Ownership structure of franchise chains: Trade-off between adaptation and control
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| Year of publication | 2018 |
| Type | Appeared in Conference without Proceedings |
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| Description | This study provides a new explanation of the ownership structure of franchise firms by highlighting that there is a trade-off between adaptation and control under increasing uncertainty. Franchising networks are formed to reduce transaction costs by combining franchisee outlets (as adaptation mechanism) to increase local responsiveness and company-owned outlets (as a control mechanism) to increase central coordination. Franchisors use more local responsiveness stemming from a lower proportion of company owned outlets (PCO) to access the local profit opportunities under low to moderate environmental uncertainty and more central control by a higher PCO under a high environmental uncertainty to better coordinate interdependent local market outlets. Hence the franchisor has to find an optimal PCO by balancing the PCO decreasing effect of higher local adaptation with the PCO increasing effect of higher central coordination under increasing uncertainty. We argue that, under low to moderate degree of uncertainty, it is likely that the information and search cost savings exceed the higher coordination and control costs under lower PCO, and, under a high degree of uncertainty, it is likely that the higher coordination and control cost savings exceed the higher information and search costs under higher PCO. Therefore, there is a U-shaped relationship between PCO and environmental uncertainty. Data from Swiss and German franchise systems provide support of this hypothesis. |
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