Academic journal article Journal of Applied Management and Entrepreneurship

An Integrative Approach to Franchisor Strategy in Large Chains

Academic journal article Journal of Applied Management and Entrepreneurship

An Integrative Approach to Franchisor Strategy in Large Chains

Article excerpt

Executive Summary

The article explains important anomalies concerning franchising that limit endurance of this form of cooperative entrepreneurship. This integrative framework extends the resource scarcity thesis to a resource augmentation perspective and reconciles it with the administrative efficiency thesis. This framework suggests that deft large franchisors would: (a) continue to emphasize franchising over owning to meet the growth objective, (b) buy back inefficient franchised outlets to improve chain's efficiency as well as to discourage franchisee opportunism, and (c) convert satisfactorily performing owned-operations into franchises to further augment resources. Contributions and implications of this expanded and coherent franchisor strategy for practice and research are discussed.

Cooperative entrepreneurship, as opposed to independent entrepreneurship, has not received adequate attention of entrepreneurship scholars (Shane & Hoy, 1996). This lack of attention is "problematic" (1996: 325) because: (a) the growth of forms of cooperative entrepreneurship, such as franchising, is accelerating and (b) these forms may require addressing issues beyond those explored in research focusing on independent entrepreneurship. Franchising has been used by legendary entrepreneurs such as Ray Kroc (McDonald's) and Dave Thomas (Wendy's) as an important tool in achieving phenomenal growth of then: ventures (Combs & Ketchen, 2003). Also, it "creates opportunities for thousands of budding entrepreneurs every year (2003:443)." Given that both experienced and budding entrepreneurs continue to get attracted to franchising every year, research that can explain the endurance of franchisorfranchisee cooperative ventures is needed. For example, a cooperative arrangement may not be very successful if franchisees seek a long term relationship but perceive that their franchisor is pursuing shorter term goals (Baucus, Baucus & Human, 1996).

Many studies (e.g., Alon, 2001; Michael, 1996; Kaufmann & Dant, 1996) have pointed out that the importance of franchising in the U.S. and the world economy is increasing. For example, it represented more than one third of all US retail trade in early nineties (Bond & Bond, 1994) and 40% more recently (Combs & Ketchen, 2003). Recognizing its importance, researchers (e.g., Carney & Gedajlovic, 1991; Castrogiovanni, Bennett, & Combs, 1995; Combs & Castrogiovanni, 1994; Michael, 2000a, b; Norton, 1988a, b) have tried to explain the rationale for franchising with the help of two dominant viewpoints, the resource scarcity thesis and the administrative efficiency thesis. The resource scarcity thesis views franchising as a means to accessing scarce critical resources such as financial capital, managerial talent, and local knowledge. The administrative efficiency thesis views franchising as a means to mitigating agency problems.

Neither of the two theories is, however, individually capable of providing a complete explanation of franchisor strategy-the relative emphases placed by a franchisor on franchising versus company ownership (Carney & Gedajlovic, 1991)-especially in the case of large chains. The resource scarcity thesis does not answer the important question: Why do large franchisors continue to franchise once the scarcity of resources has been overcome? Likewise, the administrative efficiency thesis does not adequately answer another important question: Why do large franchisors buy back (repurchase) franchises? At the first glance, these practices-continued franchising and buy back by large franchisors-appear to be counter intuitive. Indeed, extant explanations of these practices are generally focused on the short-term and thus, put a question mark on the endurance of a franchisor-franchisee cooperative venture.

An integration of the resource scarcity and the administrative efficiency theses is needed given recent empirical findings that suggest each has the ability to explain important questions in franchising research (Combs & Ketchen, 1999). …

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