Ownership decisions in plural contractual systems : Twelve networks from the quick service...

EuropeanJournal ofMarketing33,1/2

European Journal of MarketinK,Vol. 33 No. 1/2.1999, Abstracts andkeywords, C MCB University Pres.'?.0309.0566

Excbange relationships in consumermarkets?jaqueline Pels

Keywords Consumer marketing. Interaction,Marketing theory, Relationship marketingDiscusses the validity of classifyingtransaction and relationship exchanges (andmarketing theories) according to whether theselling firm is operating in consumer orindustrial markets. It is only recently thatrelationship marketing, and thus the exchangerelationship paradigm, has started to becomean alternative approach to consumer markets.Aims at understanding if the work of theIndustrial Marketing and Purchasing (IMP)can be applied to end-user consumer markets.There is a series of reasons behind thisdecision: however, the most relevant one istrying to bring a very extensive body oftheoretical work within the realm of consumermarketing. First, lists the interaction andnetwork approach assumptions (to beassociated with the concept of exchangerelationships), next, analyzes and reformulatesthese assumptions and finally, suggests thatthe interaction and network approach canbe applied to consumer markets, showingthat both transaction and relationshipexchanges may co-exist in all markets,regardless of the productyservice sold or client/market served.

Using means-end structures for benefitsegmentation: an application toservicesGUnther Botschen, Eva M. Thekn andRik Pieters

Keywords Benefit segmentation,Consumer behaviour, Image,Market segmentation, Product attributes.Services marketingAlthough the basic idea of benefitsegmentation lies in using causal, as opposedto descriptive, factors as segmentation criteria,most of the empirical studies do notdifferentiate between product attributes andthe benefit sought by consumers. Theobjectives of this article are to clarify thedistinction between attributes and benefitssought, and to apply a modified laddering

technique, based on means-end theory to usethe elicited benefits to form benefit segments.A comparison with attribute-based segmentsdemonstrates that means-end chains provide apowerful tool for "true" benefit segmentation.

Ownership decisions in pluralcontractual systems: twelve networksfrom the quick service restaurantindustryRobert Dohlstrom and Ame Nygaard

Keywords Distribution channel.Franchising, Networks,Organizational theory. Service industries.Transaction costs

A substantial body of research employsagency theory and transaction costs analysisto explain ownership decisions in distributionchannels. Agency theory identifies factors thatprompt firms to favor behavior-basedcontracting over outcome-based agreements.Transaction cost economics is acomplementary framework which maintainsthat the organizational form in a locationshould be the one that economizes onproduction and transaction costs. Priorresearch illustrates that independent variables(e.g. proximity to highways, dedicated assets)outlined in these theories provide a partialexplanation for ownership decisions.Nevertheless, scant research has analyzedwhether factors outlined in agency theory andtransaction cost analysis are employed byexecutives when making ownership decisions.The purpose of this study is to investigatemanagerial rationales underlying pluralcontractual networks.

Small business participation in theglobal economyPeter G. Graham

Keywords Australia, Export, Globalization,International marketing. Small firms.Small-to-medium-sized enterprisesBusiness, management, workers andgovernments are responding to globalimperatives. These imperatives includemarketing. The origins of global marketing lie

Ownership decisions in pluralcontractual systems

Twelve networks from the quick servicerestaurant industry

Robert DahlstromSchool of Management, College of Business and Economics,

University of Kentucky, Lexington, USA, and

Arne NygaardNorwegian School of Management, School of Marketing, Oslo, Norway

Keywords Distribution channel. Franchising, Networks, Organizational theory.Service industries. Transaction costs

Abstract A substantial body of research employs agency theory and transaction costs analysis toexplain oivnership decisions in distribution dmnnels. Agency theory identifies factors that promptfirms to favor behavior-based contracting over outcome-based agreements. Transaction costeconomics is a complementary framework which maintains that the organizational form in alocation should be the one that economizes on production and transaction costs. Prior researchillustrates that independent variables (e.g. proximity to highways, dedicated assets) outlined inthese theories provide a partial explanation for ownership decisions. Nevertheless, scant researchhas analyzed ivhether factors outlined in agency tlieory and transaction cost analysis are employedby executives when making ownership decisions. The purpose of this study is to investigatemanagerial rationales u?iderlying plural contractual networks.

IntroductionThe purpose of this study is to investigate franchisors' rationales for electing toown some locations and sell franchises in other outlets. Our goal is not to testextant theory, but to identify whether logic from agency theory and transactioncost economics enters into ownership decisions in franchisee! distributionchannels. We employ a grounded theory approach as a means for identifyingownership strategies in the quick service restaurant industry. Secondary data,depth interviews, franchisor offering circulars, and confirmatory interviewsserved as the data for the study. The research makes three contributions tointerorganizational research;

The authors are grateful to Torger Reve for his guidance throughout the development of thismanuscript. In addition, we thank Terry Amburgey, Anna Dubois, F. Robert Dwyer, PatrickKaufmann, Gregory Gundlach, and Francine Lafontaine for their insightful comments on a vl^i^NauTi^-PP-S^,previous version of this manuscript. «• MCB university Press. 0309-0566


60

(1) The research indicates that factors outlined in agency theory andtransaction cost economics enter into ownership decisions, but thesedecisions are not made at the store level.

(2) The study offers evidence which suggests that the level of franchisorownership is a network decision that is associated with the operatingsystem, product development, conflicts of interest, and trust. As a meansof illustrating heterogeneity among networks, niche strategies aredescribed that represent alternative means for management of thefranchised system.

(3) The study provides evidence which suggests that the scale of operationshas a significant influence on the form of trust operating in thedistribution network.

Efficient organization for production and distribution is an important corporateissue and a key research area for organizational theory. Many firms usemultiple contractual forms to administer exchange relationships. For instance,most franchisors sell distribution rights to franchisees and simultaneouslyoperate a portion of the distribution systems. These plural contractualnetworks enable firms to compare - on an ongoing basis - the resources,financial returns, and information available from alternative contractual forms(Powell, 1990).

Agency theory (Jensen and Meckling, 1976) and transaction cost economics(Williamson, 1985) provide criteria for selecting efficient contracts at specificnetwork locations. Agency theory views the firm as a set of contracts betweenprincipals and agents granted authority to operate on their behalf (Fama, 1980).The extent to which agency contracts emphasize outcomes over behaviors isinfluenced by information systems, outcome uncertainty, risk aversion, goalconflict, task programmability, outcome measurability, and relationshipduration (Eisenhardt, 1989a). Transaction cost economics (Williamson, 1985) isa complementary framework that addresses organizational efforts ateconomizing on the costs of running an economic system. According to thisapproach, the organizational form in a location should be the one thateconomizes on production and transaction costs. As asset specificity,transactional frequency, and uncertainty increase, hierarchical organizationoffers comparative advantage over price-based transactions.

Many agency and transaction cost studies treat decision making as a micro-level analysis of the efficiency of organizing a transaction within or outside thefirm (Coase, 1937). Despite the insight offered by this perspective, severalresearchers question whether this micro-analytical approach is appropriate foranalysis of ownership decisions. In particular, Bradach and Eccles (1989) claimthat factors unrelated to economic theory contribute to ownership decisions,and they suggest that research should incorporate macro-level objectives ofsenior management. Analysis of macro-level objectives should provide insightinto ownership strategies operating throughout a network. In addition,investigation of managerial objectives should illustrate whether organizations

benefit from the use of multiple control mechanisms. Investigations of Decisions inmanagerial strategies stand to augment institutional economics, yet scant plural contractualresearch has prompted executives to identify their reasons for using multiple svstemsorganizational forms (Lafontaine and Kaufmann, 1994).

