of the entity; (p) training, ciated with managing the real estate aspect of the technical support, and guidance provided by the business. Franchising has also grown because the franchisor; and (q) a proven product service mix model is attractive to entrepreneurs. For example, with an established market. Hence, franchising pro- the franchise business model provides entities that vides entrepreneurs with an easily replicated, pro- want to own lodging facilities an advantage and ven business model with an established value chain, competitive edge over other ownership models proven value proposition, a proven profit mechan- given that franchising provides these entities with ism, a strong brand or trademark, and a unique immediate access to reputable, trusted, and experi- concept which can be used immediately to grow enced trade names; expert services such as market- their businesses quickly. In so doing, the franchise ing services; training of key personnel; advertising model allows entrepreneurs to bypass several steps support; and access to systems such as reservation in the entrepreneurial process such as the business services. Entrepreneurs also gain immediate access model validation. For franchisors, the benefits to value-chain activities and services such as access include (a) increase revenue from fees paid by the to established distribution networks and access to franchisee, which supports overhead and operating the brand’s supply chain. For entrepreneurs, costs; (b) brand spread, or growth of the franchise immediate access to these activities and services (nationally and internationally) with each additional

Downloaded by [University of Massachusetts, Amherst] at 15:03 29 December 2017 increases the likelihood of venture success. franchise sold; and (c) influx of capital to expand The growth of franchising in the lodging industry the franchise. has also been driven by benefits received by fran- chisees and franchisors. Benefits obtained by fran- Lodging industry franchising: A complex and chisees are numerous and include the following: (a) evolving relationship reduction of entrepreneurial startup risks given that franchises are usually turnkey operations and their The growth of franchising in the lodging industry business risks are lower than those of independent has resulted in the relationship between franchi- startups because there is product acceptance; (b) sors and franchisees becoming more complex, management and operational expertise and profes- especially as franchisors seek to generate more sional assistance from the franchise; (c) assistance revenue from provision of mandatory and discre- with on-site training; (d) reduced operating costs tionary services to franchisees. In some cases, the derived from savings obtained from economies of relationship is often opaque, not only to those who THE JOURNAL OF HOSPITALITY FINANCIAL MANAGEMENT 59

are primary stakeholders in the relationship but for design, décor, equipment, and operating especially those considered to be outside existing procedures. Typical services included national relationships, which includes potential investors. and international central reservation networks, The opaque nature of the lodging franchise rela- national and international advertising campaigns, tionship is further complicated by the fact that management training programs, provision of sup- lodging parent companies have several brands, port technologies such as property management and each brand has a different franchise relation- systems, and central purchasing systems. Other ship with their franchisees. services provided included architecture, construc- The role that franchising plays in lodging firms’ tion, and interior decoration services. However, as revenue portfolio also dictates the complexity of parent companies move away from asset owner- the franchise relationship. For example, lodging ship to a revenue model reliant on franchising, the firms that are purely franchising firms will gener- mandatory and discretional services have ate their revenues from a stream of franchise fees. increased, evolved, and changed. In addition, in In contrast, lodging firms that are quasi-franchise recent years, the goal of lodging franchisors is to firms typically offer fewer fee-laden discretionary centralize several services that were previously per- services. Franchise services offered by lodging formed at the property level by specialists. For franchisors can be broadly described as mandatory example, previously, revenue management was and discretionary services. Mandatory services are performed by revenue management specialists at those that are required by the brand or parent the property level. However, today, these services company to ensure consistency of brand standards are offered to franchisees on a per-hire or fee basis. while discretionary services are those designed to The provision of these additional services to fran- improve and enhance operational performance chisees provide more revenue streams for franchi- directly or indirectly and are generally selected at sors. However, by offering more specialized the discretion of the property’s management or services to franchisees, it potentially provides cost ownership. However, failure to use discretionary savings to franchisees because they do not have to services over time could lead to deviation from bear employment and other operational costs asso- brand standards, which could elicit noncompli- ciated with similar positions at the property level. ance penalties. Furthermore, it allows franchisees and their agents As noted, lodging firms for which franchising to focus their efforts on the tasks of managing the represents a significant component of their rev- daily operations for the lodging facility. enue model have focused on providing a wide The shifting of services away from the property array of mandatory and discretionary services, level and centralizing them requires a high level of both of which have grown in recent years espe- trust between the franchisor and franchisee. cially as lodging firms shift the revenue compo- Furthermore, both parties must be committed to nent of their business model away from traditional the relationship for it to be mutually beneficial. sources and more toward franchising. Because Trust and commitment are the cohesive elements in the franchise relationship and can be perceived

Downloaded by [University of Massachusetts, Amherst] at 15:03 29 December 2017 these services are sold to franchisees, lodging firms have become more owner-centric, especially as a facilitator of cooperative exchange under con- when compared with the lodging franchise rela- ditions of uncertainty. At its core, franchising is a tional model of the past. This focus on the own- system that is characterized by mutual interdepen- ership by the franchisors is simply one of dence (between the franchisee and franchisor), but economics. The closer the franchisor is to the also one that is characterized by asymmetrical owner, the more services he or she can potentially control given that power and control rests with sell to the owner, thereby increasing revenues. the franchisor, not with the franchisee. Both par- Lodging franchising is business format franchis- ties enter the relationship trusting that there will ing, which is when the franchisor sells a way or be exchanges of resources and that both parties format of doing business. As such, in the past, will be committed to the relationship. Franchisors lodging franchise companies have provided fran- trust that the franchisee will perform at expected chisees with an established brand name, standards levels and within rigid guidelines, whereas 60 L. A. JACKSON AND H. JUNG

