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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Retailing, Volume 79, Issue 2, 2003, Pages 63–75
In this paper we examine the changes in ownership patterns of franchise systems as they mature. We compare the predictions made by three alternative theories within the context of the fast food industry. Signaling theory predicts that franchise systems will move toward a greater reliance on franchised outlets as systems mature, while resource acquisition theory (or as it is sometimes known, ownership redirection thesis) predicts a tendency in the opposite direction. A third theoretical perspective, tapered integration or plural forms, suggests a tendency toward maintaining a steady state of mixed distribution. Results indicate that although franchisors value the benefits of the mix of ownership types and do maintain that mix over time, there is some evidence of a greater tendency to permanently convert existing franchised outlets to company-owned outlets as fast food systems mature and gain greater access to resources.
Franchising has literally reshaped the retail landscape since its infancy in the 1950s. By most estimates, franchising now accounts for $1 trillion in annual retail sales from approximately 320,000 businesses in 75 industries and employs more than 8 million people. In the U.S., franchising accounts for more than 40% of all retail sales and 1 out of 12 retail establishments (International Franchise Association, 2002). Franchising has also been cited as one of the fastest growing U.S. exports to the world (House Committee on Small Business, 1990). Not surprisingly, therefore, franchising has attracted research attention from diverse disciplines including management, law, economics, marketing, and finance. Within much of this literature (including marketing), ownership issues surrounding franchises (principally, understanding how firms make organizational form choices) have been an important topic of inquiry. Initially, most academic research focused on the determinants of a preference for either franchised or company ownership (Caves & Murphy, 1976, Oxenfeldt & Kelly, 1968 and Rubin, 1978). More recently, the concept of tapered integration (Harrigan, 1984) has been added to this stream of literature to understand the strategic choice to maintain a mix of both company-owned and franchisee-owned outlets within the same system (Bradach, 1997). Research into organizational choice in franchising can be further divided into unit level arguments and strategic firm level arguments. Agency theory, for example, has been the primary tool of analysis regarding unit level choices based on the comparison of incentive alignment and monitoring costs (Brickley & Dark, 1987). When agency theory is employed to explain combinations of company-owned and franchised outlets within a system, it is based on the assumption of heterogeneous outlets, that is, differences among units on variables such as distance from headquarters, size, and potential profitability (Lafontaine, 1992). In this paper, we initially compare two contradictory, strategic firm-level explanations for the choice of franchising as an organizational form, namely, those of signaling and resource acquisition accounts. These two theories form a particularly interesting contrast in that they predict diametrically opposed dynamic effects as franchise systems mature. Stated simply, signaling theory would suggest an initial preference for company-owned outlets with a subsequent tendency toward franchising whereas resource acquisition would suggest an initial preference for franchise ownership with a subsequent tendency toward company ownership. It should be noted that these shifts can both be expressed as general strategic tendencies rather than the specific unit level choices that are typically the subject of agency theory analysis (Bradach & Eccles, 1989 and Brickley & Dark, 1987). A secondary goal of the paper is to empirically evaluate the emergence of a series of motivations hypothesized to underlie the choice of plural forms as a stable organizational form. Although the premise of stable plural forms appears to be gaining research attention, many of its arguments currently lack empirical grounding. We include in our analysis of franchise system dynamics, therefore, the impact of a preference for plural form organization. In other words, we examine the circumstances under which a system would not demonstrate tendencies toward either a more fully company-owned or franchised profile. Rather these systems would seek to maintain some form of balance of company-owned and franchised outlets. We begin this paper with a brief review of the theoretical and conceptual arguments surrounding resource acquisition, signaling and plural form. In particular, we examine the dynamic implications of these alternate theories of franchising and demonstrate how they suggest differing strategic tendencies for the entire chain. Next, the methodology of an empirical study within the fast food industry is described; in turn, followed by a