The purpose of this study is to investigate managerial rationales underlyingplural contractual networks. Our approach is consistent with Daft and Lewin's(1993) call for grounded research focused on gaining an understanding of 6 1strategies operating in a specific context. Our objective is also consistent with ^ ^ ^ ^ ^ ^ ^ ^ ^ ^Eisenhardt's (1989a) recommendation to augment agency theory andWilliamson's (1985, p. 116) call for additional theoretical developments. Ourstudy makes three contributions to interorganizational research. First, weindicate that factors outlined in institutional economics enter into ownershipdecisions, but these decisions are not made at the store level Second, we suggestthat the level of franchisor ownership is a network decision associated with theoperating system, product development, and conflicts of interest. As a means ofillustrating network heterogeneity, we present niche strategies employed byfranchisors to co-ordinate network operations. Third, we suggest that the scaleof operations has an influence on the form of trust operating in the network.

The manuscript is organized into four sections. The first section describesthe research method. The second section presents rationales associated withcontractual networks, and the third section describes franchisor nichestrategies. The final section outlines implications of the study.

MethodThe method for our study is based on the grounded theory approach forcomparative analysis (Glaser and Strauss, 1967) and Eisenhardt's (1989b)framework for case research. The unit of analysis is a distribution networkrelying on franchised and corporate outlets, and the sampling frame is quickservice restaurants (QSR) in Bond and Bonds' (1994) annual survey.

Grounded theory calls for theoretical sampling in which the analyst jointlycollects, codes, and analyzes data. Strauss and Corbin (1990) identify severalforms of theoretical sampling that vary based on the extent to which theresearcher attempts to maximize variation in theoretically relevant categories.Our goal is to augment understanding of ownership strategies. Therefore, weuse a purposeful sampling technique that maximizes variation in franchiseeownership of the retail network. The mean level of franchisee ownership is 80percent. The sample can be broken down into quadrants:

(1) less than 62 percent;

(2) 62 percent to 80 percent;

(3) 81 percent to 93 percent; and

(4) more than 93 percent franchised.

A second factor associated with the level of vertical integration is scale ofoperations (Riordan and Williamson, 1985). For example, Monteverde and


62

Teece (1982) indicate that larger automobile firms are more inclined to bringdesign and component manufacturing in-house. We investigated whether scaleof operations was related to ownership strategies. The size of the systems didnot exhibit normal distribution and was characterized by a wide range ofresponses (from two to 13,230 units). Although the mean size of the networkswas 500 units, most systems had less than 100 stores. In order to maximizevariation between categories, we separated the sample into three groups:

(1) less than 100;(2) 100-500; and(3) more than 500 units.

The first group accounts for 70 percent of the franchisors, but less than5 percent of the retail shops. By contrast, the third group represents less than 12percent of the franchisors, but more than 88 percent of the outlets. We includedthe middle group to examine transitions in strategy associated with varyingscale.

When the percentage of franchising and that of size dimensions are viewedsimultaneously, we obtain 12 variations of plural contractual networks. Thematrix identified in Table I ranges from small franchisors owning 60 percent ofthe outlets to large franchisors owning approximately 1 percent of the retailstores.

We conducted semi-structured interviews with the director of franchisedevelopment for one firm in each cell of Table I. Thus, the data representresearch conducted with 12 QSR franchisors. The Appendix provides thequestions posed in each interview. The interviews were performed in Georgia,Indiana, Kentucky, Michigan, Ohio, and Texas. The interviewer ensured thatdetailed interview notes and impressions were completed within 24 hours ofeach interview. The length of the interviews ranged from 90 minutes to fourhours, with the average interview taking about two-and-a-half hours.

We also incorporated franchisor financial information in the study. TheFederal Trade Commission in the USA requires that franchisors providepotential franchisees with a detailed account of responsibilities and expectationsinherent in the franchised agreement. This document, commonly known as the"offering circular," was obtained from each of the franchisors. The offeringcircular provides: background information on the franchise, pending and priorlitigation, initial franchise fees, initial investments and creditors, franchisee on-going investments, franchisor and franchisee obligations, territories,trademarks and related commercial symbols, patents and copyrights, financialstatements, and other issues (e.g. terminations, repurchases).

The published records (Bond and Bond, 1994), franchisor interviews, andoffering circulars provided the input for a first draft report that was sent to theinformants. Each informant was interviewed by phone about one week afterreceiving the report. These confirmatory interviews ensured that the compiledopinions and information were consistent with those expressed by the

Number of outlets

<100FranchisorsTotal outlets

No. franchisedNo. corporate

% franchised

100-500FranchisorsTotal outlets


% franchised

>500FranchisorsTotal outlets


% franchised

TotalsFranchisorsTotal outlets


°'o franchised

Source: Bond and Bond (1994)

<62

23469180

41

592124867328

48,4124.2044.208

43

329,8024,6325,170

39

Percentage franchised62-80 81-93 <93

2271753218S

74

587261625676

422.28916.0556.234

71

3123.87817.2036.675

73

27818716109

87

22942524285

411.3079,811

87388

3312,41910.2791,640

87

19961930

^1Oi.

96

92,1512.109

4297

314.17114,156

1599

3117,28317,195

8897

Totals

912,%52,358

fin767

214.2383,2251,013

73

1556,17944,22611,953

73

12763,38249,80913,573

74

Decisions inplural contractual

systems

63

Table I.Profile of QSR

franchisors using piuralcontractual networks

franchisors. First, the interviewer reviewed the franchisor's financial datareported in the study. The franchisor had the opportunity to correct any of thesummarized information. Second, the franchisors were asked to comment onwhether their rationales for plural contracting were adequately represented inthe study. Additionally, the franchisors discussed monitoring and controllingbrand quality, location decisions (including such agency factors as storeproximity to highways, population density, and distance from headquarters),dedicated investments, and transaction costs. Finally, the franchisorscommented on whether they felt the study was representative of ownershipdecisions in the quick service sector of the restaurant industry.

The method for analysis of the in-depth interviews, offering circulars, andconfirmatory reports was based on Turner's (1980) procedure for categorydevelopment. We developed categories through a paragraph-by-paragraphanalysis of the data. The categories were entered into a database that noted:

(1) the specific category;

(2) responding firm;


64

(3) phase of data collection;

(4) exact location of the comments; and

(5) cross-references to related categories.

In order to identify similarities and differences in the informant reports, wetabulated the categories and the incidence of discussion of each category inTable II. For example, the small franchisor with less than 62 percent franchisedlocations discussed how the operating system was managed by the franchisoron two occasions.

Consolidation of the specific categories into broader groups aids intheoretical development as it enables us to address 40 subjects rather than over400. We found a consensus in the discussion of the following ten categories:

(1) growth;

(2) training;

(3) royalties;

(4) franchising fees;

(5) advertising fees;

(6) mystery shoppers;

(7) site selection;

(8) initial product costs;

(9) investments necessary to open a new store; and

(10) system-wide development strategy.