franchisees rely on the franchisor to leverage the of economic and financial rewards in the franchise brand and provide services such as advertising and business system is generally achieved if the interests promotion as well as managerial support in the of the franchisor and franchisees are aligned form of training, services, and process and system through a formal relationship or franchise agree- design. ment, as well as the execution of all elements of Given the evolving nature of the lodging fran- the contractual arrangement by both parties. chise relationship over the past two decades, it is Nonetheless, with most franchise agreements, the imperative that a better understanding is developed franchisor typically specifies the contractual terms, about the roles, responsibilities, and resource services, and responsibilities of the relational part- exchanges involved in today’s lodging franchise rela- ners and specifies how types of services and tionship. Hence, the purpose of this exploratory resources and economic rewards, payments will be research is to develop a conceptual model that suc- shared and distributed in the relationship, which cinctly captures, documents, and explains the com- often form the basis for conflicts between both ponents involved in the resource exchanges that parties. It is important to note that, with most occur in the lodging franchise relationship. This franchise system, the agreement terms are estab- understanding will lead to a better understanding lished by the franchisee are nonnegotiable (Davies of the unique components of the relationship et al., 2011). between lodging franchisors and their franchisees. Although franchising offers a compelling and The conceptual model is grounded in the trust- effective form of entrepreneurial relationship, it commitment constructs of marketing research. In also imposes restrictions and penalties that com- the context of franchise relationships, trust investi- promises entrepreneurial preferences, creativity gates factors that affect the long-term success and self-governance. In addition, the interests of of franchise–franchisor relationships. Perceptions the franchisor and franchisees are often dissimilar of trust typically develop during the early stages of (Harmon & Griffiths, 2008), and in some cases, the relationship and guide behaviors and actions diametrically opposed (Michaels & Coombs, during future interactions (Dwyer, Schurr, & Oh, 2008), and unequal. For example, in the lodging 1987;Rempel&Zanna,1985). Commitment acts as industry, franchisors’ claim to income is usually a signal of intent and develops as parties in a rela- superior than that of franchisees given that fran- tionship purposefully engage resources to build and chise royalties are based on gross sales, whereas maintain the relationship (Dwyer et al., 1987), with franchisees profitability is contingent on their abil- trust been the major determinant of commitment ity to effectively manage their operational costs. (Morgan & Hunt, 1994). Hence, franchisors might develop and implement strategies geared toward market share growth, brand spread, and revenue maximization growth Literature review without regard for unit or store costs, which could potentially impair the profitability of franchisees. The franchise relationship Furthermore, franchisees are limited to the finan- Downloaded by [University of Massachusetts, Amherst] at 15:03 29 December 2017 Franchising involves a business relationship in cial returns generated from their unit’s operation, which an organizing entity (the franchisor) sells a whereas the franchisor income is the aggregate of proven business operating format that allows a all the units in their system; hence, franchisors can semi-autonomous entity (the franchisee) the right remain solvent while units in their system fail. to market and sell goods and services under the This often leads to a high level of divergence in organizing entity’s brand name. While the franchi- trust and commitment (Davies et al., 2011). sor and franchisee are legally distinct and separate entities (Mandelson, 2004), the economic rewards Trust and commitment in franchise relationships and responsibilities from the franchise system are interdependent between franchisor and franchisee The success of franchise relationships is contingent (Davies, Lassar, Manolis, Prince, & Winsor, 2011; on mutual trust and commitment between the Kumar, Scheer, & Steenkamp, 1995). Maximization parties, who enter a mutually beneficial, symbiotic, THE JOURNAL OF HOSPITALITY FINANCIAL MANAGEMENT 61

and strategic relationship. Commitment and trust standards and procedures are opaque). This could by both parties are important because they force occur if franchisors implement procedural and each party to work at preserving the relationship policy changes without timely consultation and investment that each party has made; further, the conveyance of information with and to franchi- success of either party is dependent on the success sees. In contrast, loss of competence trust can of the other. Commitment and trust by the parties arise from franchisors failing to deliver or under- is also important because it forces the parties to delivering benefits outlined in the franchise agree- resist opportunistic attractive short-term alterna- ments such as appropriate training, because of tives and instead focus on the anticipated long- mismanagement on the part of the franchisor term benefits of staying in the relationship (Davies et al., 2011). (Morgan & Hunt, 1994). This commitment and Trust occurring in franchise systems can also be trust at the core of the relationship lead to effi- defined as franchisees’ confidence to accept a cal- ciency, profitability, productivity, and effectiveness culated risk with the franchisor and allows fran- (Cook & Emerson, 1978; Meyer & Allen, 1984; chisees to handle vulnerabilities inherent in their Thompson & Spanier, 1983). relationships with the franchisors. This calculation In the context of the franchise relationship, of trust is based on the franchisee using criteria of commitment relates to exchanges of resources— trustworthiness. Thus, an important prerequisites tangible and intangible—and both parties in the of franchisee trust is integrity. Franchisees expect relationship believe in exerting effort to maintain that franchisors will perform actions that will the relationship given that such maintenance will result in positive outcomes. Failure to generate lead to value enhancement and mutual benefits in positive outcomes will result in erosion of confi- the long term (Moorman, Deshpande, & Zaltman, dence and ultimately trust. This is especially 1993). From an organizational perspective, and in important in franchise relationships because trust the franchise system, commitment is important is central in achieving cooperation, problem sol- because it leads to less contractual terminations, ving, and dialogue, which are important elements increased organizational citizenship behaviors, and in franchise relationships. Hence, trust influences organizational support (Eisenberger, Fasolo, & relationship commitment given that lack of trust Davis-LaMastro, 1990). Trust exists when parties decreases commitment, suggesting that trust is a in a relationship have confidence in an exchange determinant of relationship commitment (Achrol, partner’s reliability and integrity (Morgan & Hunt, 1991). 1994); Moorman et al., 1993). This definition In the franchise system, there must be a high draws on the classic work of Rotter (1967), who level of bidirectional trust. If conditions of mis- described trust as the willingness to rely on an trust exist on the part of the franchisees, they exchange partner in who one has confidence. might conclude that contractual obligations are Trust on the part of the franchisees suggests that not in concert with their economic interests and they trust their partner, the franchisor, to provide as such, it could lead to circumstances in which

