Reorganization: a strategic tool that hurts firm innovation? A franchise case study

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Reorganization: a strategic tool that hurts firm innovation?

A franchise case study

by

JESPER BROUWER

University of Groningen

Faculty of Economics and Business

MSc BA Strategic Innovation Management

June 2014

Jesper.brouwer.25@student.rug.nl Student number 1914081

Supervisor:

Prof. dr. W.A. Dolfsma, University of Groningen

Co-assessor:

F. Noseleit, University of Groningen

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ABSTRACT

This research examines the role that reorganization has on a firm innovation. Previous literature is divided on the subject; many argue that innovation suffers as a

consequence of reorganization, others argue it might offer the best environment for innovation. Based on findings of a case study of a franchise in a dynamic and highly competitive retail environment, several factors were found that influence a firm’s degree of innovation despite reorganizing. Evidence suggests that there are four main factors of influence, namely: (1) Type of reorganization, a restructuring or

downsizing; (2) Degree of (workload) pressure; (3) Degree of acceptance by

franchisees; (4) The quality of interaction between a franchisor and franchisee. It was found that the cause of reorganization often determines which type is used. Downsizes were found to lead to a decrease in innovation due increases in negative pressures, while restructures improved innovation directly and by reducing pressures. In addition, results suggest that communication increases innovation indirectly by aligning the interests of franchisees and franchisor and directly by improving the knowledge network within the firm.

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1. INTRODUCTION

In times of crisis, the temptation is often to “salami slice” the budget to show in-year ﬁnancial success rather than to invest in longer-term cost-saving innovation (Salge & Vera, 2012). Some organizations tend to take this ‘easy’ way and lay off a significant percentage of their employees to cut costs. However, firms do not necessarily only reorganize just to cut costs, they also reorganize to increase productivity or to realign with a changed environmental situation and be in a better position to compete (Bowman & Singh, 1993; Bowman, Singh, Useem, & Bhadury, 1999)

When reorganization takes place, a lot of time and effort is likely to be focused on learning new skills and accepting new responsibilities that come with the new positions (Ashelford, 2012). When employees are preoccupied with learning new skills and the like, less time and resources will be available for innovation. Employees are the ones in the organization who are most likely to have firsthand experiences with customers, and can therefore be valuable sources of new innovative ideas (Day & Moorman, 2010). Basically, if reorganization involves a recombination or even deletion of business units, the workforce of a certain organization tends to decrease as well. After the reorganization, the employees within these firms have to do more with less. This requires the top management to be creative in organizing the organization to cope with the increased workload per employee. It can be argued it requires some sort of innovation and creativity to do ‘more with less’.

While reorganization may reduce costs and prolong the survivability of the firm, reorganization may delay the more ‘radical’ innovations and often disrupt incremental innovation (Dougherty & Bowman, 1995), and because of that the company may lose its competitive advantage over time. A few factors can be identified that may cause this

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5 the long run. This paper aims to contribute to the literature fields of innovation and change management.

Especially in recent years, there is a lot of talk about reorganization in the media. Surprisingly though, little academic attention has been directed towards the effects of reorganization on innovative performance. Some argue that reorganization has a negative impact on innovation while others argue that it could be the most fertile environment for qualitative innovation (Ashelford, 2012).

1.1 Research Question

Some firms reorganize to cut costs, other firms reorganize to have a better fit with the competitive environment. Reorganization is a well-studied subject, however its effect on innovation has not received adequate attention. For instance, how does the new organizational structure or a reduction in workforce affect innovation within a firm? These questions are likely to have an impact on employees. Reorganizations can be stressful for the people involved; they could lead to increased unhappiness among employees, and could even lead to better performing employees leaving the firm. Despite these factors, many firms deem

reorganizations necessary to survive and it should be mentioned that many reorganizations are effective; not all fail. There are many ways on how a firm can reorganize, but does it acquire the intended effect in the long run, or do reorganizations only lead to more reorganizations down the road? Based on these questions the research question of the paper is as follows.

How does the way in which a firm reorganizes impact the extent to which it will remain innovative despite reorganizing?

This research strives to answer the research question by conducting an embedded case study on a franchise organization currently undergoing reorganizations in a dynamic environment.

2. LITERATURE REVIEW

The background literature for this case consists of three parts. First, reorganization will be defined and discussed based on previous literature. Second, definitions and theoretical

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6 reorganization and innovation will be discussed. Finally, certain predictions based on

previous literature will be made in order to guide the research.

2.1 Reorganization

According to Karim (2009) reorganization, more specifically business unit reorganization, is the creation of units, deletion of units, or recombination of units within the firm; the

structure of the organization is changed, but the activities and resources of these units still remain within the organization. This definition however neglects the fact that when unit are deleted or recombined, certain resources can be lost, such as workforce. McKinley and Scherer (2000) define organizational restructuring as “any major reconfiguration of internal administrative structure that is associated with an intentional management change program.” This definition boils down to the same as the definition given by Karim (2009), except the latter definition also includes downsizing without the deletion of business units, which is relevant for this study. As it becomes apparent, the definition of reorganization is confusing and contradicting at times (McKinley and Scherer, 2000; Bowman et al., 1999; Karim, 2009). Karim (2009) makes a distinction between business unit reorganization and unit acquisitions and divestures. The terms that will be used in this research to make a distinction of type of reorganization are restructuring and downsizing. During this study I will look if indeed reorganizations are divided into two different types, namely restructurings and downsizes. Additionally, other academics often make a distinction in types of organizational

restructuring, such as portfolio, financial and organizational restructuring (Bowman et al. 1999), however this is not in the scope of this research. In this paper focus lies on

organizational restructuring and downsizes only.

In their paper, McKinley and Scherer (2000) argue that reorganizations, or as they call it organizational restructuring, can have intended and unintended outcomes. Intended outcomes are, as discussed in the introduction, a better alignment with the environment, cost reduction, increasing productivity and an increase in shareholder value. The unintended outcomes, however, are short-term cognitive order in the eyes of the top executives that were responsible for restructuring, and long-term environmental disorder because of organizational

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7 and anxiety, which both have a negative effect on their motivation (Staw et al., 1981).

Furthermore, in their findings, Brickley and van Drunen (1990) find that when reorganization is preannounced, it increases shareholder wealth, but in a long term period after the

reorganization, there is a significant decline in earnings performance.