After identifying similarities across groups, we looked for topics thatdistinguished sub-groups of franchisors. Among franchisors owning arelatively high percentage of the retail outlets, we found similarities in;franchisee experimentation, plan for 50 percent franchisor ownership,extensive corporate reporting system, franchisor development of the operatingsystem, quality control through explicit standards, and knowledge shared withfranchisees. Four of these categories (no franchisee experimentation, plan for 50percent franchisor ownership, extensive corporate reporting system, andexplicit quality control standards) were also expressed by franchisors operatingnetworks with 62-80 percent franchisee ownership with more than 100 outlets.Franchisors owning a relatively small percentage of the retail locationsemphasized:

• franchisee input into operating system;

franchisee new product ideas;

' procedures for new product development;

• franchisor stores keep an eye on the market;

plan for 100 percent franchisee growth;

s

c-j c-j r-j CM

S B"P, V

sz 9

o •+?

bo bo

.s s • l l

c ^ - 3c -s y

fp

1

fa ^

g ap E"" OD.

^ .S1= "oj -S

cl£i

3 -^

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systems

65

Table H.Categories associated

with franchisor networkownership strategies


66

Table U.

B^

O o

(M (M CO i n CO CM

CM CO CO 1—

p

cBD

8

• conflict resolution; Decisions in

• ownership mentality; plural contractual

• franchisor stores run under different philosophy. systems

Among franchise systems with 62-93 percent franchisee ownership we foundsimilarities in:

franchisee input into operating system;

franchisee new product ideas;

explicit procedures for new product development;

franchisor stores keep an eye on the market; and

team development of the concept.

There are similarities in the categories discussed by franchisors managingnetworks with 62-93 percent franchisee ownership and those with less than7 percent franchisor ownership. A significant difference, however, is manifest inthe orientation to system management. Retail systems with 62-93 percentfranchisee ownership emphasize team development, yet networks with morethan 93 percent franchisee ownership focus on support of franchisedoperations.

We also identified differences in the reports based on the scale of operations.We found that small franchisors reported close-working relationships withfranchisees and placed an emphasis on goodwill in the maintenance of thecontractual agreement. By contrast, we found that large franchisors enforcedcompliance with operating procedures and placed greater emphasis on theapplication as a means of screening potential franchisees. In the followingsection we use these similarities and differences to present rationalesunderlying plural contractual networks.

Rationales underlying plural contracting in franchisingWe organize our analysis of ownership strategies into discussions of agencytheory, transaction costs, plural contractual forms, and scale of operations.

Agency theoryAgency theory provides a compelling framework for analysis of incentives andcosts in alternative contracts. Vertical integration researchers frequently applythis theory to explain retail ownership decisions (see Eisenhardt (1989a) for areview). For example, Brickley and Dark (1987) indicate that high monitoringcosts, low initial investments, and high incidence of repeat patronage favorfranchising over corporate ownership of retail outlets. In an early application ofagency theory to franchising, Rubin (1978) suggested that franchising was nota mechanism for raising capital. He suggested that the parties to franchisecontracts should prefer investments in a portfolio of shares in franchisee outletsto investments dedicated to a single market. Franchisors in our study, however,maintained that franchising was an effective mechanism for overcoming


68

financial constraints (Carney and Gedajlovic, 1991). Two franchisors describedthe contribution that franchisees made to the system in the following manner:

Our business revolves around the brand name. We create the brand through advertisementson national television. The advertisements sell the brand name and the latest promotion. Buttbe big things sold in the advertisements are price and convenience. We estimate that it takes$40 million (annually) to sell a product on national TV. But. for a low involvement product likeours, it takes $60 million. We can bargain and get network advertisements for about 60-70percent of the spot advertising costs. $60 million is about 5 percent of $ 1.25 billion in annualrestaurant sales. At approximately $500k per store, we need about 2,500 outlets to draw therevenues that enable us to promote the brand nationally. We need a way to develop that manystores, but we don't have the capital to do it ourselves. The cash flow is better at the stores weown, but franchising is a tool that lets us use otber people's capital and lets other people takethe risk. Let other people pay for the national advertising.

We rely on franchising because it opens up sources of capital that we couldn't access, givenour current financial situation. The franchisees often have better credit ratings than us, and sotheir sources of capital can be much better.

In contrast to Rubin (1978), franchisors apparently establish franchises to gainaccess to capital. Rubin (1978) also suggests that franchisors developfranchised locations due to monitoring costs and incentives. Interestingly, theimportance of franchisee incentives was only expressed by franchisors owninga relatively small percentage of the outlets in their network. Two of thesefranchisors noted the following benefits to franchisee operations:

An ownership mentality has been much more successful for us than a manager mentality. Wetend to attract "mom and pop" type owners that invest life savings in the stores. These peopleare willing to put in 14 hour days to make the store successful. We can't get that kind ofdedication from managers.

We're more successful store-per-store when we franchise. When you run a chain ofrestaurants, you don't get a lot continuity from managers. With franchisees the standards arehigher.

Agency theory suggests that franchisors elect to franchise operations where thecosts of monitoring performance and behavior are difficult. As the costs ofmonitoring agent efforts increase, the principal (i.e. franchisor) developscontracts that offer incentives for performing efficiently. Brickley and Dark(1987) find that locations near headquarters - where monitoring is relativelyinexpensive - are corporately owned, while distant operations are franchised.Similarly, Norton (1988) reports that franchises are employed in scarcelypopulated areas while corporate ownership is preferred in urban areas. Inaddition, agent's incentives to maintain quality should influence ownershipdecisions. Thus, Brickley et ai (1991) indicate that franchisor-outlets havestronger incentives to maintain quality in non-repeat purchase settings (e.g.near highways), yet franchisees are preferred in settings with repeat customers.

Franchisors claimed that independent variables from agency theory -notably the proximity to highways, distance from headquarters, and populationdensity - were not incorporated into ownership decisions at specific locations.Consistent with the "alternative proposition" described by Carney and

Gedajlovic {1991), the rights to market in a region are determined prior to site Decisions inselection. Two franchisors offered the following perspectives on ownership: plural contractual

You've got to remember that franchising is a global strategy but franchisees are SVStemSgeographically limited. Where does a franchisee that owns a (complementary chain's rights tofranchise) in Des Moines want to own franchises? In Des Moines. We sell a guy like this therights to do business in the Des Moines ADI (area of dominant influence) and then work withhim on selecting locations. When it comes to selection we want to own the most lucrative 39opportunities, but this doesn't coincide with being urban or rural or where the highway is. It's ^^^.^^^^^^^^^far more complicated than that. Sometimes we invest in rural areas because the cost of land isso much cheaper and we can get a better return in these locations.

We use a three-step process. First the franchisee signs an area development agreement. Thenthey propose sites after which we go through an extensive approval process.

These quotes were obtained from large franchisors that use area developmentcontracts, but similar sentiments were expressed by franchisors that do not relyon area development agreements.

Although conditions surrounding a location do not apparently influencewhether a site will be franchised, elements of agency theory are incorporatedinto network ownership decisions. In our sample there is some evidencesuggesting firms franchise to gain exposure in distant markets. One franchisorrecognized that franchising was an opportunity to gain exposure in a marketwithout committing resources to the area. His rationales for franchisingincluded:

We received an inquiry a few years ago about opening up restaurants in Denver. Now, if youlook at the (restaurant location) map, we don't do business in Colorado or any state thatborders it. We signed an area development agreement for a franchisee to open up ten stores inDenver. We're getting exposure in this market without sending a management staff.