Downloaded by [University of Massachusetts, Amherst] at 15:03 29 December 2017 agreed-upon resources, capabilities, and services, they do not feel compelled to comply with the whereas franchisors trust that franchisees will franchise regulations. Hence, it behooves franchi- adhere to all terms specified by the contractual sors to maintain transparency, trust, and goodwill agreement. Key to the definition is the concept of with franchisees, especially given that unmotivated confidence on the part of the trusting parties on franchisees could subvert operational policies and the basis of the belief that the trustworthy party is procedures, which could ultimately undermine the reliable and has a high level of integrity, which are franchisor’s brand equity. Thus, trust is an impor- associated with qualities such as competent, hon- tant factor in the mutual long-term profitability est, fair, responsible, and helpful (Morgan & Hunt, and viability in a franchise system, which suggest 1994). Within franchise relationships, trust can be that it benefits franchisors to take steps to enhance of two types—integrity trust and competence trust. franchisees’ trust in them and their systems Loss of integrity trust results from misunderstand- (Davies et al., 2011). For their part, franchisors ings arising from franchisor activities (e.g., when also must trust the integrity of the franchisees. 62 L. A. JACKSON AND H. JUNG

To ensure compliance, the requirements of that it will lead to commitment in the relationship. franchisees are outlined in the legally binding con- Communication, which can be defined as formal tract, the franchise agreement which specifies how and informal sharing of meaningful and timely franchisees must act. Whereas franchisees are obli- information between parties involved in the rela- gated to act within the parameters of the agree- tionship, is also a precursor to trust because it ment, the agreements do not always cover all fosters trust as it helps in resolving disputes and possible contingencies (Crochet & Garg, 2008), aligns perceptions and expectations. In contrast, and consequently, franchisors do not always accumulation of trust leads to better communica- believe that they have full control over the actions tion, which is positively related to trust (Moorman undertaken by franchisees in the administration et al., 1993). and operation of their units (Stalworth, 1995). In According to transaction cost analysis literature, addition, the interdependency nature of franchise parties who engage in opportunistic behavior do agreements sometimes causes expectations and so out of self-interest, which have the net effect of obligations to become unclear and often leads to eroding relational commitment and trust, because unintentional breaches or perceptions of breaches such behaviors are often perceived as deceit as opposed to actual breaches (Parhankangas, oriented which violates the underlying premise of 2004). trust. Hence, if parties in a relationship such as Precursors of relationship commitment and those in a franchise relationship perceive that the trust include relationship termination costs, rela- other party engages in opportunistic behavior, tionship benefits, shared value, communication, such perceptions will lead to an erosion of trust and opportunistic behavior. In a franchise rela- and, thus, commitment (Morgan & Hunt, 1994), tionship, terminated parties will generally seek because parties in the relation believe they cannot alternative relationships, which generally have trust their partner. high switching costs. For lodging franchise rela- Trust and commitment are desirable qualitative tionships, such costs are often exacerbated by idio- relational outcomes (Mohr & Nevin, 1990) and are syncratic investments or investments that are essential for fostering relationships such as fran- difficult to switch to another relationship (Heide chise relationships. Other qualitative factors that & John, 1988). In some instances, there are no enhance and promote relational outcomes include switching costs involved if the relationship is dis- (a) acquiescence and propensity to leave, (b) coop- solved. However, termination of the relationship eration, (c) functional conflict, and (d) decision- incurs costs, which can be describes as all expected making uncertainty. Acquiescence and propensity losses to both parties, which would include losses to leave relates the degree of adoption and adher- from the termination, relationship dissolution ence of policies or requests by partners in the expenses, and switching costs. Expected termina- relationship. Consequently, relational commit- tion costs can lead to ongoing relationships been ment positively impacts or influences acquiescence perceived by parties as important thereby leading while trust influence acquiescence through rela- to commitment in the relationship as parties

Downloaded by [University of Massachusetts, Amherst] at 15:03 29 December 2017 tionship commitment. Propensity to leave relates attempt to avoid termination costs. Hence, mutual to the likelihood that a partner will exit or termi- trust between franchisor and franchisee reduces nate the relationship. Hence, regarding commit- costs that could arise from distractions associated ment, there is a strong negative relationship with close monitoring developed to prevent between organizational commitment and propen- opportunism. sity to leave. Cooperation or a condition in which Both parties involved in the franchise relation- all parties work together to achieve mutual goals ship typically seek partners that will add value to (Anderson & Narus, 1990) is an important ele- the relationship. Hence, franchisors will typically ment in franchise relationships. Regarding trust commit to developing and maintaining relation- and commitment, cooperation is important ships that offer superior benefits to franchisees because it promotes relationship building and con- relative to other options to ensure that franchisees sequently enhances trust and commitment. In will be satisfied with the services offered, given franchise systems, cooperation does not mean THE JOURNAL OF HOSPITALITY FINANCIAL MANAGEMENT 63

