Academic journal article Journal of Small Business Management

Franchisor Geographic Expansion

Academic journal article Journal of Small Business Management

Franchisor Geographic Expansion

Article excerpt

During the past three decades, franchising has blossomed into a major business form. Over one-third of all retail sales in the United States is through franchised outlets, and approximately 20 percent of the U.S. gross national product results from franchise operations. The importance of franchising is expanding beyond United States borders with franchising rapidly becoming the fastest growing form of business in the global economy (Justis and Judd 1989).

The essence of franchising is successful replication of a business from one geographic market to others (Caves and Murphy 1976, Rubin 1978). In fact, franchising often is a key tactic for pursuing goals of territorial expansion and commensurate sales growth (Justis and Judd 1986, Martin 1988; Nevin, Hunt, and Ruekert 1980; Oxenfeldt and Kelly 1968-69, Stephenson and House 1971) in geographically fragmented markets (Porter 1980). Franchising firms (franchisors), therefore, are valuable subjects for studying ways in which businesses seek to expand the geographic dimension of their competitive scope (see Porter 1985).

To date, however, little research has focused on firm expansion tendencies in the franchising context. Some "life cycles" have been posited (Justis and Judd 1989, Oxenfeldt and Kelly 1968-69), but geographic expansion has been assumed while research has focused primarily on topics of system organization, particularly on tradeoffs of franchising versus firm ownership (Brickley and Dark 1987, Contractor 1984, Martin 1988, Rubin 1978). Thus, little is known about the geographic expansion tendencies of franchisors.

Through franchisor-franchisee partnerships, a franchisor firm accesses the capital and other resources of its franchisees (Carney and Gedajlovic 1991, Gilman 1990, Stephenson and House 1971). Thus, franchising is a tactic for enhancing a firm's geographic expansion capabilities. To determine the value of this tactic, it is important to study the geographic expansion strategies of franchisors, and this article reports the findings of one such study.

As the following sections explain, there are two competing views on franchisor expansion - "unconstrained expansion" and "constrained expansion." Having two competing views is very problematic for two reasons: (1) evidence in support of either view is primarily anecdotal and thus may be biased due to factors idiosyncratic to the firms that happened to be selected or by the interpretation of the investigator(s); and (2) managerial implications of these two views are somewhat contradictory. The unconstrained view suggests that limitations in franchisor capability are irrelevant when considering geographic expansion. In contrast, the constrained view suggests that these limitations are relevant. This study tested those views by assessing whether franchisor capabilities influence geographic expansion efforts. Hypothesized relationships between breadth of geographic expansion effort and franchisor age, size, and multinational posture were examined. This study, therefore, provides insight into whether franchisors should consider their own capabilities (in addition to available market opportunities) when developing an expansion strategy.

UNCONSTRAINED EXPANSION

Arguments supporting an unconstrained expansion perspective emphasize that franchising itself provides considerable expansion capabilities and that market conditions often favor rapid and broad geographic expansion. Early literature (for example, Caves and Murphy 1976, Oxenfeldt and Kelly 1968-69, Stephenson and House 1971) suggests that firms could raise the capital needed for expansion more quickly through franchising than through other means. Rubin (1978) questioned this argument, pointing out that because of reduced investment risk, a franchisee would be better off buying shares in the whole firm instead of "putting all the eggs in the one basket" of a particular franchise. Rubin's criticism shifted research emphasis toward the reduced outlet monitoring needed and the correspondingly increased entrepreneurial capacity (Norton 1988, Williamson 1991). …

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