We're about to open up stores in Florida. We know there's a great opportunity there, but its tooexpensive for us to send a development team. And it's expensive for us to continue to go outand check on these locations. So, we're lining up franchisees in Florida.

Thus, this franchisor recognizes that costs of external agents are lower thaninternal agents when the market is far removed from headquarters. In contrastto prior studies (e.g. Brickley and Dark, 1987), these decisions are not made on aunit-by-unit basis, but for an entire market. Franchisors that hold a smallpercentage {< 7 percent) seem to prefer franchising over franchisor operationsin part due to a history of conflicts between franchisee and franchisoroperations. The following statement summarizes their orientation to pluralcontracting:

When you're running restaurants and selling franchises you have a conflict of interest andstore managers with different objectives. At one point, we owned about 40 percent of ourstores, but we paid too much attention to the stores and not enough to the system. We've nowconverted to where we only own a few restaurants. When you've got franchisor stores, themanagers are interested in getting promoted out of the restaurants. We had difficulty-maintaining continuity in these places. But the stores are the franchisees' livelihood. Theywant to increase their volume and have a vested interest in the community. So, we getcontinuity and leadership from these managers.


70

Thus, the operators of networks with minimal levels of franchisor ownership donot see corporately-held locations as vital sources of revenues. Thesefranchisors feel that by owning many stores they develop a conflict of interestbetween the franchised system and restaurant operations. The franchisorsmaintain only a few stores in order to eliminate conflicts of interest. Consistentwith agency theory (Eisenhardt, 1989a), the franchisors recognize that the levelof conflict can be curbed by increasing the percentage of franchised outlets.

Transaction cost economicsTransaction cost economics (TCE) addresses organizational efforts aimed ateconomizing the costs of running an economic system (Williamson, 1991).Whereas reduction of agency costs is focal to agency theory, TCE identifiesfactors that enable the firm to economize on transaction costs. Transaction costtheory has been applied in a range of studies on the boundaries of the firm (seeRangan et al. (1993) for a review). In the fast-food context, the franchisor selectsbetween franchises and corporately-held outlets. The distinction betweenfranchised and corporately-owned outlets is not analogous to market versushierarchical contracting. Franchised contracts incorporate authority systems,incentive systems, standard operating procedures, and dispute resolutionmechanisms suggesting that these interorganizational contracts constitutehybrid organizational forms (Stinchcombe, 1985). The organizational form in alocation should be the one that economizes on governance (i.e. production andtransaction) costs, and the degree to which governance costs are minimized isassociated with the level of asset specificity (cf. Williamson, 1985, p. 103). Assetspecificity refers to the degree to which investments are dedicated to a specificpurpose. For example, modular, twin drive-through buildings cast in afranchisors' color schemes have limited value outside the franchised network.As the level of specificity increases, the comparative advantage of franchisor-owned outlets should increase relative to franchises.

None of the franchisors in our sample suggested that ownership decisions atspecific locations were associated with store-level investments in property,construction materials, equipment, training or advertising. Most of theseinvestments are not made with the franchisor, but they identify assets that mustbe secured to develop a franchise. Table III provides a breakdown of the majorinvestments made by new participants in a QSR network. In each case, the levelof asset specificity does not vary between systems that are minimallyfranchised and those that use a high level of franchising.

Asset specificity at the store level does not enter into the ownershipdecisions. As in agency theory, the rights to an area are secured prior to siteselection. Franchisors contend, however, that the desire to control transactioncosts is highly germane to franchise development. In the beginning thefranchisor must develop an efficient, profitable operating system. Thisoperating system refers to the procedures necessary to make products availablefor consumption. The system incorporates procedures for productprocurement, food preparation, dining area layouts (including drive-through

Number of outlets

<100Property salvage

valueEquipment salvage

value(Construction salvage

value ($)Training salvage

valueFranchise feeAdvertising fee

100-500Property salvage


value(instruction salvage



>500Property salvage


valueConstruction salvage



<($K)

300

175

325

2020

650

300

600

1530

350

180

250

6.512.5

:62(%)

80-100

10

30

80

5

90

15

15

50

2.75

80-110

10

50

90

5

Percentage franchised62-80 81-93

($K)

Lease

50

200

1019.5

250

200

100

1520

500

250

62

2025

Co)

n/a

10

95

50

3

100

10

50

80

4

100

10

60

100

5

($K) 1

Lease

150

180

1010

Lease

50

105

2020

225

155

180

1025

f 0 ' \I •Of

n/a

10

80

90

2

n/a

10

10

85

5

90

10

50

80

3

($K)

Lease

50

200

1515

Lease

200

300

1520

150

150

185

1515

Decisions in93 plural contractual

C''̂ ) systems

n/a 7 1

10

50

90

3.5

n/a

10

50 . O•

60*

1

80

20

35

50 Table HI.Retailer investments

4 and fees

windows), kitchen designs, and other issues associated with serving food in aQSR setting. Ray Kroc, for example, became interested in McDonald's becauseof the operating system's ability to serve eight patrons simultaneously (Kroc,1977). Human and physical assets are dedicated at the inception of the system.The franchisor invests in food preparation techniques, recipes, kitchen layouts(and ergonomics), dining area layouts, point-of-sale computer systems,procurement procedures and sources of inventory, and other operating factors.In addition, the franchisor invests in physical assets that include commercialkitchen equipment (e.g. fryers), signage, and dining facilities. The franchisors inour study were highly cognizant of the sunk costs associated with designing the


72

restaurant operating system. Consistent with prior transaction cost research{e.g. Monteverde and Teece, 1982), franchisors organize their business tosafeguard their investments. Furthermore, more emphasis is placed oninvestments in the operating system by franchisors that own more of the retailnetwork. Two franchisors that owned more than 50 percent of the outlets in thenetwork described system control:

Each of our stores uses our computer system. The hardware and software is completelycustomized for our use. The software enables us to obtain up-to-the-minute information onsales by product in each of our stores. Complete company policies and operating proceduresare on-line in the point of sale system. This system, the mystery shopper program, andvisitation reports enable us to control operations in the stores.

We look for prospective franchisees that are interested in complying with our strict standardsfor operations. Standardization is the key to success in our stores. The new franchisees mustbecome familiar with our operating philosophy and conform with our explicit standards.

We supply franchisees with operations manuals outlining our methods and procedures.Excellent food and service are the threads of consistency that unify all our restaurants, so it'simportant that our standards and procedures remain uniform.

Relative to other franchisors, those holding larger percentages of the retailoutlets placed greater emphasis on maintaining the operating system. Thisemphasis was embodied in explicit on-line manuals, detailed reportingprocedures, explicit standards, and lengthy training sessions.

Plural contractual formsIn their review of plural contracting, Bradach and Eccles (1989) suggest thatcontractual networks yield synergy via complementary sources of information{Dant et al., 1992). In our sample there is evidence that franchisors takeadvantage of complementary sources of information in the development of newproducts and operating procedures. The value placed on these sources ofsynergy varies with the percentage of franchisor ownership. Franchisors with62-93 percent franchised operations gain and share a wealth of informationfrom franchisees. For example, a McDonald's franchisee in Cincinnatideveloped the North Atlantic whitefish sandwich to meet the dietaryrequirements of his Catholic customers (Kroc, 1977). Innovative new productsoften have system-wide appeal, yet the franchisor may not initially recognizethe opportunity. Two franchisors in the 62-80 percent franchised categoryoffered the following anecdotes;

Our founder hated this new (trademarked) product. He said we'd changed his product, and thenew one tasted terrible. The new recipe was conceived by a franchisee. The founder reallyhated this product, but it now accounts for about 35 percent of our sales.

