Does Multi-unit Franchising Aid Differentiation? An Exposition

Abstract

IntroductionFranchising is key tool in the entrepreneur's tool box (Combs & Ketchen, 2003: 443), perhaps due to its compelling appeal to a variety of entrepreneurs seeking to build a business in retail trade and services. Franchisor-entrepreneurs use it to assemble resources to create large chains rapidly (Michael, 2003: 61) while simultaneously mitigating agency problems associated with operating a network of decentralized production network (Michael, 1999a: 313). Franchisee-entrepreneurs, on the other hand, see franchising as a quick means of starting a business by purchasing a that gives them rights to use an established business format and the associated identity. However, despite the prominence of franchising, research has traditionally remained focused on investigating the rationale for franchising. As a result, the question why firms franchise has been examined many times over the last three decades (see Castrogiovanni, Combs & Justis, 2006, and Combs, Ketchen, Shook & Short, 2011, for recent reviews, and Combs & Ketchen, 2003, for a meta-analysis). Further, franchising research has paid a lot of attention to system characteristics (e.g., age, size, and percent franchised) and contract terms (e.g., royalty rates and initial fees) as variables that can explain success or failure of franchising systems (Shane, 1998) as well as of franchisees (Michael & Combs, 2008), but other approaches are needed (Combs et al., 2011).Although most profitable strategies are built on (MacMillan & McGrath, 1997: 133), very little research has been directed to it in franchising. This gap is addressed here by providing a theoretical examination, as a crucial first step, of how organizational design may be crucial to enhancing differentiation. Conceptual articles play a very significant role in creation of substantive knowledge in social sciences (Yadav, 2010) but efforts at developing conceptual understanding about strategy-structure fit involving non-traditional organizational forms such as franchising have been lacking (Yin & Zajac, 2004) - despite the long-standing seminal works by Chandler (1962) and Rumelt (1974) showing the importance of matching strategy and structure within traditional firms.The issue I explore is: how do franchisors organize their systems so that they can develop competitive advantage relative to other franchisors'? To my knowledge, this issue has not been formulated as the main research question of any franchising study so far. According to Michael Porter (1980), low cost and differentiation are the two generic approaches to competitive advantage. Garg, Priem and Rasheed (2013) have explained the low cost advantage but the differentiation advantage of multi-unit franchising has not been systematically explicated so far.Further, although early research did not explore variations in franchising forms, franchising itself is not a single, monolithic organizational form; franchisors often exploit their single business concept using different forms of franchising (Bradach, 1995, 1998; Kaufmann, 1992). Franchisors use single-unit franchising (SUF), in which each franchisee is restricted to own and operate only one unit, as well as multi-unit franchising (MUF), in which an individual franchisee can own and operate many units. Moreover, there are different forms within multiunit franchising. Some franchisors offer incremental franchising (IF), wherein a franchisee is sequentially awarded several units without a prior commitment for multiple awards. Others offer area development franchising (ADF) under an umbrella contract that assigns rights to multiple units upfront to one franchisee and delegates responsibility to her for developing a pre-assigned territory according to a pre-established time line.Studies have emerged to establish the rationale for these alternative franchising forms (e.g., Bradach, 1995, 1998; Bercovitz, 2004; Garg, Rasheed & Priem, 2005; Hussain & Windsperger, 2010; Kaufmann, 1992; Kaufmann & Dant, 1996; Perryman & Combs, 2012). …