THE PREVALENCE AND PERFORMANCE IMPACT OF SYNERGIES
IN DUAL DISTRIBUTION NETWORKS
Brinja Meiseberg
Westfälische Wilhelms-Universität Münster
Institute of Strategic Management
48149 Münster
Germany
Tel: +49-251-8331959 Fax: +49-251-8338333
E-mail: meiseberg@ism.uni-muenster.de
Paper presented at the EMNet 2011
December 1 – 3, 2011, Limassol, Cyprus
(http://emnet.univie.ac.at/)
ABSTRACT
The intriguing issue of “dual distribution” in franchising (the “plural form”, i.e. the coexistence of franchised and company-owned outlets in a chain) has received consistent attention
from organizational and franchising scholars. Based on Bradach’s (1995, 1997, 1998) early
work, the broad consensus is that using the plural form helps chains cope with the four “franchising imperatives” – system growth, chain uniformity, local responsiveness, and systemwide
adaptation. Hence, the “right” mix of franchised and company-owned units is critical for chain
performance. Yet, despite the obvious importance of chain composition, empirical research on
synergies in the plural form is largely absent, and insights on performance implications of dual
distribution are equally scarce. Consequently, based on extensive data from 122 chains, this
paper provides what is ostensibly the first in-depth examination of the prevalence and performance effects of synergies that franchisors actually achieve by using the plural form. The
study concludes with managerial implications for governance design in franchised chains.
JEL: L14, L26, D85, D83, M13
Keywords: Dual distribution, plural form, synergies, externalities, franchising imperatives,
chain performance
2
THE PREVALENCE AND PERFORMANCE IMPACT
OF SYNERGIES IN DUAL DISTRIBUTION NETWORKS
INTRODUCTION
An externality is a missing price tag.
(Fletcher 2011)
Organization scholars have long argued that ultimately, any transaction will be organized by
the combination of price and hierarchical constraints that minimizes organizing costs (Hennart
& Anderson 1993). Simultaneously, dual distribution systems have become widely used across
diverse business contexts (Bradach 1997; Dant & Kaufmann 2003; Hendrikse & Windsperger
2004; Lafontaine 1992). “Dual distribution” implies that a firm owns and manages some parts
of its distribution system, while contracting with market agents to manage others (Srinivasan
2006). As using vertically integrated and market-based channels are two distinct methods for
organizing transactions that each have particular costs and benefits, dual distribution has decisive consequences for firm strategy and performance (Kidwell & Nygaard 2011).
Dual distribution (“the plural form”, i.e. the coexistence of company-owned and franchised
units in a chain) has received consistent attention in franchising research. Based on Bradach’s
(1995, 1997, 1998) early work, the broad consensus is that using the plural form is necessary
to meet four crucial managerial challenges – the four “franchising imperatives” of (1) geographic expansion of the chain, (2) brand protection and chain uniformity, (3) competitiveness
and local responsiveness, and (4) service and/or product concept evolution and systemwide
adaptation. Yet, the topic of dual distribution is a difficult one for studies on organizations that
often try to find the one best solution to a particular problem, as dual distribution may not tend
to exhibit one single optimal form. Past research has primarily focused on documenting the
existence of the plural form in different industries, and on the plural form’s various antecedents, like information asymmetry (Heide 1994, 2003), uncertainty (Dutta et al. 1995; John &
Weitz 1988; Srinivasan 2006), or transaction costs (Anderson 1988; Bergen et al. 1992; Dahlstrom & Nygaard 1994, 1999; Rindfleisch & Heide 1997; Weiss & Anderson 1992). For explaining observed proportions of the plural form in practice and for defining “optimal” chain
composition, conceptual studies have offered various qualitative arguments (Bradach 1995,
1997, 1998; Lewin-Solomons 1999). Empirical studies have emphasized circumstantial factors, for which data was available from secondary sources (e.g. chain age, size, territory coverage, fee structure, internationalization, or industry). However, these studies have not examined
in depth the considerable range of synergies that can be realized by combining vertically integrated and market-based channels. In fact, empirical research on synergies in the plural form is
3
largely absent (Bradach 1997, 1998; Cliquet & Nguyen 2004; Dnes 1993; Dnes & Garoupa
2005; Hendrikse & Tao 2005; Hendrikse & Windsperger 2004; Lewin-Solomons 1999;
Sorenson & Sørensen 2001).
In addition, synergies that franchisors achieve in pursuit of the four managerial imperatives are
critical for chain performance. Still, insights on performance implications of dual distribution
are scarce (Srinivasan 2006). Heide (2003) points out, “the specific performance implications
of plural systems remain unanswered [...] establishing a link between particular governance
approaches and outcome variables seems an important research priority.” Combs et al. (2004),
Perrigot et al. (2009) and Watson et al. (2005) make equally strong cases for the need of studying performance effects in the plural form. Combs et al. (2011) emphasize, “[d]ocumenting
synergies between franchised and company-owned outlets, systemwide and within the same
geographic market” and “[i]nvestigating the performance effect of synergies among companyowned and franchisee outlets” as two major gaps in franchising research.
Consequently, this paper explores the intriguing phenomenon of dual distribution in franchising by what is ostensibly the first detailed examination of the actual prevalence and performance effects of synergies that individual franchisors achieve by combining franchised and
company-owned outlets. Based on extensive data from 122 chains, we examine the following
research questions: What externalities do company-owned and franchised units actually provide to chains in practice? How do different strategic orientations, and the various synergies
pursued through dual distribution, affect a franchisor’s choice of the proportion of the two
outlet types in the chain? How does this choice relate to firm performance? Do the effects of
dual distribution on firm performance vary across firms? As much of the literature is based on
empirical evidence derived from the North American experience, the empirical analysis focuses on a European context, to add to a more holistic view in franchising research.
The next section provides an overview of the literature. Then, hypotheses are developed. The
subsequent sections describe the data and the model estimation procedures, followed by the
results. The last section concludes, offering managerial and research implications.
THEORETICAL BACKGROUND AND HYPOTHESES
Research on dual distribution marks a departure from studying “ideal forms” of governance,
viewed as alternatives to one another, towards attention to the combination and interaction of
ideal form properties (Mols 2000). The phenomenon of dual distribution has been studied under the labeling of “hybrid channels” (Rangan et al. 1993), “multiple channels” (Anderson et
4
al. 1997), “hybrid marketing systems” (Moriarty & Moran 1990), “systems of plural governance” (Heide 1994), “tapered integration” (Harrigan 1984), “plural systems” (Dahlstrom &
Nygaard 1999) or “plural forms” (Bradach 1997). All these are characterized as arrangements
where firms combine vertically integrated and market-based channels. Vertically integrated
channels are owned, operated and managed through hierarchical, corporate control. Marketbased channels are owned and operated by market agents, and are managed primarily through
provisions and incentives in a relational contract between the firm and its agents (Srinivasan
2006; Williamson 1975, 1985). In franchising1 research, “dual distribution” refers to the simultaneous use of vertically integrated (company-owned) and market-based (franchised) units
by a franchisor. As both vertical integration and market governance have distinct economic
and structural characteristics, the net advantage of dual distribution arises from the aggregation
of benefits and costs of each channel and the synergies across the dual channels (Bradach
1995; Heide 2003; Srinivasan 2006).
Traditional distribution channels literature has been particularly interested in the advantages of
having different channels serve customer segments with different needs for customization,
quality assurance, lot size, availability, after-sales service or logistics (Anderson et al. 1997;
Mols 2000). Distribution literature has also discussed the conflict potential arising from dual
distribution (Moriarty & Moran 1990; Webb & Didow 1997). Strategy-based literature has
focused on the benefits of dual systems for diverse downstream and upstream activities; on
lower fixed costs compared with full integration; on the option of using market-based units for
the irregular part of the demand while using internal units for the stable part; on gaining access
to outside R&D activities; on reducing the risk of becoming dependent on either unit type; on
offering incentives through competition between both types of units; on full vertical integration becoming a more credible threat, as well as on access to information on cost and market
prices (Harrigan 1984; Mols 2000; Porter 1980). Besides, the plural form has been analysed
through various theoretical lenses, including signaling theory (Gallini & Lutz 1992), the resource-based view (Dant & Kaufmann 2003), property rights (Windsperger 2004; Windsperger & Dant 2006), and incentive-based theory (Chaudey & Fadario 2004; Dant et al. 2008).