A specific type of reorganization that might be relevant in this research is downsizing or layoffs. In their research of 300 reorganizing firms, Kabanoff, Palmer and Brown (2000) found that downsizing produces no substantial improvement in firm performance compared to other firms in their industry. However, they do examine an increase in productivity on the short term that quickly fades away. In this example the focus of top management lies on cutting-costs, according to the authors firms that did improve in the long run, did so by focusing on reorganizing, restructuring and increasing productivity.

Unfortunately, most research about reorganization has been done in large corporations, so some of the findings of previous authors might not be fully applicable in a smaller franchise setting. Nevertheless, it is expected that even in a franchise similar results will be found. Possibly on a smaller scale due to the smaller management team and with more resistance due to opposing forces at work. The nature of a franchisor and franchisee relationship is

sometimes compared to a parent and child relationship, within such a relationship, friction can sometimes occur. Friction can be caused because of rules set up by the franchisor or

disobedience by the franchisee. In other words, the franchisor is always looking for control to for example strengthen the brand and offer consistent quality, while the franchisee wants as much freedom as possible (Rubin, 1978). Officially a franchisee is an independent business owner, but they are still obligated to follow orders from the franchisor, it is therefore not a rare occurrence for franchisees to sometimes oppose the franchisor, leading to agency problems (Lee, 1999)

2.2 Innovation

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8 radically new, compared to previous products or services. Tushman and Romanelli (1985) define incremental innovation as “changes that encourage the status quo”, radical innovations are described as “processes of reorientation wherein patterns of consistency are fundamentally reordered.” The second distinction is between technical and administrative innovations. Administrative innovations are innovations in organizational structure and administrative processes, technical innovations are related to product, service and production process technology (Damanpour, 1991). The final distinction is between product and process innovations. Product innovations are new products or services introduced to meet a market need. Process innovations are innovations that improve a firm’s production or operation. In this paper innovation is defined to range from all abovementioned types of innovations. Furthermore, in this paper innovation focuses on the transfer of complex knowledge that is not perceived as directly related to the ongoing day-to-day business of the organization but related to the creation of future competitive advantage (Aalbers, 2012)

According to Brown and Eisenhardt (1997), good innovation performance is required in turbulent markets where change is “pervasive, unpredictable and continuous”. This statement implies that innovation is a key determinant in attaining and maintaining a competitive edge. However, innovative knowledge is hard to manage due to its tacit nature. In most cases innovative knowledge transfer solely occurs between informal relationships within the firm (Aalbers, 2012). For this study it could mean that of all innovations, most of them originate from informal relationships. Furthermore, for innovative knowledge transfer to thrive, a structure that combines elements of cohesion and range is required (Reagans & McEvily, 2003), in other words a network structure should consist of strong connections and

connections that span boundaries. Additionally, in an organization such as a franchise, the upper management may not be aware of potential innovative knowledge that employees or franchisees have. There could even be cases where franchisees may not be willing to share their innovations, possibly because of competition (Hansen, 1999). Due to this it is predicted that a large portion of the innovations will come from the top instead of both top down and bottom up, leading to a lot of potential successful innovations to never be implemented.

Another interesting finding related to franchises and innovation comes from Szulanski and Jensen (2008). In their paper they find that innovating the franchise-formula for a local

market could actually hurt the firm. They argue that knowledge transferred by the

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9 closely as possible is preferred, since the formula is what made the franchise successful in the first case (Szulanski and Jensen, 2008). In a more practical sense, they argue that the

franchisor should employ more strict guidelines for franchisees to follow.

So, on the one hand there are authors who argue that a lot of potential innovations are lost due to a top down approach, but on the other hand there are authors who argue that a

franchise should be top down with regards to innovations in order to thrive. For this case it is expected that indeed strict guidelines would make the franchise more successful at first, however once a store is well established, the headquarters should encourage innovative ideas from franchisees that could work on a local level or even at national level.

2.3 Reorganization influencing innovation

Some research has been conducted that studies a form of reorganization on a type of innovation. For instance, the effect of downsizing on creativity or innovation has been studied intensively by renowned scholars such as Dougherty and Bowman (1995), who offer advice for managers to minimize the anti-innovative effect that comes along with downsizing.

Furthermore, Amabile and Conti (1999) studied the effects of downsizing on creativity within a firm, in their study, they find evidence that creativity declined significantly during a

downsizing event, however after the event creativity may recover slightly. Additionally, Hitt et al. (1994) find that ‘survivors’ of downsizing events are often unwilling to take important risks for fear of being penalized for a bad decision. This means that these employees are likely to become less innovative, more resistant to change and more conservative because of the uncertainty and their perceived risk in their environment (Hitt et al., 1994). Guthrie and Datta (2008) also find evidence that the loss of critical human and social capital, coupled with lower commitment and greater rigidity of the ‘survivors’ probably contributes to the

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10 Guthrie only discuss downsizing, downsizing can be a part or consequence of reorganization, but in this paper it does not equal reorganization.

In their paper McKinley & Scherer (2000) conclude that restructuring is often a necessity to survive, but an increase in innovation by a firm is a goal that can be achieved with the same reorganization. They, however, do not have the ‘magic formula’ for firms on how to achieve this. Moreover, other research that has been conducted does not specifically address the effects of reorganization on innovation, it either focuses on financial performance as an outcome, or the object of research is downsizing and other restructuring mechanisms are neglected. Furthermore, according to Brown & Eisenhardt (1997) the relation of innovation and organizational change is very important. They state, “innovation is intimately related to broader organization change. Yet research to date has revealed very little about the underlying structures and processes by which firms actually achieve continuous innovation and

ultimately, change”

As mentioned in the introduction of the paper, Ashelford (2012) states that academics are divided on the topic of reorganization’s influence on innovation. Some argue that

reorganization has a negative impact on innovation while others argue that it could be the most fertile environment for qualitative innovation (Ashelford, 2012). This is the gap that will be addressed in the paper, while there has been some research during the 80s and 90s on subjects that only encompass a small part of this proposition; there is no study that

specifically investigates the subject as a whole. Additionally, there is the possibility that the way the market operates, such as the shift from a goods-dominant to a service dominant market (Vargo & Lusch, 2004), might have changed over the past decades, thus resulting in new possible outcomes.

