اثر شکل سازمانی بر کیفیت : در مورد فرانچایزینگ

The organizational form of franchising has been shown to yield higher profits and faster growth through reducing agency costs. Why then does anyone not franchise? In this paper I argue that the diffuse residual claims of the franchise system reduce overall system quality, and that this problem is inherent in the nature of franchising. The theory is tested by examining evidence from both the restaurant and the hotel industries, including chains that franchise and ones that own all of their units. In both industries, quality is negatively related to the percent franchising in the chain, controlling for size, growth in units, monitoring costs, market segment, ownership structure, multi-chain operation, and price. The results suggest that the franchise contract increases free-riding and decreases quality in decentralized service chains, and that quality is not contractible in this setting.

Franchising is an organizational form chosen by management in order to compete in industries in the retail trade and services sectors that require highly decentralized operations at a chain of multiple sites. Unlike employees, franchisees invest their own capital and receive residual claims from a specific site rather than a salary. Existing research has explained franchising as a solution to the agency problem; franchising overcomes the moral hazard problem of site managers operating within a chain of dispersed units. Making site managers residual claimants reduces agency costs relative to using corporate employees. These conclusions present a puzzle for scholars of organizational form. Despite its beneficial effects, franchising does not have a monopoly on retail trade and services: as an organizational form, franchise chains have between a third and a half of industry sales where they compete, as Michael (1996) reports. Given that competition in organizational form is a well documented phenomenon (e.g. Armour and Teece, 1978 and Michael, 1994), and that franchising in its present form has existed for almost 50 years, why has competition in organizational form not eliminated nonfranchising chains? It is the contention in this paper that the franchise system, whatever its other advantages, cannot deliver the same high quality as a totally owned organization, and that this is inherent in the nature of franchising. Both theory and empirical evidence from two industries will be offered to support this conclusion. Section 2 reviews the literature on explanations of franchising, and its expected effect on quality. Section 3 presents the research design for the empirical estimation. Section 4 presents evidence from the restaurant industry. Section 5 presents evidence from the hotel industry. Section 6 concludes.

This study explores in the setting of franchising the effect of contracting and residual claimant status on quality. In the restaurant industry, quality is shown to be negatively related to the percent franchising, controlling for size, growth in units, monitoring costs, market segment, ownership structure, multi-chain operation, and price. In a separate examination of the hotel industry, percent franchising is again shown to negatively affect quality, with similar controls. The limitations of the data bear repeating. The relatively small sample and the industry-specific nature of the study suggest that further research on a larger scale should be undertaken to determine if the results hold more generally.24 Also, the study did not control for compensation packages in company-owned units. Franchisees clearly are residual claimants, but employee-managers of company-owned units may vary in their compensation from a fixed wage to a complex combination of wage, bonus, and pension. A future study might include such effects. I have answered the original question — why not franchise — by demonstrating that franchise chains have lower quality than owned chains. Before examining the implications, it is worth considering alternative explanations for the results. Better quality by owned chains may be driven by some aspect of human resources training or selection that is stricter on employees than on franchisees and as a result yields ‘better’ site managers. But the cost of terminating a franchisee is much higher than the cost of terminating an employee. The cost differential would suggest more careful training and selection of franchisees than corporate managers. Second, the research has not observed effort or free-riding directly; few studies have. If one believes that free-riding is not an issue in franchising chains, then these results suggest that franchisees use less effort that results in lower quality than hired managers, which contradicts existing empirical literature as well as agency theory generally. Lacking support from other causes, we return to the original theoretical explanation — low relative quality is an inevitable result of the allocation of residual claims linked to the decision to franchise — although further research, perhaps with time series data, would be valuable. The empirical model assumes that ownership of each chain and of each of its sites has been chosen prior to operating decisions regarding quality (and consumers’ experiences of it). Logically, site and chain organizational form decisions must be made before operations can begin, so the timing of these decisions rules out a causality from quality to organizational form. But an unobserved factor affecting the choice to franchise may also affect the level of quality chosen. I am unaware of any theoretical argument for why high quality chains might choose not to franchise for reasons other than the incentive properties of franchising, but this cross-sectional study cannot rule out the possibility. So either a greater reliance on franchising leads to lower quality, or organizations with lower quality choose to franchise.25 The effect on competition is the same, however; the organizational form of franchising cannot deliver high quality. But why would any chain choose an organizational form that must lead to lower quality? Two reasons are possible. First, relatively low quality in the long run does not matter if there is no long run. The competitive pressures in these retail trade and services industries may be so great on young firms that short term survival requires a compromise of long term position, especially if chains are heterogeneous in their initial resource endowments. Second, customers (or a significant portion of them) might find quality less important than other product or service attributes, such as cost or convenience. For example, franchising may allow the chain to grow larger and faster, as argued in Thompson (1994), yielding economies of scale that lead to lower prices. Or franchising may allow the chain to offer more locations in more dispersed regions, with more convenience to customers. In the long run, a heterogeneous population of customers might allow for at least two competitive positions or strategic groups (Caves and Porter, 1977). One employs franchising, with higher managerial effort and possibly faster growth, to achieve high penetration at a low but satisfactory quality level. The other employs ownership, offering higher quality but lower size, and presumably less convenience. Therefore, chain owners may choose franchising, with lower relative quality, in order to resolve agency. But, once franchised, a chain cannot costlessly change to fully owned; the typical franchise contract runs 20 years. Therefore, the allocation of residual claims may be an important mobility barrier in these industries. If the organizational form of franchising does determine a competitive position, this implies an alternative direction for research. Rather than examining variation in the percent franchised among firms that franchise, insight into organizational form and product market competition might come from examining franchising by comparison to other organizational forms, a research design that has been far less common. Interaction between product market competition and internal organization is high on the research agenda, yet franchising research has avoided this direction. Franchising has been used as a testing ground to prove agency theory, rather than as a choice of organizational form with implications for market structure, performance, and welfare. The results should be of interest to scholars interested in contracting as well. It has been asserted that it is difficult and costly, if not impossible, to specify quality completely and verifiably. When incomplete contracts are the crime, quality is the theorists’ first suspect. Results here do support their suspicions: contracting for quality is very difficult, if not impossible. The franchisors in the dataset are all large and successful companies, competing in a business where quality is an important dimension of competition, and engaging in what appears to be a well organized and well managed effort to monitor quality. Yet quality is lower. It is incorrect to say that monitoring is ineffective — it is unknown what quality would be in the absence of monitoring — but monitoring is not as effective as corporate ownership of units. If these efforts cannot assure quality, then it is unlikely that any firm can contract for quality. The impact of organizational form on product market competition has implications beyond franchising. For example, like franchising the multi-divisional corporation also exists to exploit an externality: shared resources across multiple lines of business. Case evidence of General Motors and IBM reported in Argyres (1995) suggests that high-powered incentives such as near-residual claimant status for the managers of lines of business hurt development of shared resources. Further research can illuminate the relationship among quality, organizational form, and externalities.