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Intellect

When innovation hurts: BYU study shows overseas franchises should stick to the plan

Innovating a franchise to fit local conditions may actually lead to less growth, shows a new study from Brigham Young University's Marriott School of Management.

The study, published in the latest issue of the academic journal Research Policy, explains that adapting a franchise business plan to distinct environments may stunt growth for several years, while copying an exact business plan helps networks of franchises grow.

"Conventional wisdom says that if you want to grow, you should tailor to your market," said Robert Jensen, BYU assistant professor of strategy and international business. "However, the flip side of this is that you were just sold a set of knowledge that is successful. The knowledge that came from headquarters is more important than local knowledge, at least at first."

Jensen studied how well master licensees -- individuals who buy the right to build a network of franchises -- successfully expanded their networks in 23 countries.

Innovation isn't bad, Jensen said, but if you start changing things too early, before you understand the business model, you can't innovate successfully.

"Michelangelo didn't begin his artistic career by using brand-new approaches," Jensen said. "He mastered all the existing techniques, and then he was capable of innovating in valuable ways. The same thing happens here."

Mail Boxes Etc., the subject of the study, gave master licensees a 52-week plan that outlined exactly how they should build a successful network. One example Jensen highlights in the study is a master licensee who felt that the Austrian market was too different from the United States and that the business plan couldn't work without innovation. He felt he needed to recruit more educated and sophisticated franchisees who could innovate within their franchises. They demanded a higher return on their investment, and when his innovation didn't support those higher returns, the pool of potential franchisees decreased and network growth slowed.

The master licensee for Canada also felt that the U.S. model was not optimized for his home country. But instead of innovating, he chose to copy the model exactly. After four years he felt he understood what made the model successful and how to adapt it without destroying its reason for success. The Canadian network is now the second largest in the Mail Boxes Etc. company.

Jensen looked at the correlation between how well master licensees followed the 335 separate steps in the 52-week plan and how many franchises they opened up in their country's network.

"There's a reason for each of those 335 steps and the order in which they come in the plan," Jensen said. "They embody success. The problem is nobody knows for sure which of those 335 steps are important and which aren't. Changing things means taking a big gamble."

The study showed that even small changes in the early years had a large impact over time. By being ten percent more faithful to the plan (following 33 additional steps) networks grew by 20 more stores over eight years. A master licensee who fulfilled the entire plan (compared to the average that followed about half the steps) experienced growth of an additional 163 stores over eight years.

After eight years, Jensen found, the effect dissipates and catering to local markets becomes more important.

While individual franchise owners are closely monitored on how they run their stores, there is usually a lot more leeway with how master licensees build their networks.

"I think companies will shift to being a little bit tighter with what master licensees do," Jensen said, "and try to codify successful knowledge better and then hold master licensees to it."

Writer: Camille Metcalf

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