Franchisees come up with some great new product ideas. We have salad bars in all of ourpizzerias. I would have never thought to market baked potatoes in pizza parlors, but they'vebeen a great addition to our menu. A franchisee started selling them at lunch, and the ideatook off.

Franchisors who welcome franchisee product development recognize that the Decisions innew concept is not ready for system-wide use when it is created. An important plural contractualsource - and justification - for franchisor revenues is the conversion of the new systemsproduct into a system. The new product may require different technologies,equipment, and preparation procedures. The franchisor formulates the productto ensure system-wide availability of food preparation equipment andingredients at relatively affordable prices {i.e. consistent with other menu * ^offerings). In addition, the franchisor develops the in-store promotions used to ^ ^ ^ ^ ^ ^ " ^ ^ ^ ~launch the new product. Thus, the innovation may emerge from the franchisee,but it is refined by the franchisor.

Franchisors holding relatively small percentages of the outlets also rely oninformation sharing and new product development between retail outlets.Nevertheless, franchisees in these networks are more likely to be involved indeveloping the concept for use throughout the network. Two franchisorsexpressed the following attitudes toward product development:

We learn from our franchisees al! the time. One of them came up with the idea of putting oursandwiches in a pita rather than a submarine roll. It's a great addition because it gives us amatrix extension. We can add one product to purchasing that lets us sell 13 new items.

Almost all of our new product ideas come from franchisees. We learn a lot from them. Theyget bored and start experimenting. When they come up with a good idea it must be presentedto the FAC (franchising advisory council). The FAC gives them approval and then they try itout as an LTO (limited time offer). One of them recently came to us with a chicken fajita thatthey're testing now. If it works for them, everyone will offer it.

Retail networks with less than 62 percent franchisee-ownership rely moreheavily on the franchisor to develop products. In their offering circulars, theyexplicitly forbid franchisees from experimenting with new products. Forexample:

The Franchisee is required to serve and sell only such products prescribed and approved bythe Franchisor and only from the location specified in the Franchise Agreement.

This franchisor did not want their franchisees to experiment with new foods ornew operating procedures. New products were most likely to be developed intheir test kitchens. Similarly, changes in the operating system originated withthe franchisor. Franchisors owning large portions of their networks made thefollowing comments about new ideas:

Hntrepreneurship doesn't work well in our system. Over the years we've developed specificrecipes, and we really don't want franchisees to tinker with them.

One of the secrets to our concept is the limited menu. We offer quick service by offering elevenmenu items and combinations of these items. Each new item slows down service and increasesinventory costs. We don't want franchisees adding menu items that are going to slow downdeliveries. New items or seasonal items like chili and fish sandwiches are added at ourdiscretion.

We really discourage franchisees from experimenting with our system. It takes them awayfrom operations, and quality tends to go down. Most new products come out of our testkitchens.


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Scale of operationsEvidence in our sample suggests that the size of the network is related to theform of trust employed to manage the system. Zucker (1989, p. 54) refers to trustas a "set of expectations shared by those involved in an exchange." The form oftrust establishes what is appropriate and fair, and it indicates obligations andexpectations in the relationship. Trust is manifest in three ways:

(1) process-based;

(2) characteristic-based; and

(3) institutional-based trust.

Process-based trust is tied to past or expected exchange and is associated withreputation. Prospective franchisees can gauge the level of process-based trust ina network by contacting current franchisees. Characteristic-based trust isattributable to social similarity, often due to family, background, or nationality.In 11 of our 12 franchises we find no evidence for characteristic-based trust.Nevertheless, one franchisor discussed how the system's initial growth wasthrough the franchisor's extended family Institutional-based trust is tied to thedevelopment of formal mechanisms ensuring that expectations and obligationsdo not rest on personality or history. Most information provided in the offeringcircular prescribes role responsibilities, and thus serves as institutional-basedtrust.

The forms of trust may develop together in a relationship, but the modes oftrust are also substitutable (cf. Zucker, 1989). Our data suggest that the form oftrust varies with network size. Although the offering circulars outlineinstitutional and process-based trust, differences in the form of trust areembodied in the mechanisms used to sell and maintain franchises. Smallfranchisors often have a strong, localized concept, but prospective franchiseesmay be unaware of their potential customer's knowledge of the franchisedbrand. These franchisors emphasize the personal commitment made byfranchisor and franchisee to the success of the system. One franchisor summedit up in the following way:

I want to tell you about a 56-year-old lady who recently hecame a new franchisee. When westarted working with her she told us of her interest in starting a new career after her childrenhad left home. I'll never forget her (store) opening. She invited me, the lawyers, the contractor,the advertisers... all the people involved in setting up the franchise. She introduced me to everymember of her family and friends as "This is the lady that put me into business. This is thewoman that is going to make me successful." When people do things like this you realize thatwe're in the business of building relationships. That's what makes it fun, and that's whatmakes it exciting.

The emphasis on process-based trust and personal commitment reflects thebenefits that small franchisors offer to franchisees. The institutional-basedtrust is supplanted by personal commitment. The small franchisor does notignore financial considerations, and, in fact, has much more to lose if arestaurant fails. Nevertheless, relative to large franchisors, the smaller

franchisors place greater emphasis on each party's personal commitment to the Decisions insuccess of the restaurant. plural contractual

The large franchisors' strategy is markedly different and relies primarily on systemsinstitutional mechanisms in the franchise agreement. Large franchisors by nomeans ignore personal commitments, but the size of their systems precludesthem from stressing process-based trust to the same extent as their smallsystem counterparts. Two large franchisors summed it up as follows: ' ^

The little guys (franchisors) can take the time to go out and meet everybody in the franchiseesfamily. We really don't have time to do that. We look closely at their financial. If they have theequity to get into the business, we'll take a close look at their potential.

The mom and pop franchisee is not for us. We don't have the time to work with them. We haveto do most of our screening from the financial profile we get on the application.

Large and small franchisors also differ in the manner in which they enforceoperating procedures. In small networks franchisors expect franchisees to actin accordance with the procedures outlined in the operations manuals. Relativeto large franchisors, however, enforcement of the operating procedures tends tobe less strict. In their discussions of operations and their contracts, smallfranchisees put less emphasis on strict adherence to operating policies andgreater emphasis on goodwill. For example, two small franchisors' franchiseagreements read as follows:

Franchisee must conform to the terms and provisions of this Agreement and the Manual tomaintain the Company's reputation and goodwill and to protect the Marks associated withsuch reputation and goodwill.

Franchisee shall conduct operations in a business-like fashion and in an orderly and cleanmanner. Because of the nature of the subjects covered in the Operations Manual, it is notdesirable to subject them to the rigid terms of the Franchise Agreement.

In large networks franchisors place greater emphasis on the operating manuals.Moreover, large franchisors are more prone to make conformance with theoperating manuals required action. Two large franchisors enforced adherenceto operating procedures with the following clauses:

Franchisee shall operate the franchise restaurant in strict accordance with the confidentialmanual which, among (ither things, sets forth the standard method of operation for a (brandname) restaurant, the business format, recipes, menus and insfructions for food preparationand control of quality and portions.

