This paper looks at franchise relationships as a specific form of strategic alliance in which the franchisor and its franchisees interact and adjust to each other over time. As any other organization, franchise partners have to deal with balancing control (‘exploitation’) and innovation/adaptation (‘exploration’). We aim to answer two questions:

- How does the exploration/exploitation trade-off manifest itself in franchise systems and relationships?

- How do franchise partners respond to each other in dealing with the trade-off, and why do they adopt these responses?

We distinguish five ‘franchise system characteristics’ on which franchisors have to make strategic decisions in dealing with exploration and exploitation in their systems: positioning, hardness, innovativeness, organization of franchisees’ strategic participation, and growth objectives. On the relationship level, these characteristics determine the franchise partners’ perceptions of strategic compatibility. In the research model, a partner X’s response toward Y depends on: X’s perception of strategic and operational compatibility with Y, X’s perception of alternatives, and switching costs.