Company-owned Units Research Articles

Chain Affiliation and Human Resource Investments: Evidence from the Restaurant Industry

Drawing on organizational theory, agency theory, and research in strategic human resource management, this study explores how chain affiliation influences human resource (HR) investments using data from a nationally random survey of restaurant establishments. We propose that chain-affiliated units will make different investments in those areas of the HR system where chains establish superior organizational routines compared with nonaffiliated units. By contrast, we argue that in the absence of chain routines, ownership incentives will drive differences in human resource investments. Specifically, we find that franchisee-owned units focus more on cost reduction by underinvesting in human resource practices compared with company-owned units and independently owned units when organizational routines are not provided by the chain. We provide further support for our theoretical arguments using additional data on multiunit ownership and franchisor influence. Finally, we conduct supplemental analyses to explore the relationship between different human resource investments and two important organizational outcomes: employee turnover and customer satisfaction ratings from Yelp. Our results highlight the types of human resource practices that are important for service work and suggest that the provision of organizational routines can have important implications for the long-run success of chains and their units. Funding: Financial support from the Center for Advanced Human Resource Studies, Cornell University; and the Rockefeller Foundation is gratefully acknowledged. Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2021.1539 .

Why franchisors recruit franchisees from the ranks of their employees

ABSTRACT A shortage of suitable franchisees has long plagued the Australian franchise industry impacting franchisors’ capacity to grow their chains. This exploratory research identifies, defines and examines an unresearched category of franchisees that of internally recruited franchisees, who prior to their franchise recruitment were employees of the franchisor. This category has previously been ignored by the literature even though estimates of some chains place the proportion of internally recruited franchisees at over 40 per cent. Employing qualitative interviews with key franchisor decision makers this research begins to address this gap. This study investigates what factors drive franchisors to recruit franchisees from the ranks of their employees and how they perceive this impacts on the achievement of franchising’s four strategic imperatives of unit growth, system uniformity, local responsiveness and system-wide adaption. Seven drivers for the internal recruiting of franchisees were identified: company owned units, significant system hierarchy, larger unit scale, unit viability, system maturity, capital freedom and strong growth in unit numbers. A preliminary model of factors influencing the propensity of franchise systems to recruit franchisees internally is presented. This research provides the first contribution to the franchise literature on the internally recruited franchisee phenomenon. In a practical sense this study should influence the recruitment practices of franchisors.

Determinants of Corporate Social Disclosure in the Franchising Sector: Insights from French Franchisors' Websites

This paper focuses on the notion of corporate social responsibility (CSR) within the franchising sector. More specifically, a set of research hypotheses derived from Regulation Theory and Transaction Cost Analysis addresses the relationships first between the chain size and the extent of corporate social disclosure (CSD) on franchisors' websites, and then between the percentage of company-owned units within the chain and the extent of corporate social disclosure (CSD) on franchisors' websites. The empirical study encompasses a total of 136 French franchise chains. Findings reveal that 86.03% of these franchisors communicate about their CSR activities on their website. Moreover, a significant relationship exists between chain size (respectively, the percentage of company-owned units within the chain) and the extent of CSD provided on franchisors' websites.

Best fit, best practice, or stuck in the middle? The impact of unit ownership on unit HR performance in franchise systems

Franchising is an important form of entrepreneurial wealth creation in many retailing and service industries. Since Human Resource Management (HRM) is a critical factor in such industries, it is important to understand how franchisees—as semi-autonomous entrepreneurs—deal with HRM in their units and how this ultimately affects performance at the unit level. However, the very few studies linking franchisee HRM behaviors to performance have not included multi-unit franchising (MUF) as a type of unit ownership. Given the ever-increasing popularity of MUF and the unique characteristics of MUFs, this represents an important knowledge gap. We aim to fill this gap by building a theoretical framework on how the type of unit ownership affects unit HR performance within franchise systems. Building on agency, resource and entrepreneurship perspectives, we propose that units owned by single-unit franchisees (SUFs) and small MUFs (i.e., franchisees with a very small number of units) adopt a ‘best fit’ system regarding HRM, whereas company-owned units (COs) and units owned by larger MUFs (i.e., franchisees with a large number of units) typically adopt a ‘best practice’ system. Each system has its own advantages and disadvantages, which results in two contrasting propositions regarding their effects on unit performance. Moreover, we expect the units owned by medium-size MUFs to have the lowest performance since they are ‘stuck in the middle’ regarding their HRM system.