report of our findings. The final section contains a discussion of the implications of those results. Resource acquisition account of franchising Though introduced to the franchising context by Oxenfeldt and Kelly (1968), the resource acquisitions perspective of organizational strategy has impressive lineage. Its pedigree has been traced to at least six well-delineated schools of thought (Hunt, 1999). Its most obvious linkages can be tracked to the resource-based view of the firm (Penrose, 1959 and Wernerfelt, 1984) and resource dependence theory (Pfeffer & Salancik, 1978). In general the latter frameworks conceive strategic organizational choices and interfirm governance as a coping response to the forces of environmental uncertainty and limited firm-specific resources. That is, confronted by resource limitations, firms are predicted to opt for strategic organizational and interorganizational governance choices that ensure the availability of resources critical for the furtherance of their business. Within the franchising context, Oxenfeldt and Kelly (1968), Caves and Murphy (1976), Norton (1988), and Gilman (1990) have argued that entrepreneurs use franchising to gain access to significant resources that are in short supply in the early stages of the development of their chains. These growth-minded but resource-constrained entrepreneurs have two realistic options available for securing external resources: (1) selling equity and (2) selling franchises. Debt options are often not realistic because growing chains are seldom able to furnish requisite collateral to qualify for the level of loans needed, a problem exacerbated by the novelty of many franchise concepts at the time they are introduced (e.g., leak detection, cookies in a mall). Selling equity secures access to only financial capital. Franchising, however, represents an efficient bundled source for all three critical capitals (i.e., financial, managerial, and informational; cf. Norton, 1988). Moreover, though subject to some discussion (Rubin, 1978), there is an indication that franchisees may be attracted with a lower rate of return than investors, making franchising the less expensive option (see Caves & Murphy, 1976, Dant, 1995, Hunt, 1973, Lafontaine, 1992, Oxenfeldt & Thompson, 1969 and Ozanne & Hunt, 1971 for a dialogue on this theme). Under the resource acquisition view, therefore, franchisees are portrayed as expedient, willing, and efficient suppliers of three primary critical capitals: financial resources, managerial resources, and informational resources. However, franchisees are also portrayed as particularly hard to manage. As Oxenfeldt and Kelly (1968) put it “The frustrations and difficulties involved in operating a franchise system are powerful pressures toward ownership which permit[s] far greater control.” Interestingly, their description of the franchisor’s “conflicts of interest with independent businessmen” appears to indicate that the primary source of these difficulties is misdirected effort on the part of franchisees rather than sub-optimal effort. Franchisees may try hard, but they may try hard at the wrong things, at least according to the franchisor. This is consistent with Shane’s (1996) argument that the incentives created by granting franchisees residual claims are capable of solving sub-optimal effort, but that misdirected effort is better solved through monitoring mechanisms within company-owned chains. Thus, the resource acquisition argument assumes that franchisors would always prefer to manage company units to franchised units, but that sometimes that option is unavailable due to lack of resources. Franchising is only attractive when resources are constrained or when the units are so marginal as to make them unworthy of company investment even with company management. Hunt (1973) was first to document franchisors’ preference for growth through company-owned units. He discovered that the proportion of company-owned outlets in the fast food restaurant franchises had jumped from 1.2% in 1960 to 11.3% in 1971; moreover, the desired level of company-ownership (by franchisors) was found to be 42%. Oxenfeldt and Kelly (1968) viewed these changes in the choice of ownership as a dynamic process. Franchising was seen as an initial stage in the life cycle of these retailing firms, one that would be replaced by company ownership as the firm came to have access to the funds to acquire the franchised units. Although this ownership redirection might sometimes be the result of franchisor opportunism (Dant, Kaufmann, & Paswan, 1992), it was also predicted to be consistent with the franchisees’ natural desire to eventually sell their investments and retire. The link between the maturation of systems and changes in the choices made regarding ownership of outlets, therefore, was clearly embedded in this framework and spawned a stream of research on the topic (see Dant, Paswan, & Kaufmann, 1996 for a meta-analysis on this subject). Typical of this stream, Shane (1998) found a curvilinear link between system size and ownership patterns, suggesting that