absence of conflict or dispute. Instead, it means broader understanding of the issues investigated that partners (a) work together even while having and reduced threats to validity (Maxwell, 2012). differences in opinions or outlook to ensure that Hence, validity was established using multiple the relationship lasts and (b) cooperate through lines of sight, which ultimately resulted in conver- joint efforts to achieve synergistic outcomes. ging lines of inquiry. Conflicts and disagreements are normal in most The study applied purposeful sampling and relational exchanges. However, if hostility among informants were selected on the basis of the con- partners is not resolved, it can lead to relationship tribution they could make to the study (Creswell, dissolution. If disagreements and disputes are 2013). Selection of the key informants through this resolved in an amicable manner, the conflict can method was important given that only the key be referred to as functional conflict, given that they informants from respective lodging organizations stimulate thought and interest, prevent corporate who could provide the invaluable and in-depth stagnation, and provide a way for relational part- information required to investigate the issues ners to air problems, solve problems, and generate were contacted. Unlike statistical sampling solutions. In the relationship, decision-making whereby a sample is selected that is representative uncertainty relates to the extent to which partners of the population, in purposeful sampling, indivi- has enough information to make decisions, predict duals are selected because they can provide useful the consequences of the decision, and have con- information about the research problem and can fidence in the decision (Achrol & Stern, 1988). help flush out the key issues and provide critical Hence, if franchisors can reduce uncertainty in information that can support, challenge, or refute the franchise relationships, it will enhance trust the issues discussed (Yin, 2009). All data were and commitment (Morgan & Hunt, 1994). analyzed using the constant comparative method. This approach was used to identify emerging pat- terns and key themes. Method Overview Data collection This exploratory research attempted to define and explain the components of the lodging franchising A previously noted, content analysis was con- relationship and present findings as a conceptual ducted on secondary data to identify patterns and model. Hence, an inductive approach that com- key themes in the lodging franchise relationship. bined content analysis with semi-structured inter- The sampled secondary data were confined to view data was deemed appropriate and was franchise disclosure documents from nine leading accomplished through a two-step approach. U.S.-domiciled or quasi-domiciled (for example, Content analysis of franchise disclosure docu- Intercontinental Group) lodging parent ments were first used to identify themes and com- companies. The nine companies were based on number of properties in their franchise system.

Downloaded by [University of Massachusetts, Amherst] at 15:03 29 December 2017 ponents of the franchise relationship. This step was deemed appropriate given that the franchise Nine parent companies were deemed appropriate disclosure documents capture the essence of the to accomplish the objectives of the study given that franchise relationship. The interviews were then parent companies comprised multiple brands. The used to verify the applicability, appropriateness final sample comprised 9 parent companies and 75 and categorization of the components that brands, shown in Table 2. emerged from the content analysis. Therefore, Content analysis of each brand’s franchise dis- both methods are closely linked to enhance the closure documents was conducted to obtain infor- validity of each other. Hence, information was mation about each company’s franchise system. collected from various sources to reduce the risk Specific emphasis was placed on examination of that conclusions drawn reflect systematic biases or the following areas of the franchise disclosure limitations inherent in one qualitative method. document: Furthermore, using several sources allowed for a Downloaded by [University of Massachusetts, Amherst] at 15:03 29 December 2017 64 .A AKO N .JUNG H. AND JACKSON A. L.

Table 2. Sampled Parent Companies and Their Brands. Parent Companies Brands La Quinta La Quinta Inns & Holdings Inc. Suites Carlson Rezidor Country Inns & Park Inn Radisson Radisson Radisson Park Plaza Quorvus Hotel Group Suites Red Blue Collection Hotels Park Hyatt Grand Hyatt Andaz Hyatt Place Hyatt Hyatt Hyatt Hyatt Hyatt Hyatt Zilara/ The Unbound Corporation Regency Centric House Residence Ziva Collection by Club Hyatt Hotels St. Regis The Luxury Le Méridien Westin Tribute Sheraton Design Element Aloft Four Points by & Resorts Collection Portfolio Hotels Sheraton Worldwide Choice Hotels Comfort Inn Ascend Hotel Comfort Quality Sleep Inn Clarion Cambria MainStay Suburban EconoLodge International Collection Suites Hotels & Suites Suites InterContinental InterContinental Kimpton HUALUXE Holiday Inn Holiday Inn Holiday Inn Holiday Inn Staybridge Candlewood Hotels Group Hotels & Resorts Hotels & Hotels & Hotel & Hotels Express Resort Club Suites Suites Restaurants Resorts Resorts Hotels Vacations Hilton Waldorf Astoria Conrad Hotels , A DoubleTree Tapestry Hilton Hampton by Home2 Suites Homewood Worldwide Hotels & Resorts Hotels & Hilton & Resorts Collection by by Hilton Collection by Garden Inn Hilton by Hilton Suites by Resorts Hilton Hilton Hilton Hilton Embassy Suites Hilton Grand Worldwide by Hilton Vacations Wyndham Wyndham® Wyndham Wyndham TRYP Wingate® by Hawthorn® Microtel by ® Baymont Inn ® ® Howard Worldwide Hotels and Grand® Garden® Wyndham Suites Wyndham Worldwide & Suites® Johnson® Resorts Collection ® ® Marriot AC Hotels by Autograph Courtyard by EDITION Fairfield Inn Gaylord JW Marriott Marriott Moxy Hotels Protea International Marriott Collection Hotels & Marriott & Resorts Hotels & Suites Hotels Hotels & Executive Hotels by Resorts Resorts Apartments Marriott Marriott Hotels Marriott Renaissance Residence TownePlace SpringHill The Ritz- Vacation Hotels Inn by Suites Suites Carlton Club Marriott THE JOURNAL OF HOSPITALITY FINANCIAL MANAGEMENT 65

