Multi-unit Franchise System Performance: An Organizational Economics Analysis

Abstract

Previous studies have not examined the performance of multi-unit franchise systems. The paper addresses this research gap by investigating franchisor performance of multi-unit franchise system from an organizational economics perspective by using data from Germany and Switzerland. According to the agency theory they show that under a strong brand name free-riding risk may be reduced through MUF and hence MUF positively influences the performance the systems. In addition, the data support the transaction cost hypothesis that environment uncertainty is negatively related to the performance of MUF systems. Furthermore, using property rights theory, they show that intangible local market assets are negatively and intangible system-specific assets are positively associated with MUF performance. Finally, the results indicate that decentralization of decision making has a positive performance effect on MUF systems.

Appendix: Measures Employed

1.1 Franchisor Performance

Ten items measured on a seven-point scale Likert scale anchored with: 1 is much worse than expected and 7 much better than expected (α = 0.849). The franchisors are asked: To what extent did you realized the following objectives last year?:

• 1. Saving in administrative costs

• 2. System growth

• 3. Better alignment of products and services to the customer needs

• 4. More effective coordination between the head office and outlets

• 5. Reduction in costs, increase in yields

• 6. Increase in innovation, saving in coordination and control costs

• 7. Better quality of offered products and profit growth

1.2 Franchisees’ Specific Investments

The initial investments of the franchisees.

1.3 Environmental Uncertainty

Two items measured on a seven-point scale Likert scale anchored with: 1 = strongly disagree and 7 = strongly agree ($\upalpha =0.845$).

• 1. The sales at the outlet level are very fluctuating.

• 2. It is very difficult to predict the market development at the outlet level.

1.4 Intangible Local Market Assets

The franchisors are asked to evaluate the advantage of franchising compared to company-owned outlets. Five items measured on a seven-point scale Likert scale anchored with: 1 = no advantage through franchising and 7 = very great advantage through franchising ($\alpha =0.780$).

• 1. Better quality control

• 2. More innovation

• 3. More local market knowledge

• 4. Higher administrative skills

• 5. More efficient human resource management

1.5 Intangible System Know How

Seven items measured on a seven-point scale Likert scale anchored with: 1 = very easy to transfer and 7 = very difficult to transfer ($\alpha =0.915$). The franchisors were asked: how difficult is it to transfer to the franchisees:

• 1. Brand name

• 2. Marketing know-how

• 3. Organizational know-how

• 4. Administrative know-how

• 5. Quality management know-how

• 6. Accounting know-how

• 7. Human resources know-how and IT know-how

1.6 Decision Rights

The franchisors were asked: to which extent do the franchisees influence the following decisions? Twelve items measured on a seven-point scale Likert scale anchored with: 1 = not at all and 7 = to great extent ($\alpha =0.867$).

• 1. Implementation of investment activities at the outlet

• 2. Financing the investment project at the outlet

• 3. Selection of suppliers

• 4. Hiring employees at the outlet

• 5. Training of the employees at the outlet

• 6. Product/service offering in the local market

• 7. Price formation at the local market

• 8. Use of advertising and sales promotion

• 9. Equipment at the franchised outlets

• 10. Procurement of inputs

• 11. Introduction of new products in the local market

• 12. Use of accounting and controlling system at the outlet

1.7 Brand Name

Five items measured on a seven-point scale Likert scale anchored with: 1 = strongly disagree and 7 = strongly agree ($\alpha =0.745$). The franchisors were asked:

• 1. Our brand name is very strong as compared to our competitors?

• 2. Our franchise system enjoys higher brand recognition as compared to our competitors?

• 3. Our franchise system enjoys a good reputation for quality?

• 4. Our brand name is very important for achieving competitive advantage?

1.8 Behavioral Uncertainty

Three items measured on a seven-point scale Likert scale anchored with: 1 = disagree and 7 = strongly agree ($\alpha =0.763$). The franchisors were asked: It is very difficult to:

• 1. Measure the performance of franchisees.

• 2. Control the behavior of the franchisees.

• 3. Assess the competencies and capabilities of the franchisees.

Age:

The natural log of the number of years since opening up the first franchised outlet in Germany/Switzerland.

Size:

The natural log of the total number of outlets in the chain.