franchise systems that initially favor franchised units begin to prefer company ownership once they become moderate sized entities for a variety of structural and agency reasons. Moreover, anecdotal evidence provides examples of the dynamism within systems regarding the ownership of outlets. Recently, Burger King announced the conversion of 30 franchised units in Miami into company-owned units as “part of a strategy to build the base of corporate stores” (Walker, 2001). Similarly, Krispy Kreme announced that due to the success of its area development franchise model, it would acquire a controlling interest in the franchisee that holds the rights to Wisconsin, Minnesota, and Colorado (Canada News Wire, 2002). From a dynamic perspective, therefore, the core of the resource acquisition argument implies a preference for and the substitution of company-owned outlets for franchised outlets over time. That substitution can be prospective (i.e., new company-owned outlets may be increasingly opened even though they would have been opened as a franchised outlets earlier in the company’s history) or retrospective (i.e., operating franchised outlets may be converted into company-owned outlets as seen in the Burger King and Krispy Kreme examples) although complete substitution is not likely as the low profitability outlets will make their reacquisition uneconomic. The resource acquisition account, therefore, yields the following hypotheses: H1a. The larger the franchise system, the more likely the strategic tendency toward company ownership of outlets. H1b. The older the franchise system, the more likely the strategic tendency toward company ownership of outlets. H1c. The greater the internal access to financial, informational and managerial resources, the more likely the strategic tendency toward company ownership of outlets. Signaling theory account of franchising Signaling theory presents a very different account of franchising (Beggs, 1992, Gallini & Lutz, 1992, Gallini & Wright, 1990, Lafontaine, 1993 and Leland & Pyle, 1977; Mishra, Heide, & Cort, 1998; Tirole, 1988). While the resource-based perspective models entrepreneurial response to internal constraints facing firms (i.e., lack of adequate capitals for expansion), signaling theory is focused on the externalities of market imperfections and knowledge asymmetries to explain organizational choice. Entrepreneurs desirous of attaining the incentive advantages of franchising are depicted as facing an asymmetric information problem: How do good franchisors signal the quality of their concept to prospective franchisees when bad franchisors have the incentive to misrepresent their quality in an attempt to sell franchises? Information asymmetries are commonplace in realistic marketplaces (Beggs, 1992, Gallini & Wright, 1990 and Mishra et al., 1998), and the premise that organizations attempt to manage the adverse affects of such information asymmetries is now well established in the literature. Two primary forces precipitate such asymmetries: (1) the very nature of the subject on which information is sought (e.g., demand for a service concept or the profit potential of a business are simply impossible to predict with certitude ex ante since they must be experientially determined in the future), (2) the inability of individuals to accurately assess informational cues available since such information can be opportunistically or inadvertently misrepresented by the suppliers of information. Hence, misrepresentations and false claims can create adverse selection problems for the users of information; moreover, moral hazard problems may also occur if the topics about which information is sought (e.g., concept demand) can vary across individual transactions or outlets for exogenous reasons (Akerlof, 1970, Eisenhardt, 1985 and Holmstrom, 1979). Firms attempt to counter the deleterious effects of such information asymmetries using a variety of signaling devices (e.g., warranties, pricing, advertising and promotion to signal product quality). Signaling is a particularly salient issue within business format franchising because the latter involves the transfer of trade names and operational know-how, both of which are intangible assets, and especially important managerial contingencies for the less well-established systems. Franchisors can powerfully and credibly signal their own confidence in the profit potential, the viability and the robustness of their systems, by the direct operation of a critical mass of outlets (i.e., company-owned units; Gallini & Lutz, 1992 and Tirole, 1988). This argument closely parallels Leland and Pyle’s (1977) reasoning that entrepreneurs can more easily convince potential investors of their project’s viability by making direct personal investments in their enterprise. Unlike unit-level agency arguments where ownership decisions turn on the comparison of monitoring costs for particular outlets, the signaling argument suggests system level strategic decisions. In this way it mimics the resource acquisition and plural form arguments. In other words, although it has