Multi-unit franchising strategies: a real options logic

Abstract

Theories of the firm so far applied to explain franchising struggle to enlighten its operational extensions, such as multi-unit franchise strategies. The corporate decision to grow via multiple franchising has not been yet analyzed with a view to accounting for how the flexibility to franchise or not (vis-a-vis the rigidity of investing into new own outlets), as uncertain market circumstances warrant, can drive performance. In this study, we seek to fill the gap by proposing a theoretical framework and empirically investigating about the real options that underlie multi-unit franchise strategies. Three are the key contributions to the franchising literature. First, an options-based classification of multi-unit franchise strategies is advanced in an effort to better explicate franchising and its performance consequences. Second, evidence drawn from the U.S. franchising industry is provided so as to both support classical findings on franchising and highlight the key source of extra value brought in by optionality associated with multi-unit arrangements and their impact on network performance. Third, “theoretical diversity” on franchising (Combs et al. In: J Manage 30:907–931, 2004) is enlarged by responding to the recent call for researchers to deliver complementary insights into what makes franchising work applying for the first time the real options theory to franchising. Implications of our findings for researchers, managers and policy-makers are discussed.