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Franchisors and Franchisees Must Avoid the Peter Principle

By Ed Teixeira

It’s important that franchisors and franchisees maintain a sense of balance when it comes to franchisee growth. While some franchisees want more territory and some franchisors are more than willing to accommodate this request, it’s important that this growth be carefully controlled.

Over forty years ago Dr. Laurence Peters, a Canadian sociologist wrote a book entitled The Peter Principle. Some consider this book and its theorem to be a satire on business organizations. I think it would be difficult not to find someone who has worked in a company that hasn’t heard of the Peter Principle.

Simply stated The Peter Principle takes the position that people employed in organizations work their way up the ladder by doing the job that they are paid to do. When the employee demonstrates that they have reached that point, they are promoted to the next level in the organization. This process continues until the employee reaches positions where they can no longer perform their job competently, which are typically those jobs at the management level. As the saying goes: “Employees are promoted to their level of incompetency.” Dr. Peters states that the majority of meaningful work is performed by employees who have not yet reached their level of incompetence.

Since franchising consists of franchisees, who invest in, own and operate a franchise under a franchise agreement, could The Peter Principle apply to this relationship? In my opinion, it does but with a slight twist.

Because franchisees have an entrepreneurial personality, which in most cases results in a desire to build and grow their franchise, it’s quite common for a franchisee to want more territory and/or locations. Since franchisors need new franchisees in order to grow the franchise network, many franchisors are willing to accommodate this entrepreneurial desire on the part of their franchisees. Both parties reward performance albeit in different ways that can lead to unintended consequences. The franchisee has difficulty operating multiple locations and the employees rises to his or her level of incompetency.

This situation can happen at various times:

At the Beginning of the Relationship

It’s not uncommon for a new franchisee to request added territory or an option for another franchise before they have even opened their first franchise. Some franchisors in their desire to sell another franchise, may meet this request despite the fact that the franchisee has no track record operating the franchise. Franchisors may establish performance goals for the franchisee but these goals are sometimes bypassed at a future date.

After the Franchisee has Operated for a Year or More

There are countless examples of franchisees that had success after their first year in operation and expressed a desire for another franchise. Adding another franchise may be to protect their territory or to fill their appetite for more growth. Since the franchisee has had some success, although for a short period of time, the franchisor may be willing to grant another franchise. Some franchisors might even be willing to finance a portion of the franchise fee.

Although, there are numerous cases where franchisees expand and are successful, there are also situations where the outcome is not positive. Operating an additional franchise means management and financial resources will be more important and the ability to respond to problems becomes more of a priority. Unlike an employee who has not made a financial investment a failed franchisee has far more consequences.

It’s important that franchisors and franchisees recognize that certain instances of franchisee growth can mirror The Peter Principle, where a franchisee grows to their level of incompetency.