School of Management Critical Success Factors of International Franchising: Case Studies of Foreign Franchisors in Asia Stephen Choo This thesis is presented as part of the requirements for the award of the Degree of Master of Commerce of the Curtin University of Technology December 2001 Abstracts A multiple case study of four foreign franchisors was conducted in 2000 to study the critical success factors of international franchising in East Asia. The four franchisors were chosen because they possess different international franchising capabilities and are at varying levels of internationalisation. This study provides a useful insight into how a foreign franchisor should approach and compete successfully in East Asia. Firstly, the research provides a conceptual model, which displays the six key categories and success factors for international franchising in East Asia. The study has made a significant contribution in identifying two new categories that have mostly been neglected by researchers in international franchising. Secondly, the study reveals a unique form of master franchising that is being practiced in East Asia. Thirdly, the effective management of Asian partners is found to begin with recruiting the right partners with the desired characteristics and subsequently developing a long- term mutually beneficial working relationship with the partners. Finally, successful franchisors were found to believe strongly in the power of branding and niche marketing in East Asia. i Acknowledgements I would like to express my heartfelt appreciation and gratitude to my supervisors Dr. Tim Mazzarol and Professor Lawson Savery for their wisdom, encouragement, and invaluable direction throughout the year. I am particularly appreciative of their fine effort in meticulously and painstakingly going through my thesis with a “fine tooth- comb.” My special thanks must go to Dr. Mazzarol for his continuing mentoring, support and guidance over the past several years. This research would not have been possible without the open access to the four studied organizations. I wish to thank all of the respondents who willingly gave their time to share their knowledge and stories with me. In particular, I would like to acknowledge the significant contributions Messrs Phil May and Shaik Aziz of Dome Coffees have made to this study. They have been incredibly generous in their support, of which I am most appreciative. My deepest gratitude and love, however, is reserved for my wife Tina. Her tireless effort in preparing those delicious sandwiches for my lunches and unconditional support has made the undertaking of this thesis possible. This thesis is, therefore, dedicated to my beautiful wife, partner and friend. ii TABLE OF CONTENTS 1 Introduction.............................................................Error! Bookmark not defined. 1.1 Problem Statement ........................................Error! Bookmark not defined. 1.2 Purpose of the Study.....................................Error! Bookmark not defined. 1.3 Contributions of the Study............................Error! Bookmark not defined. 1.4 Definition of Terms ......................................Error! Bookmark not defined. 2 Literature Review...................................................Error! Bookmark not defined. 2.1 Definitions of International Franchising.......Error! Bookmark not defined. 2.2 International Franchising Phenomenon........Error! Bookmark not defined. 2.3 Modes of International Franchising..............Error! Bookmark not defined. 2.4 Research on International Franchising .........Error! Bookmark not defined. 2.5 International Franchising Capabilities..........Error! Bookmark not defined. 2.6 Internationalisation of U.S. Franchisors .......Error! Bookmark not defined. 2.7 International Franchising in East Asia..........Error! Bookmark not defined. 2.8 Changing Consumers in East Asia ..............................................................44 3 Country Profile: Singapore...............................................................................47 3.1 Background Information..............................................................................48 3.2 Marketing Environment ...............................................................................48 3.3 Franchise Industry.......................................................................................54 3.4 Implications for Foreign Franchises ............................................................61 4 Research Methodology ......................................................................................63 4.1 The Case Study Method...............................................................................64 4.2 Application of the Case Study Method........................................................68 5 Case Studies........................................................................................................80 5.1 Dome Coffees Australia Pty. Ltd.................................................................80 5.2 Coffee Bean and Tea Leaf.........................................................................117 5.3 The Body Shop ..........................................................................................125 5.4 Royal Copenhagen Ice Cream...................................................................139 6 Data Analysis....................................................................................................147 6.1 Distance Management ...............................................................................147 6.2 Contract Enforcement................................................................................156 6.3 Cultural Adaptability.................................................................................166 6.4 Host Country Risk Management ...............................................................171 6.5 Marketing Approach..................................................................................174 6.6 Partnership Management ...........................................................................181 7 Findings ............................................................................................................193 7.1 Propositions Discussed ..............................................................................193 7.2 The Model..................................................................................................196 iii 8 Conclusions and Recommendations...............................................................200 8.1 Answering the Research Questions ...........................................................200 8.2 Conclusions................................................................................................207 8.3 Recommendations for Future Research.....................................................209 9 References.........................................................................................................211 10 Appendix A: Guideline for Interview Questions ......................................227 iv LIST OF TABLES & FIGURES TABLE 2:1 International Franchising Capabilities and Capacity for 30 Development TABLE 2:2 Success Factors in Establishing and Operating Foreign Units by 32 U.S. Franchisors TABLE 3:1 Proportion of Singaporeans by Age Group 51 TABLE 4:1 Typology of International Franchisors 74 TABLE 5:1 International Locations of Dome Cafes 81 TABLE 5:2 Operational Categories for Auditing Dome Cafes 114 TABLE 5:3 Schedule of Franchise Fees for Indonesia 114 TABLE 5:4 Dome Coffees’ International Activity 115 TABLE 5:5 International Locations of Coffee Bean and Tea Leaf 117 TABLE 5:6 The Body Shop’s Worldwide Locations 125 TABLE 5:7 International Locations of The Body Shop’s Company Stores 128 TABLE 5:8 Royal Copenhagen’s Overseas Master Franchisees 140 TABLE 6:1 Distance Management 150 TABLE 6:2 Contract Enforcement 159 TABLE 6:3 Cultural Adaptability 167 TABLE 6:4 Host Country Risk Management 172 TABLE 6:5 Marketing Approach 177 TABLE 6:6 Partnership Management 183 FIGURE 6:1 Frequency Distribution of Issues Within Each Category 148 FIGURE 7:1 A Model of CSFs of International Franchising in East Asia 198 v 1 INTRODUCTION As a business model, franchising has experienced a significant increase in popularity throughout the world over the past three decades. Commencing from the 1970s, franchising has grown to represent nearly one-third of United States (U.S.) domestic sales (Boe, Ginalski and Henward III, 1987). In 1990 it totaled approximately US$700 billion of sales (Hogan, 1990; Steinberg, 1991). The majority of this growth has been attributed to “business format franchising” (Chan and Soon, 1992; Felstead, 1994). Business format franchising requires the franchisee replicate, in different locations, the entire franchisor’s business concept other than the right to use its trademark. This type of franchising accounts for 74 per cent of all franchise arrangements in the U.S., where it contributes some 14 per cent of total retail sales (Mendelsohn, 1995). Franchising is not just a U.S. phenomenon but has proven to be highly popular elsewhere. Franchising is common in Europe, parts of Asia, Australia and New Zealand (Chan and Justis, 1990; Durden, 1994; Preble, 1995). With respect to Asia, Japan was the first country in the region to be targeted by U.S. franchisors in the 1970s (TDB and Arthur Andersen, 1997; Love, 1995). As of March 1995, Japan had 158,000 franchise outlets, which ranked the country as having the third largest number of franchise