Marketing scholars have examined under what conditions plural governance leads to greater
efficiency, using agency theory (Bergen et al. 1992; Brickley & Dark 1987; Dutta et. al. 1995;
Gallini & Lutz 1992; Lafontaine 1992; Martin 1988; Norton 1988; Rubin 1978; Shane 1996,
1
Franchising is a business arrangement wherein a firm (the franchisor) collects up-front and ongoing fees in
exchange for allowing other firms (the franchisees) to offer products and services under its brand name and using
its processes, which creates entrepreneurial opportunities on both sides of this relationship (Combs et al. 2011).
5
1998) or transaction cost economics (Dant et al. 1996; Dutta et al. 1995; Heide 1994, 2003;
John & Weitz 1988; Mols 2000; Rindfleisch & Heide 1997).
The emergent consensus is that dual distribution mitigates problems associated with either
exclusive vertical integration or market governance. The basic argument is that both kinds of
units provide distinct “externalities” that contribute to reaching common objectives in the
chain, e.g. joint organizational learning and innovation (Bradach 1997, 1998; Cliquet & Nguyen 2004; Dnes 1993; Dnes & Garoupa 2005; Hendrikse & Tao 2005; Lewin-Solomons 1999;
Sorenson & Sørensen 2001; Srinivasan 2006; Williamson 1981). “Externalities” are defined as
uncalculated exchange outcomes, accruing to transacting parties and/or to others, that arise
due to incomplete calculation of the exchange equation by one or both parties (Mundt 1993).
That is, in their transactions with the franchisor, company units can provide externalities to
franchised units, and vice versa. Then, by combining company and franchised units, franchisors can realize synergies for the entire system. Synergies are regularly understood as “the
value that is created and captured, over time, by the sum of the businesses together relative to
what it would be separately” (Davis & Thomas 1993; Martin & Eisenhardt 2001). For example, Kalnins and Mayer’s (2004) study of Texas pizza restaurants found that both franchisees
and company outlets benefited from the local knowledge of the other, and that locally accumulated experience reduced failure rates for both. Similarly, Oxenfeldt and Kelly (1968) established that franchisees provide resources like capital, skilled management and knowledge that
promote competitive advantage for the entire chain. Research has also argued that company
units, to the entire chain’s advantage, serve as a safeguard for chain uniformity, a platform for
concept evolution, or a testing laboratory for new products that franchisees can adopt later on
(Combs et al. 2011; Kaufmann & Eroglu 1999).
Synergies achieved by combining both types of units help coping with the essential managerial
challenges in franchising, which are (1) geographic expansion, (2) brand protection and chain
uniformity, (3) competitiveness and local responsiveness, and (4) service and/or product concept evolution and systemwide adaptation. Thereby, the actual composition of a chain by franchised and company units has decisive consequences for chain performance.
(1) Geographic Expansion of the Chain. Unit growth can be achieved by the addition of company units to the chain, the addition of franchised units, or the inclusion of additional units to
preexisting franchisees (Bradach 1995). As regards company-owned units, Gallini and Lutz
(1992) assumed that franchisors have private information about the profitability of their business concept, and that consequently, company units support chain growth by serving as a sig6
nalling device that inspires confidence in prospective franchisees (Combs & Ketchen 1999;
Dant & Kaufmann 2003; Lafontaine & Kaufmann 1994; Michael 2009; Minkler 1992). Compared with franchised units, company outlets also offer higher profits per unit that can finance
further expansion (Cliquet 2000; Hunt 1973). Also, they provide planning reliability during
growth by causing less legal problems (Bradach 1997; Gillis & Combs 2009; Hunt 1973) and
can compensate for a lack of suitable franchisee candidates (Hunt 1973). They can also increase market potential beyond franchisee investment capacity, when consumers associate
company flagship stores with standardized franchise stores (Cliquet & Croizean 2002).
Franchisees, in turn, provide the franchisor with scarce financial and managerial resources
(Alchian & Demsetz 1972; Combs & Ketchen 1999; Hunt 1973; Srinivasan 2006). Holding
rights to their units’ residual profits, they may work more efficiently than salary-based managers in company units, thereby lowering operating and monitoring costs for the franchisor
(Lafontaine & Shaw 2005; Srinivasan 2006). As the franchise contract is designed so that the
upside benefit of increased revenues partly accrues to the chain, but the downside risk of poor
performance is borne solely by the franchisee (Bradach 1998; Srinivasan 2006), franchisees
also provide chains with opportunities for low risk, low cost access to markets that would not
be worthwhile to pursue with vertically integrated channels (Dahlstrom & Nygaard 1994).
Thus, franchised outlets enable a more rapid cross-over of the critical threshold for the entire
chain (Cliquet 2000; Cliquet & Croizean 2002). Taken together, vertically integrated and market-based units clearly provide externalities that contribute to reaching growth objectives, so
that franchisors using both kinds of units can realize synergies for the entire chain.
(2) Brand Protection and Chain Uniformity. Uniformity is crucial because it increases brand
name capital. Vertical integration offers concept control (Bradach 1997; Gillis & Combs 2009;
Hunt 1973; Sen 1993) and company units enhance uniformity of operations by, for example,
providing training sites that teach the business model (Cliquet & Croizean 2002), increasing
the franchisor’s negotiation capacity towards franchisees (Bradach 1997; Srinivasan 2006;
Walker & Weber 1984), or making threads of franchisee contract termination believable (Dutta et al. 1995; Lewin-Solomons 1999). Further, company units provide an environment for the
controlled development of standards (Lafontaine & Kaufmann 1994) that may decrease the
incentives for unauthorized experiments in the individual outlets. Both company and franchised units can serve as performance benchmarks for each other, thereby synchronising market efforts across outlets (Bradach 1997; Cliquet 2000; Gillis & Combs 2009; Kidwell & Nygaard 2011). Both may promote an intrasystem socialization process and support greater cohesion in terms of business conduct (Bradach 1997). Also, both can demonstrate uniform product
7
availability to consumers (Bradach 1997; Gillis & Combs 2009; Sen 1993). Multi-unit franchisees can enhance uniformity by “copying” the franchisor’s organizational structure and
processes in multiple outlets (Bradach 1997; Gillis & Combs 2009). Yet, franchisees may provide limited benefits only as they have higher incentives to free-ride on the trademark, and are
harder to control than manager-employees in company outlets (Bradach 1995; Rubin 1978).
(3) Competitiveness and Local Responsiveness. In adapting to changes in local situations, customer behavior, or market laws, “local responsiveness” is a means by which chains demonstrate “flexibility” (Brickley & Dark 1987). On a variety of issues, local conditions might warrant a specific local response, for example, tailoring a menu to local tastes or varying prices to
match a nearby competitor’s (Bradach 1995). Apart from increasing adaptation capacity, company units can provide local market information and experience that keeps the franchisor from
engaging in risky experiments franchisees might otherwise push through (Bradach 1997; Cliquet 2000; Dant & Kaufmann 2003; Lafontaine & Kaufmann 1994).
By co-locating local knowledge and decision rights, franchised units provide high potential to
adapt to local situations (Cliquet 2000; Jensen & Meckling 1991). Franchisees are often sufficiently qualified to take decisions without having to wait for the franchisor to respond to local
competition first (Garg et al. 2005). Also, they have intimate knowledge of local conditions
and can offer rich qualitative data, which improves the franchisor’s decision-making in local
company outlets (Bradach 1997; Cliquet 2000; Dant & Kaufmann 2003). Here, Bradach
(1997) found evidence of a two-way “mutual learning” process between company units and
franchised units. Testifying to synergies in dual channels, a restaurant chain CEO noted, “The
chain [company units] gives you a system perspective, while franchisees give you a local perspective. We are constantly working to balance both perspectives. By having both company
and franchised units, we are able to do that” (Bradach 1998; Srinivasan 2006).
(4) Service and/or Product Concept Evolution and Systemwide Adaptation. Adaptation refers
to the system as a whole and how it reacts to threats and opportunities in the competitive environment (Bradach 1995). Kaufmann and Eroglu (1999) suggest that franchisors must trade
benefits associated with standardisation and adaptation to meet heterogeneous market demands. Benefits of company units may comprise providing broad market data (Bradach 1997;
Cliquet 2000) and a lab for testing out new ideas before release (Bradach 1997; Dant & Kaufmann 2003; Dant et al. 1992; Lafontaine & Kaufmann 1994;). Also, company units can improve routines and enable fast diffusion of information through the chain (Dant & Kaufmann
2003; Sorenson & Sørensen 2001).