At all times, franchisee shall strictly comply with the procedures, standards and otherprovisions contained in the operations manual and the other manuals provided by thecompany and any other manuals that may hereafter be developed by the company.

Owing to the higher volume, large franchisors supplant process-based trustwith the written contract. These franchisors offer an established,internationally recognized brand and seek growth to enhance brandrecognition. The strategies to increase revenues are operating in small and largefranchises, but the trust orientation and reference points for acceptable levels ofgrowth vary markedly. These differences in the varying levels of trust aremanifest in medium sized networks. Like their large system counterparts, these


76

franchisors want to maintain the personal commitment and social bondsoperating in the small systems. As the networks grow, however, emphasis shiftsfrom social commitment to financial resources.

Franchisor niche strategiesSeveral factors associated with the percentage of franchised ownership andsystem size provide the opportunity to characterize six strategies employed byQSR franchisors (see Table IV). The percentage of franchisor ownership andsize of a network are associated with the operating system, productdevelopment strategies, conflicts of interest, and trust.

Administered networksSome networks emphasize an operating system developed by the franchisor toensure efficient operations and quality service provisions. The franchisors'operating systems enable franchisor stores to provide service equal to or betterthan franchised outlets with returns that exceed those from franchisee stores.For example, one franchisor in this category claimed that the operating systemoffered 20 percent returns in franchisor stores versus 4 percent royalties infranchised locations. Because these networks emphasize the franchisor'sinvestment in the operating system, we refer to these systems as administerednetworks. In these networks, development of the operating system is thefranchisor's responsibility. For example:

By owning most of the (brand-name) restaurants, we Ve been able to establish comprehensiveperformance goals for revenues and quality. We get a wealth of information on these issuesweekly to make sure that all our stores - both company stores and franchises are on track.

In addition, enhancements to the operating system in these networks primarilycome from the franchisor as evidenced by the following statement:

Most of our system is owned by us. So, we can gauge how much product costs should be, howmuch waste there is in food preparation. By running stores we keep up with food preparationtechniques and share this information with our franchisees.

These franchisors are also active in new product development. Thesefranchised systems are more likely to have test kitchens to develop newproducts. In these systems the franchisees are not permitted to developproducts or experiment with recipes. As one franchisor stated:

We spent a lot of time developing recipes. Breadsticks are our signature item. It took a lot oftime and effort to get them just right. We thought we had them down and started selling themin the stores. We had to pull them and re-formulate the product. But now it's a great draw. Wedon't want franchisees or store managers to change the way we make this product or anyother menu item.

The manner in which the operating system is maintained distinguishes smallfranchises from large administered networks. In the small networks,communication between franchisor and franchisee emphasizes the personalcommitment each has to implementing the operating system. One smallfranchisor characterized this strategy as follows:

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77

Table IV.Strategies underlying

the management ofplural contractual

networks


78

We look for franchisees that care about quality and are willing to comply with strict standardsfor everything from food preparation to service with a smile. We have built a strong,successful restaurant chain by maintaining our original philosophy: and this philosophycontinues to be the driving force in our future. We operate as a family with one goal in mind -customer satisfaction.

Large administered networks also emphasize the franchisor's operating system.They regulate operations, however, through institutional mechanismsembodied in the offering circular, franchise agreement, and operating systemmanuals. Small franchisors emphasize the franchising family, yet their largesystem counterparts place greater emphasis on the franchised concept. Forexample:

We have seven franchise business managers and one district franchise director that act as alink between the company and its franchisees. The managers perform regularly scheduledrestaurant operations evaluations to ensure that each franchised restaurant consistentlydelivers the highest quality food and fast friendly service in a clean environment. They alsoreview the financial results and effectiveness of franchise restaurant management to identifypossible areas of improvement.

Entrepreneurial networksSome networks do not rely on the franchisor to develop the operating system.Because these systems emphasize the entrepreneurial efforts of the franchisees,we refer to these systems as entrepreneurial networks. In these networks, theoperating system is enhanced through action taken by the franchisees, andfranchisors welcome these contributions. For example:

Originally, our concept was a free-standing building, but today we're also opening a lot ofrestaurants in strip malls. The strip mall concept and store layout was developed by one of ourfranchisees.

In entrepreneurial networks new products are developed by franchisees, andthe franchisor has a relatively minor role. One franchisor discussed thefollowing strategy for product development:

Ix)cal market knowledge is critical in franchising. We expect franchisees to modify the menusfor their customers. Franchisees know their markets and come up with all kinds of ways toprepare products for their customers. Then, they take the idea to the FAC and see if otherfranchises are interested.

The franchisors rely heavily on the entrepreneurial activities of theirfranchisees. In addition, they often have a history of conflicts with theirfranchisees. For example:

We want to have a limited role in the retail side. When you start running too many restaurants,franchisees start wondering about your priorities. A few years ago we were getting complaintsthat our promotions helped us, but did nothing for the franchisees. And they were right. We'vesold off many stores to franchisees. We play a limited role in the stores and spend our timesupporting our franchisees.

Administered networks emphasize revenues derived from franchisor locations.By contrast, entrepreneurial networks do not rely on franchisor outlets as majorsources of revenue. In these entrepreneurial systems, the franchisor stores are

used as a showcase for the brand. One small franchisor using this strategy Decisions in^^^^^^' plural contractual

As our (promotional) literature states, we are in business to help entrepreneurs to succeed. Butyou can't lose sight of store operations, so we run a couple of stores near headquarters. Thesestores are used for training and testing grounds for new ideas. You can't run these stores likenormal shops.

In these networks the franchisor stores are used sparingly and serve primarilyto showcase the franchising system. Franchised locations are the primarysources of revenue and also provide a sense of continuity and local leadership tooperations. In the small networks the franchisor is able to maintain a personalrelationship with the franchisees, and this relationship is fueled by a commonentrepreneurial spirit. One small franchisor offered the following anecdote:

When you buy this franchise, you buy me. The thing that makes us different is ... I knoweveryone of my franchisees very well. I talk to them regularly and keep in close contact witheach of them. I am able to visit each restaurant at least once a month. I've even gone onvacation with my franchisees from time to time. Now, how many people in this business cansay that?

Large entrepreneurial franchisors place greater emphasis on the writtencontract and conformance with the business format outlined in the operatingmanuals. For example:

We supply our franchisees with documentation covering operations. We check-up on themthrough seven area managers that visit stores 3-4 times per year. The area managers use achecklist that grades each store and ensures that store procedures follow company policy.

Co-operative networksAdministered and entrepreneurial networks emphasize the efforts offranchisors and franchisees, respectively. In contrast, other networksemphasize synergy between franchisor and franchisee business practices.Because these systems emphasize the synergy between franchisor andfranchisees in product development and brand management, we refer to themas co-operative networks (Powell, 1990). These networks are maintained bycombining the entrepreneurial drive of franchisees with the enhancedmonitoring procedures of franchisor stores. For example:

The evolution of our concept has been a team effort. We don't like random experimenting, sowe work together with the franchisees in the franchising advisory council. When someonecomes up with an idea - one of our managers or a franchisee, it's presented at the FAC meetingbefore its implemented. We tried all kinds of things, like kids eat free, a chicken and turkeybarbecue from 5-9. One franchisee suggested that we bake buns on premises. This isparticularly important where there are few bakeries, like in rural areas. New ideas arediscussed at the meetings, and then we decide who'll test the idea out. Usually the guy thatcame up with the idea wants to give it a try. But we work together on these projects.

