Replication in an International Franchise Strategy the Eataly Moscow Case
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Master's Degree programme in International Management Second Cycle (D.M. 270/2004) Final Thesis Replication in an International Franchise Strategy The Eataly Moscow case Supervisor Prof. Vladi Finotto Graduand Giulia Vianelli 832185 Academic Year 2016 / 2017 “Culture eats strategy for breakfast.” Peter Druker ABSTRACT This thesis’ aim is to investigate franchising as a replication strategy for the internationalization of Italian food and beverage companies. The focus is on two determinants of replication strategy: knowledge transfer and the tradeoff between local adaptation and global integration. In particular, how they are influenced by the choice of franchising as governance of the new business unit. The case study of this dissertation is represented by Eataly Moscow opening project. The analysis highlighted the main issues that an Italian food and beverage organization faces in undertaking an international franchise in a culturally distant market. Table of contents INTRODUCTION ..........................................................................................................13 1 LITERATURE REVIEW: REPLICATION STRATEGY 1.1. Replication as a strategy ................................................................................ 15 1.2. Capabilities framework .................................................................................. 17 1.2.1. Capabilities in the internationalization context ......................................... 19 1.3. Knowledge flows ............................................................................................ 20 1.3.1. Forward knowledge flows .......................................................................... 20 1.3.2. Backward knowledge flows ........................................................................ 22 1.3.3. Political character of replication process ................................................... 22 1.4. Tension between adaptation and standardization ........................................ 24 1.4.1. Integration - Responsiveness framework .................................................. 24 1.5. Flexible replication theory ............................................................................. 26 2 FRANCHISING FOR INTERNATIONALIZATION 2.1. The choice of governance .............................................................................. 29 2.1.1. The franchising ........................................................................................... 30 2.1.2. Governance and organizational learning ................................................... 34 2.1.3. Governance and knowledge transfer ......................................................... 36 2.1.4. Governance and local environment ........................................................... 36 2.2. A franchising framework ................................................................................ 37 2.2.1. Ownership structure .................................................................................. 38 2.2.2. Business format .......................................................................................... 40 2.2.3. Contract design .......................................................................................... 41 2.2.4. Size and age ................................................................................................ 42 2.2.5. Relationship between franchisor and franchisee ...................................... 42 2.3. Partner selection process ............................................................................... 43 2.3.1. Opportunistic selection, strategic selection and market selection ........... 44 2.3.2. Criticalities .................................................................................................. 45 2.4. Decentralization of decision making autonomy ............................................. 47 3 ITALIAN FOOD AND BEVERAGE: EATALY AS A NEW CONCEPT 3.1. The company .................................................................................................. 53 3.1.1. The philosophy ........................................................................................... 53 3.2. Made in Italy ................................................................................................... 56 3.2.1. Exports data and Russian Embargo ............................................................ 56 3.2.2. Dimension and internationalization ........................................................... 57 3.2.3. Competitive levers ...................................................................................... 60 3.3. History of the brand and Eataly store development ...................................... 63 3.3.1. The first project and Slow Food support .................................................... 63 3.3.2. International expansion and latest developments..................................... 65 3.3.3. International competitors .......................................................................... 66 3.4. The brand format ........................................................................................... 68 3.4.1. A synergistic system ................................................................................... 68 3.4.2. Market ........................................................................................................ 70 3.4.3. Restaurants ................................................................................................. 71 3.4.4. Departments ............................................................................................... 72 3.4.5. Education .................................................................................................... 75 3.5. Eataly’s foreign strategy ................................................................................. 76 3.5.1. The governance type .................................................................................. 76 3.5.2. Italian stores, franchised stores and joint venture stores .......................... 78 3.5.3. A new international franchise project ........................................................ 81 4 EATALY MOSCOW 4.1. Methods ......................................................................................................... 89 4.2. The project timeline ....................................................................................... 93 4.3. Product related issues .................................................................................... 94 4.3.1. Format unfamiliarity ................................................................................... 96 4.3.2. Embargo impact ......................................................................................... 98 4.3.3. Entry barriers ............................................................................................ 101 4.4. Relation with the franchisee ........................................................................ 102 4.4.1. Franchisor involvement ........................................................................... 103 4.5. HR management .......................................................................................... 105 4.5.1. Knowledge transfer .................................................................................. 106 4.6. A process view ............................................................................................. 109 CONCLUSIONS .......................................................................................................... 113 REFERENCES ............................................................................................................. 115 SITOGRAPHY ............................................................................................................ 119 List of Figures and Tables Figure 1.1 - Dynamic capabilities of international organizations. ......................................... 20 Figure 1.2 - The I-R framework. ............ ................................................................................ 25 Table 2.1 - Implications of governance choice in the replication process ............................. 30 Figure 2.1 - Examples of product distribution franchises and business format franchises ... 31 Figure2.2 - Distribution of jobs in Business format franchising, US 2016 .............................. 33 Figure 2.3 - Distribution of GDP contribution in business format franchises, US 2016. ........ 33 Table 2.2 - First 10 positions of Franchise Direct’s top 100 global franchises 2017. ............. 34 Figure 2.4 - A franchising framework. .................................................................................... 38 Figure 2.5 – Franchisee selection approach........................................................................... 43 Figure 2.6 - Factors that influence the centralization of decision making autonomy ........... 48 Figure 3.1 - Slogan in Eataly Munich. ..................................................................................... 54 Figure 3.2 - Eataly Manifesto. ................................................................................................ 55 Figure 3.3 - Distribution of 33.676 food companies based on dimension (in number of employees), year 2011 ........................................................................................................... 58 Figure 3.4 - Average dimension (in number of employees) of food industries in Italy and in the main European countries, year 2010 .............................................................................