8
Yet, being more responsive to market needs relative to bureaucratic, integrated channels, franchised units are an important source of product innovation (Bradach 1997; Srinivasan 2006;
Yin & Zajac 2004). For example, three of McDonald’s most successful products, the “Big
Mac”, the “Filet-O-Fish” and the “Egg McMuffin”, were originally introduced by its franchisees (Newsweek 1997). In addition, franchisees usually intend to share their views on proposed new products with the franchisor, thereby helping identify good ideas (Bradach 1997;
Dant et al. 1992; Lafontaine & Kaufmann 1994). They can help develop product markets, increase process innovation, and offer more objective feedback than managers (Bradach 1997;
Cliquet 2000; Lafontaine & Kaufmann 1994; Sorenson & Sørensen 2001; Srinivasan 2006).
As a CEO interviewed by Bradach (1995) noted, “There is a tendency for company people to
tell me what they think I want to hear [...] The independent thinking of the franchisee brings a
check and balance to the system that is very valuable.” Franchised outlets can also reduce the
know-how drain by offering career opportunities to company managers when these managers
strive to become independent (Bradach 1997).
In sum, regarding why and when franchisors use franchising rather than company ownership,
and the consequences of these decisions, are decisive questions (Combs et al. 2011). Yet, although dual distribution can offer benefits compared with vertical integration, it also makes
each side vulnerable to exploitation by the other. For example, unscrupulous franchisors can
collect fees from franchisees and provide little support in return (Cochet & Ehrmann 2007;
Hoy 1994). Uncooperative franchisees can cut quality in their outlets, thereby increasing their
own margins but damaging the franchisor’s brand name (Caves & Murphy 1976; Kidwell &
Nygaard 2011). Previous studies argued that in business relationships, opportunism on either
side can be curbed by relational norms that establish a cooperative climate in the chain (Cannon et al. 2000; Hansen et al. 2008; Mellewigt et al. 2007). As Hadfield (1990) pointed out,
“When a contract is embedded within an identifiable relationship [...] contractual obligations
are often modified, supplemented or completely supplanted by the norms of the ongoing relation.” Thereby, relational norms may promote the realization of synergies in chains.
For explaining observed proportions of the plural form in chains and for arguing “optimal”
chain composition, previous studies have mostly concentrated on qualitative arguments, and
generic factors for which data was readily available from secondary sources. So far, there
seems to be no in-depth empirical examination of the considerable range of externalities that
arise in practice, i.e. of synergies that individual franchisors seek and achieve by combining
both unit types in their pursuit of the four central managerial objectives of growth, brand protection, and local and systemwide adaptation. This study addresses this research gap. Follow9
ing the theoretical background described above, we expect that chain composition (i.e. the
extent of plural form) depends on the synergies franchisors (1) seek with respect to their managerial objectives; (2) can actually achieve by combining the two kinds of units; and (3) that
decisions on the extent of plural form are contingent on, particularly, those externalities that
arise from cooperating with market channels. We further expect (4) that achieved synergies
have a significant effect on chain performance:
H1: The extent of plural form is contingent upon strategic orientations.
H2a: The more(less) relevant positive externalities are provided by company-owned units,
the higher(lower) the chain’s strategic tendency towards company-owned outlets.
H2b: The more(less) relevant positive externalities are provided by franchised units, the
higher(lower) the chain’s strategic tendency towards franchised outlets.
H3: The provision of positive externalities by franchised units is contingent upon relational norms.
H4a: The more(less) relevant positive externalities are provided by company-owned units,
the higher(lower) the chain’s performance.
H4b: The more(less) relevant positive externalities are provided by franchised units, the
higher(lower) the chain’s performance.
SAMPLE, VARIABLES, AND METHODS
Sample. In Germany, in 2008, 950 systems made a total of €47.1 billion revenues. The number
of franchisees amounted to 57,000, the total number of people employed in franchising was
450,000. Retail is the largest German industry in franchising (in 2008 sales, 35%), but services
have become strong (33%; data from the German Franchise Association). The sample comprises German chains in the retail and the service sectors. In autumn 2010, self-administered
postal questionnaires and a university address for responses were distributed among all franchisors that belong to the German Franchise Association, and among those named the top 100
German franchisors by the Impuls 2008 study (if these were not listed as members of the Association). The formulation of the questionnaire emerged from a qualitative-explorative prestudy involving franchisors, consultants, and franchisee focus groups. All variables and items
are based on previous research. Questionnaires targeted one highly ranking strategy executive.
In three rounds of follow-up calls, non-respondents were contacted for telephone interviews.
Responses were collected until April 2011. 122 usable responses returned (response rate 26%).
Variables.
Extent of plural form. In line with previous research, the extent of plural form is operationalized as the proportion of company-owned outlets (the “plural form rate”). The proportion is
10
measured in two ways – first, as the current rate of company outlets (Dant et al. 2008); second,
as the number of company outlets of all new outlets in 2009 (Combs et al. 2004).
Chain Performance. Previous research suggests that capturing the multidimensionality of firm
performance requires objective and subjective measures to achieve triangulation (Baron &
Tang 2009; Stam & Elfring 2008). Hence, we use both. Following Zahra et al. (2002), we use
the objective performance criterion of total sales. Sales are the most common indicator of performance (Gilbert et al. 2006; Roberts & Dowling 2002; Stam & Elfring 2008). Although
sales volume is only a short-term measure of a store’s competitive strength, long-term implications suggest a strong linkage of sales and profitability (Buzzell & Gale 1987). For measuring
sales, respondents filled in a series of blanks (Zahra & Bogner 2000; Zahra et al. 2002). Prior
research recommends comparing primary and secondary data to establish validity of surveybased measures (Stam & Elfring 2008; Zahra et al. 2002). Sales data was checked against data
made available by the German Franchise Association’s annually published franchise guide.
Data was available for a subsample of 45 firms. Tests alleviate concerns; correlations between
the data are substantial (0.940, p < 0.001). To quantify subjective success, five items measure
the extent of “satisfaction with performance”. The items ask respondents to evaluate their recent performance relative to different comparison levels (SP1 to SP5, Appendix).
Externalities. Most of the literature centres on synergies as an outcome of mergers and acquisitions (M&A). Mergers and acquisitions have been used to achieve rapid entry into growth
markets, to acquire expertise, technology, products, brands, market presence, experienced
management, to reduce exposure to risk, and to complement internal product development
(Brock 2005; Haspeslagh & Jemison 1991).2 Combining company and franchised units in a
chain aims at reaching similar ends. Therefore, in line with previous literature on alliance synergies (Brock 2005; Walter & Barney 1990), we measure synergies using a taxonomy of managerial goals. Franchisors rate the extent to which either unit type, in their opinion, provides
synergies to the chain (EX1 to EX8, Appendix; we refer to the term “item” for these overall
evaluations by the franchisor). To reduce the risk of reversed causality, externalities are related
to franchisors’ previous experience, and performance is measured as current performance. We
suggest that reversed causality is not an issue as current performance does not allow changing
the chain’s channel mix in an instant, but channel mix develops over time and current perfor2
Researchers of corporate strategy have attempted to measure synergy using proxies for the underlying process
and assets of the two involved business units (Markides & Williamson 1994), like presence of similarities in the
resource base (Capron 1999; Harrison et al. 1991), relatedness in products/markets (Rumelt 1974), opportunity to
share or combine resources among businesses (Haspeslagh & Jemison 1991), or, as an outcome, abnormal returns
associated with acquisitions (Seth 1990; Chatterjee 1986, 1992). Yet, there has been very little research on synergy measures despite three decades of inquiry into the M&A phenomenon (Krishnan et al. 2009).
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mance is an outcome of this developmental process, rather than that the process could be an
outcome of current performance. In addition to using the questionnaire items (as described
above) that measure synergistic contributions of company and franchised units for the chain,
we investigate synergies in much detail, integrating prior theoretical and empirical research
(Table 2).
Strategic Orientation. Botti et al. (2009) argue that decisions on the franchisee vs. company
ownership mix relate to the four franchising imperatives and chain strategy, to chain size (as a
proxy for lifecycle stages), and to competitive dynamics of the industry. Chain size and industry will be included as controls, and we use a measure of the system’s strategic orientation that
captures how strongly chains focus on each of the four imperatives (SO1 to SO4, Appendix).