The potential relationship between reorganization and innovation within a franchise setting could be influenced by a number of factors. First of all, the cause of a specific

reorganization might have a different impact than other reorganizations on innovation output. For example, a reorganization necessitated by economic downturn will have a different impact than reorganization due to change in leadership (Ashelford, 2012). Second, the type of reorganization, such as downsizing or restructuring, is also a factor that must be considered to have an effect on innovation since previous authors in the field also make a distinction

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11 not come as a surprise, it will have a much less negative impact on innovation (Feldman, 1990; Tourish et al., 2004). Lastly, the stance of a franchisee opposed to the franchisor may have a significant impact as well. This could be due to agency problems, since franchisees are considered independent business owners, but at the same time have to follow orders from the franchisor (Lee, 1999; Rubin 1979).

3. METHODOLOGY

The research approach that will be followed in this paper is theory development,

specifically a case study approach. The case study approach was adopted because of its ability to reveal rich and in-depth data (Yin, 2009), which is essential to study the effect

reorganizations have on innovation of a firm.

To study the effects of reorganization and restructures within a firm on innovation, a case of a firm that is currently in the process of reorganizing is selected. The selected firm is medium to large in size, so the results of this research can be compared to the results of other papers in the field. The studied firm, Kaldi, is a firm which is internationally active. These criteria will make the case more specific and allow other researchers to potentially reproduce the research.

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12 innovation process, amount and quality of new products, designs etcetera, and the amount and diversity of contact among employees (Reagans & McEvily, 2003).

Another reason for choosing this type of design is because when the firm in question fits certain criteria, it represents a typical firm (Yin, 2009). In this case, Kaldi represents a typical franchise organization with financial trouble due to economic downturn. Due to this, the firm is forced to reorganize to survive. Kaldi’s case will be described in more detail in the chapter ‘case description’. Another important reason to study this case is the fact that the researcher was also involved in implementing parts of the reorganization in 2012. Due to these previous engagements with the firm, the researcher can acquire complete unrestricted access to the company, and compare the initial situation with the current situation. This rationale is what Yin (2009) calls the longitudinal case; a single case study at two or more different points in time. Furthermore, within Kaldi important events have taken place in the timespan of two years of which the effects can now be studied. Since the author was involved with Kaldi in the past, observations were made at that time resulting in a lot of knowledge of the firm and its processes.

3.1 Quality Criteria for research

According to Aken, Berends & van der Bij (2012) controllability, reliability and validity are the most important research-oriented quality criteria. “They provide the basis for inter-subjective agreement on research results”. Controllable research allows other scholars to replicate the study (Aken et al., 2012). By carefully describing the methodology of this research, the controllability will be high.

When a study is reliable, the researcher can demonstrate that the operations of a study— such as the data collection procedures—can be repeated, with the same results (Yin, 2009). There are four potential sources of bias: the researcher, the instrument, the respondents and the situation. (Aken et al., 2012). To reduce the potential harm of researcher bias,

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13 and therefore increase reliability (Aken et al., 2012). Respondent bias is countered by

involving respondents from all units of analysis. These include respondents from the upper management, the CEO, board of franchisees and individual franchisees. To combat situation bias, some respondents will be interviewed multiple times at different moments in time.

Validity consists of three types: (1) construct validity, (2) internal validity and (3) external validity. Construct validity is high when the concept being studied is measured by the correct instruments (Yin, 2009, Aken et al., 2012), in other words construct validity is high when the researcher indeed measures what he intends to measure. To ensure high construct validity, multiple sources of evidence will be used and a chain of evidence will be established. Internal validity is mainly a concern for explanatory case studies and not very relevant for exploratory research, such as this study. In case studies it is difficult to apply effective tactics to increase internal validity (Yin, 2009). Nevertheless, by using tactics such as explanation building and pattern matching in the data analysis phase, internal validity will be ensured as much as possible. External validity refers to the generalizability or transfer of research results and conclusions to other people, organizations, countries, and situations (Aken et al., 2012). Common criticism on single case studies is that they are poor for generalizing to a broader spectrum (Yin, 2009). However, this is incorrect since case studies rely on analytical generalization instead of statistical generalization, which is the case with quantitative

research. In analytical generalization, the investigator is striving to generalize a particular set of results to some broader theory (Yin, 2009). Therefore, while the single case in this research might be unique and hard to generalize to other companies specifically, the results can be generalized to a broader theory.

3.2 Case description

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14 shops in the Netherlands declined to 32. Due to this, Kaldi felt the need to engage in a chain of reorganizations and change its strategy.

Before the qualitative research can start, a better understanding of the organization is preferred. As mentioned before, Kaldi is a franchise. The franchise consists of a (1) small management team who manage the franchise from the central headquarters. This team consists of five core members, including the CEO, and a few trainees. Typically, the headquarters makes most of the decisions, such as which products to offer and how to advertise. Next to that are (2) three boards of franchisees, one for each region in the Netherlands. Per region the franchisees can choose a peer to represent them on the board. Once they are on the board, they can voice their concerns and they have the power to refuse certain decisions made by the management team. Lastly, there are the (3) thirty franchisees, who all have their own Kaldi store.

3.3 Data collection method

To ensure reliability and construct validity, the data for this research will be collected via multiple sources. These include (semi-)structured interviews, documents and observations.

To gain a better understanding of the recent changes within the firm, an initial interview was conducted with the CEO of Kaldi. Since the CEO is also the founder of the organization, he is an ideal respondent for uncovering initial data. In addition, the CEO is involved or at least aware of all processes happening within the company.

In this interview a good first impression of the latest reorganizations and innovations was formed. It provided a solid foundation of knowledge of the organization to proceed with the study. Furthermore, in the initial interview the CEO pointed out where to look for data from the reorganization. Access to their database was provided as well as employees and

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poor-15 performers. Of these selected firms the franchisee in charge was interviewed, during this research they will remain anonymous so they can freely speak without fear of possible repercussions. The interviews were conducted according to the Interview Protocol in appendix A. It should be noted however that these interviews were semi-structured, so not every question was asked and some of the follow-up questions are not listed. Additionally, the average performing store underwent the full extent of the restructuring recently. It is the first store of the franchise to have been changed according to the new strategy; it serves as a pilot for the other stores in the franchise. Therefore the newly designed store is interesting to further investigate, since it is the fruition of one of the most radical changes within Kaldi.

