An interview with
Peter M. Birkeland
author of Franchising Dreams: The Lure of Entrepreneurship in America

Question: Franchising has become an ever-present feature of the American economic landscape. One-third of the U.S. gross domestic product flows through franchises, and they employ one out of every sixteen workers. How did franchising come to play such a dominant role in the American economy?

Peter M. Birkeland: I think three factors have fueled the growth of franchising. First, there are people who have some sort of business on a small scale, say, a restaurant or a bakery, and they have designs to expand to a national market. Franchising affords an opportunity for the aspiring entrepreneur to reach a national market in relatively short order, with little capital outlay, and with minimal risk. While there have probably always been people with grandiose ideas, the business owner today can work with a specialist franchise consulting company to take his or her idea or product and make it "franchiseable." These franchise consulting companies essentially sell a "franchise package" that includes the legal requirements to franchise, marketing plans to sell franchises, and business format plans that take an idiosyncratic and unique business and standardize it. Even services that seem to be impossible to standardize, like a haircut, are widely franchised through essentially this process of desire on the part of the entrepreneur, and means through a consulting specialist.

A second factor that increases the dominance of franchising is demand by individuals to operate a business, to be their own boss, or to otherwise work independently. These people believe that owning a franchise will allow them to achieve that goal. The idea of owning a business seems to be a fairly persistent demand in the American economy, and there is a rich sociological tradition, from Eli Chinoy's Automobile Workers and The American Dream to Nicole Biggart's Charismatic Capitalism, that documents the aspirations and realization of that demand. Franchising Dreams follows within that broader sociological tradition. Also, it is interesting to note that demand for franchise units increases in inverse proportion to the health of the economy. When the economy is roaring franchise demand is down, but when the economy languishes-because of corporate layoffs, corporate downsizing, or other factors--franchising becomes more attractive.

A third factor that drives franchising is consumers who either prefer to purchase goods and services from franchised outlets, or are at least not averse to doing so. Franchised outlets are ubiquitous in the economy-they are located in the strip malls, in small towns, suburbs, urban areas, in fact, one can hardly escape franchising. As long as these three factors exist and remain strong, franchising will continue to grow.

Question: In your book, you argue that opening up a Subway or Blockbuster Video isn't necessarily as easy as it looks. In fact, for many entrepreneurs out there, having a franchise can lead to financial insolvency, or at least instability. What challenges and pitfalls await people when they take on a store or shop of their own?

Birkeland: There are two major challenges that await each aspiring franchisee. First, there are challenges that all business owners face in operating a small business such as managing employees, keeping costs down, selling products and services people want to buy, and all the other challenges associated with business ownership. But the owner of a franchise unit has additional challenges in working with the franchiser, because there are constraints on how he or she may operate their unit. In the book I relate a story told to me by a franchisee who had owned a unit in a fast-food franchise. He was African-American and mentioned that the franchiser had standard operating hours of 11:00am to 11:00 pm, or something like that, but in his urban market those hours were inappropriate and his sales suffered. It took quite a bit of work to convince the franchiser to allow franchisees in urban markets to alter the standard operating hours. If you owned your own business you would just change the hours to fit your market, but in a franchise system you have to operate according to the franchiser's standards, and this may impact your sales and profits.

Question: Even more interesting is the array of frustrating logistics and contractual technicalities that franchisees face when they go into business. The myth of owning and running your own business, is, well, a myth, right?

Birkeland: Absolutely. If you enter into franchising you're buying a license to operate under a trademark and all that it implies. The trademark may dictate certain business practices, operating procedures, employee relations, warranties, hours of operation, capital improvements, and so on that impact one's business. In the best-case scenario you may gain greater sales and profits because of the trademark, but there are also externalities over which you have no control. Franchisees in the Denney's chain were negatively impacted when one franchisee discriminated against certain customers. For better or worse, the trademark limits a franchisee's independence, and also binds all franchisees together.

Question: What's interesting about your new book is you amassed this wealth of information about franchising by actually working at franchise units for three different companies. How would you describe this experience? And the folks for whom you worked?