The Dynamics of Growth in Franchising

A franchise company is a hybrid or plural form, typically established by both company-owned units and franchised units, where the latter receive an entire business format. We explore the reasons that explain franchise chain growth and how franchising firms choose the extent of company ownership. We build a dynamic model including contractual and system variables such as fees, royalties, investment, chain size, or trade name recognition. By means of this model, we go on to analyze the dynamic behavior of a chain and how its ownership structure evolves over time as a result of the interaction of the variables mentioned above. Using theories from strategic management and agency models, it is argued that franchise chains pursue a balanced growth that lead to superior performance.

Performance in Distribution Systems: What is the Influence of the Upstream Firm’s Organizational Choices?

This paper studies the performance of distribution networks as the result of a range of organizational choices made by the upstream firm. The analytical part of the paper surveys the vast literature devoted to franchising and to dual distribution. From this framework, several testable propositions are derived, linking the networks performance to the organizational choices. Three complementary criteria of performance are taken into account : the internationalization rate, the expansion rate, the market share. The paper provides evidence that these criteria are empirically related. Thus, a system of simultaneous equations is defined, free of endogeneity relating to the explanatory variables. The estimations on recent French data by means of the three-least squares method provide robust results, and show that the type of distribution network, the number of company-owned units in the network, the type of sector, and the choice to manage several networks simultaneously affect the performance in distribution systems.

Monitoring Policy and Organizational Forms in Franchised Chains

Franchising is nowadays a prominent way to organize the distribution sector. While previous literature suggests that monitoring issues are a critical determinant of organizational choices, it is rather silent on the optimal monitoring strategy once the organization of the chain is set. In this article, we analyze the monitoring policy of chains with both franchised and company-owned units. We develop a model in which a chain monitors its outlets under asymmetric information on local demands and managers’ efforts. We show that partial monitoring (i.e., when the franchisor monitors only a subset of its outlets) represents an optimal monitoring policy. Second, we identify the units that should be monitored. Finally, we discuss the impact of information technologies and outlet location on monitoring policy and how it may affect the proportion of franchised and company-owned units within the mixed chains.

Vectors of Influence on the Contractual Mix: Geographical Dispersion vs. Automation in Brazilian Franchised Chains

This paper aims the influence of coordination costs on the proportion of company-owned units in Brazilian franchised chains. This influence was split into two competing vectors: the geographical dispersion of outlets on the one hand and the automation/standardization level of processes in the outlets on the other. Greater geographic dispersion increases monitoring costs, which requires performance incentives mechanisms. This view is convergent to the Agency Theory approach for franchising contracts, which proposes that powerful performance incentives are obtained when the local manager is shifted to residual claimant of the outlet (a franchisee). Reciprocally, automated manufacturing processes can increase the chain capability to monitor (even from a distance) its units, reducing the need for more powerful incentives. These statements are tested in this study. The tests are performed based on information from 191 franchised chains in Brazil listed in the yearbook of the Brazilian Franchising Association (ABF-2007). A cross-sectional analysis was performed, in which the proportion of both company-owned and franchised units (the contractual mix) is faced with proxies related to the monitoring capabilities of the chains. The study’s results support the propositions tested: both vectors act in the expected direction on the contractual mix. These results may be useful both for deciding to expand the chain as well as for choosing distinct technology bundles of production processes.