Relational Norms. “Relational norms” are defined as shared expectations that parties have
regarding cooperative behavior when working together towards mutual and individual goals
(Axelrod 1986; Cannon et al. 2000; Gibbs 1981) (RN1 to RN6, Appendix).
Controls. We control for generic factors that have been used in previous research to explain
the extent of the plural form (Botti et al. 2009; Dant et al. 2008; Table 1):
Controls
Exemplary Literature
C1
Company age
Alon (2001); Dant & Kaufmann (2003); Dant et al. (2008);
Lafontaine (1992); Lafontaine & Shaw (1999); Shane (1998)
C2
Total network size in the domestic
market
Alon (2001); Dant & Kaufmann (2003); Dant et al. (2008);
Lafontaine & Shaw (1999); Shane (1998)
C3
Average total investment required
in ‘000s of Euros
Alon (2001); Brickley & Dark (1987); Dant & Kaufmann (2003);
Dant et al. (2008); Lafontaine (1992)
C4
Average franchise fee in ‘000s of
Euros
Dant & Kaufmann (2003); Dant et al. (2008); Lafontaine (1992);
Shane (1998)
C5
Average ongoing royalty fee rate
in percent
Alon (2001); Dant & Kaufmann (2003); Dant et al. (2008); Shane
(1998)
C6
Cash liquidity requirement in
‘000s of Euros
Dant et al. (2008); Lafontaine (1992); Shane (1998)
C7
Incidence of internationalization
Dant et al. (2008); Perrigot & Cliquet (2005)
C8
Sectoral differences (1 – products
and retail versus 0 – services)
Caves & Murphy (1976); Dant et al. (2008); Lafontaine & Shaw
(1999); Shane (1998); Thomas et al. (1990)
Note: Data from the German Franchise Association’s annual franchise guide. We further control for multi-unit ownership by
the average number of outlets each franchisee owns per system, with insignificant results.
Table 1. Generic Factors.
Franchisors interviewed in the pre-stage all suggested that the approaches taken were appropriate for gathering information on the study context. As parts of this research are based on
self-reported data from a single source, there are concerns of common method bias. We control for common method bias using Harman’s single factor test. The test yields more than one
12
factor, no factor accounts for most of the variance, the variance explained by the largest eigenvalue is 35%. Then, according to Podsakoff et al. (2003), common method bias is not an issue.
The study further compares the average sample observation with the average system member
of the German Franchise Association along the dimensions age, size, and industry, using data
from the Association’s Annual Guide. No evidence of nonresponse bias emerged.
Methods.
First, we use detailed descriptive statistics to document franchisors’ perceptions of the prevalence of externalities in their chains, to explore synergies that arise in practice in depth.
Second, we use MANOVA analysis to determine if strategic orientations (H1) have an effect
on the extent of plural form. MANOVA is also used to establish whether relational norms
among franchisees and the franchisor have an effect on externalities provided by franchised
outlets (H3). For the MANOVA analyses, the sample is split into two subgroups using the
familiar median split approach (first, low versus high subgroups on the extent of plural form;
second, low vs. high on cooperative orientations). MANOVA is useful when there are multiple
criterion variables (in the first case, the franchisor’s strategic orientations in terms of growth,
uniformity, responsiveness, and adaptation; in the second case, franchisees’ contributions to
each of these imperatives) and one or more categorical predictor variables (first, low versus
high subgroups on the extent of plural form, and second, low vs. high subgroups on cooperative orientations) (Green 1978). The test for differences across the predictor groups in
MANOVA is based on statistics that are convertible into equivalent multivariate F-ratios
(Cooley & Lohnes 1971). The procedure safeguards against the inflation in the error rate that
would occur if a series of t-tests were mounted instead of of the MANOVA-ANOVA-multiple
paired comparisons routine (Dant et al. 2008).
Third, as regards the relationship between externalities and the extent of plural form, and the
relationship between externalities and performance, we estimate OLS regressions. The models
employed for testing the effect of synergies on first, the extent of plural form (H2), and second, chain performance (H4), are:
H2a(b): Extent of Plural Formi = f (externalitiesi, generic_factorsi)
H4a(b): Performancei = g (externalitiesi, generic_factorsi),
where i refers to an individual chain and “generic factors” are circumstantial variables
often used in previous research on the extent of plural form and performance.
We use log-transformed variables for robustness checks and control for absence of multicollinearity with Variance Inflation Factors (all below three), and for normal distribution of disturbances with Kolmogorov-Smirnov-Tests.
13
RESULTS
Table 2 presents the effects of pursuing different strategic goals on plural form choice. Table 3
displays the franchisors’ in-detail evaluations of synergies achieved in their chains. Statements
are ordered by goal category and ranked by descending means. We document reliability statistics, and correlations with the respective overall externality measure (the “item”; Appendix).
Table 4 summarizes descriptive statistics. Table 5 offers results of the OLS analyses of synergies and generic factors in explaining the extent of plural form, and shows how synergies
achieved affect chain performance. In particular, the table illustrates the relative importance of
each kind of synergy for both choices on plural form extent, and performance. Table 6 indicates the effects of cooperative orientations on the realization of synergies with franchisees.
Comparison of Means
MANOVA
ANOVA
ANOVA
ANOVA
ANOVA
Wilks‘ Lambda Converted to
F (4, 114) = 7.468
Strategic Orientation
Plural Form Rate
N
Mean
Std. Dev.
Growth
Low
61
2.35
1.21
High
58
1.97
1.14
Low
61
2.97
1.10
High
58
2.14
0.92
Low
61
2.48
1.13
High
58
3.12
1.02
Low
61
2.27
0.88
High
58
2.81
0.99
Uniformity
Local Responsiveness
Systemwide Adaptation
P < 0.001
F
p-value
3.18
p < 0.1
19.89
p < 0.001
12.01
p < 0.01
8.90
p < 0.01
N = 119 (cases with incomplete data are excluded from this analysis).
“Plural Form Rate” operationalized as the proportion of company-owned units within the network.
Means display the franchisor’s strategic orientation towards each of the four imperatives: 1 – “most important”, 4 – “least important”.
Read: Franchisors that use a high proportion of company-owned units in their chain have a stronger strategic focus towards uniformity than
franchisors that use a low proportion of company-owned units (2.14, “very important”, vs. 2.97, “less important”).
Table 2. Strategic Orientation: Comparison of Means.
14
Franchising Imperative
Franchisor
Evaluation:
Means and S.D.
Exemplary Literature
Growth/Adding New Units
Company-owned units facilitate growth because of:
[Mean: 4.34; Reliability: 0.98; Correlation with Item: 0.462, p < 0.001]
GC1 Profits (“They provide higher profits per unit, compared with franchised units, that
can finance further growth.”)
4.48
2.02
Cliquet (2000); Cliquet & Croizean (2002); Hunt (1973)
GC2
Franchisor Credibility (“They signal the franchisor's credibility and competence to
franchisee candidates.”)
4.37
1.90
GC3
Managerial Capacity (“They compensate for a lack of good franchisee candidates.”)
Brand Image Attractiveness (“They enhance chain attractiveness beyond franchisee investment capacity: Consumers associate company-owned flagship stores at
prestigious locations with standardized franchise stores.”)
Stability (“They provide planning reliability to the chain by causing less legal
problems and filing less lawsuits.”)
4.34
1.92
Cliquet (2000); Combs & Ketchen (1999); Dant & Kaufmann
(2003); Gallini & Lutz (1992); Lafontaine & Kaufmann (1994);
Minkler (1992)
Cliquet & Croizean (2002); Hunt (1973)
4.34
1.97
Cliquet (2000); Cliquet & Croizean (2002)
4.22
1.99
Bradach (1997); Gillis & Combs (2009); Hunt (1973);
Oxenfeldt & Kelly (1968)
4.20
1.67
Hunt (1973); Srinivasan (2006)
4.16
1.64
4.11
1.66
Brickley & Dark (1987); Dahlstrom & Nygaard (1994);
Srinivasan (2006)
Cliquet (2000); Cliquet & Croizean (2002)
4.10
1.67
Cliquet & Croizean (2002); Combs & Ketchen (1999); Hunt
(1973); Srinivasan (2006)
5.48
1.35
Cliquet & Croizean (2002)
GC4
GC5
Franchised units facilitate growth because of:
[Mean: 4.14; Reliability: 0.95; Correlation with Item: 0.884, p <0.001]
GF1 Managerial Capacity (“They compensate for a lack of good manager-employee
candidates.”)