its foundation in economic contract theory, signaling provides a more strategic rationale for the profile of a franchising system than that provided by the aggregation of unit-level ownership choices envisioned in the core agency literature on franchising (Brickley & Dark, 1987, Lafontaine, 1992 and Rubin, 1978), or the literature on local search costs (Minkler, 1990). In their examination of signaling effects in franchising, Gallini and Lutz (1992) first focus their analysis on the information-based reasons for observing dual distribution in new and untested systems. Subsequently, they extend their argument to suggest how that profile will change over time as the quality of the system can be ascertained through other cues. A dynamic description of franchise system evolution under the signaling account commences with chains opening company-owned outlets until they have created credible marketplace signals about the quality of their concepts (i.e., differentiated themselves). Once the system has established that credibility, the strategic direction of the firm should tend toward franchising and away from company-owned units. The reason for this is that like the resource acquisition argument, signaling has an imbedded assumption regarding a general preference for the ownership of the outlets. Since signaling adopts an agency perspective on franchisee incentives, all else equal, franchised outlets are presumed superior to company-owned outlets because of the benefits of hard working franchisees. Whereas in the resource acquisition view the initial stage of franchise ownership is used to get the system over a resource hurdle until it can grow with the preferred company-owned outlets, in signaling, the initial stage of company-ownership is used to get the system over a credibility hurdle until it can grow with the preferred franchisee-operated outlets. One way to think of this credibility hurdle would be to assume that real trade name value becomes increasingly knowable by franchisees as the system establishes a history of proven results. The test, therefore, would be to find measures of the actual value of the trade names, assume those values to be known by prospective franchisees and relate them to system ownership trends. The value of franchise brands (not to mention the value of operational expertise), however, is clearly not an easily available fact to potential franchisees or academic researchers. In fact, a review of the relevant literature indicated that fewer than 20% of U.S. franchisors reported earnings claims, arguably the most direct indication of the quality of their concept (Vincent & Kaufmann, 1996). Indirect indicants of trade name value such as the longevity or size of the system, however, are readily available. If those indirect indicants are used by prospective franchisees in assessing the value of franchise rights, the signaling value of company ownership should decrease as the system demonstrates its ability to survive and become a large and established system. As Gallini and Lutz (1992, p. 472) put it “When a large number of outlets have operated for many years, consumers are familiar with the product. A potential franchisee may well have direct experience with the product, and can readily observe the number of customers at nearby outlets.” Thus, prospective franchisees should be more likely to trust the value of the trade names of larger and older systems and rely less on the signals implicit in the number of company-owned units. This trust, in turn, would allow those older and larger systems to adopt an ownership strategy that tends toward a more fully franchised system. Gallini and Lutz (1992) offer some indirect evidence in support of their theory, but Lafontaine (1993) using system growth and age at the time of franchising as indicants of value did not find the predicted link with the increased use of franchising, and in fact found a positive relationship between age at the time of franchising and the use of company-owned units. She interpreted this as supportive of the franchisor moral hazard rationale for franchising. Her dependent measure was the static proportion of company-owned outlets, and thus she did not relate the specific dynamic tendencies of a system as it moved to alter that mix at a particular point in time to the system’s current age. We offer the following hypotheses as suggested by the signaling account, and note their juxtaposition with those of the resource acquisition account in the tradition of a strong inferences program (Barnes, 1977 and Bloor, 1976): H2a. The larger the franchise system, the more likely the strategic tendency toward franchised outlets. H2b. The older the franchise system, the more likely the strategic tendency toward franchised outlets. Plural forms and the dynamics of franchise systems Like resource acquisition and signaling, the plural form rationale for franchising also discusses the choice of unit ownership at the strategic level (Bradach, 1997). Bradach and Eccles (1989) invoke the notion of tapered integration (Harrigan, 1984) to argue that the strategic