Item 1: The franchisor and any parents, prede- digitally recorded and transcribed verbatim and a cessors, and affiliates constant comparison approach was used to identify Item 5: Initial fees frequently occurring themes (Creswell, 2013; Item 6: Other fees Silverman, 2013). Item 9: Franchisee’s obligation A total of seven semi-structured interviews were Item 11: Franchisor’s assistance, advertising, conducted with lodging executives associated with computer system and training. lodging franchise systems and included corporate franchise lawyers and franchise directors. Themes that emerged from the content analysis Participants were selected on the basis of their suggested that a key component of the lodging knowledge of the topic under investigation, lod- franchise relationship is that it involves an ging franchise systems. Hence, these professionals exchange of resources between the franchisor and were selected because they could provide critical franchisee. Franchisees provide franchisors with a information on lodging franchise relationships. stream of fees and in return franchisors provide an The final sample comprised 7 individuals, of array of services that can be classified as direct which 4 were men and 3 were women. All indivi- franchise support services and indirect franchise duals were assured anonymity for themselves and support services. Direct services included (a) mar- their companies. keting and sales, (b) development, (c) finance and risk management, (d) training, (e) technology sys- Results and discussion tems, (f) revenue management, (g) operations sup- port, (h) preopening services, and (i) procurement The lodging franchise relational model (see services. Once these components were identified, Figure 3) encapsulates a bidirectional, value-dri- interview questions were developed around them ven, mutually beneficial, symbiotic relationship and interviews were conducted to verify the between the lodging brand and the lodging facility themes that emerged and, hence, obtain further owner, that is contingent on trust and commit- insights into the component of the lodging fran- ment. The relationship between both parties is chise relationship. The interview questionnaire formalized through a legal document, the franchise contained six questions. The questions and the agreement, which governs the franchisor’s rela- topics of exploration were developed and designed tionship with the franchisees. These two entities in direct relation to the main objective of the enter a formal, legally binding relationship study: What are the key components of the lod- through the franchise agreement, which outlines ging franchise relationship? the provisions and conditions of the agreement. Interviews began with broad questioning about This document governs the relationship and forms interviewees’ perceptions and definition of the the basis and benchmark for trust and commit- franchise relationship and what are the compo- ment for both parties. Hence, deviation from the nents of lodging franchise relationships. agreement without the consent of either party will

Downloaded by [University of Massachusetts, Amherst] at 15:03 29 December 2017 Interviews were conducted face to face and over elicit a breach of trust and hence, affect the the telephone and lasted between 20 and 35 minute offended party’s commitment in the relationship. and were organized in semi-structured or semi- Because lodging franchise agreements are written standardized discussion format. This method by the franchisor, care should be taken that the allowed for the documentation of rich data given agreements that govern the relationship have simi- that it enabled the interviewer to ask interviewees lar clauses for all brands under parent companies. predetermined questions on the research topic in a This will ensure that the parent company achieves systematic and consistent order. This method also brand spread for all brands. If this is not the case, allowed the interviewer freedom to digress and brands under parent companies with restrictive or probe beyond the prepared questions (Berg, 2011). repressive clauses will receive less brand spread Thus, interviews were formal yet active, which that those with less restrictive clauses. made the interview likened to a conversation Lodging franchise agreements are franchisor- (Holstein & Gubrium, 1995). Responses were centric and typically contains clauses governing Downloaded by [University of Massachusetts, Amherst] at 15:03 29 December 2017 66 .A AKO N .JUNG H. AND JACKSON A. L.

Brand Hotel Owner Owner

Franchise Agreement

VALIDATED BUSINESS MODEL OPERATIONAL SYSTEM MANAGEMENT EXPERTISE

Franchisor Franchisee BRAND SPREAD FEE PAYMENTS

Performance Finance / Sales & Analytics Risk Marketing Development Management Support Frequent Initial Fee Marketing Traveler Fee Program Target Fee Establishment Revenue Lead Training Management Procurement Contact/ Support Owner/ Support Generalist Agent

Specialist Royalty Sales/ Deployment Miscellaneous Fee Reservation Fee Fee Technology Operations Pre-Opening /System Support Support Support Communications

Figure 3. The lodging franchise relational model. THE JOURNAL OF HOSPITALITY FINANCIAL MANAGEMENT 67

purchasing of supplies, payment of royalties and of fees payments and brand spread from the fran- system fees, marketing and advertising, and perfor- chisee. At the broad level, the franchise operating mance by each party. Although the franchise agree- system for lodging includes: the brand name; busi- ments in the sample varied in scope, in general, the ness and operational systems, including policies commonalities in the agreements were the follow- and procedures for each functional department ing components: the names of parties signing agree- and; systems for strategic planning. Franchisees ment—the name of the legal entity representing the also receive technological systems and support, brand as well as the corporation, partnership, or which are aimed at enhancing operational effi- sole proprietor owning the hospitality franchise ciency, productivity, guest experience, transaction unit; detailed definition of terms—clear definition processing, distribution channel management, cus- of terms that might be ambiguous and could be tomer relationship management systems (includ- misinterpreted by entities involved in the contrac- ing management systems), tual arrangement; license grant, which outlines how revenue enhancement, and cost containment. the franchisee can use the franchisor’slogo,signage, Technological systems also include customer inter- and name in operating the hospitality enterprise; action technologies including reservation systems the term or length of the franchise agreement (hos- and social interaction systems. Lodging franchisors pitality franchise agreements typically have dura- will also develop and maintain websites for fran- tions of 20 years); window options for “early outs” chisees so that they can advertise products and (typically, the 5th, 10th, and 15th years of the agree- services as well as process transactions through ment); fees, which include affiliation fees, royalty this medium. Lodging franchisors also provide fees, marketing fees, reservation fees, training fees, lodging management expertise to lodging franchi- and technology upgrade fees; required performance sees. The management expertise provides guidance reports such as occupancy reports, room revenue for each functional areas of the lodging facility. In reports, average daily rates, restaurant sales reports, addition, expert advice is offered in areas such as and tax reports; responsibilities of the franchisor, training and development. including marketing, enforcement of brand or fran- Franchisee also receive a business model whose chise standards, and inspection schedules; responsi- elements (customer targets, the value proposition, bilities of the franchisee, including adherence to the value chain and the profit mechanism) have operational standards, payment schedules, and sig- been validated. This is arguably perhaps the most nage requirements; assignment of agreement,which valuable resource that the franchisee receives. This outlines transfers of ownership; termination or is because franchising allows them to bypass this default of the agreement, which describes conditions tedious and often expensive stage in the entrepre- under which the agreement can be terminated by neurial process. Hence, from the outset of opera- either party; insurance requirements—a clear indica- tions, lodging franchisees will understand precisely tion of the types and amounts of insurance required who are their targeted customer segments. This by the franchisee; requirements for alterations, knowledge undoubtedly allows them to save finan-

