Pedro Lucas de Resende Melo, Tales Andreassi y Moacir de Miranda Oliveira Jr.
Intangible resources may contain a number of components capable of generating sustainable competitive advantage in terms of innovation in franchising chains. In franchising we use several intangible resources that result in the expertise developed in each franchise. The franchisee is responsible for developing many attributes prepared by the franchisors. One can state that the relations with the customer is an important responsibility to be developed, aiming at building customer loyalty. This loyalty is awarded in accordance with the standards of quality set by the franchisors and maintained by the franchisees, who are in charge of their performance in local markets. Moreover, one should mention the development of human resources by franchisors, which should mainly provide training for franchisees and their employees so that they can ensure the standards of customer service quality (Sorenson and Sorensen, 2001; Windsperger and Dant, 2006).
Therefore, a full understanding of the chain and the competences developed over the years, regarding the selection of franchisees, franchise layout, products and the strength of the brand, are intangible resources. The development of this knowledge generates the franchise’s expertise. This can help reduce costs and improve the quality of service, and is also a source of competitive advantage that enables firms and individuals to develop competences that are valuable for their chains (Klein and Leffler, 1981; Norton, 1988; Kacker, 1988; Coliseum, 1994; Barney, 1991; Castrogiovanni et al., 2006).
These intangible resources are difficult to copy as they integrate a number of management practices that are often not restricted to a few people; they involve the assignments and functions of many players, such as franchisors, franchisees and franchising chain staff (Polanyi, 1962; Windsperger and Dant, 2006).
Consequently, managerial positions are very important in the pursuit of competitive advantage, considering the added capability of understanding and choosing which attributes and competences the organizations should develop in order to adapt quickly to potential opportunities. The lack of a competent body of managers may undermine support for the differences gained (Barney, 1991; Prahalad and Hamel, 1990). Given these issues, in franchises many managerial duties fall upon the franchisor, who takes on the function of chain manager. The franchisee is responsible for local management, which also requires competences for managing the local staff.
As a result we can regard franchisors as the “top management team”, whose market and management expertise can pave the way to innovation, especially when they comprise heterogeneous teams. It is worth highlighting the importance of the expertise brought to the table by these franchising executives who coordinate the franchisees, preparing them to generate superior performance within the chain. Decisions taken by the group manager will lead to better coordination of resources among firms (franchisees). This will bridge the firm’s limitations more easily due to access to resources that may guarantee competitive advantage. Therefore, resources and competences that are difficult to copy, scarce, and valuable become strategic assets that provide competitive advantage for franchises (Combs and Ketchen, 1999b; Bantel and Jackson, 1989; Conner and Prahalad, 1996; Teece et al., 1997; Schilling and Steensma, 2002; Amit and Schoemaker, 1993).
As a result of this and based on the material previously discussed, we established our first proposition:
P1: The professionalization of franchisors is an intangible resource that can generate sustainable competitive advantage for innovations by the franchising chain.
The performance of local entrepreneurs as franchisees is crucial to franchising chains. These franchisees are intangible resources, capable of adding information to the franchisors, providing them with a supply of products and services appropriate to their markets of operation and, along with that, generating innovations. This local action promotes emerging innovations, which, if properly managed by franchisors, can be used by other franchisees in the same chain (March, 1991; Sorenson and Sorenson, 2001; Thompson, 1994; Bradach, 1997; Windsperger and Dant, 2006).
The importance of the changes proposed by local franchisees is of paramount importance, because the geographical dispersion of the franchise chain can lead to a situation in which the standards determined by the franchisor may require adjustments to fulfill the needs of the local customers. Standardized procedures are not sufficient for better chain performance; diversification may be required and will happen as a result of the enterprising actions of the franchisees. The exception concerns homogeneous markets, in which franchisee action is not the key, since many modifications do not apply to the franchisor’s directives (Minkler, 1992; Kaufman and Eroglu, 1998; Sorenson and Sorenson, 2001).
What stands out is that, unfortunately, many innovations developed by franchisees are not communicated to the franchisor. The franchisor is responsible for stimulating internal debate among the franchisees, developing a better relationship with a view to generating more trust and reaping benefits from the identification and more widespread implementation of local adaptations.
The evidence presented by Gassenheimer et al. (1996) shows that proactive franchisees have a tendency to be concerned with the relations between others franchisees and the franchisors. Therefore, these enterprising franchisees have a greater commitment to the exchange of knowledge and are in a better position to access other franchisees’ innovations.