GF2 Area Development (“They can develop less attractive areas that can accommodate future company-owned units.”)
GF3 Expansion Speed (“They allow a rapid cross-over of the critical threshold for the
entire chain.”)
GF4 Financial Input (“They provide the system center with financial capital for chain
expansion.”)
Uniformity
Company-owned units enhance chain uniformity because of:
[Mean: 5.24; Reliability: 0.79; Correlation with Item: 0.674, p < 0.001]
UC1 Provision of Training (“They serve as training sites for franchisees.”)
15
UC2
UC3
UC4
UC5
UC6
UC7
UC8
UC9
Franchisor Negotiation Capacity (“They demonstrate the value of making franchisor-induced changes to franchisees, improve the negotation capability of the
franchisor towards the franchisees and counterbalance the need to follow (overly)
restrictive franchisee-friendly legislation.”)
Concept Control (“They provide concept control that enhances brand value.”)
5.43
1.43
5.29
1.54
Benchmark (“They help solve the problem of setting performance standards by
providing a benchmark to franchised units.”)
Test Laboratory for Standards (“They serve as a platform for the development of
standards and policies.”)
Franchisor Autonomy (“They curb franchisee opportunism by making the threat
of franchisee contract termination believable.”)
Council Votes (“They support ad council decisions in favor of the entire system.”)
Product Availability (“They demonstrate ubiquitous product availability to consumers.”)
Socialization Process (“They support the intrasystem socialization process (i.e.
social cohesion among franchisees and manager-employees).”)
5.26
1.48
5.24
1.47
Bradach (1997); Cliquet & Croizean (2002); Dant & Kaufmann
(2003); Dant et al. (1992); Hunt (1973); Lafontaine &
Kaufmann (1994); Lewin-Solomons (1999); Srinivasan (2006);
Walker & Weber (1984)
Bradach (1997); Cliquet (2000); Cliquet & Croizean (2002);
Combs & Ketchen (1999); Gillis & Combs (2009); Hunt
(1973); Sen (1993); Srinivasan (2006)
Bradach (1997); Cliquet (2000); Gillis & Combs (2009); Kidwell & Nygaard (2011)
Lafontaine & Kaufmann (1994)
5.16
1.45
Lewin-Solomons (1999)
5.16
5.12
1.34
1.56
5.07
1.37
Dant & Kaufmann (2003); Lewin-Solomons (1999)
Bradach (1997); Cliquet (2000); Cliquet & Croizean (2002);
Combs & Ketchen (1999); Gillis & Combs (2009); Sen (1993)
Bradach (1997); Gillis & Combs (2009); Lafontaine &
Kaufmann (1994)
3.72
1.64
3.71
1.51
Bradach (1997); Cliquet (2000); Gillis & Combs (2009); Kidwell & Nygaard (2011)
Bradach (1997)
3.64
1.67
Bradach (1997); Gillis & Combs (2009)
3.59
1.58
Bradach (1997); Cliquet (2000); Cliquet & Croizean (2002);
Combs & Ketchen (1999); Gillis & Combs (2009); Sen (1993)
3.80
1.31
Bradach (1997); Dant & Kaufmann (2003)
Franchised units enhance chain uniformity because of:
[Mean: 3.66; Reliability: 0.96; Correlation with Item: 0.890, p < 0.001 ]
UF1 Benchmark (“They help solve the problem of setting performance standards by
providing a benchmark to company-owned outlets.”)
UF2 Socialization Process (“They support the intrasystem socialization process (i.e.
social cohesion among manager-employees and franchisees).”)
UF3 Chains within the Chain (“Multi-unit franchisees ‘copy’ the franchisor's organizational structure.”)
UF4 Product Availability (“They demonstrate ubiquitous product availability to consumers.”)
Local Responsiveness
Company-owned units enhance local responsiveness because of:
[Mean: 3.72; Reliability: 0.89; Correlation with Item: 0.883, p < 0.001]
LC1
Managerial Experience (“They provide experience that can keep the franchisor
from engaging in risky experiments franchisees might push through if they alone
16
LC2
LC3
had local market experience.”)
Local Market Information (“They serve as individual sources of local market
information.”)
Adaptation Capacity (“They provide adaptation capacity to changes in economic
situation, client behavior, or market laws.”)
Franchised units enhance local responsiveness because of:
[Mean: 4.64; Reliability: 0.93; Correlation with Item: 0.897, p < 0.001]
LF1
Adaptation Capacity (“They provide adaptation capacity to changes in economic
situation, client behavior, or market laws.”)
LF2
Managerial Qualification (“If necessary, they are qualified to make important
decisions without waiting for the system center to respond to local competition.”)
LF3
Local Market Information (“They have intimate knowledge on local conditions
and offer rich qualitative data.”)
LF4
Know-How Spillovers (“They improve decision-making in local company-owned
outlets.”)
3.77
1.37
Bradach (1997); Lafontaine & Kaufmann (1994)
3.61
1.42
Cliquet (2000)
4.77
1.75
Cliquet (2000)
4.65
1.79
Garg et al. (2005)
4.62
1.81
Bradach (1997); Cliquet (2000)
4.54
1.81
Dant & Kaufmann (2003)
3.61
3.60
3.50
1.49
1.38
1.51
Sorenson & Sørensen (2001)
Sorenson & Sørensen (2001)
Bradach (1997); Cliquet (2000)
3.45
1.50
3.40
1.49
Bradach (1997); Cliquet & Croizean (2002); Dant & Kaufmann
(2003); Dant et al. (1992); Lafontaine & Kaufmann (1994);
Lewin-Solomons (1999)
Dant & Kaufmann (2003)
5.11
5.05
1.48
1.50
Bradach (1997); Srinivasan (2006)
Bradach (1997); Dant & Kaufmann (2003); Srinivasan (2006)
Systemwide Adaptation
Company-owned units enhance systemwide adaptation because of:
[Mean: 3.51; Reliability: 0.91; Correlation with Item: 0.904, p < 0.001 ]
SC1
Improvement of Routines (“They help incrementally improve existing routines.”)
SC2
Diffusion of Information (“They facilitate the diffusion of information.”)
SC3
Market Data Provision (“Together, they provide a broad data basis for market
analyses.”)
SC4
Test Laboratory for Innovation (“They provide a lab for testing out new ideas
before release.”)
SC5
Efficiency Improvement (“They allow franchisors to spot new ways of improving
efficiency.”)
Franchised units enhance systemwide adaptation because of:
[Mean: 5.00; Reliability: 0.95; Correlation with Item: 0.886, p < 0.001]
SF1
Market Development (“They open up new markets.”)
SF2
Product Innovation (“They extend the product range or improve product quality
and efficiency.”)
17
SF3
SF4
SF5
SF6
SF7
SF8
Process Innovation (“They explore and experiment for the development of new
routines.”)
Market Orientation (“They hear the voice of the market and enhance innovation
through competent curiosity.”)
Joint Production (“They help identify and develop good ideas.”)
5.03
1.54
Bradach (1997); Cliquet (2000); Sorenson & Sørensen (2001)
4.99
1.55
Bradach (1997); Srinivasan (2006)
4.98
1.60
Know-How Retention (“They reduce know-how drain by retaining previous company-owned outlets' managers as franchisees when these managers strive to become entrepreneurs.”)
Diffusion of Information (“They provide for an efficient information flow from
bottom to top.”)
Objective Feedback (“They are a source of objective input on franchisor policies.”)