In addition, the franchisees and franchisor-managers participate in thedevelopment of new products. New products may be developed by franchiseesor franchisors, but the franchisor prepares new products for distribution


80

throughout the network. The procedure for new product development in thesenetworks is reflected in the following statement:

We sell mostly buffalo wings, but 80 percent of our menu is other foods. Its the old 80-20 rule.Eighty percent of the menu is for people that don't like wings. We call this the fourth personphenomenon. Four people are going out to lunch. Three want to eat wings, but the fourthhates wings. We put all this stuff on our menu to attract that fourth person. Franchisees comeup with a lot of great ideas for the fourth person. We then work with them to develop ways tosource ingredients in all the markets we serve.

Interestingly, these were the only networks that mentioned plural forms oforganization (franchisor and franchisee stores) in their promotional materials.One small co-operative system franchisor accentuated the spirit of co-operationbetween franchisor and franchisee:

By working with the franchise owners, managers of the stores, and employees, we make themthe best people (professionally and personally) they can possibly be. If the people in thesystem are the best they can be, then their system will be too.

Large co-operative networks also focus on co-operation, but they place greateremphasis on co-operative efforts to establish and maintain the brand. The largeco-operative establishes a minimum level of capital necessary to promote thebrand within a market. Small franchisors do not differ from large firms basedon the percentage of sales dedicated to advertising. Nevertheless, the smallfranchisors do not target a level of advertising necessary to promote the brandin a market. The strategy of the large co-operative franchisor is reflected in thefollowing:

When a franchisee invests in our franchise, they acquire the strength and sophistication of anational organization with broad experience and far-reaching capabilities. It's a partnershipfrom which we both benefit. The franchisee provides the initial investment and the personnelcommitment to manage the business effectively. We provide valuable marketing insight andoperating experience to assist in reaching the franchisees' goals.

DiscussionThe purpose of this study has been to investigate managerial rationalesunderlying plural contracting in the quick-service restaurant industry.Franchisors indicated that the level of franchisor ownership is related to theoperating system and new product development. In addition, the size of thenetwork is associated with the form of trust. The strategies outlined in Table IVwere identified through a grounded theory approach to theoretical developmentand comparative analysis. Purposeful theoretical sampling (Strauss andCorbin, 1990) enabled us to identify polar strategies associated with a high andlow percentage of franchisor ownership (Eisenhardt, 1989b}. The methodenabled us to compare polar cases with those more closely associated with themean level of franchising in the industry. In addition, the design provided theopportunity to compare the strategies of small and large players in the industry.The in-depth interviewing process provided the opportunity for franchisors toelaborate on rationales underlying their strategies.

Limitations Decisions inWe recognize several limitations associated with the design of our study. First, plural contractualour analysis is restricted by a sampling procedure based on network size and svstemsdegree of franchisor ownership. Other criteria (e.g. network age, contractlength) may lead to different generalizations about franchisor strategy. Ouranalysis is also restricted by the number of interviews and financial reportsprovided by the franchisors. We verified the financial information through 8 1multiple sources of data and multiple interviews with a single informant in each ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ~network. Multiple interviewers at the franchisor locations would have offeredmore power to corroborate the franchisors' method for maintaining quality(Steier and Greenwood, 1995). Interviews with franchisees would have providedgreater insight into the content of franchised relationships. In addition,franchisees would have offered contrasting perspectives on dedicated assetsand trust.

Another limitation concerns the generalizability of the QSR industry to otherindustries that employ franchising. The quick service restaurant industry ischaracterized by substantial investments in brand capital, yet brand capital isnot paramount throughout franchising. Other industries that rely on franchiseddistribution {e.g. tax preparation) not only place less emphasis on brand capital,but they also rely on a different mix of contracts. Clearly, there is a need foradditional studies addressing plural contracting in other distribution andmanufacturing contexts.

We also recognize that our analysis of agency theory and TCE is notcomprehensive. Our objective is not to test these theories, but to identifywhether variables from these theories are incorporated into franchisorownership decisions. A broader investigation of agency theory wouldincorporate self-interest seeking, bounded rationality, and risk aversion(Eisenhardt, 1989a) while the TCE analysis could be expanded to consideropportunism and uncertainty (Williamson, 1985).

Implications for interorganizational researchCoase's (1937) call for analysis of the efficiency of transactions under alternativegovernance structures has stimulated substantial research. Our study, however,indicates that directors of some distribution systems do not make ownershipdecisions at the transaction level. In certain contexts, factors outlined in agencytheory are incorporated into ownership decisions, but these factors areemployed at a macro-market or network level. Geographical distance of specificoutlets does not apparently concern quick service franchisors, yet the overalldistance of a market from the franchisor influences ownership decisions.Similarly, conflicts of interest throughout the network - rather than at the storelevel - fuel franchisors' interests in selling distribution rights. Similararguments were made by franchisors regarding specific assets. As afranchisor's investments in an operating system increase, greater emphasis isplaced on corporate ownership. Nevertheless, the ownership decision is made atthe network level rather than at specific locations.


82

Consistent with Bradach and Eccles (1989), we offer evidence suggesting thatmanagement of the network is germane to ownership decisions in quick servicerestaurant systems. We augment the Bradach and Eccles study, however, byillustrating that these networks are heterogeneous interorganizational systems.The six niche strategies described in our study reflect different means employedto maintain and enhance franchised operations. To the extent that franchisorshave investments in the operating procedures, they are more likely to rely oncorporate ownership. These franchisors rely on corporate resources to developnew products and make modifications to the operating system. By contrast,some franchisors hold small percentages of their distribution networks to takeadvantage of the entrepreneurial prowess of their franchisees. In thesenetworks enhancement of the operating system and new product developmentare franchisee responsibilities. These franchised networks are also more likelyto report a history of conflicts between franchisor and franchisees.

Synergy between franchisor and franchisees is a critical factor in themanagement of other franchised systems. These networks do not emphasizethe capabilities of one contractual mechanism over another (Bradach and Eccles1989). It is important that these systems attempt to exploit the advantages offranchising and corporate ownership. These networks emphasize co-operationbetween franchisee and franchisor in enhancements to the operating systemand in product development. Managers of these networks recognize thefranchisees' abilities to propose new ideas and the franchisors' capability toturn these ideas into components of the franchised system.

Our results have implications for the treatment of agency theory andtransaction cost economics as descriptive and normative theories oforganizational design. Many descriptive studies (e.g. Brickley and Dark, 1987)have investigated whether elements of agency theory or institutional economicscan be employed to explain ownership decisions at specific locations. In someindustries (e.g. QSR franchising) factors surrounding specific location may offersome predictive validity, yet such analyses may not reflect decision making bynetwork managers. Preliminary field research is necessary to ensure that thelevel of analysis in descriptive models is consistent with the level of decisionmaking within the industry. Preliminary discussions with network executivesshould enhance the explanatory power of descriptive models and augment theresearchers' understanding of organizational design.

Our results also underscore the need to examine the normative value ofinstitutional economics for organizational theory. Although our findingsindicate that some managers of QSR networks do not make decisions at the sitelevel, the research did not consider whether site-level decision making is moreefficacious than a network approach. Future studies should consider using anormative approach (e.g. Anderson, 1988) as a means for examining whetheradherence to recommendations outlined in institutional economics enhancesorganizational efficiency.

