Academic journal article Journal of Small Business Management

Strategic and Contextual Influences on Firm Growth: An Empirical Study of Franchisors

Academic journal article Journal of Small Business Management

Strategic and Contextual Influences on Firm Growth: An Empirical Study of Franchisors

Article excerpt

This study examined five-year growth patterns among a sample of 246 franchise networks in order to identify factors associated with network growth. Two strategic factors and two contextual factors were significantly related to growth. Among those four significant factors, however, two of the relationships were in directions opposite of those hypothesized. The most likely explanations of these findings, taken together, suggest that both strategy and context exert influences on growth, though strategic influences may be greater than contextual ones.

Growth is a nearly universal goal of firms (Dalton and Kesner 1985). Consequently, it has received widespread attention by researchers (Weinzimmer, Nystrom, and Freeman 1998; Whetten 1987). Findings have been inconsistent across studies, however, regarding objective factors associated with firm growth (Birley and Westhead 1990; Davidsson 1991; Kazanjian 1988). To some extent, such inconsistencies could be due to differences in the populations from which research samples were drawn (Weinzimmer, Nystrom, and Freeman 1998). It is possible, for example, that correlates of growth differ between Fortune 500 firms and new small businesses or firms operating in the manufacturing service sectors.

Early research on franchising suggested that growth was the primary reason why firms begin franchising in the first place (see Oxenfeldt and Kelly 1968-69; Julian and Castrogiovanni 1995). It was argued that firms often could gain access to the capital and other resources needed for expansion more easily through franchising than by other means such as public stock offerings (Caves and Murphy 1976; Stephenson and House 1971). Though some researchers subsequently criticized this resource scarcity argument (Rubin 1978, for example), it has recently received strong empirical support. Combs and Ketchen (1999) found, for example, that restaurant chains relied more on franchising in their expansion efforts to the extent that they faced difficulties raising capital through such other sources as stock sales, debt, liquid assets, and future earnings.

As an alternative to the resource scarcity argument, some researchers have posited that franchising eases agency problems and the associated monitoring costs of multi-unit operations (Brickley and Dark 1987; Lafontaine 1992; Mathewson and Winter 1985; Meyer and Brown 1979; Norton 1988). Since franchisees receive the residual profits of their units, they are more motivated than employee-managers to do whatever it takes to maximize unit profitability and are thus less likely to shirk their managerial responsibilities (Carney and Gedajlovic 1991).

Overall, the research to date suggests that franchising offers multiple benefits (Castrogiovanni, Bennett, and Combs 1995; Combs and Castrogiovanni 1994; Combs and Ketchen 1999) and that the resource scarcity and agency arguments for franchising are complementary rather than competing. Because of both its resource and agency benefits, franchising is a useful tool for firms interested in pursuing geographic expansion and commensurate organization and sales growth (Julian and Castrogiovanni 1995).

Since correlates of growth often differ across populations of firms, and because growth is a primary reason for franchising, the present study focused on factors influencing the growth of franchisors. In the following sections, the research hypotheses are explained, the methodology is described, and this study's findings are presented and discussed.

Research Hypotheses

As noted, this study sought to identify factors influencing the growth of franchising firms. Two types of factors were considered: strategic factors are the relatively controllable levers that franchisors can manipulate in efforts to influence their growth rates; contextual factors are those which are not easily controlled by franchisors, at least in the short run, and thus are the "givens" of the situations facing those firms. …

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