The effects of new franchisor partnering strategies on franchise system size
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We test these hypotheses empirically, using panel data on a sample of 1,292 business
format franchise systems from 152 industries that were established in the
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MANAGEMENT SCIENCE informs ® Vol. 52, No. 5, May 2006, pp. 773–787 doi 10.1287/mnsc.1050.0449 issn 0025-1909 eissn 1526-5501 06 5205 0773 © 2006 INFORMS The Effects of New Franchisor Partnering Strategies on Franchise System Size Scott Shane Weatherhead School of Management, Case Western Reserve University, 11119 Bellflower Road, Cleveland, Ohio 44106, sas46@cwru.edu Venkatesh Shankar Mays Business School, Texas A&M University, College Station, Texas 77843, venky@venkyshankar.com Ashwin Aravindakshan Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742, glads79@yahoo.com Manyyoungfirmsusestrategicactionstoattractpartnerswhohelpthemincreasethesizeoftheiroperations quickly. This article examines the use of strategic actions to attract partners and increase system size in the context of franchising. We build on research in entrepreneurship, marketing, organization theory, strategic management, and finance to develop specific hypotheses about the influences of franchisor pricing policy and strategic control decisions on system size. We test these hypotheses empirically, using panel data on a sample of 1,292 business format franchise systems from 152 industries that were established in the United States between 1979 and 1996 and followed from their inception forward in time. Our model accounts for the endogeneity of strategic decisions, controls for unobserved firm and industry factors, and accounts for selection effects due to system failure. The results show that franchisors that grow larger (1) lower royalty rates as the systems age, (2) have low up-front franchise fees that rise over time, (3) own a small proportion of outlets and lower that percentage over time, (4) keep franchisees’ initial investment low, and (5) finance their franchisees. Key words: firm size; franchising; pricing; ownership; econometric model History: Accepted by Wallace J. Hopp, technological innovation, product development, and entrepreneurship; received April 20, 2005. This paper was with the authors 1 week for 2 revisions. 1. Introduction to facilitate the attraction of franchisees and expand Organization theory and strategic management system size (Gallini and Lutz 1992). In this article, we research have long held that a firm’s ability to part- argue that the key strategies involve pricing policy— ner with other firms helps to increase the size of which we define as decisions involving royalties on its operations quickly (Eisenhardt and Schoonhoven sales to end users, up-front franchise fees paid by 1996, Stuart et al. 1999). The value of partnering has franchisees to franchisors, and initial investment made led to a wealth of research that examines how young by the franchisees—and strategic control—which we firms attract other firms to work with them (Bruderl define as decisions about ownership of outlets and et al. 1992, Eisenhardt and Schoonhoven 1996, Powell the approach to financing those investments—because et al. 1996). research has shown that these strategic decisions are Much of the research on the efforts of firms to central to securing channel partners, such as distribu- attract partners has focused on their use of reputa- tors, dealers, wholesalers, and retailers (Anderson and tion, social ties to prominent actors, or the exploita- tion of observable assets to attract others (Stuart et al. Weitz 1992). 1999). However, as Bhide (2000) has observed, most Prior research in franchising has looked at deter- young firms lack all three of these things and must minants of pricing policy decisions (Agrawal and Lal attract partners through strategic actions. This paper 1995, Kaufmann and Dant 2001, Lal 1990), drivers discusses strategic actions by firms to attract partners, of strategic control decisions (Dant and Kaufmann focusing on the empirical setting of business format 2003, Dant et al. 1996, Kalnins 2004, Lafontaine and franchising. Kaufmann 1994, Lafontaine and Shaw 2005), determi- Prior research has shown that the size of a fran- nants of survival of franchisors (Shane 1996, Shane chise system depends, at least in part, on the fran- and Foo 1999), and the influence of ownership mix chisors’ ability to attract franchisees to work with on franchisor performance (Sorenson and Sorenson them (Dant and Kaufmann 2003, Lafontaine and Kauf- 2001). However, analysis of the influence of these mann 1994). Franchisors can adopt specific strategies strategic actions on franchise system size is limited. 773
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