Plural Franchise Organizations
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PLURAL FRANCHISE ORGANIZATIONS Georg Spranger Institute of Strategic Management | University of Muenster | Germany II PLURAL FRANCHISE ORGANIZATIONS A thesis presented to the Department of Economics in partial fulfillment of the requirements for the degree of Doktor Rerum Politicarum in the subject of Economics, Westfaelische Wilhelms-Universitaet Muenster Inauguraldissertation zur Erlangung des akademischen Grades eines Doktors der Wirtschaftswissenschaften durch die Wirtschaftswissenschaftliche Fakultät der Westfälischen Wilhelms-Universität Münster Georg Spranger Muenster, Germany September 2005 To entrepreneurs in franchising © 2005-2006 by Georg Spranger All rights reserved. JEL: J33, L22, L25 D6 Thesis Committee Dean: Prof. Dr. Theresia Theurl Supervisor: Prof. Dr. Thomas Ehrmann Co-Supervisor: Prof. Dr. Gerhard Schewe Date of Disputation: November 24, 2005 For correspondence contact the author: Georg Spranger | Institute of Strategic Management | University of Muenster | Leonardo Campus 18 | D-48149 Muenster | Germany Tel.: + 49 170 4718 500 | Fax: +49 251 833 833 3 E-Mail: [email protected] II Table of Contents Table of Contents......................................................................................................................... III PART A............................................................................................................................................................1 I Introduction................................................................................................................................ 1 1 Background ............................................................................................................................ 1 2 Plural form research questions............................................................................................... 2 3 Content overview ................................................................................................................... 3 4 References.............................................................................................................................. 6 II Acknowledgements .................................................................................................................. 9 PART B ..........................................................................................................................................................11 I Why do franchisors combine franchises and company-owned units?..................................... 11 Overview................................................................................................................................... 11 1 Introduction.......................................................................................................................... 12 2 The plural structure of franchise chains............................................................................... 13 3 Franchisor motivations to apply the plural form.................................................................. 16 4 Empirical testing of the plural form aspects ........................................................................ 30 5 The plural form chosen for cooperative management ......................................................... 36 Appendix................................................................................................................................... 38 References................................................................................................................................. 39 II Franchisee vs. Company Ownership – An Empirical Analysis of Franchisor Profit............. 43 Overview................................................................................................................................... 43 1 Introduction.......................................................................................................................... 44 2 Corporate finance for governance structures ....................................................................... 46 3 Empirical Analysis of the Profitability of Plural Chains ..................................................... 52 4 Conclusions and Discussion................................................................................................. 61 References................................................................................................................................. 63 III Beneficially constraining franchisor’s power ....................................................................... 65 Overview................................................................................................................................... 65 Introduction............................................................................................................................... 66 1 Power allocation in franchise chains.................................................................................... 67 2 Managing the franchisee’s ex-ante risk ............................................................................... 70 III 3 Managing the franchisee’s ex-post risk ............................................................................... 77 4 Consequences of cooperative franchisor management ........................................................ 81 5 Concluding remarks ............................................................................................................. 85 References................................................................................................................................. 86 Appendix................................................................................................................................... 89 IV A Franchisor Decision Matrix for Structuring the Chain ..................................................... 93 Overview................................................................................................................................... 93 1 Introduction.......................................................................................................................... 94 2 Hybrid form characteristics of franchising .......................................................................... 96 3 Implications of the franchise life-cycle thesis...................................................................... 99 5 A decision matrix for franchisors....................................................................................... 103 6 A new model of the franchise life cycle ............................................................................ 108 7 Implications for franchisor management in general .......................................................... 114 References............................................................................................................................... 115 Appendix................................................................................................................................. 119 PART C ........................................................................................................................................................120 Appendix.................................................................................................................................... 120 A. Entrepreneur Magazine Data 2004................................................................................... 120 B. Literature Overview ......................................................................................................... 141 IV PART A I Introduction 1 Background This dissertation has been inspired by a discussion that I had with my supervisor Thomas Ehrmann back in 2002 when we talked about the book “Franchise Organizations” by Jeffrey Bradach. Having studied Bradach’s writing on a phenomenon which he called the plural form, I criticized his study as being too anecdotal and too heavily reliant on qualitative data of five case studies. The reply I received was both short and encouraging: “Go ahead, improve the issue.” Consequently, this thesis contains my written work that has been undertaken since this conversation. Borrowing an analogy from this world’s wild life serves well to introduce the plural form phe- nomenon and thereby the topic of this book: Out in the world’s oceans, tunas and dolphins initially compete for food. As they hunt for smaller fish, tunas encircle their targets and then attack right towards the center. Breaks in the circle though regularly allow many prey to escape. Because of their ability to communicate, dolphins on the other hand are more efficient hunters, though smaller group sizes permit to attack only smaller swarms of fish. Stunningly now, tunas and dolphins fre- quently join each other for hunting, thereby combining their individual strengths and alleviating initially existent weaknesses. While the mass of tunas does the ground work, the fewer dolphins coordinate the armada and close the breaks in the circle. Necessarily though, the groups have to handle additional complexity of a dual structure and they have to agree on sharing the common sur- plus in food. Taking a closer look at today’s franchise chains, their organizational setting and hence their inher- ent operational challenges to be successful are very similar as for the case of dolphins and tunas. As typical hybrid forms, franchise chains combine organizational methods like “price” and “hierarchy” with organizational institutions