On the other hand, in order for these innovations to become more widespread, the franchisors must set up knowledge management mechanisms and thereby replicate these innovations at the other franchise units under their responsibility. Knowledge management has the merit of encoding local tacit knowledge, transforming it into explicit knowledge; thus, one can bring it into franchise and disseminate this knowledge to other franchisees (Nonaka, 1994; Nonaka and Takeuchi, 1995).
The concept of a learning organization employed by Senge (1992) can be used in the context of the relationship between franchisor and franchisees. To get better results in a franchising chain through the participation of franchisees, they have to be able to bring improvements and innovations to the franchising chain. According to this concept, knowledge management emerges as an alternative in the search for innovations; one can derive changes in routines, improvements in procedures and the development of new standards from the ability to adapt to local needs, all because of the exchange of experience between those involved (Cyert and March, 1963; Argote et al., 1990; Sorenson and Sorenson, 2001).
However, knowledge management requires the development of human resources by means of stronger training over the years, which can enhance knowledge within a franchise chain. There are several ways to transfer knowledge, such as telephone consultations, meetings or coaching (Simonin, 1999).
The franchisees that develop local innovations can disseminate these practices during meetings held by the franchising chain from time to time, conveying to the franchisor, right from the start, techniques that can be implemented by other franchisees. When it develops the ability to propagate knowledge about innovations, the chain will develop a greater capacity for exploiting local markets (Gillis, 2007; Bradach, 1997).
Based on what we have previously established, our second proposition is subdivided into two related topics:
P2a: Franchisees with enterprising profiles are intangible resources and are able to generate innovations in franchising chains.
P2b: Knowledge management is itself an intangible resource capable of creating a cycle of franchisee innovations.
Relations between the firms are considered relational resources that add to the knowledge base of strategies and competences developed by franchisors and franchisees in their daily operations. Indeed, these relations improve the exchange of resources, competences and knowledge, strengthening the alliance between the parties involved and creating unique resources that are more valuable, rarer and harder to imitate. The maturing of these relations is extremely important for the franchisors and can lead to the chain under a franchisor’s management raising its performance standards (Gillis, 2007; Dyer and Singh, 1998).
The relational perspective suggests that strengthening relations can reduce opportunism, increase the added value of the innovations coming from franchisees, provide increased standardization and reduce the variability of operations (Dant and Gundalach, 1998; Dyer and Singh, 1998). Nevertheless, the commitment underlying these relationships and the trust of customers and other stakeholders (agents) should be the key for relations success. This commitment and trust derive from (i) the provision of superior resources and solutions vs. other competitors; (ii) the maintenance of senior corporate values common to these partnerships; (iii) effective communication based on market knowledge and on the constant evaluation of these partnerships, and (iv) the avoidance of opportunistic maneuvers that will not provide competitive advantages because of their malevolent character. Additionally, managing relations require that the organization give up any imposing attitude vis-à-vis the market and that it invigorate its ability to address the circumstances of the groups involved (Morgan and Hunt, 1994).
Over the years, learning derived from these relations will provide improved clarity about which resources should be combined, generating more significant business opportunities for the groups involved. There are studies that show that relations built over time generate competitive advantages among the firms involved and are difficult for competitors to imitate (Dyer and Singh, 1998; Walker et al., 1997).
These relational resources help to capture innovations from the franchisees and to disseminate them throughout the chain. There are two types of relational resources that apply to franchising. The first, the "knowledge sharing routines," deals with standards that allow for regular interaction among members of the franchise and transfer, recombine or even generate specific resources. It involves the regional consultants sent by franchisors to franchisees to support the dissemination of news in local, regional and national meetings. The second type of relational resource refers to the use of governance mechanisms. These mechanisms strengthen the security methods involved in the agreements signed by the chains’ members, minimize transaction costs, and help to increase the value of innovation among franchisees (Dyer and Singh, 1998; Bradach, 1997).
Therefore, trust is a key factor when it comes to allowing the franchisees more autonomy, while the franchisor, on the other hand, can implement changes that are accepted by the franchising chain, especially changes in routines, innovations, new promotions or changes in products and the delivery of services. The end result will be a larger number of innovations and quick processing by the chain (Gillis, 2007; Dant and Gundlach, 1998; Kaufmann and Eroglu, 1998).
Based on the above, we establish the third proposition:
P3: The practice of franchisors and franchisees maintaining relations establishes sound competences in the area of innovation in the franchising chains.