4.97
1.50
Bradach (1997); Dant & Kaufmann (2003); Dant et al. (1992);
Lafontaine & Kaufmann (1994)
Bradach (1997)
4.95
1.49
Bradach (1997)
4.92
1.46
Bradach (1997); Cliquet (2000); Lafontaine & Kaufmann
(1994); Lewin-Solomons (1999)
Note: The four imperatives and all statements are taken from previous research. Where the source of a synergy was given in the original literature, we kept the formulation (e.g. “Franchisees provide…”); if the source of a synergy was not specified as either company or franchised units and both could, theoretically, be potential sources, statements were assigned to both groups (e.g. if the
wording was, “The plural form helps to…”, we reformulated the statement once for company units and once for franchisees, rather than assigning statements to one group or the other). Of course,
this list cannot be meant to be exhaustive; but, these statements have reoccurred in the literature. Franchisors rate “1 – very inaccurate description, 7 – very accurate description”. Statements are
assigned to the four imperatives following the literature and backed by exploratory factor analysis. Scale reliability is assessed by Cronbach’s alpha. Item-to-total and inter-item correlations support
construct reliability. Factor loadings support convergent validity. “Correlation with Item” refers to the questionnaire item measuring the respective externality (EX1 to EX8, Appendix).
Table 3. Synergies in Detail.
18
Variable
(1) Plural Form Rate
(2) Performance
(3) Growth: Company-owned Units’
Contribution
(4) Growth: Franchised Units’ Contribution
(5) Uniformity: Company-owned
Units’ Contribution
(6) Uniformity: Franchised Units’
Contribution
(7) Local Responsiveness: Company-owned Units’ Contribution
(8) Local Responsiveness: Franchised Units’ Contribution
(9) Systemwide Adaptation: Company-owned Units’ Contribution
(10) Systemwide Adaptation: Franchised Units’ Contribution
(11) Company Age
(12) Total Network Size in the Domestic Market
(13) Average Total Investment
Required
(14) Average Franchise Fee
(15) Average Ongoing Royalty Fee
Rate
(16) Cash Liquidity Requirements
(17) Incidence of Internationalization
(18) Sectoral Differences: Services
(0) vs. Products and Retail (1)
Mean
S.D.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
30.56
29.90
444.98
597.08
4.01
1.88
4.57
1.64
-0.534***
0.019
4.81
1.40
0.561***
0.060
4.03
1.66
-0.502***
0.162†
3.89
1.67
0.262**
0.053
4.56
1.72
-0.611***
0.230*
-0.140
3.27
1.34
0.448***
0.091
-0.014
-0.464***
0.207*
-0.471*** -0.013
4.80
1.70
0.109*
-0.077
-0.176†
0.112
-0.132
0.095
0.046
17.48
12.32
0.396***
0.337**
0.201*
-0.430
0.261**
-0.293**
0.036
-0.131
0.280**
-0.031
1
200.82
682.07
0.096
0.428***
0.076
-0.224*
0.054
-0.124
0.072
-0.048
0.179†
-0.093
0.135
111.17
161.16
0.147
-0.272**
0.179†
-0.167†
-0.159†
-0.133
0.171†
-0.014
0.579*** -0.014
14.34
12.10
0.529***
0.335**
0.435*** -0.307**
0.279**
-0.122
-0.152
-0.214*
0.169†
-0.028
0.519***
0.259**
5.08
2.67
0.234*
0.113
0.127
-0.148
0.115
-0.080
0.166
-0.113
0.261*
-0.052
0.128
0.140
55.55
79.65
0.492*** -0.001
0.291**
-0.422***
0.309**
-0.177†
-0.079
-0.225*
0.250**
0.037
0.566***
0.061
992.26
2933.14
0.065
0.125
-0.243†
-0.124
0.114
-0.015
0.119
-0.185
0.356*
0.792*** -0.022
-0.120
0.218*
-0.136
-0.131
-0.197†
(14)
(15)
(16)
(17)
1
0.051
1
0.410*** -0.064
-0.113*
-0.254**
-0.294**
-0.086
0.494**
-0.120*
1
-0.098
1
0.426*** -0.355***
-0.013
0.201*
1
0.651*** -0.302**
-0.087
0.246**
0.503*** -0.460***
-0.020
-0.373***
1
-0.106
1
0.492*** -0.216*
0.237*
-0.154
1
-0.357***
0.272**
1
0.027
1
1
-0.044
1
0.444***
-0.011
0.787***
-0.213*
1
0.215*
1
0.654***
0.060
1
0.390*
0.011
0.132
0.244*
-0.259*
-0.071
1
0.125
Significance levels (two-tailed): *** p < 0.001; ** p < 0.01; * p < 0.05; † p < 0.1.
Plural form rate operationalized as the proportion of company-owned units within the network. Sales performance scaled up by factor ten in millions of Euros. Average total investment required, average franchise fee, and cash liquidity requirements in thousands of Euros.
Average ongoing royalty rate in percent. Incidence of internationalization as network size outside the domestic market.
Table 4. Descriptive Statistics.
19
Dependent Variable
C
Model 0
Model 1a
Model 1b
Model 2
Model 3
Plural Form Rate
Plural Form Rate
Plural Form Rate
Plural Form Rate
Performance
27.127**
(9.869)
18.498
Growth: Company-owned Units’ Contribution
(14.385)
(1.160)
0.165
(1.684)
-1.655
-0.091
4.842** (1.633)
0.227
-5.400** (1.506)
-0.300
Uniformity: Company-owned Units’ Contribution
Uniformity: Franchised Units’ Contribution
Local Responsiveness: Company-owned Units’ Contribution
Systemwide Adaptation: Company-owned Units’ Contribution
Systemwide Adaptation: Franchised Units’ Contribution
Company Age
0.417†
Total Network Size in the Domestic Market
0.007
-0.048*
Average Franchise Fee
0.527*
Average Ongoing Royalty Fee Rate
1.863*
Cash Liquidity Requirements
0.141**
Sectoral Differences: Services (0) vs. Products and Retail (1)
F/LR statistic
R2
Adj. R2
-0.001
-14.450**
(0.237)
0.172
(0.005)
0.148
(0.022)
-0.257
(0.253)
0.213
(0.892)
0.166
(0.050)
0.376
(0.001)
-0.138
(5.273)
-0.220
0.133
0.002
-0.037*
0.358†
1.034
0.103*
-0.001
-3.935
8.309 ***
0.377
0.331
(0.199)
0.055
(0.004)
0.055
(0.018)
-0.197
(0.215)
0.145
(0.734)
0.092
(0.042)
0.274
(0.001)
-0.087
(3.566)
-0.060
13.198***
0.592
0.547
27.396
2.142*
-0.868
3.302*
-3.563*
(1.178)
0.204
-6.251*** (1.182)
-0.359
4.288** (1.524)
0.193
(1.056)
-2.371*
-0.135
(0.189)
0.290
0.120
(0.004)
0.004
0.088
(0.017)
-0.034*
-0.183
0.584** (0.204)
0.236
(0.032)
0.314
0.028
(0.039)
0.101*
0.270
(0.001)
-0.001
-0.139
(4.303)
-5.092
-0.078
3.661**
Local Responsiveness: Franchised Units’ Contribution
Incidence of Internationalization
(13.323)
2.617*
Growth: Franchised Units’ Contribution
Average Total Investment Required
34.132*
15.406***
0.629
0.588
2.734*
-3.695**
3.189*
-3.075**
0.134
0.002
-0.032*
0.439*
0.216
0.093*
-0.001
-1.883
(16.638)
-544.946
(447.011)
(1.055)
0.135
(1.562)
-0.048
(1.516)
0.155
(1.398)
-0.198
(1.125)
0.152
(1.293)
-0.212
(1.485)
0.143
(1.027)
-0.175
(0.182)
0.055
(0.004)
0.042
(0.016)
-0.171
(0.199)
0.178
(0.675)
0.019
(0.038)
0.247
(0.001)
-0.111
(0.182)
-0.029
-14.998
(8.358)
-0.049
(0.974)
0.005
(0.737)
0.003
(37.565)
0.247
(3.213)
0.036
(34.745)
0.191
(39.899)
0.114
(27.589)
0.143
(4.878)
0.206
(0.105)
0.230
(0.027)
-0.108
(5.347)
0.245
(18.149)
0.093
(1.009)
-0.167
(0.025)
0.218
(109.307)
-0.222
15.145***
0.698
0.652
N = 122. Beta coefficients reported. Standard errors in parentheses, standardized beta coefficients reported below. Significance levels (two-tailed): *** p < 0.001; ** p < 0.01; * p < 0.05; † p < 0.1.
Table 5. Synergies, Extent of Plural Form and Chain Performance: Results.