Monitoring Policy and Organizational Forms in Franchised Chains

One recurring theme that emerges from empirical studies on franchising is the coexistence of franchised and company-owned units within the same chain. This paper supports the idea that mixed chains or dual distributions are efficient organizations when both the behavior of managers and the nature of local markets are costly to observe. We also show that partial monitoring, i.e. when the franchisor monitors only a subset of its outlets, represents an optimal monitoring policy. Finally, we discuss the impact of information technologies and outlet location on monitoring policy and how it may affect the proportion of franchised and company-owned units within the mixed chains.

The Rational of Plural Forms: An Empirical Study at the Chain Level

In this article, we investigate the relative performances of company- owned outlets vs. franchised outlets using an original database consisting of 150 units of a French chain. At first glance, the financial and quality performances of company-owned units are better than franchised units. However, this result is reversed when the particular characteristics of each unit are taken into account in the analysis. Furthermore, our result suggests that if company-owned units are less efficient than franchised units, all things being equal, they respond more quickly to change imposed by the franchisor leading to higher quality performances. This result highlights the fact that if franchisees have greater incentives to maximize return on sales and quality, they are also more independent of the franchisor and could therefore impede adaptation of the chain. Thus, franchised units may represent a drawback when the franchisor wants to implement a new strategy and may explain why plural forms (i.e. franchise mix) appear to be efficient organizational choices.

Franchise et efficience : Application de la méthode DEA aux hôtels franchisés et succursalistes d'un réseau mixte

Résumé Les performances des hôtels franchisés et des hôtels en propre d’un même réseau mixte sont ici comparées. Dans cette perspective, les principaux avantages de la mixité des réseaux sont passés en revue avant d’explorer la question de recherche suivante : « Y-a-t-il des différences significatives entre les unités franchisées et les unités succursalistes en ce qui concerne leurs performances? ». L’étude empirique impliquant plus de 200 hôtels appartenant à un réseau européen est composée de deux parties : quelques statistiques générales d’une part, et une analyse par enveloppement des données (méthode DEA) d’autre part. Les résultats de cette recherche indiquent que, contrairement aux prédictions théoriques habituelles, les hôtels en propre sont significativement plus efficients que les hôtels franchisés. La discussion permet de mettre en avant les contributions, les limites et les perspectives de cette recherche.

Plural form chain and efficiency: Insights from the French hotel chains and the DEA methodology

This paper compares plural form chains, i.e., chains in which franchised units and company-owned units coexist, in terms of performance and more specifically in terms of efficiency, to predominantly franchised chains and predominantly company-owned ones. The data envelopment analysis (DEA) is implemented to assess the efficiency of hotel chains in the French market. It is shown that plural form chains have a significantly higher average efficiency score than predominantly franchised and company-owned ones. Managerial implications are drawn for managing hotel chains.

Ownership form, Managerial Incentives, and the Intensity Of Rivalry

This study investigates how differences in ownership form—between franchised and company-owned units—affect managerial incentives and competitive pricing in different oligopolistic contexts. We arg...

US-Based Franchise Systems

This study assesses both firm and relationship characteristics that may differentiate US-based franchisors that have internationalized operations from those that do not. Multiple discriminant analysis is used and shows that both firm and relationship characteristics are important discriminators. Not surprisingly, international franchise systems are larger and exhibit lower levels of solidarity. A surprising finding, however, is that international systems exhibit lower levels of opportunism, in spite of greater geographic and cultural proximity. Interestingly, a number of firm characteristics (number of domestic units, number of franchised versus company-owned units, firm age, and experience with franchising) and relationship characteristics (flexibility, trust, behavioral transparency, and effectiveness) were not significant discriminators between domestic and international franchisors. Implications of the findings and directions for future research are provided.

Why do Franchisors Combine Franchises and Company-Owned Units?