choice of a combination of price, authority, and trust (in their terminology, the use of plural forms) is often the most effective method of governance over economic transactions. In their view, a combination of control mechanisms rather than a preference for one ideal type permits the firm to reap synergistic benefits unavailable if only one form is used. Hence, the existence of both forms of system ownership, company-owned and franchisee-owned, is predicted to complement and benefit the management of the other form principally by providing alternate models for unit management and supplying informational insights only available within one of the two forms. Building on this perspective, Dant, Kaufmann, and Paswan (1992) proposed a battery of ten synergistic advantages that can specifically accrue to franchise systems adopting a plural form strategy. For instance, company units may serve as efficient laboratories for market testing new products before they are promoted to the franchisees, while franchisee units can be a source of valuable new business and product ideas. Under this theory, franchisors are expected to recognize the efficiency-enhancing and strategic benefits of plural forms. The precise synergistic benefits to be gleaned from dual distribution are generally traceable to the different incentives confronting the employee and franchisee store managers. For example, claims to residual profits provide powerful incentives to franchisees to identify aggressive cost cutting and revenue enhancing ideas that franchisors can fruitfully adopt and implement in corporate stores. Conversely, direct exposure to the marketplace in the form of company-owned outlets allows franchisors to identify opportunities beyond the scope of individual franchisees (Walker & Weber, 1984), and obtain direct market knowledge essential to curtail free-riding problems, thereby protecting both franchised and company-owned stores from the deleterious effects of trademark deterioration. This view of synergistic advantages (Bradach & Eccles, 1989; Dant, Kaufmann, & Paswan, 1992), further developed in Bradach (1997), suggests a steady state of mixed distribution strategy that tends toward neither more full franchised nor toward more fully company-owned systems. In sum, just as a tendency toward franchised or company ownership may reflect strategic signaling or resource acquisition considerations, the firm’s desire to exploit the combination of company-owned and franchised outlets should be reflected in a steady-state strategy where no such tendencies are exhibited. Although Bradach’s (1997) ethnographic investigation provides some corroborative evidence for some of the advantages of the steady-state strategy, there has been no large-scale study of these dynamics. To test the impact of a firm’s recognition of the benefits of plural form governance, we offer the following hypothesis: H3. The greater the firm’s recognition of the synergistic benefits of dual distribution, the less likely the strategic tendency toward either franchised or company-owned outlets.
نتیجه گیری انگلیسی
Much of the current literature on choice of organizational form within a franchising context is focused on unit level decisions, that is, whether specific choices about the ownership of individual units are predicated on certain contingencies. For instance, much of agency theory inspired research models the choice of individual contracts in terms of considerations of unit specific managerial incentives and monitoring costs. System-level observations are then explained by the aggregation of unit level decisions. In contrast, less attention has been devoted to strategic franchising theories that make predictions regarding system-wide dynamics associated with choice of organizational form over time. In the spirit of strong inferences program (Barnes, 1977 and Bloor, 1976), our paper sought to empirically evaluate the competing accounts of three such strategic franchising theories, namely, resource acquisition theory, signaling theory, and the theory of plural forms. Data show support for the resource acquisition account of franchising dynamics rather than the signaling theory account. The larger, the older and the more resource flush systems appear more likely to exhibit a strategic tendency towards company ownership of outlets rather than franchisee-operated units. More generally, then, our results bolster the arguments for further articulating the resource acquisitions-based interpretations of ownership issues within franchising. The resource-based view of the firm (Penrose, 1959, Pfeffer & Salancik, 1978 and Wernerfelt, 1984), which conceives of organizational choices as being predicated on the forces of environmental uncertainty and limited firm-specific resources, appears to accurately capture the contextual marketplace realities of North America, at least within the fast food industry, and therefore is deserving of greater theoretical attention in interorganizational governance choice contexts. Our results also show universal recognition of the benefits of plural form