20
1.716
1.349
85.619*
12.418
64.300†
49.137
48.386*
9.640†
0.195†
-0.387
11.694*
20.144
-1.208
0.043†
-281.486*
4.627***
0.414
0.324
Comparison of Means
MANOVA Wilks‘ Lambda Converted to
Externalities
ANOVA
ANOVA
ANOVA
ANOVA
Growth:
Franchised Units’ Contribution
Uniformity:
Franchised Units’ Contribution
Local Responsiveness:
Franchised Units’ Contribution
Systemwide Adaptation:
Franchised Units’ Contribution
F (4, 117) = 71.572
Cooperative
Orientation
N
Mean
Std. Dev.
Low
57
3.87
1.61
High
65
5.26
1.37
Low
57
3.25
1.50
High
65
4.81
1.43
Low
57
3.13
1.02
High
65
5.98
0.87
Low
57
4.62
1.31
High
65
4.98
2.00
p < 0.001
F
p-value
26.64
p < 0.001
35.09
p < 0.001
275.91 p < 0.001
1.38
p > 0.1
N = 122.
Table 6. Relational Norms: Comparison of Means.
MANOVA was highly significant (Table 2), as were three of the four follow-up ANOVA results corresponding to H1. As an examination of the means reveals, a strategic orientation towards uniformity causes franchisors to use a higher proportion of company units, whereas a
strategic orientation towards local responsivenesss or systemwide adaptation concurs with a
lower rate of company units and a strategic tendency to use franchising. Thus, H1 is largely
supported. However, contrary to a priori expectations based on literature arguments, a strategic
orientation towards growth comes with using company outlets rather than franchised units.
As regards the in-detail synergies realized in the plural form, all detailed statements strongly
correlate with the respective overall item. When factor analysed, all statements load highly
onto their respective factor. Factor loadings support convergent validity. Item-to-total and inter-item correlations support construct reliability. There is a limited number of crossloadings,
all of which remain under the value of 0.4. Scale reliability is assessed by Cronbach’s alpha; all
values are acceptable (Table 3). As regards growth aims, synergies achieved by including
company units in the chain mostly refer to company unit profits financing chain growth, and to
signaling franchisor credibility to prospective franchisees. Franchised outlets in turn compensate for a lack of suitable employee-managers and help develop areas where company units
may be located in the future. As regards uniformity goals, franchisors believe that company
outlets offer high externalities (mean value of 5.24), and their central benefits to the system are
in providing training sides to franchisees, and in improving the franchisors’ negotiation capacity towards franchisees. Franchisees, in turn, score low on promoting uniformity (mean of
3.66), but at least help set uniform performance standards. This result supports Kidwell and
21
Nygaard’s (2011) claim that plural forms produce comparative efficiency information that
serves as an implicit disciplinary device, and benchmarks and controls shirking among (owned
and franchisee) units in the network. For local responsiveness aims, company outlets do not
contribute much (shown by low means), but by providing managerial experience, they help the
franchisor avoid risky experiments franchisees might otherwise push through. Franchisees provide adaptation capacity, and managerial qualifications useful to take performance-enhancing
decisions. As regards systemwide adaptation goals, again, franchisees score much higher than
manager-employees (mean of 5.00 vs. 3.51). Here, company outlets support the improvement
of routines and the diffusion of information in the system, whereas franchised units develop
markets and enhance product innovation.
Next, we use the overall “items” (EX1 to EX8, Appendix) for realized synergies to examine
the extent of plural form (Table 5). Hypothesis 2a and 2b are supported. Regarding the generic
factors, at first, many appear significant (Model 0). However, their significance decreases
when synergies enter the equation; the adjusted R2 rises by approx. 22%. Hence, synergistic
considerations are highly relevant in explaining the extent of plural form. To establish result
robustness, Models 1a and 1b first consider synergies related to two imperatives each. Model 2
includes synergies with respect to all the four imperatives, leading to the same results as regards the importance of synergistic considerations and the relative non-importance of generic
factors. Considering the impact of synergies on plural form choice, in general, results concur
with qualitative arguments in the literature. The extent of plural form is higher if franchisors
believe company outlets to enhance growth, uniformity, responsiveness or systemwide adaptation, and lower if franchisors believe franchised outlets to benefit these aspects more (yet,
growth contributions are insignificant). As regards the generic factors, the higher the average
investment required, the lower the company units’ proportion; possibly, as the franchisor has to
bear these investments. Similarly, the higher cash liquidity requirements and the higher the
ongoing franchise fee, the lower is the proportion of franchised outlets – eventually, because
finding prospective franchisees who are able and willing to invest as much is more difficult.
Turning to the performance effects of synergies displayed in the same table, particularly those
chains are successful that know how to derive synergies from franchised outlets. Thus, Hypothesis 4b is supported. The better franchisors can get franchisees in line and realize synergies
in terms of uniformity, franchisees’ local responsiveness, and systemwide adaptation, the better
is the financial performance of the entire chain. Here, company outlets do not appear to increase performance in particular (H4a). Rather, company units seem to be the “safe bet”,
whereas actual performance peaks are realized by employing skillful franchisees. As regards
22
generic factors, network age and (inter)national size, fees, and industry membership are associated with performance, which seems intuitive and in line with the literature. The direction of
our results does not vary substantially for the two alternative dependent variables (extent of
plural form as the number of company units of all new units, and the performance variable of
performance satisfaction), but sample size decreases. Hence, we report the above results.
As franchisees obviously make all the difference to chains performance-wise, finally, we examine effects of cooperative norms in the chain (Table 6). Revisiting Hypothesis 3, we find
support for the hypothesis. Franchisors that conduct their business with franchisees in a cooperative way achieve more synergies than others. Franchisors with high cooperative orientations
score higher on franchisee-induced synergies in terms of growth, uniformity, and local responsiveness. Contrary to our expectations, however, they do not score higher on synergies with
respect to systemwide adaptation. Thus, it seems that cooperative norms affect synergies only
as regards the first three franchising imperatives, but interestingly, franchisees enhance systemwide adaptation no matter what the norms. A possible explanation might be that franchisees that experience less cooperative behavior by their franchisor interpret their situation
more like “being in business for themselves, and by themselves” (instead of the common mantra of “being in business for themselves, but not by themselves”) and thus show a strong desire
to follow their entrepreneurial strides to develop their business. Yet, as regards growth synergies, they may be less drawn to develop remote areas on behalf of the franchisor, and would
not be willing to contribute high financial input at start-up as they do not experience sufficient
levels of trust towards their franchisor. Arguing along the same lines, with respect to uniformity, they might not be suitable as benchmarks as they are not in sufficiently close contact to the
franchisor to provide substantial insights into behavior-performance outcome linkages; or, with
respect to local responsiveness, they may not (want to) provide local market information in
relevant depth and quality. Given the performance impact of franchisee-induced synergies,
cooperative norms become all the more important.
DISCUSSION
Firms are generally urged to leverage synergy among elements of their business to optimize
resource allocation (Capon et al. 1990). Surprisingly, however, past studies that analyse dual
governance choices have not committed to an in-depth investigation of synergies in the plural
form. In addition, despite the importance of dual distribution in practice, insights on its performance implications are scarce (Srinivasan 2006). By relating synergies to dual distribution
strategy and to firm performance, this paper answers previous calls for more empirical research
23
on synergies and performance implications of plural governance (Combs et al. 2004, 2011;
Heide 2003; Hendrikse & Windsperger 2004; Perrigot et al. 2009; Watson et al. 2005).
The preliminary evidence demonstrates that the synergies franchisors seek and can actually
achieve are central determinants for the chosen extent of plural form. The results also show that
the relative importance of each respective synergy for coping with the four franchising imperatives outweighs generic explanations for chain composition. In particular, synergies that are
provided by franchised outlets (rather than company units) are highly relevant for decisions on
the channel mix. The franchisor’s ability to get franchisees in line – which works better if there
are cooperative norms in place – explains both the extent of plural form choice and determines
chain performance. The strongest impact on the extent of plural form stems from synergies
realized by franchised outlets as regards local responsiveness (std. coeff. 0.212); uniformity
(0.198); and systemwide adaptation (0.175). The respective standardized betas for company
outlets are (much) lower (ranging from 0.143 to 0.155). Regarding generic factors, channel mix
also depends on cash liquidity requirements – the higher these requirements are, the higher the
proportion of company units. This result, together with the fact that systems with a strategic
orientation towards growth rather use company units, indicates that finding adequate franchisees willing to invest in system membership is not a trivial issue – simply trying to “sell
franchises” is hardly a strategy that works out when pursuing expansion plans.