Starting in the 1990s, many mergers and acquisitions took place worldwide, sparking the questioning of the role of innovation in the face of this new organizational movement, given the intense transactions involving technological knowledge that helped to enhance firms’ innovation potential. It is important to mention that up to then, the discussions involved the transfer of know-how and the capacity for technological development among the newly merged companies (Grandstad et al., 1992; Beers and Sadowski, 2003; Sorensen, 2000; Cohen and Levinthal, 1989).
Through mergers and acquisitions, organizations can gain access to new resources that were previously limited or even difficult to develop internally. The peculiarities of the firms generate synergic actions, enabling access to new resources that may also be acquired through strategic alliances (Wernerfelt, 1984; Helleloid and Simonin, 1994).
One can analyze acquisitions in the light of another element, the fact that they work as an attractive alternative to R&D investments, precisely because they offer enterprises immediate access to new markets and dispense with internal innovations, which are therefore acquired through the firms that have become part of the group. As a consequence, there is no risk of internal development as developed markets are added. It is natural, however, that a developmental mentality will be required over time. In the short term, however, resource sharing will be dominant (Balakrishnan, 1988; Shelton, 1988).
Burgelman (1986) emphasizes an important issue: that both the growth and development of firms can be achieved through acquisitions and innovation. And because it has restricted resources, which is clearly the case of franchises, one of two possible directions is emphasized.
Having recently worked on this issue, Beers and Sadowski (2003) examine the relationship between innovation generation and the procedures for acquiring firms. According to these authors, the potential for innovation increases after these mergers, which generate a greater ability to launch new products and services.
One can revisit the experience of the pharmaceutical industry, which went through a strong merger and acquisition process in the last decade. For this industry, this process can mean cutting the R&D cost of drugs, which is extremely expensive because they require specialized resources, in particular research personnel, drug development time being as long as 15 years in many cases. Meanwhile, the pharmaceutical industry in many countries has been subject to competition from generic (unbranded) products. Moreover, broken patents add to the pressure to develop new drugs to be marketed under the protection of a patent (Morgan, 2001).
Based on the points above, we establish a fourth proposition:
P4: Mergers and acquisitions among franchise chains generate new competences that foster innovations.
Organizational culture encompasses a particular configuration of models of behavior, norms, values and knowledge of a given firm, which are conveyed over time to employees. An interesting case is that of François Dalle, the founder of L’Oréal, who contributed to the dissemination of enterprising values within the organization, by establishing an innovation-oriented organizational culture. The results of his concern with launching new products, services and activities centered on winning new markets are visible, in line with his enterprising managerial orientation (Fayolle et al., 2008).
On the other hand, some authors point out that entrepreneurship can be characterized within the organization only if the behaviors and processes focus on the continuous recognition, evaluation and exploitation of opportunities by employees at all levels. Besides gaining, as a result, a pioneering position, the firm’s innovation cycles will be stronger and will more easily overcome the usual risks faced by new businesses (Stevenson and Jarillo, 1990; Miller, 1983).
Barney (2001) highlights the creation of competitive differences, noting a particular aspect in firms: If there is a series of cultural values which are unusual in other organizations, one may say that there is a competitive advantage, as long as, evidently, these values contribute efficiently towards this organization’s competitiveness.
On the other hand, a problem that firms face in the growth phase is growing bureaucracy, process control, and formality, along with reduced staff autonomy. These are complex issues that concern the orientation of the business with regard to entrepreneurship, involving above all corporate strategy, the management of human resources, and the organizational culture. In fact, the founder plays a distinctive role at the firm, having been responsible for the creation of values and for establishing an enterprising culture. One can see that in many situations, when there is greater autonomy among the staff and its functions are encouraged, this can lead to organizational development, resulting in changes that are beneficial to the hierarchical structure at play (Thornberry, 2001; Hofstede, 1985; Pinchot, 1985).
In sum, the organizational culture is metaphorically similar to a "chemical compound," whose formula is difficult to recreate because it is a collection of behaviors and values. The founder or even the organiztion’s board are to be underscored as promoters of a proactive, ever-entrepreneurial attitude (Fayolle et al., 2008).
Based on what was seen previously, we arrive at our sixth proposition, subdivided into two:
P5a: An organizational culture that encourages entrepreneurship itself generates innovation in the franchising chains.
P5b: Organizational culture is a source of sustainability for the competitive advantage of innovations within franchising chains.
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