organizations or mixed distribution strategy; however, the strength of that recognition failed to predict the steady state, presumably due to lack of sufficient variance on these particular measures. Even though H3 was not supported, the related findings are theoretically important. These results represent the first quantitative, data-based verification of the various benefits of plural forms within franchising as asserted in the theoretical literature by Bradach and Eccles (1989) and Dant et al. (1992). Equally important, the different benefits clearly align themselves along two thematic factors of insight and control, affording us a peek at underlying theoretical structures. In addition, these themes or dimensions are meaningful within a franchising context. The implication would appear to be that the strategic insight and control afforded by the plural forms are richly valued by franchisors regardless of their preference for particular types of outlet ownership. More broadly, the combined pattern of overall results also hints at the need to combine the economic perspective with more socialized aspects of organizational form decisions ( Granovetter, 1985 and Shane & Foo, 1998). The results of this investigation are important to franchise managers and policy makers as well. Much of the recent increase in interest in further regulating franchising is linked to the interpretation associated with changes in ownership patterns, and the opportunistic behavior on the part of franchisors that some infer from these changes. These questions are fueled by anecdotal claims by disgruntled franchisees. A recent news article reported that since January 2000, Dunkin’ Donuts had filed 350 lawsuits against U.S. franchisees (McDonalds’, although much larger had filed about a dozen in the same period). Franchisees responded to the suits alleging cleanliness and reporting violations by claiming that Dunkin’ Donuts “exaggerated allegations to pressure them to sell their stores back to the company or pay settlements” (Hendrie, 2002). On the other hand, in this study the association between increasingly available resources and a tendency toward more company ownership may suggest a more natural evolution that need not imply any opportunistic appropriation of franchisee created value. This is further supported by the strong franchisor recognition of the benefits of mixed ownership. At the very least, it calls for much more focused research specific to the question of franchisor opportunism before any change in public policy is finalized. Further research is also needed to determine if this pattern is replicated across other industry segments. Although fast food is the modal example of franchising in the U.S., different industry characteristics could very well alter these findings. For example, the level of familiarity with fast food franchises in general might reduce the importance of signaling compared with an industry segment new to franchising. Similarly, fast food might require more resources than a franchise where location issues are less salient, thereby altering the impact of resource acquisition on changes in the ownership mix. Another complication not examined here is the impact of multi-unit franchising on these relationships. It is possible that the presence of multi-unit franchising makes the buyback of units easier because of the ability to negotiate for blocks of units. It also permits the franchisor to purchase a controlling interest in an incorporated mini-chain of stores while retaining the franchisee’s involvement as seen in the Krispy Kreme example (Canada News Wire, 2002). Moreover, the franchisee-controlled mini-chain is less likely to exhibit the strong unit-level incentive benefits associated with single unit ownership. On the other hand, the use of area development contracts increases the risk for prospective franchisees and may require more credible assurances of concept quality and thus greater company ownership at the outset. Additional research into the impact of multi-unit franchising in general, and area development in particular, is clearly warranted. From a managerial perspective, since all franchisor subgroups recognize the plural forms benefits, franchisor-managers would do well to share their sentiments in this regard with their franchisees as well as the public policymakers. As previously noted, franchising occupies a very special status in contemporary retailing in North America (and indeed, the world) because of its size and growth rate. Moreover, based on the market trends in recent years, franchising is increasingly emerging as a viable and attractive format for businesses contemplating international trade. Such rapid growth and expansion activity is not only likely to exert tremendous pressures for resources, but also raise legitimate concerns about ensuring control and uniformity in the franchised offering to the final customers—especially in far off markets. In addressing these seemingly opposite pressures of growth and control, managers would do well to bear in mind the synergies to be gained by plural forms.