The empirical results also illustrate the performance impact of synergies provided by franchisees. In fact, franchisee-based externalities related to chain uniformity are highly important
to chain performance, even though the literature points out that franchisees do not tend to represent a stronghold for promoting uniformity. In-depth examination shows that, however, franchisees contribute to uniform system appearance by providing internal benchmarks and helping
the internal socialization process develop. E.g., previous studies have pointed out that franchisees convey controversial opinions to the system center on behalf of employee-managers,
enhancing social cohesion by acting as a “mouthpiece” for them (Bradach 1998).
Summing up, the franchisor’s decision on the extent of plural form depends on strategic orientations; all kinds of synergies that can be realized with respect to the four franchising imperatives are factored in in the decision on the extent of plural form; franchisee-provided externalities in terms of uniformity, local responsiveness, and systemwide adaptation, are most relevant
to chain performance, whereas in terms of synergies, the mode of growth, i.e. growing through
company-owned or franchised units has no consequences for performance outcomes; yet, finding adequate franchisees seems the main limitating factor, particularly, if cash liquidity re24
quirements for system entry are high; cooperative norms are crucial to extract benefits from
franchised outlets as regards uniformity and local responsiveness, however, franchisees seem
to enhance systemwide adaptation no matter what the norms are.
Managerial Implications. The empirical results, obtained from a relatively large sample of
chains, substantiate the practical relevance of two central claims in the literature – first, company and franchised units complement each other (Bradach 1998), and second, chain performance benefits from balancing the exploitation provided by company units with the exploration emanating from franchised units (Sorenson & Sørensen 2001). We can also establish that
dual distribution does not offer unilateral benefits to all chains, as implied by some studies
(e.g., Bradach 1998; Moriarty & Moran 1990), but depends largely on underlying chainspecific characteristics like strategic orientations and cooperative norms. The findings demonstrate that the achievement of synergies is contingent on relational governance in chains. In
sum, our in-depth examination of externalities helps with their management, by showing in
detail what kinds of synergies can be achieved in different channel combinations, how these
synergies can be triggered, and what effects result for chain performance.
Moreover, not only developing cooperative norms in the chain is important, but also, organizing franchisee selection so that individuals are preferred who provide relevant externalities to
the chain. That is, the focus shifts to organizational questions related to managing human resources (Rubin & Dnes 2010), where franchisors need to invest in selecting and training chain
members they can work with. In a similar vein, the M&A literature emphasizes that effective
integration of firms is essential to realize planned synergies (Caves & Porter 1977; Krishnan
2009; Martin & Eisenhardt 2001). Also, the results hint at the trade-off between high liquidity
requirements as a self-selection device for finding able prospective franchisees, and the deteriorating effect of such requirements, which can cause qualified candidates to turn away.
Franchising occupies a very special status in practice because of its size, growth rate, and as an
attractive format for international trade. Yet, rapid growth does not only exert pressure on resources, but also on ensuring control and uniformity in the chain, especially in far-off markets.
As noted by Dant and Kaufmann (2003), in dealing with these seemingly opposite challenges
of growth and control, managers must bear in mind to proactively design and to monitor the
channel mix to realize synergies needed during system evolution.
Theoretical Implications. Our paper extends previous research in at least two ways. First, we
provide detailed empirical evidence of the specific benefits and trade-offs when focusing the
channel mix on exploitation versus exploration in practice. In-depth mapping is necessary to
25
develop the thought and theory of externalities in franchising further. Second, our analyses
demonstrate that, and how strongly, the combination of corporate and franchised units depends
on the synergies sought by franchisors and that, and how much, achieving these synergies is
contingent upon chain-specific relational governance, and relevant to chain performance.
Srinivasan (2006) noted that future research on the performance implications of dual distribution should use other methods than secondary data, particularly, in-depth interviews or surveys,
across different industry contexts and organizational characteristics (e.g., culture or organizational structure). We use survey and interview data and incorporate cooperative norms as an
organizational characteristic. In addition, Botti et al. (2009) argue that channel mix may be
related to the four franchising imperatives, chain strategy, size and industry competition. We
also provide evidence for this claim by focusing on the chains’ strategic orientations (as well as
size and sectors). Still, the topic of synergies in the plural form offers ample opportunities for
future cross-disciplinary studies, as synergies relate to organizational and individual ethics,
fairness, attitudes, social distance, embeddedness, relationships, group behavior and a variety
of areas across multiple disciplines (Mundt & Houston 2010). Also, research into the effects of
multi-unit franchising on synergies and chain performance is clearly warranted. Ultimately, as
franchising has become such a vital force in the global economy, the issue of performance in
franchise chains is worthy of empirical investigation in its own right (Dant & Kaufmann 2003).
26
APPENDIX
Measures.
Subjective Performance. Anchoring success by reference to comparison levels follows Anderson and Narus (1990); the chosen comparison levels are in line with Gillis and Combs (2009)
and Delaney and Huselid (1996).
How satisfied are you with (1 – very dissatisfied, 7 – very satisfied):
SP2
“Our firm’s performance compared to our competitors’ over the last 3 years in terms of growth in
sales”
“Our firm’s performance compared to our competitors’ over the last 3 years in terms of profitability”
SP3
“Our firm’s performance compared to our competitors’ over the last 3 years in terms of market share”
SP4
“Our firm’s performance compared to our competitors’ over the last 3 years in terms of quality of products or services”
“Our firm’s performance compared to our competitors’ over the last 3 years in terms of satisfaction of
customers”
SP1
SP5
Note: Cronbach’s alpha is 0.891. The items load highly on one factor (all loadings > 0.824). The inspection of item-to-total
and inter-item correlations provides further support for scale reliability. Convergent scale validity is tested via the correlation
between the summated scale and a single item assessing franchisees’ overall satisfaction with performance (wording: “How
satisfied are you overall with your performance?” 1 – very dissatisfied, 7 – very satisfied). The correlation is substantial
(0.565, p < 0.001). A scale is built by averaging the sum of the scores of the items, using equal weights.
Externalities. Franchisors rate the extent to which managerial goals of their chain had been
fulfilled by using either kind of channel, following Brock (2005) and Walter and Barney
(1990) who examine the extent to which managerial goals of the acquiring company had been
fulfilled by integrating their respective firm with the acquired firm.
Many franchise systems include both franchisee-owned and company-owned outlets. Here, we want your opinions about synergies that are realized by combining company-owned and franchised outlets in your system.
“Judging from our experience, we believe that (1 – highly disagree, 7 – highly agree):”
EX1 “When pursuing chain growth, a company-owned outlet provides high synergies to the entire system.”
EX2
“When pursuing chain growth, a franchised outlet provides high synergies to the entire system.”
EX3
“When pursuing chain uniformity, a company-owned outlet provides high synergies to the entire system.”
“When pursuing chain uniformity, a franchised outlet provides high synergies to the entire system.”
EX4
EX5
EX6
EX7
EX8
“When pursuing local responsiveness, a company-owned outlet provides high synergies to the entire
system.”
“When pursuing local responsiveness, a franchised outlet provides high synergies to the entire system.”
“When pursuing systemwide adaptation, a company-owned outlet provides high synergies to the entire
system.”
“When pursuing systemwide adaptation, a franchised outlet provides high synergies to the entire system.”
27
Strategic Orientation. In line with Botti et al. (2009), the measure comprises the four franchising imperatives.
“Over the last years, foremost, our strategy was aimed at (ranking, 1 – most important, 4 – least important):”
SO1
“Geographic expansion of the chain.”
SO2
“Brand protection and chain uniformity.”
SO3
“Competitiveness and local responsiveness.”
SO4
“Service and/or product concept evolution and systemwide adaptation.”
Relational Norms. Following Cannon et al. (2000), cooperative norms are measured as follows:
“In our dealings with our franchisees (1 – very inaccurate description, 7 – very accurate description):”
RN1
“We must work together to be successful.”
RN2
“Both sides are concerned about the other's profitability.”
RN3
“Both sides are willing to make cooperative changes.”
RN4
“One party will not take advantage of a strong bargaining position.”
RN5
“We do not mind owing each other favors.”
RN6
“No matter who is at fault, problems are joint responsibilities.”
Note: Cronbach’s alpha is 0.925. Although matching franchisee data would be desirable, for practical reasons, we use only
franchisor-reported data.
28
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