Downloaded by [University of Massachusetts, Amherst] at 15:03 29 December 2017 which outlines the right of the franchisor to change cial resources by not attempting to target unfruit- the agreement; arbitration and legal fees,which ful targets. The validated business model will also addresses both franchisor and franchisee responsi- provide franchisees with a clear understanding of bilities as it regards disputes; and signature page, the lodging facility’s value proposition or the pro- which is the page for both entities to sign the ducts and services the facility should offer its tar- franchise agreement. geted segments. In addition, franchisors provide The relationship is bidirectional given that there franchisees with value chain information which is a flow of resources from and between the fran- documents and explains to franchisees the various chisor and franchisee. The intangible franchise processes and activities that must be performed to asset that includes a tried, tested, and proven produce product service offerings in the most operational system, business model, and manage- profitable and efficient manner. Finally, franchi- ment expertise flow from the franchisor to the sors provide franchisees with the final element of franchisee while the franchisor receives a stream the business model, the profit mechanism. This 68 L. A. JACKSON AND H. JUNG

includes aspects such as pricing structures for pro- support the processing of reservations, costs asso- ducts and services, cost structures, benchmarks ciated with the operation of a central reservation and guidelines, and important information on system, and 3rd-party-generated reservations. how to make the entity financially viable. Reservations fees are mixed costs for the franchisee Franchisors receive brand spread with each and have a fixed component and a per transaction additional franchise that is added to the system. component; loyalty program or frequent traveler Brand spread can be defined as the proliferation of program fees, which are fees for the administration the franchisor’s brand in the lodging marketplace. of loyalty programs; and miscellaneous fees,which The more units the franchisor the more awareness includes fees for personnel training, third-party and market presence it has, leading to market supplier support, consulting fees, hardware and coverage. However, while the goal of the franchi- software updates, mandatory meeting and conven- sor is to increase brand spread, care should be tion attendance, technology support and assistance, exercised spreading the brand in oversaturated licensing fees, and additional management expertise markets as brands of the parent company could such as architectural assistance, legal guidance, and face a situation where they essentially cannibalize development expertise. each other. If oversaturation of the brand occurs in Other expenses borne by franchisees include a marketplace, franchisee could lose trust in the capital costs for the purchase of real estate as brand and become less committed. Hence, it well as expenditures associated with construction, behooves franchisors to take steps to ensure that purchase of inventory, and costs associated with brand spread does not lead to marketplace brand obtaining required operational licenses. In addi- saturation. tion, franchisees are faced with hospitality firms, In return for the intangible franchise asset, a there are costs that are termed hidden costs that well developed franchise operational system, a include hardware and software upgrade costs, validated business model, operational systems, meetings and conventions costs (franchisees are management expertise and brand spread, the fran- required to attend annual franchise meetings and chisor receives a stream of income in the form of events), and liquidated damages (if the franchisee fees. Although each lodging franchise will have fee elects to terminate the agreement without cause). structures germane to its specific organization, Each franchisor will determine how to calculate findings suggest that fees typically comprise two liquidated damages, which for hotels can be broad categories: initial fees and continuation fees. based on projected occupancy percentage during The initial fee is the initial payment, which is a period preceding the termination; a percentage typically submitted with the completed application of the franchise fees that would have been earned or at the signing of the franchise agreement, and during the remainder of the contractual term; or are simply fees paid to obtain the franchise rights. all projected losses, costs, and expenses the fran- For lodging properties, the initial fees comprise a chisor would incur as a result of the termination. fix amount and a per room fee. To aid franchisees in achieving their economic goals and to preserve brand equity, lodging firms

Downloaded by [University of Massachusetts, Amherst] at 15:03 29 December 2017 Continuing fees are paid periodically throughout the term of the agreement (usually monthly). The have developed a team of franchise service support different types of continuing fees borne by hospi- experts and specialists in centralized locations who tality franchisees are as follows. Royalty fees are are charged with providing expert guidance and payments for use of the franchisor’s brand or support services to franchisees. The guidance and trade name, service marks, logos, goodwill, and support is to provide expertise to the hotel opera- other franchise services. Lodging royalty fees range tors so that they can execute their daily functions from 1% to 5% of monthly gross income. Other fees effectively. In addition, the specialists and service include marketing and advertising fees,which support team is also in place to help franchisees usually go into a fund and are used by the franchi- reduce costs by eliminating several in-house spe- sor for brand-wide advertising efforts and are based cialist functions. An important precursor of lod- on rooms revenue and ranges from 1% to 6% of ging franchise relationship is communication and gross rooms revenue; reservation fees,which timely response to franchisees’ request for expert THE JOURNAL OF HOSPITALITY FINANCIAL MANAGEMENT 69