Next to that, one member of the board and one from the management team were also interviewed, allowing all units of analysis to be included. Furthermore, the knowledge and field notes of the researcher’s research of a year before were used to support the newly collected data.

4. RESULTS

The results will be structured according the theoretical predictions that were proposed based on the literature review (Yin, 2009). But before we can go more in depth on the relationship between reorganization and innovation, the initial situation and the innovation process needs to be described first, followed by the description of the reorganization itself. Only after this information, the full extent of the relationship can be uncovered, which will be analyzed in the last sub-chapter ‘Post-reorganization’.

4.1 Before the reorganization

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4.1.1 The innovation process

Since Kaldi does not have a designated R&D department, most of the innovations come, top-down, from the CEO.

“*Laughs* I think until now, most of the innovative ideas came from me. In the future I hope that this will change, else it will stay like the one-man-show it always has been.”

According to several franchisees their CEO is a creative, visionary type of leader:

“He is always looking for improvements and is sometimes two steps ahead, for better or for worse…”

The CEO admitted that his creativity and the never ending pursuit of perfection could also be a weakness:

“The downside of me is that I have way too many ideas. I need my team around me to make sure not every idea gets implemented, because else everyone will go crazy.”

He gets most of his ideas from non-formal interactions, but also from employees and stores. Some ideas are worth implementing, others are not. As mentioned in the quote above, Kaldi’s management team is needed to funnel his ideas and filter out the not-worthwhile ideas. The opinions of the team carry a lot of weight for the decision-making process, especially since a lot of factors need to be considered. He noted:

“In any case, we do not rush the process; my team has a lot of influence on me. In

principle, franchisees are self-employed; they do not blindly follow orders. Everything has to be considered.”1

Kaldi’s innovation process pre-reorganization can be summed up as follows:

1. CEO forms ideas originating from the environment or employees; 2. These ideas are tested by the management team;

3. Ideas are adjusted or dropped based on feedback; 4. Implementation phase

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17 Additionally there is another way to implement innovations within Kaldi. This is called the “illegal way” by Kaldi employees. While franchisees have a certain freedom and autonomy to manage their stores, they have to stay true to the franchise formula. For Kaldi franchisees this means they are forbidden to, for example, change the stickers on the windows, change the furnishings or offer products not provided by preferred vendors. Nevertheless, sometimes franchisees secretly offer products not provided by the suppliers. A franchisee said the following:

“To be able to sell new products which are not offered by our suppliers, you have to register the product, conduct a feasibility study, provide financial data and general

information of the supplier, before you could offer the product. This process could take weeks or even months and before it is even completed, the demand or hype for a certain product could be long gone. So yeah, we sometimes buy new products and just put it on our shelves and sell it.”

Surprisingly enough, a lot of new products or innovations were implemented through this illegal way. When a new product introduced by a franchisee is discovered by the

headquarters, they are forced to halt the sale. However, when a product or innovation has shown to be very successful, they will be replicated in other stores by the headquarters.

“If you look back over the years, very successful things were implemented this way. For instance, the sale of ice cappuccino was illegally started by one store, now all stores offer it and the yearly revenue exceeds 100.000 euro’s.”

4.1.2 contact amount and diversity

Kaldi’s franchise network consists of thirty to forty franchisees, depending on the point in time. These franchisees have stores located all over the Netherlands, in Belgium and China. This makes face to face contact more difficult, hence a lot of the contact between the

franchisees and the headquarters are done through e-mail, phone and sporadic store visits by headquarters. Most of the contact via phone or e-mail is related to the day-to-day business or urgent questions; very rarely new ideas from franchisees are brought up in a phone

conversation or e-mail. However, there are occasions when a store is visited new ideas get discussed with a member of the management team. This idea then goes through the

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18 However, contact between franchisees was very limited. They are somewhat acquainted with each other, but they hardly have any contact. Most contact occurs between franchisees who are in close proximity of each other, for example in neighboring cities or the same provinces. Even then, the contact is mostly limited to day-to-day business or small talk. A franchisee mentioned the following:

“…You exchange information about products and discuss to purchase supplies together for example, but discussing new ideas… Usually you discuss that during a formal meeting rather than informal through the phone.”

A few times a year formal meetings take place with all the franchisees, during which multiple things get discussed regarding the organization, but also new ideas and products get showcased. The new innovations that are discussed are mostly innovations ready for the implementation-phase.

One could argue that innovation-wise contact is pretty much one-sided, coming almost exclusively from the top. Additionally, the amount of contact is virtually non-existent among franchisees, limited only to formal meetings and sporadic (informal) contact between

franchisees who are familiar.

The diversity in contacts, however, is above standards. There are a lot of diverse persons with different backgrounds, experiences and thought worlds among the franchisees. This is largely due to franchisees coming from different cities in the Netherlands, having different upbringings and educations. The Kaldi headquarters have to deal with many differing needs of franchisees, according to interviewees this can lead to a lot of frustration. However, the different viewpoints and thought worlds can also lead to radical innovations or improvements. Unfortunately, most contact exists between franchisee and headquarters and not among franchisees. This brings us to the next topic.

4.1.3 The degree of awareness for innovative ideas

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19 ideas or new products with each other. Based on casual talk between members of the

organization and observations, during this time there were no clearly structured procedures other than a lengthy and complex procedure to introduce new products. There was also no platform to discuss new ideas or improvements.

Valuable opportunities to innovate for the firm as a whole were not acted upon, which lead to stagnation within the firm, which in turn only worsened the situation.

4.2 The reorganization

Until the beginning of the decade, Kaldi was steadily growing. As a result of the economic recession and other factors, such as the rise of internet shopping and shifting customer needs, Kaldi’s profits began to decline after 2009. Over time, many franchisees were seeing less and less customers in their stores. Consequently, some of the franchisees were forced to leave the franchise due to insurmountable losses on their part. Approximately ten stores were closed or changed owners during this time. One of the largest issues within Kaldi was the lack of uniformity, a franchisee said the following:

“You need uniformity to be distinguishable for the customers. At the moment, this is not case and it is a complete mess. I feel that it goes at the expense of the power of the brand. […] If you look at the logo for example, it is slightly different everywhere.”

On the other hand, a lot of the franchisees expect a certain degree of freedom and do not like it if orders are given or products are forced upon them:

“Unless you want a riot, you shouldn’t continually force me to buy products, for which there is no market in my region.”

