A study of ninety-four food-service chains revealed four distinct groups relating to strategic use or avoidance of franchising. The four groups are as follows: manager-scarce franchisors, money-scarce franchisors, franchising minimizers, and seasoned veterans. The use of franchising by the manager-scarce and money-scarce franchisors supports the concept that youthful companies take up franchising to gain access to resources in an economical fashion. Franchising minimizers avoided the potential tangles of franchise-related agency, most likely because they wanted to maintain control of their strong brand names and relatively complex operating systems. The seasoned veterans had been in business the longest but were driven by neither agency concerns nor resource scarcity. They made modest use of franchising; some for many years and some only recently. While their growth was not speedy, their financial performance ranked with franchise minimizers. This group also enjoyed long tenure of managers, meaning that its members did not face scarcity of human resources.
Franchisees employ more than 18 million Americans (14 percent of private sector employment) with a total payroll of $506 billion and overall economic output of $1.53 trillion. See International Franchise Association, “Franchise Expo: Future Business Owners Spring into Action,” October 20, 2004 (press release); and International Franchise Association, “Franchise Community Brings Message to Congress,” September 28,2004(press release).
2.
S. C. Michael, “To Franchise or Not to Franchise: Analysis of Decision Rights and Organizational Form Shares,”Journal of Business Venturing11 (1996): 57-71.
3.
Among restaurants and hotels, one study found a negative relationship between franchising and quality as rated by consumers in Consumer Reports. See S. C. Michael, “The Effect of Organizational Form on Quality: The Case of Franchising,”Journal of Economic Behavior & Organization43 (2000): 295-318.
4.
Our definition of strategic groupsis based on M. E. Porter, “The Structure within Industries’ and Companies’ Performance,”Review of Economics and Statistics61 (1979): 214-227.
5.
The argument that managers’ ability to identify, train, and monitor new managers is a key constraint to growth was first outlined by E. Penrose, Theory of the Growth of the Firm (New York: Wiley, 1959).
6.
See S. R. Thompson, “The Franchise Life Cycle and the Penrose effect,”Journal of Economic Behavior and Organization24 (1994): 207-218.
7.
A recent study of 448 restaurant owners and operators listed recruiting and retaining good employees as their number one challenge. See C. Enz, “Issues of Concern for Restaurant Owners and Managers,”Cornell Hotel and Restaurant Administration Quarterly45, no. 4 (November 2004): 315-332.
8.
J. E. Stiglitz and A. Weiss, “Credit Rationing in Markets with Imperfect Information,”American Economic Review71 (1981): 393-410.
9.
V. Hoover, D. J. Ketchen, and J. G. Combs, “Why Restaurant Firms Franchise: An Analysis of Two Possible Explanations,”Cornell Hotel andRestaurant Administration Quarterly44 (2003): 9-16.
10.
K. M. Eisenhardt, “Agency Theory: An Assessment and Review,”Academy of Management Review14 (1989): 57-74.
11.
Another cost of franchising involves multioutlet franchisees rather than franchisors. These franchisees face agency relationships with the outlet managers they hire. Franchising may still be attractive in this situation because the local franchisee can still monitor the managers more closely and at lower costs than the firm could if the outlets were under firm ownership. Similar to single store franchisees, multioutlet franchisees have a much more powerful incentive to maximize profits than a district manager would have under the alternative arrangement of firm ownership.
12.
An in-depth examination of five restaurant chains showed that firms use much wider spans of control for franchised outlets and audit franchisees’ operations less frequently. See J. L. Bradach, “Using the Plural Form in the Management of Restaurant Chains,”Administrative Science Quarterly42 (1997): 276-303.
13.
In early 2005, for example, some Blockbuster franchisees refused to adopt the firm’s heavily promoted elimination of late fees on video rentals.
14.
See, for example, B. Mascarenhas and D. A. Aaker, “Mobility Barriers and Strategic Groups,”Strategic Management Journal10, no. 5 (1989): 475-485.
15.
About 30 percent of franchisors offer direct financial assistance to their franchisees. Most franchisors will also assist the franchisee in finding a bank or lender. See “How to Finance Your Franchise,”USA Today, October 13, 2004.
16.
Respondents did not differ from nonrespondents in terms of the type of institution employed (public or private, F = 0.02, p = .91) or the length of hospitality program offered (two- or four-year, F = 0.91, p = .34). Thus, we found no evidence of nonresponse bias.
17.
Our financial capital-scarcity measures are drawn from L. J. Bourgeois, “On the Measurement of Organizational Slack,”Academy of Management Review6, no. 1 (1981): 29-39.
18.
Our two intellectual-capital variables are correlated at r = .31(p < .01), and our financial-capital-scarcity variables are correlated at r = -.20 (p < .05). These correlations are at levels that allow us to better capture the underlying concepts without significant overlap between the measures.
19.
This measure is based on F. Lafontaine, “Agency Theory and Franchising: Some Empirical Results,”RAND Journal of Economics23, no. 2 (1992): 263-283.
20.
After standardizing the variables, we obtained a suggested grouping structure through cluster analysis using the Ward method. To determine how many clusters exist, we examined the dendogram and agglomeration coefficient for convergence. The number of clusters was also examined by reanalyzing the data three times on a different random two-thirds of the data. This analysis was done to ensure that the clustering algorithm was not capitalizing on random variation. Finally, confirmation of configuration membership was sought using the k-means algorithm, an iterative partitioning procedure. Whereas hierarchical clustering procedures make one pass through a data set, iterative partitioning makes multiple passes and thus is able to overcome any poorinitial cluster assignments.
21.
A drawback of cluster analysis is that it relies partially on researchers’ judgments. To minimize this concern, we followed the “best practices” for verifying clusters described in D. Ketchen and C. Shook, “The Application of Cluster Analysis in Strategic Management Research: An Analysis and Critique,”Strategic Management Journal17, no. 6 (1996): 441-458.
22.
We also tested for performance differences among the strategic groups using data from the two years prior to our study (1989- 1990). This was done to guard against the possibility that preexisting performance differences were driving our results. No differences were found; thus, it appears that the performance differences in 1994and1995are notsimply a reflection ofpriorperformance.
23.
S. W. Norton, “Franchising, Brand-Name Capital, and the Entrepreneurial-Capacity Problem,”Strategic Management Journal9, no. 5 (1988): 105-114.
24.
Lafontaine, “Agency Theory and Franchising.”
25.
See D. C. Hambrick and P. A. Mason, “Upper Echelons: The Organization as a Reflection of Its Top Managers,”Academy of Management Review9, no. 2 (1984): 193-206.
