Academic journal article Journal of Small Business Management

Franchisor Types: Reexamination and Clarification

Academic journal article Journal of Small Business Management

Franchisor Types: Reexamination and Clarification

Article excerpt

In a recent article, Carney and Gedajlovic (1991) discussed two primary arguments as to why firms franchise rather than own retail units outright, and why the proportion of franchised units might vary. They labeled these the (a) resource scarcity and (b) administrative efficiency theses. Although their primary purpose was to clarify firm choices to franchise or own units outright, Carney and Gedajlovic's identification of franchisor types was, perhaps, the most important contribution of their study. Obviously, the validity of their resource scarcity and administrative efficiency findings hinges on the validity of their taxonomy. More importantly, the taxonomy raises questions about much prior franchising research by implying that studies may have suffered from sample heterogeneity concerns or severe generalizability limitations. Since the Carney-Gedajlovic findings have such great potential importance, they cannot be accepted without independent confirmation. The present study reexamined the Carney-Gedajlovic taxonomy to generate evidence on the validity and usefulness of its franchisor-type distinctions.

PRIOR RESEARCH

As noted, Carney and Gedajlovic set out to examine two key arguments for why firms might choose franchising over firm ownership. The resource scarcity argument is that franchising eases access to capital and managerial resources needed for firm growth (Hunt 1973, Oxenfeldt and Kelly 1968-69, Stephenson and House 1971). Specifically, franchisees provide the start-up capital needed to establish franchised units and often play active roles in franchise management. The administrative efficiency argument stems from agency and transaction cost views. Specifically, the argument is that a firm's reliance on franchising (i.e., its proportion of franchised to total units) is an intendedly optimal combination of franchised and firm-owned units that minimizes the firm's costs of monitoring the various units in its network (Caves and Murphy 1976, Krueger 1991, Mathewson and Winter 1985, Rubin 1978).

As the notion of optimization suggests, some administrative efficiency arguments favor franchising while others favor firm ownership. Under agency theory, franchising sometimes has been viewed as a compensation scheme that improves the alignment of unit manager (franchisee) incentives with those of the firm (franchisor) (Krueger 1991, Norton 1988a). Since franchisees have considerable investments at stake, and since they receive profits of franchises, they are more motivated (than managers of firm-owned units) to do whatever it takes to maximize franchise profitability. Thus, less monitoring of unit management effort is needed under franchising (Norton 1988b). However, franchising brings with it a different set of agency concerns (Brickley and Dark 1987, Meyer and Brown 1979). Since franchisees benefit from unit profit while franchisors benefit from network sales (i.e., franchisors typically receive a royalty on franchise sales), franchisor and franchisee incentives may become misaligned (Blair and Kaserman 1982; Kaufmann and Rangan 1990; Martin 1988; Norton 1988a; Zeller, Achabal, and Brown 1980).

Analyzing variables suggested by the resource scarcity and administrative efficiency arguments, Carney and Gedajlovic identified franchisor types. That is, theft analysis of thirteen variables revealed five significant factors (eigenvalues greater than one), and these were argued to be associated with five franchisor types: (a) rapid growers, (b) expensive conservatives, (c) converters, (d) mature franchisors, and (e) unsuccessfuls.

Need for Replication

The Carney-Gedajlovic study warrants replication because of the potential importance of its results. Specifically, if discrete franchisor types exist, much prior franchising research may have suffered from sample heterogeneity or generalizability concerns (Stanfield 1976). No study is perfect, and Carney and Gedajlovic's suffered from certain methodological concerns. …

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