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20 “They want a tight franchise formula and want uniformity above else. You can never accomplish that. Every store has its own owner and every business owner knows its own customers the best. If something is forced upon me from the headquarters I really begin to wonder: Does it have to be like this?! Unless it’s a nice product, then I will sell it.”

As it becomes apparent, there is a certain opposition between the franchisee and franchisor. The franchisees want close to complete autonomy and the franchisor wants uniformity and control. When business is going well, these issues are not that severe. But when business is going slow as a result of the financial crisis, the tensions build up. Eventually leading up to a point where the franchisees rebelled against the headquarters.

These factors prompted the management team to think about their current strategy and the direction in which the firm was headed.

4.2.1 Communication

By looking at the findings in the previous subchapter, it becomes apparent that there are many issues related to communication or lack thereof. The franchisor is unaware of new ideas from franchisees and the communication among franchisees is virtually nonexistent. Clear communication is key for franchises. The CEO said the following about communication:

“If you look at a franchise, it’s all about one thing and that’s communication. ‘Headquarters can’t communicate’. That has nothing to do with our organization, every franchise formula has to deal with this issue”

As headquarters it is not wise to only force things on the franchisees, they have to listen and adjust accordingly as well. In the end, the franchisees have to buy products or decor with their own money. This did not happen enough and as a result a “rebellion” was instigated by the franchisees. The franchisees wanted more say in the organization and headquarters wanted to reduce the tensions within the organization. In 2012, this has led to the birth of the board of franchisees. The board consists of three members, one chosen from each region2 in the

Netherlands by its franchisees. Every chosen member of the board and headquarters have multiple meetings a year, during which they discuss issues, marketing, ideas and new products. Furthermore, the management is obligated to run certain decisions by the board, such as firing a core member of the organization.

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21 The installation of the board could be seen as the first major step of the reorganization. First and foremost, it gave the franchisees more power. Additionally, it also provided a

platform for franchisees to discuss and communicate new concepts, innovations and products. It was the first step to improve the communication and relieve the tension between the

franchisees and headquarters in order to reduce the agency problems.

4.2.2 Downsizing events

The next step of reorganizations included downsizing. Two core members of the relatively small management team left the firm. When two managers of a small team leave the firm, the shock can be felt throughout the whole organization. Especially considering that this team runs one of the larger coffee franchises in the Netherlands3. One of the two managers, Mr. Hendriks, who left the firm, was responsible for the recruitment of new franchisees for new locations or takeovers of existing locations. Whenever a new location is opened or when a new franchisee joins the firm, he grooms them for the job and assists them until the point when the store is opened. The other manager that left the firm, Mrs. Henny, was responsible to advise and train franchisees individually from the moment on the new store is opened. She would be available for franchisees for questions, help and advice on both managing the store and financial related issues. She frequently visited the stores for face-to-face contact and was considered the “go-to person” when franchisees are in need of support.

According to the franchisees, Mr. Hendriks was largely responsible for the growth of Kaldi. In December 2012, during the last major recruitment period of franchisees, Mr. Hendriks announced that he would leave the firm. This came as a slight surprise for the people involved, especially for the franchisees who were in the midst of a takeover from a previous franchisee. As a response, Mrs. Henny was appointed by headquarters to take over Mr. Hendrik his tasks. This led to a substantial increase in workload for Mrs. Henny, who was promoted to director of stores. It severely impacted the quality of the guidance, such an impact that there was hardly any guidance at all according to one franchisee who had just entered the franchise when these events took place:

“On the evening that I formally met with the previous owner, Mr. Hendriks told me he was going to quit. […] For better or worse, Mrs. Henny then took over his tasks. Mrs. Henny should be there for franchisees to guide them after the takeover, but that has hardly taken

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22 place at all. […] She was always very busy, she was continuously travelling across the

country and it was wearing her down. The times that she was here in my store, she was on the phone with others all the time, while she should have been there for me. It was very annoying and it was a negative experience for me.”

Due to the lack of guidance for this particular franchisee and others, there was hardly any room and time for innovation. As a result it was decided to not extend her contract. According to the CEO, there was already a lot of talk in the organization:

“Internally, the core is always up to speed on the latest. […] The moment I had doubts on whether to let her go or not, I informed the board of franchisees and asked for feedback. That way we try to take away the surprise.”

So in order to moderate the negative effect of downsizing, the management team announced and discussed the possibility of Mrs. Henny leaving the firm beforehand. According to the respondents it was the correct move to let her go, however the job disappeared and there was no real replacement. The CEO took over part of her tasks when visiting the stores. A franchisee said the following:

“There was no substitution for Mrs. Henny. Do we notice a difference since she left? Yes and no. You notice it somewhat since she came to your store with some regularity; she was responsible for some of the supplier purchases, deals with suppliers, marketing. Since she left those activities halted. Hans (CEO) took it over somewhat, meddled with some supplier purchases. But we have yet to notice anything from it. Product sales and marketing are somewhat less effective.”

Another franchisee also noted that there was hardly any difference when she left other than regular visits: “Guidance never took place in my case, not before and not after.”

Even though in this case it was pre-announced and less of a surprise than Mr. Hendriks leaving the company, the execution of the downsizing was performed poorly. Many

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23 the quality of the guidance for franchisees has deteriorated significantly. There is only so much a single person can do in a day; it is therefore not strange to see a decline in quality, especially if the person who took over the tasks has other, arguably more pressing tasks to do first.

Fortunately, in 2014 a new job was created within Kaldi’s management team. A person new to the firm was hired with a background in psychology and sociology. This person is responsible to manage franchisees’ expectations. According to the CEO one of the largest issues is the overestimation of franchises by franchisees, he said the following:

“People join our franchise with a pink balloon and think: “This is so much fun, I’m going to be an independent business owner!” and then the pink balloon bursts and suddenly the formula is no longer fun, then they become irritated etc. So we hired someone to look where it all went wrong and what we as an organization can do to keep the balloon in the air

longer.”4

This newly created job will possibly offer some guidance and increase satisfaction. It still does not address the lack of guidance in the financial area or supplier relations. According to the CEO, the plan is for him to take over those tasks. Since the CEO engages more in store visits, there is more face-to-face contact and therefore more opportunities to come up and discuss new innovative ideas with franchisees. As he put it himself: “I need a lot of opinions. I have an opinion of my own, but I need to test it. So I collect a lot of opinions and the more I collect, the better it is to form my image of something.”