assistance from the franchisee. To aid with this The sales and marketing support team is respon- process, lodging companies have developed a sible for providing guidance in areas such as help- structured process to ensure that franchisees ing the franchisee determine market segmentation receive timely support and assistance from their and distribution channel mix. They also help the team of experts. Timely communication between franchisee find new business opportunities in their the franchisor and franchisee is essential for local markets and in so doing, help them gain and maintaining trust and commitment. As such, to grow market share. The marketing and sales sup- facilitate this objective, each franchisee is assigned port team is also charged with informing franchi- a lead contact person who acts as the primary or sees about available tools that will enhance lead contact for the franchisee or the franchisee’s marketing performance and help grow market agent. The person in this role has general knowl- share. In addition, they are also responsible for edge of hotel operations and is knowledgeable in reviewing programs deployed at the property all the services and support functions offered by level as well as review hotel performance data the franchisor. Other specific skills, tasks and and meet with agents of the franchisees either on responsibilities of the individual in this role property or virtually to discuss strategies for include: (a) a thorough understanding of the com- improvement and jointly develop action plans petitive landscape; (b) understand the owner’s with the franchisee and follow-up as needed. investment strategies and advocates for the fran- Other functions of the sales and marketing team chisor’s role in the owner’s growth plans; (c) notify include acting as an extension of the franchisee’s the development team of any growth opportunities sales team when circumstances warrant such with the owner; (d) conduct franchisee screenings; actions. The marketing and sales franchise service (e) attend meetings to support new hotels; (f) team also assist with in integrated marketing effort participate in handover of hotel from hotel open- initiatives (aimed at driving business through the ing support and transition to franchise perfor- most profitable channels) including: national, mance support; (g) inform the franchisee if the regional and trade campaigns; direct, online and hotel opening is placed in default; and (h) provide social; public relations and community initiatives; feedback to relevant franchisee license committee and maintaining relationships with travel agencies to approve stipulations in the franchise license and travel management companies. agreements. The revenue management franchise sales support Once the franchisee or the franchisee’s agent team is responsible for consulting with the franchi- contact the franchisor for assistance, the lead gen- see on a frequent basis, at least once per week to eralist will identify the reason for the contact and discuss and set competitive pricing strategies. They will assign the franchisee or the agent to a direct are also responsible for advising franchisees on how support team specialist based on the reason for the to maximize yield from distribution channels. The contact. Whereas franchisors develop titles and team is also charged with helping franchisees with terms germane to their specific organization, the strategic demand planning, competitive rate posi-

Downloaded by [University of Massachusetts, Amherst] at 15:03 29 December 2017 tasks and services performed are virtually the tioning, inventory management across all distribu- same. The team of franchise service experts are tion channels, Global Distribution Systems (GDS) organized in teams and can be classified as those market share analysis, third-party relationship man- that provide direct support and indirect support. agement and centralized reservation support, which Direct support services are provided by specialists is aimed at reducing or eliminating on property who provide direct support and guidance for the reservations employees. The revenue management functional areas of hotel operations as well as service support team is also responsible for inform- strategic planning and development. Hence, they ing the franchisee about revenue management tool provide guidance in (a) sales and marketing, (b) so the hotel can be more competitive and optimize revenue management, (c) risk management and revenue performance. The team also works with the finance, (d) training, (e) technology and informa- franchisee to review deployments that have been tion systems, (f) development, (g) procurement, assigned and schedule time to meet with hotel and (h) hotel preopening. members to discuss performance. Finally, the team 70 L. A. JACKSON AND H. JUNG

is available to the franchise’s revenue management The finance service support team assist franchi- lead for consulting on revenue management sees with: access to financial tools to track and strategies. measure the performance of the hotel (e.g., The operations support team focuses on working accounting tools, payroll tools); legal operational with franchisees to ensure that they deliver brand support—including assistance with customer con- consistency. As such, they will assist each property tracts, supplier contracts, employee issues, guest to implement new corporate initiatives and pro- complaints/claims, aiding owners dealing with grams. They will also train hotel staff members on major customer and vendor bankrupts. This team these new programs and initiatives to ensure that also provides capital planning and management employees deliver these programs in a manner that services such as administering both short and enhances guest experiences. They will also discuss long-term capital plans and work with owners on available tools with franchisees that will help them how to spend capital and manage capital budgets. focus on key performance metrics. They are also The risk management team provide owners with responsible for reviewing hotel performance data guidance on safety training with a view to redu- and schedule on property or virtual meetings with cing insurance premiums. the franchisee’s agents. Another important service that is provided by The operations support team is also responsible the franchisor is training support. The training for ensuring quality assurance and brand consis- programs delivered by these teams are designed tency. In some systems, this function is performed to deliver information that will assist employees by a separate team. Responsibilities of the team deliver services that help to maintain brand stan- includes providing frequent quality inspections dards. Hence, the programs delivered by this team and services to help monitor, measure, and are targeted educational programs for the ongoing improve guest quality (includes quality inspections development of employees. The team also design, and guest feedback) to remove underperforming develop and deliver programs for onboarding new hotels from the franchise system to maintain team members. brand strength and brand equity. In addition, Franchisees also receive technology support from although some systems will have a dedicated the franchise services team. The role of this team is team that provides support for the food and bev- widely diverse and covers virtually all technology erage function, the operations support team often related functions for franchisees. Services provided provide support to franchisees for food and bev- by this team include (a) support for all in-room erage. In this role, they perform the following technologies including entertainment technologies, functions: provide enhanced food and beverage (b) assistance with property management software support to help franchisees drive labor efficiency, systems, and (c) and provision of simple off-the- generate food and beverage profits, and provide shelf/out-of-the-box information technology solu- menu design support. The team also provide inno- tions that have the information technology solu- vative food and beverage concepts to be used in tions needed to get the hotel functioning. The franchise development support team assist

Downloaded by [University of Massachusetts, Amherst] at 15:03 29 December 2017 hotels (e.g., coffee shop, sports bar) complete with menus, branding, training, and management franchises with several functions related to new system. hotel developments or conversions of existing The procurement service support team work properties. This team assist franchisees with build- with suppliers and secures negotiated prices on ing design, interior design, project management furniture, fixtures, and equipment and consumable and construction. Assistance with building design items from specific suppliers. Once these nego- includes the following: provision of architectural tiated prices are secured, owners or their agents support—the team helps franchisees find and eval- can then contact suppliers and purchase furniture, uate licensed hospitality architects, negotiate fixtures, and equipment and other items directly agreements, and manage the relationships, ensur- from them. The goal of this team is to secure ing that the design meets brand standards; assist supplies at favorable prices for franchisees. with market feasibility study and site selection; THE JOURNAL OF HOSPITALITY FINANCIAL MANAGEMENT 71

