Day 16-17 Why do franchisors franchise 2-4 Mar 2015 - Why...

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Why do franchis ors franchise? March 2 nd & 4 th , 2015
Why do franchis ors franchise? Predominant explanations: It’s too hard to monitor remote outlets when the business is geographically dispersed ( agency theory) . Businesses need access to financial capital and local managerial expertise, at least until they achieve economies of scale in advertising and purchasing ( resource scarcity theory) . Both explanations focus on economic factors. Both explanations focus on factors internal to the firm.
Institutional theory Small business owners must decide whether to go independent or become a franchisee. They often go with chains to solve problems of uncertainty. Franchisors must decide whether to franchise out a new outlet, or own it outright. Their behavior is shaped not only by economic factors but by cultural/cognitive models that solve problems of uncertainty.
Two types of institutional pressures confronting franchisors Environmental pressures: what is the propensity to franchise of the organization’s competitors? Internal inertia pressures: early-stage propensity to franchise affects later strategy, independent of economic context. These are “cognitive sunk costs”. This is Hannan & Freeman’s idea about structural inertia .
How do institutional influences affect the propensity to franchise?

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