However, the lack of guidance is still felt among the franchisees, especially among the underperforming franchisees. They are struggling with the formula and it seems that the more they are underperforming, the more they are “straying away” from the franchise. For instance, an underperforming franchisee made some drastic changes to his interior:

“Look, headquarters has nothing to do with the changes that we implemented here. At the end of the day, we are the ones who stand here day in and day out trying to increase our revenue. And we think this way is better.”

4_{Translation: Mensen komen bij ons met een Kaldi vestiging “Roze ballon, ojee wat leuk ik ga voor mezelf}

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24 A better performing franchisee stated that he was absolutely against deviating from the formula. Based on observations and interviews, underperforming franchisees are willing to take more drastic measures in order to survive, however by doing so they deviate from the franchise-formula. According to Szulanski & Jensen (2008) this impairs the overall success of the formula. While it could be argued that franchisees, as a result of the lack of guidance, are acting more creatively, the overall effect of their innovations are minimal. Only in a few cases where other franchisees and even headquarters are enthusiastic, these innovations get

replicated in other stores. The negative effects of the lack of a clear standard and uniformity weighed far greater than the occasional local success due to an innovation.

4.2.3 Restructuring Kaldi: Kaldi 2.0

Kaldi exists for fifteen years, in that time there has never been major reorganization to strengthen the brand, to standardize every store. Consequently, the designs differ a lot. Some stores still have the same interior and décor as ten years ago, while others have newer designs. Furthermore, due to declining profits and shifting customer needs a radical change was

necessary.

4.2.3.1 A new strategy

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 Increase the experience of enjoying a cup of coffee or tea

 Increase the uniformity of Kaldi stores

 Strengthen the brand

 Increase brand awareness

 Responsible economic growth in the Netherlands as well as Europe

 Attain a customer-satisfaction of at least an 8 out of 10 for both selling products and serving drinks

 Continue to remain green in production and serve fair coffee and tea in order to have a high-quality end product.

 Retain good franchisees longer in the organization and keep them satisfied Table 1: Strategic goals 2013-2015. (Strategic plan Kaldi, 2013)

4.2.3.2 Kaldi Cru

One of the largest issues with Kaldi is its lack of uniformity, a store in Zwolle for example almost only sells coffee machines and accessories and does not serve coffee, while in

Amsterdam most of the revenue comes from drinks and food. For customers this can be confusing and therefore it could damage the brand. Additionally, sales for premium coffee machines were declining. In order to cater to the upcoming shift in customer needs, the new concept Kaldi Cru was developed. The concept involves a (1) total makeover for the stores, (2) new specialized ways of making coffee, (3) more specific offering in types of coffees and (4) adjusting the ratio of products to serving food and drinks in favor of serving food and drinks.

Albeit slightly delayed, the first pilot-store opened in April 2014. It is still too early to measure the full extent of its success, but the initial results look promising. Furthermore, the franchisee in charge reported a high level of satisfaction with the newly designed store and noted that initial customer reactions are positive. In addition, other franchisees have taken an interest as well.

4.2.4 Restructuring communication

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26 restructure the entirety of Kaldi’s intranet. The new system is a type of internal social media platform in which franchisees and managers can freely communicate with each other. The main reason for engaging in this partnership was the need for a single platform where all information can be found and shared. Another reason was to greatly reduce the amount of internal e-mails.

Before its implementation, communication was largely one-sided and when franchisees had questions they had to e-mail or call headquarters by phone. Furthermore, a lot of essential information, such as the guidelines, rules and procedures were documented as a hardcopy and difficult to look up. The new system changed this and made all information easily accessible. The manager in charge noted: “In a short time it became an online database with a lot of information for our franchisees and next to a database it is becoming a community where franchisees can share information with each other.”

4.3 Post-reorganization

Over the last two years there have been many changes within the firm, both on

organizational level and in the stores. On the next page a timeline is presented to illustrate the major events that took place in the last two years. These events all have an effect on

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Figure 1. Timeline of major events.

4.3.1 Type of reorganization

During the last two years there have been two types of reorganization: (1) restructurings and (2) downsizes. The restructurings include the installment of the board, the new strategy which gave birth to the newly designed stores and communication system, and the new job of managing expectations. The events of two upper managers leaving the firm and its aftermath are considered downsizing events.

When for reorganization is caused by external factors, such as the financial downturn, the likely first reaction is to downsize. However, this may not be always the case. On the

organizational level, ineffective employees were the first to be replaced or removed from the organization. The continuous transfer of tasks and unclear job descriptions as a result of managers leaving the firm led to chaotic management and confusion among franchisees. A franchisee describes how a product promotion was handled:

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28 He also noted that every part of information is communicated by different managers, leading to contradicting information. Consequently, franchisees’ first reaction is to doubt decisions and products forced upon them by the headquarters when times are bad. These factors seem to only worsen the situation, leading to even worse performance and less innovation. The following example was given by a frustrated franchisee:

“Part of a franchise is that the organization buys supplies in large quantities. However, they decide what product to purchase. In some cases, the products are unsellable to

customers, but because headquarters still have a large supply of said product, they say they cannot switch to better selling substitute before all the products are sold. I don’t see why not, in the end there will be a return on the investment. […] Instead they continue to force us to sell products for which there are almost no markets.”

However, when reorganization takes place with the intention to improve the firm and not only cutting costs or ‘streamlining the organization’, the reorganization tends to be well-received by all parties involved. For instance, when internal communication was improved, interaction between franchisees increased, leading to an increased sense of empowerment. Furthermore, a manager was hired to improve the quality of communication from

headquarters towards franchisees and to manage their expectations. These restructurings were mainly instigated by the research that was conducted in 2013. The need to change came from within and the research resulted in a renewed strategic plan, which gave birth to changes in structure, processes, communication and even a newly designed innovative store layout.

4.3.1.1 Restructurings

Based on the data that was collected, these types of reorganization have a different influence on innovation. The CEO said the following about the board of franchisees, the first restructuring:

“We now work two years with the board, and I am more than happy on how the board is handling itself and I also like that they are critical towards headquarters.”

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29 innovation according to the literature. Before the installment, almost all the ideas came from the top down; this is no longer the case. A board member gave an example:

“One of the franchisees discovered this new rare product and found out that there was a market for in the Netherlands, it was brought up in a board meeting and now a lot of

franchisees sell it.”

