Franchising is a highly interdependent business between franchisor and its franchisees, and conflicts are therefore highly likely. Thus, conflict management is one of the most important tasks in the success of franchising. Conflict is inevitable in franchising, but it is possible to resolve it in a satisfactory manner.
Mediation, a form of Alternative Dispute Resolution(ADR), is a desirable alternative for resolving disputes. Mediation is faster and more cost-saving than lawsuit, which saves time and money, has the advantage of being able to operate flexibly and to protect the confidentiality of the enterprise and protect the interests of the enterprise. In particular, since the friendly relationship between the parties can be maintained even after resolving the dispute, it is considered to be a very useful mean for resolving the disputes in franchising characterized by the interdependent ongoing relationship.
There are several dispute settlement systems operating at public level in Korea. But, unlike in developed countries, there are few companies operating their own dispute settlement system at private level. In spite of the fact that the in-house dispute settlement system is important in the affiliated business, there have been no cases reported to the academic community in this regard. Exceptionally, some leading companies in domestic convenience store industry are operating in-house dispute mediation system successfully. Korea Seven, a masterfranchisee of Seven Eleven Convenience Stores, is the case. The purpose of this study is to identify the meaning of the in-house dispute mediation system as an effective mean of conflict resolution by analyzing the process, performance and the success factors of Korea Seven’s dispute mediation system. The present study also attempts to provide several useful implications for utilizing it as a means of conflict management. This study examines the existing literature on the dispute settlement system and suggests some policy implications for the establishment of the in-house dispute settlement system at the private level through the case analysis of Korea Seven. In particular, this study suggests that, in contrast to the public dispute settlement system, the success of the in-house dispute settlement system at the private level requires the culture of win-win cooperation within the company, the commitment of top management, and the dedicated efforts of the mediation committee members.
Korea Seven’s in-house mediation system introduced in March 2014 is regarded as a successful and efficient dispute resolution mechanism in various aspects. The Mediation Committee, whose role is to resolve the disputes by clarifying and coordinating the conflicting party’s business interests, governs the whole mediation process as a neutral third party.
The committee consists of five members, including the chairperson, whose term of office is two years. The chairperson is a neutral and impartial external person with expertise and coordination experience in the affiliated business, in agreement with the franchise headquarters and the franchisee. Korea Seven’s dispute settlement procedures consist of ① submission of applications, ② prior consultation of the operation team, ③ receipt of disputes and basic investigation of facts, ④ notice of acceptance, ⑤ deliberation proceeding and adjustment recommendation, and ⑥ preparation of agreement. The franchisees who wish to submit complaints regarding the operation of the franchisee (such as conflicts or claims) must complete the application form and submit it to the Commission Secretariat together with supporting data. The secretariat confirms whether or not it has consulted with the operation team before submitting the application for dispute settlement. In the event of a dispute not preceded by consultation, the Secretariat may obtain the consent of the applicant and mediate prior consultation with the operation team. If no agreement is reached through preliminary consultation, the applicant will receive the application form, hear the opinions of relevant departments, conduct a basic investigation on the facts, and report the results to the committee. However, if it is an urgent matter or it is deemed necessary by the chairman, the basic investigation procedure may be omitted and the committee may consider it immediately.
The committee prepared a recommendation to the franchisee so as not to incur any additional costs such as an additional fee by the application for adjustment, in accordance with the purpose of the self-regulation system. Even if there is no objectively substantiated legal liability in the franchise headquarters, the franchise headquarters will ask the franchisees for issues that may raise issues from an ethical point of view or that the franchisees have suffered due to unforeseeable changes or unforeseen changes in the business environment. The reason for this is that it is important for the arbitration system to set rules in favor of the franchisee in order for the franchisee to accept the dispute resolution. In addition, the committee recommended that contracts be maintained rather than terminated as much as possible. As the complaints related to the decrease in sales are the biggest cause of the cancellation of the contract, it was suggested to plan the promotion event or to provide the temporary special subsidy as a measure to improve the cause of the decrease in sales. In the case of strategically important stores, it is suggested that the franchise headquarters take over as a direct store at the same time as termination of the contract, a method of transferring to entrusted type, and a transfer method to a third party.
As summarized in <Table 1>, Korea Seven’s in-house mediation system is considered advantageous to both parties in resolving the franchise disputes, especially in terms of relative costs and burdens compared to litigation and arbitration. The success rate in mediations of the disputes where franchisees agreed to participate is far higher than 90 percent. It also helped the parties focus their interests, facilitate communication with and understanding of the other party, explore a creative and flexible ways of dispute settlement, and preserve a more favorable relationship between the parties. More over, it also encouraged the collaborative and customer-centric mind of the employees and mitigated the tension between the company and its franchisees.
The core success factors of Korea Seven’s in-house mediation system can be summarized as follows: corporate culture of win-win cooperation, commitment and support of top management, sincere commitment of the franchisee representatives, independence and professionalism of the committee, and active internal and external public relations.