Birkeland: I was surprised. I didn't realize how difficult it was to be successful, the amount of time and resources that had to be devoted to these enterprises in order to make a decent living, much less survive. And I most certainly did not expect to find franchisees working with their spouse, children, parents, and extended kinship network in order to make a go of it. I suppose part of my naÅveté stems from an academic approach that, up to the point where I conducted the fieldwork, was quite theoretical. Nearly all of organizational theory, management, and strategy, operates on an abstract level. Even when case studies are used, it is usually the exceptional, world-class leader or company that is used to illustrate a point. If you read enough of that material you can easily come to believe that the world operates much like these outliers, but that would be a mistake.

Question: You also met with countless CEOs and executives from some pretty prominent companies. Given the challenges and difficulties that your new book exposes, you would think that they too would have a vested interest in reading it. If there is discontent on the frontlines, it has to be hurting business for the mother corporation, right?

Birkeland: Yes, you would think that companies where people are aligned to a common purpose with relatively little discord have a competitive advantage over the contentious, politicized, internally-focused company. One difference between a franchised company and a typical corporation is that franchisers have a nearly ironclad contract that can be used to control franchisees, so the problem of discontent may not really enter in to the locus of most decisions. Also, the source of that discontent could be internal to the franchisee, it could be a result of economic conditions, or it could be a result of franchiser management practices. Despite the difficulties associated with discontent on the frontlines, however, those companies that are able to pinpoint the source of that discontent and address it effectively, will be better able to compete. I believe the best companies do address the tensions within their system and that impacts their ability to retain key managers on the franchiser side as well as to attract high-quality franchisees in a competitive market for talent.

Question: We've talked quite a bit about the pitfalls that franchisees face when they embark on their new businesses. What solutions would you propose for improving the system?

Birkeland: One of the first steps needed to change any system is knowledge of the existing reality and I believe that Franchising Dreams provides a candid view of these systems that can become the impetus for change. There is a tendency within franchising to view these systems from one of two perspectives: you either look at things from the franchiser's perspective or from the franchisee's perspective. Principal agent economics views franchising from the principal (franchiser) perspective, as do many consultants and lawyers, yet there are academics, lawyers and consultants who view it from the franchisee perspective. The bifurcation ultimately leads to sub-optimal solutions and to enormous expenditures of time, effort, and resources on "winning."

For instance, I asked franchisees and franchisers how valuable the trademark was to them and the responses were consistent and divergent: franchisers believed the trademark was extremely valuable, while franchisees believed it had no value, or only a little value. This is a beautiful finding because knowledge of that inconsistency in perception can provide a foundation through which franchisees and franchisers can address the unstated tensions that they live with on a daily basis.

Question: What do you foresee to be the future for franchising in this country? Will it continue to grow? Or, for lack of better words, have we reached a point of possible saturation?

Birkeland: Although I think franchising is, for the foreseeable future, a permanent fixture in the American economy, there may be changes in business practices by both franchisees and franchisers that lead to greater success, to more stability, and to more collaboration across these very diverse systems. I would hope that Franchising Dreams might be able to provide people with a reality check on what they might encounter in franchising. One of the factors that perpetuates franchising is demand by people to operate a franchise unit and perhaps after reading the book these potential franchisees may ask tougher questions of franchisers and spurn those who have unscrupulous business practices.

Copyright notice: ©2002 The University of Chicago. All rights reserved. This text may be used and shared in accordance with the fair-use provisions of U.S. copyright law, and it may be archived and redistributed in electronic form, provided that this entire notice, including copyright information, is carried and provided that the University of Chicago Press is notified and no fee is charged for access. Archiving, redistribution, or republication of this text on other terms, in any medium, requires the consent of the University of Chicago Press.

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Peter M. Birkeland
Franchising Dreams: The Lure of Entrepreneurship in America
©2002, 196 pages
Cloth $22.50 ISBN: 0-226-05190-0
Paper $15.00 ISBN: 0-226-05191-9

For information on purchasing the book—from bookstores or here online—please go to the webpage for Franchising Dreams.

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