The same positive effect can be found with the implementation of the new communication system.

“We used to get a lot of criticism, but now we hear a lot more compliments. That is some tremendous progress.” As the CEO stated about the new system.

Thanks to the new system, the franchisees have an official platform to easily

communicate. A franchisee noted: “Colleagues used to call each other to discuss some new ideas, nowadays you find that on the new system.” The added benefit is that other franchisees can also see the discussion and could join in.

Furthermore, restructurings seem to have a negative effect on the degree of pressure due to improved job descriptions, according to the CEO:

“After each step it becomes clearer what someone’s tasks are, and what he is responsible for. We still have a long way to go, but we are going in the right direction.”

4.3.1.2 Downsizing events

Contrary to restructurings, the downsizing events were experienced as a negative effect on innovation. When Mr. Hendriks left the organization in the midst of a recruitment round, several of the respondents were “hung out to dry”, since they never got any formal guidance. Mrs. Henny took over part of the tasks, but as a result, became overworked. Due to the lack of training, guidance and interaction, many franchisees were forced to work out things by

themselves. Franchisees were too pre-occupied with managing supplier purchases next to the day-to-day business, leaving no room for innovation to be communicated towards

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4.3.2 Degree of acceptance by franchisees

Another recurring factor that influences the firm’s innovativeness despite reorganizing is the extent to which franchisees accept the changes that are implemented. The CEO noted: “Everyone is for the greater good until it damages their individual interests.”

Headquarters strives to create a uniform franchise in order have consistent quality and a stronger brand. In principle, most franchisees agree, however not all of them want to make a sacrifice to achieve it. Within Kaldi there are certain products which are mandatory to buy as a franchisee, without buying it, it is not possible to buy any other supplies. According to the respondents, it leads to a lower acceptance for changes. The same is the case with the new store design; headquarters want to roll the design out as swiftly as possible in all of the stores. Part of the design is paid for by headquarters, but there is still a portion that has to be paid for by said franchisee. A franchisee said the following about the new design:

“They asked us if we were interested in it. I said I was interested, but I wanted to see some numbers first; I wanted to see if it will work before we change things. Why would I change things if it didn’t improve? They would provide me with the numbers, well I still don’t have them… Then all of a sudden they came knocking and said that everyone has to change. I actually wanted to change, however I just wanted some numbers to support the change. I stood firmly and after a while it wasn’t spoken of again.”

The CEO said the following: “In the end it is about one thing and that’s for you to be successful as a store. You choose for a franchise knowing that it has purchasing benefits, the only thing is… supplies are purchased centrally. We can never fully satisfy everyone.”

Alternatively, the proposal for the newly designed pilot-store was “developed well” according to the franchisee involved, which made him accept the changes. Due to his quick acceptance and cooperation, the store serves as a prototype for other franchisees. In only two months, a lot of improvements were developed based on the pilot-store, leading to more innovation in the future.

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31 thereafter. This would indicate a small short-term increase in firm-innovation, but a decrease on the long-term.

4.3.3 Interaction: Amount and quality of communication

The amount and quality of communication have a positive effect on the relationship between reorganization and innovation. When Mrs. Henny was let go, extensive interaction with the board of franchisees took place. This had a couple of positive effects. First, the shock of an influential manager leaving to firm was reduced. Second, a lot of feedback was received to make the correct mutual decision. Third, there was a platform to discuss replacement. The replacement came in the form of a new job, the job to manage expectations. Its goal is to keep franchisees satisfied through high-quality communication. When everything is clearer for franchisees and actual mutual communication is the norm, innovation will thrive. The new communication system exemplifies this; in the small time during which it is active, many tips and ideas have been communicated by franchisees. These findings are in line with Reagans and McEvily (2003), who state that innovation thrives when a network consists of strong connections, such as the board, and connections that span boundaries, such as the new communication platform.

However, when reorganization is not adequately communicated, the innovativeness of the firm suffers. Changes do not get implemented the intended way, if at all. Additionally, when changes are not properly discussed, changes could be implemented which are in fact

disadvantageous for franchisees. As was the case with a recent product promotion discussed earlier. Since that promotion was not thoroughly communicated and confusing, one of the three franchise-regions boycotted the promotion, mostly because they did not see the benefits. “If headquarters were to communicate better things could have gone different.”

So, next to an effect on innovation directly, an indirect effect was discovered.

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5.

DISCUSSION

As the findings show, there are indeed several factors that impact the extent to which a firm will remain innovative despite reorganizing. Based on the results found in the case study of a firm in a highly competitive and dynamic environment, the following conceptual model is proposed:

Figure 2. Conceptual model.

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5.1 Factors influencing a firm’s innovativeness despite reorganizing

In total, thirteen relationships were found to be of influence. These relationships are divided among six propositions. Each proposition is explained based on the findings and discussed with conflicting or supporting literature.

Proposition 1a: Downsizing will increase the degree of pressure felt.

As a result of the aftermath of the financial crisis, Kaldi’s first reaction was to reduce operating expenses in order to rebalance it with profitability. The decision was made to lay off inefficient members of the management team. This type of decision is not uncommon for firms whose survival is at stake (Salge & Vera, 2012; Pratzel & Morton, 2009). When two managers with much responsibility within the firm left, their jobs were not completely

replaced; some of the tasks were transferred to other members of the organization, others were lost. As a result of the downsizing events, the workload increased for surviving members which profoundly increased the degree of pressure felt. The effect was especially noticeable due to the relative size of the downsizing events compared to the amount of managers within the firm; two out of seven manager-positions were removed. In a psychological study, Greenglass, Burke and Moore (2003) find that excessive increases in workload as a result of downsizing lead to a range of stress-induced reactions, such as burnouts and depressions. Findings indicate that pressures indeed increase when downsizing takes place. One of the key managers experienced one of these reactions as a result of downsizing. Mrs. Henny was appointed to take over tasks next to her already time-consuming, existing tasks. This severely increased her workload, what led her to be overworked. It affected the quality of her work and ultimately the franchisees under her care suffered because of that. Furthermore, due to the ad hoc nature of her new appointment as director of stores as a response to the sudden leave of a manager, the transfer of tasks and new job responsibilities were unclear for most people involved, which also increased the degree of pressure felt by franchisees.