First, the in-house dispute mediation system is not successful if the culture of win-win cooperation is deeply embedded within the enterprise. The corporate culture of win-win cooperation can be properly formed when the ethical management is manifested in the management ideology or the value system and specific practical efforts to implement it are made. Korea Seven’s corporate culture is pursuing win-win cooperation and mutual growth with internal and external stakeholders. Korea Seven’s management philosophy is to be a ‘Happy Leader to Fulfill the Happiness of Everyday Life’ and to fulfill the mission of ‘Providing convenient joy with valuable products and services to devote to the happiness of the people’, which is based on the vision of “one of Korea’s top convenience stores”, “smart work with a challenging mind, and co-growth with fair execution”. In addition, Korea Seven emphasizes corporate social responsibility and promotes mutual growth with its customers and stakeholders including its franchisees. Korea Seven is carrying out various social contribution activities to realize ethical management. These activities are largely divided into (1) self-service by employees, (2) group-linked activities, and (3) project programs. In addition to its social contribution activities, Korea Seven operates a variety of programs for mutual growth with its partners and franchisees. Support programs for partner companies include: (1) funding for the creation of a joint development fund of KRW 23 billion, (2) joint product development and marketing consulting, (3) support for market exploration using the Lotte Group distribution network, (4) education and manpower support such as the operation of the joint growth academy, (5) small and medium-sized partners’ productivity enhancement program, Industry Innovation 3.0, (6)identification of various performance sharing models, (7) strengthening communication channels with partner companies such as joint trips and surveys. The franchise business support programs include (1) the establishment and operation of a mutual growth fund for the management company worth KRW 100 billion, (2) the management of win-win partnership with the management, such as support for insolvent stores, (3) the use of corporate condominiums, and a happy family concert, (4) support for the children of business owners such as tuition fees, and (5) excellent store awards and visits to overseas stores.
The second factor is CEO commitment and support. One of the most important success reasons for Korea Seven’s in-house dispute settlement system is that the in-house dispute mediation system is supported by CEO’s sustained commitment and support. Korea Seven’s CEO, Mr. Chung, Seung In has been convinced that the in-house dispute mediation system is important for resolving disputes with franchisees from the time of the introduction of the system, and has instituted a system in which the president can not arbitrarily overturn the decision of the committee to emphasize the independence of the committee. In fact, most of the Commission’s recommendations were accepted without any modification, which contributed greatly to resolving disputes more quickly and allowing the franchisee to trust the committee’s decisions. Korea Seven values mutual growth with franchise partners and partners. All executives and employees, including CEO Chung Seung-in, are using fair trade as the most important norm in pursuing mutual growth with franchisees (business owners) and partner companies. These include the following: the prevention of unfair trade practices through transparent and fair work, establishing a fair trade order by mutual consultation, and establishing a fair trade culture. These efforts have gained a strong impetus through the introduction of the Compliance Program. Korea Seven introduced the Compliance Program (CP) on July 30, 2014. CP is an ‘internal compliance system’ that enacts and manages educational and supervisory matters in order to comply with fair trade laws by companies themselves. CP’s main content is that (1) it does not abuse its superior position with franchisees or partners, (2) does not discriminate against or provides disadvantage to its partner or its counterpart, (3) without requiring unfair economic benefits from suppliers or suppliers, (4) to be familiar with fair trade rules and action guidelines, and to actively cooperate with CP operations by department.
The third factor is the representation, independence and professionalism of the committee. The committee appointed external members with experience of dispute settlement as the chairman, while appointing two members representing each of the franchise headquarters and the franchisees to achieve a numerical balance. In particular, in the case of franchisees, two of the franchisees that have experienced and successfully operate stores have been elected through elections to ensure fairness, transparency, and representation. In particular, the legal investigation team, which is the most important element in the investigation of the dispute and the factual relationship, was responsible for fairness in judging illegality of the franchise headquarters. The committee is an independent body that does not belong to any department in the company. The decision of the committee follows the decision-making system that is reported to the CEO. The representativeness, independence and professionalism of these committees contributed greatly to the acceptance of the committee’s recommendations by the franchisee, the party to the dispute.
The fourth factor is the enormous coordination efforts of the franchisee representatives in the Committee. In order for the mediation to be successful, the recommendation must take into account the position of the parties to the dispute, particularly the franchisee, who is the applicant. For example, dismissing a complaint because it is difficult to prove the affiliation headquarters’s misconduct, and because the headquarters of the franchise headquarters does not exist, there is a concern that the franchisee may distrust the committee. In fact, if it is possible to prove the illegal act, it is advantageous for the franchisee to solve the problem through the arbitration or litigation of the fair trade arbitrator without having to apply to the committee. In addition to the legal team, the two members of the franchisees should clarify the facts of the dispute by phone or face-to-face interview with the franchisee, which is a party to the dispute, and identify what the franchisor wants. Also, if the recommendation does not meet the expectation of the franchisee, he or she persuaded the franchisee to make a dedicated effort to accept it. A competent coordinator does not encourage disputes between the parties to the dispute, but rather encourages them to step back from their standpoint and look at the problem from the perspective of the other party and understand the other party’s position. In the process of post-adjustment and control, the two members of the franchise have played a major role. The members of these franchisees tried to understand the troubles of their fellow franchisees as their colleagues.
Lastly, there are active internal and external public relations. Good publicity of the system is helpful to the establishment and development of the system. When Korea Seven’s in-house dispute mediation system was introduced, many franchisees did not know the existence of the system itself because the franchisee was also unfamiliar with the adjustment system and was skeptical about the result. Also, several company executives were reluctant in promoting the system because they worried some franchisees may use the system opportunistically by means of compelling the company to accept their requests. In addition, some hostile and dissatisfied franchisees have taken an attitude of perceiving the mediation system as a means by which the franchise headquarters conciliate them and devaluing it. Since 2014, however, Korea Seven has consistently promoted an in-house mediation system to all departments and franchisees whenever there was an opportunity, and urged franchisees to take advantage of them. Korea Seven also educated employees on the importance of self-regulation. It is considered to have contributed to the formation of a relationship-oriented organizational culture while recognizing the importance of building relationships with franchisees in franchising.
In Korea, dispute settlement system has been set up mostly at public level, however, there are few cases in which an arbitration dispute settlement system is operated at the company or private level. This study introduces the process and performances of the in-house dispute mediation system of Korea Seven which is the masterfranchisee of Seven Eleven Convenience Store. This study also provides several policy implications and research directions useful for utilizing the dispute mediation system in franchising industry.
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