Our study also underscores the role of network size in the production of trust.Zucker (1989) presents three forms of trust and provides strong evidence to

suggest that these forms may be supplemented for one another. Consistent with Decisions inZucker, we suggest that institutional trust supplants process-based trust as the plural contractualnetworks grow. Small franchisors have written contracts and offering circularsbut place relatively less emphasis on these documents when negotiating withfranchisees. Large franchisors are more inclined to emphasize the obligationsexpressed in the franchise agreement and offering circular. Thus, these largefranchisors are more likely to emphasize institutional trust while the small 8 3franchisors emphasize process-based trust. Future studies could augment our ^^^^~^^~^^~work by tracking conditions under which trust becomes an institutionalmechanism in an interorganizational network.

The franchisors in our study indicated that the managerial strategiesoutlined in Table IV were representative of plural contracting in QSRfranchising, yet they also recognized that franchisors were moving eithertoward greater franchisee or franchisor ownership. Future research couldinvestigate the factors that promote the movement toward administered andentrepreneurial networks. Our preliminary findings suggest that publicly-heldcompanies move toward greater franchisor ownership while privately-heldcompanies are more likely to rely on franchising.

Each network consists of multiple contracts between the franchisor and foodservice suppliers, the franchisor and franchisees, and food service suppliers andfranchisees. The administration of these networks varies between franchisedsystems, yet research has not investigated the performance outcomesassociated with alternative managerial policies. In some networks franchiseesenjoy lower prices due to the economies gained from group purchasing fromfood service providers. The franchisor often receives rebates from the purchasesmade by franchisees and company-owned stores. While some franchisorsallocate rebates to advertising, other franchisors view this income as a source ofprofits. Future studies could investigate alternative polices employed inadministered, co-operative, and entrepreneurial networks.

The uniform offering circular identifies the principal officers of the franchise,their managerial responsibilities, and relevant experience. Most franchisingexecutives have been employed by multiple networks, and this movement ofpersonnel contributes to the convergence of managerial practices in theindustry. For example, the knowledge gained from designing the ergonomicsfor one dual drive-through restaurant system can be incorporated intocompetitive systems. By addressing the transfer of personnel across networks,one can gain an understanding of how innovations are diffused acrossnetworks.

ConclusionsThis study employed a grounded theoretical approach to investigatemanagerial rationales associated with plural contractual networks. Ouranalysis indicates that principles from institutional economics are incorporatedinto system-wide decision making. Nevertheless, the theories do not offer acomprehensive explanation for ownership decisions. Our study identified


84

several contrasting strategies employed within plural contractual networks.Empirical work emphasizes the action taken by franchisors owning 10-30percent of a retail network. Our study suggests that the managerial strategy ofthese franchisors is not shared by franchisors holding a large or smallpercentage of the retail stores. We hope that our presentation of thesecontrasting strategies stimulates further work into plural contractual networks.

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AppendixInterview questions1. Initial questions about plural forms contracting

What kinds of fo(jds are sold in your restaurants?How many restaurants are operated using your brand name?How many of these outlets do you own? How many are owned by franchisees?Who owns property on which operations are performed?Is there a trend toward franchised or corporately held in the industry?Is there a trend toward franchised or corporately held in your firm?Why do you use both forms of outlets?What are the benefits of corporate stores? What are the benefits of franchises?

2. Revenue infonnationWhat are average monthly revenues per store?Is there a noticeable difference for franchised shops versus company-owned shops?What is the average annual increase in revenues over past two years?Is there a noticeable difference for franchised shops versus company-owned shops?

3. Site selectionHow is site selection performed? What happens first?Do you find a site and then decide whether to franchise, or will some party suggest a location?How important are geographical considerations? Is there a geographical niche you seek?

4. Start-up costsWhat are the property costs to open a stand-alone restaurant?Do these differ for franchises and franchisor shops?If a shop is open, but does not perform well, how much of the investment in property is

recouped?What special construction requirements are required in your stores (i.e. booths, wallpaper,

etc.)?Are these costs the same for franchises and corporate outlets?What is the residual value of these investments in the event of closing the store?Are these construction supplies used in other shops or are they left on premises?What special equipment is required in opening a store?


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Are the costs for equipment the same for franchisees and corporate outlets?What is the residual value of this equipment if the store closes?Will you re-use this equipment at other sites?What are the costs to train management for operations? What is involved in the training

program?What are the initial product costs in franchisee and franchisor shops?Are increases in product casts the same for both types of retailers?What other start-up costs are involved?Are there any other ongoing costs that influence franchise-franchisor ownership selection?

5. Fees and royaltiesWhat is the typical franchise fee? What does this cover?What are the royalties paid back to the franchisor?What other fees are paid back to the franchisor?What percent of products are purchased from the franchisor?Are there any other investments made by the manager/franchisee to the franchisor?

information do you get on an ongoing basis6. Corporate reporting

What structured reports (sales receipts, etc.for corporate managers? From franchisees?

Is this information drawn from computers or mechanically by managers?Are the computer costs included in the franchise fee?To what extent is the hardware customized for you? To what extent is the software customized

for you?How often do you speak to franchisees?What information do franchisees provide that assist in managing franchises?Does information derived from franchised outlets aid in the management and control of

franchisor owned outlets?How frequently do you assess product and service quality controls in franchised outlets?What information would you like to receive from these managers that you do not currently

get?To what extent do franchisees participate in decisions made regarding;

(1) hours or operations;(2) new products;(3) store hiring;(4) store location;(5) pricing?

To what extent are the operating procedures for the company written and prescribed forfranchisees?

What information do your managers provide that assist in managing other corporate outlets?Does information derived from your outlets aid in the management and control of franchises?How frequently do you assess product and service quality contrt)ls in corporate outlets?What information would you like to receive from these managers that you do not currently

get?To what extent are the operating procedures for the company written and prescribed for

managers?

7. Domestic expansionTo what extent are your expansion plans corporate-wide?Do you have general plan for the level of franchised versus owned outlets?How do you decide whether this expansion should be franchised or not?What costs do you consider? What other factors are evaltiated?Is any of your expansion granted to franchisees for an entire standard metropolitan statistical

area or other area?

If so, how do you decide whether this expansion should be franchised or not? Deds ionS inWhat costs do you consider? What other factors are evaluated? i i .̂̂ ^ iIs any of your expansion granted to franchisees for a single outlet? piUrai COntJaCrua,lHow do you decide whether this expansion should be franchised or not?What costs do you consider? What other factors are evaluated?How much of expansion is systems-wide, smsa-wide, and individual?

International expansionTo what extent are your expansion plans corporate-wide?Do you have general plan for the level of franchised versus owned outlets? ^ ^ ^ ^ ^ ^How do you decide whether this expansion should be franchised or not?What costs do you consider? What other factors are evaluated?Is any of your expansion granted to franchisees for an entire standard metropolitan statistical

area or other area?How do you decide whether this expansion should be franchised or not?What costs do you consider? What other factors are evaluated?Is any of your expansion granted to franchisees for a single outlet?How do you decide whether this expansion should be franchised or not?What costs do you consider? What other factors are evaluated?How much of expansion is systems-wide, smsa-wide, and individual?

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