Franchisors and Franchisees Must Avoid the Peter Principle
By Ed Teixeira
Itís 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, itís
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 hasnít 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: ďEmployees are promoted to their level of incompetency.Ē 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, itís 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
Itís 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.
Itís 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.
© 2011 FranchiseKnowHow, LLC
Ed Teixeira is the President of FranchiseKnowHow, LLC.
He can be reached at