oversee conceptual designs and studies; reviews observed progress; review delivery schedule of design programs, plans, and drawings; evaluate major remaining equipment and furniture, fix- construction systems and products for suitability tures, and equipment; and confirm that all design and cost effectiveness; facilitate architectural brand submittals requirements are met. compliance reviews and approvals as required The preopening franchise service support team under the terms of franchise agreement. The assist the franchisee with all preopening activities. team also provide engineering assistance and the This team is a combination of field based and engineers will provide independent technical over- centralized based personnel. The field-based team sight of third-party engineering consultants, offer- strategically visits hotels and focus on hands-on ing a peer-review approach that results in cost- delivery of key milestones throughout the hotel effective solutions for project conditions; furnish opening project, whereas the corporate-based brand-specific criteria; review proposed perfor- team tactically focuses on helping hotels deliver mance standards; evaluate proposed system alter- on actions and touchpoints to keep their projects natives, vendors, and products; review design on track for their opening date. The team also proposals; and advise franchisees on long-term executes the following functions: provide franchi- performance considerations. In terms of interior sees with all standard and unexpected preopening design, the team will assist the franchisee with the needs; provide guidance and direction on punch- following: recommending and coordinating list items; provide update on construction/renova- engagements with outside professional hospitality tion progress; offer sourcing assistance with exter- interior designers or provide such services; nego- ior signage, property management systems, and tiating agreements and managing the design pro- brand standard requirements; notify the lead con- cess through the successful completion of a capital tact if there are issues or delay that needs to be project; and coordinating design reviews at each addressed with the owner; and complete transition critical phase of design process: (concept → sche- documents before transitioning the hotel from the matic → design development → documentation; hotel team to the lead contact. furniture, fixtures, and equipment specifications Indirect support are services that focus on assist- review, construction). The project management ing franchisees with performance analytics, com- team will assist the franchisee with oversight, coor- munication and strategic planning. This team also dination, planning and execution of the project. provide tools and to help the specialists. Indirectly Typically, the team will divide the project into two support services include performance insights and phases: construction project management and fur- analytics, target establishments, specialist deploy- niture, fixtures, and equipment project manage- ment, portfolio management, and communica- ment. Construction project management activities tions. The performance analytics team analyze include (a) reviewing construction drawings for hotel’s operational data, guest experience metrics, value and constructability, (b) identifying qualified financial metrics, quality and compliance, training, contractors, (c) organizing and evaluating bids, (d) corporate responsibility and sales and marketing

Downloaded by [University of Massachusetts, Amherst] at 15:03 29 December 2017 negotiating and managing the construction con- related data. The performance analytics team work tract, (e) overseeing project schedules and capital from centralized locations also measure the effec- budgets, and (f) providing owner reports as tiveness of deployed programs. Whenever the ana- required. Furniture, fixtures, and equipment pro- lytics team detect any performance related ject management activities involve procurement of problems, they deploy the services of specialists furniture, fixtures, and equipment in a timely to resolve the detected problem. Indirect support manner so that the hotel can open at the scheduled is also provided to assist franchisee in establishing opening date. During the construction phase, the realistic and achievable financial and nonfinancial team will review the brand design and standards, targets. For example, a nonfinancial target could ensuring that they are adhered to; verify the pro- be establishing guest satisfaction targets and com- gress on mechanical, electrical, plumbing, and life paring the targets to actual performance. In this safety systems; evaluate the opening date and case, the franchisor will provide enablers to assist recommend change as needed on the basis of the hotel in achieving its goal or target. The 72 L. A. JACKSON AND H. JUNG

communications team plays a critical role in aid- the relationship and their interests are aligned. This ing communications between the hotels and the is important given that maximization of economic franchisor’s corporate office. The goal of this team and financial rewards in the franchise business sys- is to ensure that franchisees receive timely infor- tem is generally achieved if the interests of the mation about business-related and non–business- franchisor and franchisees are aligned. Alignment related events and activities in the franchise sys- of interests will also ensure that both parties will tem. Hence, they focus on trying to ensure that continue to exchange resources. A major implication each property feels as though they are part of the for franchisees is that they should ensure that they franchise family. Furthermore, communication in maintain a high level of honesty, integrity and trans- a frequently with franchisee is important given parency in their dealings with franchisees. that it helps to reinforce trust and commitment. Although this research captured the key com- ponents of the lodging franchise relationship and the resource exchanges involved, it should be Conclusions, limitations and suggestions for noted that the focus of this research was on U.S.- further research domiciled lodging companies. Future research is Franchising is the most dominant mode of operation encouraged to examine lodging franchise systems for U.S.-domiciled lodging parent companies. This in other international jurisdictions. Future mode of operation has grown in popularity because research is also encouraged to explore the deter- of actual and ostensible value-driven benefits received minants of trust and commitment in lodging fran- by both parties involved in the franchise relationship, chise relationships. Research is also encouraged to the franchisor and the franchisee. For lodging fran- explore the role that integrity trust and compe- chisors, franchising lends itself to a much leaner tence trust plays in influencing compliance. operation given that there is little or no capital expen- ditures, or expenditures associated with managing the real estate aspect of the business. Other benefits Notes on contributors received by lodging franchisors include the following: increase revenue from fees paid by the franchisee, Leonard A Jackson, Ph.D., MAcc, MBA, M.Sc.E., M.Sc. tea- which supports overhead and operating costs; brand ches in the Robinson College of Business, Georgia State University. His research areas include: entrepreneurship and spread, or growth of the franchise with each addi- business development, hospitality financial management and tional franchise sold; and influx of capital to expand asset performance. He can be reached at: leonardajackso- the franchise. For franchisees, they receive a proven [email protected] business model with an established value chain, pro- Hayun Jung, Master of Global Hospitality Management, ven value proposition, a proven profit mechanism, a works as a resourcing analyst with Intercontinental Hotel strong brand or trademark, and a concept which can Group be used immediately to grow their businesses quickly. Hence, the franchise model allows entrepreneurs to References

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