This work explores the strategic motivation of franchisors to combine franchised and company-owned stores when structuring their distribution networks. In the United States, such plurally organized chains have already outnumbered purely franchised competitors. Based on a review of existing research work, we explain how plural franchise chains theoretically outperform purely franchised or wholly company-owned systems through realizing cost reduction, quality enhancement, growth stimulation and optimized control of business risk. We then challenge these theoretical explanations with the historic data of 925 US-franchise systems, covering almost twenty years of franchise development. While we find little or no support for those strategies - cost, growth and risk improvement - that tend to benefit the franchisor at the expense of franchisees, our data reveal strong support for the quality arguments. By combining a plural form structure with high franchise fees and low royalty rates, franchisors signal outsiders how to be a reliable and cooperative principal. By simultaneously operating company-owned stores and independent franchise outlets, chains successfully force themselves into cooperational and less opportunistic behavior towards their franchisees and (thus) manage to attract more and better members to join the system.

Théories des contrats et réseaux de franchise

Contract Theories and Franchising Franchising is an excellent field of application for contract theories. This paper aims at surveying the recent literature on franchise chains and contracts. It focuses on the choice of contractual terms (the « contractual design ») with an emphasis on incentive mechanisms, the choice of organizational form (vertical integration versus franchising), and « contractual mix », i.e. system in which both company-owned units and franchised units exist side by side. For each of these issues, we present both a theoretical overview and empirical tests (when they exist).

Size, growth rate and risk sharing as the determinants of propensity to franchise in chain restaurants

The purpose of this study is to identify the determinants of selected firms’ characteristics that affect the proportion of company ownership and franchising in the chain restaurant industry. Size, growth rate as related to agency cost, brand name capital, and risk sharing arguments are proposed to explain why these financial measures are expected to differentiate the likelihood of franchising. To test these hypotheses, publicly held restaurant companies are examined. While previous research has focused on a narrow explanation for the existence of franchising, this study incorporates multiple prevailing theories to explain the proportion of franchised units to company-owned units. The study finds evidence that a restaurant's size, growth rate specifically related to monitoring costs, and risk sharing are important factors in determining the incremental use of the franchised units. On the other hand, despite predictions offered by existing literature, brand name capital is not as strong as an indicator of the mix of company-owned units and franchised units in the chain restaurants.

Contract Mixing in Franchising as a Mechanism for Public-Good Provision

This paper is concerned with the coexistence of company-owned units and franchised units in business format franchising and their different contractual arrangements. Drawing insights from case studies that indicate both the development and the maintenance of company-wide brand names and unit-specific sales activities are crucial to a franchise company, we construct a multitask model to account for such contract mixing in franchising. Intuitively, low-powered contracts are offered to some managers to induce effort for brand-name development and maintenance, while high-powered contracts are offered to the remaining managers to elicit sales activity and capture the beneficial effect of the company brand name. Franchising can thus be viewed as an organizational arrangement for production involving brand-name products and services.

Franchising versus corporate ownership: The effect on price dispersion

This paper uses data on the prices charged at fast-food restaurants in the metropolitan Pittsburgh and Detroit areas to assess the effect of franchising on price dispersion within chains in fairly narrowly defined geographical areas. A review of reasons why firms may face more price dispersion under franchising guides the empirical analyses. Results indicate that 1) franchisors do not aim for fully uniform prices even on the corporate side of their chains, 2) the degree of price dispersion is highest for firms with both franchised and company-owned units, as predicted by models implying a systematic price differential between units operated under these different contracting mechanisms, and 3) price dispersion for fully franchised chains is greater than for fully corporate chains. These last two results, combined with evidence from court cases that franchisors sometimes try to control franchisee prices directly, suggest that franchisors indeed lose some amount of control over prices charged to customers when they use franchising as opposed to corporate ownership. Finally, I find a positive effect of the royalty rate on price dispersion. This suggests that double marginalization is behind at least some of the higher prices found in franchised units in the existing literature.

Competition Among Franchises, Company-Owned Units and Independent Operators:

Population Ecology, as a dynamic model of competition, is applied to the study of franchise systems. The paper examines competition among populations of franchises, companyowned units, and independent operators, the relative responsiveness of each population to changes in its environment, and the impact of level of market demand and population density on each population. Census data from two sources, Franchising in the Economy and the Census of Retail Trade, are analyzed using Population Ecology methodologies. Directions for future research efforts are provided.