Allocation of Authority in Franchise Chains

Abstract

This paper investigates the determinants of the allocation of formal and real authority in franchise chains. Differences in business features, such as the required standardization and monitoring costs, explain the allocation of authority between the franchisor and franchisees. These variables affect the trade-off between the risk of brand name loss and the gains in knowledge sharing and learning within the network. The higher the need for standardization, the higher the risk of brand name loss, and, consequently, the more likely the franchisor is to adopt an organizational design that confers more control over the decisions of franchisees, such as business format franchising. This paper presents an empirical analysis of 223 franchise chains that provides support to the hypothesis of a negative effect of the required standardization on the level of delegation.