Proposition 1b: An increase (decrease) of pressure leads to a decrease (increase) of innovation.

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34 creativity and thus innovation. The same causal relationship could be found in this case study; whenever pressures rise, innovation performance decreases. One of the most noticeable drops in innovation was observed as a result of excessive pressures. Due to the increased workload for Mrs. Henny, many (new) franchisees were not offered any guidance, leaving them in the dark. As a result, unnecessary time and effort was spent on supply-purchases, financial matters and other matters. Consequently, not much time was left to be attributed and knowledge was scarce for coming up with new ideas, while expert-knowledge can be an excellent source for innovation (Day & Moorman, 2010). Furthermore, Andrews and Farris (1972) argue that moderate pressure can lead to optimal results, however too much pressure can lead to pressure-overload. In the case of Kaldi, the departure of a key-manager occurred in a crucial phase for which the manager was responsible, namely the guidance of new franchisees. Under a high amount of time pressure the wrong decision regarding replacement was made and as a consequence, performance suffered. The evidence is in line with Hitt et al. (1994) who argue that hasty reorganization decisions are likely to result in worse

performance.

Additionally, the literature supports the notion that employees will be less innovative when there is a role ambiguity within the organization (Donnelly Jr & Ivancevich, 1975). The opposite effect was also observed in the case. When the degree of pressure went down, firm-innovation went up. Thanks to recent restructures, role clarity increased and job tension was reduced, and a fertile environment for qualitative innovation was facilitated (Ashelford, 2012).

Hitt et al. (1994) discuss that survivors of downsizes have increased unwillingness to take risks needed for innovation for fear of being penalized for a bad decision. Such a relationship was not found in this case. Most likely, this is due to the fact that a franchise is not structured like a traditional organization, and the layoffs occurred on the management level (on which jobs are more secure and bound by contracts in this case). In contrast, the research by Hitt et al. (1994) was conducted at large firms with over 7000 employees and the layoffs were almost exclusively executed on lower hierarchal levels.

Proposition 2a: Restructuring will decrease workload pressures.

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35 restructuring is disruptive, since it destroys established practices and could harm external relationships (Amburgey et al., 1990; Hannan & Freeman, 1984; Anderson, 1991). However, in the case of Kaldi, most of the damage was already done by the series of downsizes. The restructurings offered a more comprehensive solution to the problems caused by layoffs. Due to a newly created job and improved job clarity, workload pressures were reduced.

Additionally, due to the less threatening nature of restructures as compared to downsizes, the degree of pressure did not increase, in fact it decreased due to improved role clarity. These findings are somewhat conflicting with the existing literature on restructurings. Perhaps this is due to the lack of clear definition of restructuring opposed to downsizing. Many authors see reorganization, downsizing and restructuring as the same thing, while that is not the case. In this case it was found that reorganization is divided into two main definitions: restructurings and downsizes. Overall, restructurings are more comprehensive and thought-out as compared to downsizes, that is why a positive effect was found on the degree of pressure.

Proposition 2b: Restructuring will directly lead to an increase in the innovativeness of a

firm.

In the case of Kaldi, a direct effect of restructuring on innovation was uncovered. The reason for this is simple; one of the main goals of the restructurings was to improve and renew the franchise. Naturally, this caused the firm to remain or even become more

innovative despite reorganizing. This is supported by Kabanoff, Palmer and Brown (2000) who find that firms that restructure to increase productivity for example, improve more than firms that only focus on cutting costs. In their research, Okhuysen and Eisenhardt (2002) coined the term intervention, they define intervention as a formal mechanism to improve knowledge integration in groups by providing specific behavioral directives for members to follow (Pavitt, 1993, 1994; Okhuysen and Eisenhardt, 2002). In the way restructures are performed at Kaldi, they could be compared to the interventions performed in Okhuysen and Eisenhardt’s study, only on a larger scale. One of the restructures at Kaldi led to the

implementation of a new communication system, which allowed all members of the

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Proposition 3a: An increase (decrease) in communication quality and frequency will lead

to an increased (decreased) alignment of interests.

For franchises especially, the degree of acceptance by franchisees is important. In a

normal organization managers have strict authority over its subordinates. In franchises there is less authority over franchisees, since they are more autonomous due to additional rights they have and the nature of the franchisor-franchisee relationship. As a franchisor it is therefore more difficult to implement reorganizations, since franchisees are relatively more autonomous and do not like to be told what to do or change. The fact that most changes also require

investments to be made by the franchisee increases the difficulty to implement changes even more. It is therefore essential for the franchisor to frequently engage in rich-information exchanges and to also listen to its franchisees in order to reduce resistance to change (Elving, 2005) and align interests. Based on previous research, Elving (2005) identified two main goals for communication during organizational change. The first goal is to inform and provide information regarding the changes. The second goal is to create a community within the organization (Francis, 1989; De Ridder, 2003). The first goal is relevant for the proposition, the latter will be discussed in a later proposition. When franchisees are adequately informed and benefits of the changes are also clear for them, the alignment of interest is likely to increase, and thus increasing the degree of acceptance of reorganizations by franchisees. The recent implementation of the newly designed store is a perfect example of this relationship. Headquarters told all franchisees that they had to change their stores to increase uniformity of the brand. While most franchisees were not particularly against it, communication from headquarters was one-sided and sporadic at best. Additionally, the quality of the information given was poor. Consequently, their interest were not aligned and therefore, franchisees were not convinced to adopt the changes, especially since they were required to make investments on their part as well. On the other hand, the implementation of the pilot-store of said design went excellent. The people involved stated that it was mostly thanks to the extensive and frequent communication. So because communication was of high-quality and occurred frequently, the franchisee was able to see the benefits of the change and as a result the interests of franchisor and franchisee were aligned.

Proposition 3b: An increase (decrease) in the extent to which franchisees accept

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37 For innovation to occur, social interactions and cooperation have to take place (Aalbers, 2012; Bovasso, 1996). To engage in successful cooperation, at least some sort of alignment of interests in necessary. When there is no alignment of interest in the reorganization, the

franchisees are more likely to refuse the changes and agency problems will occur (Jensen & Meckling, 1976). These problems occur because of differing motivations of the principal (headquarters) and the agent (franchisees). The problems are even more prevalent because headquarters only has an imperfect capacity to observe the franchisees’ actions (Lee, 1999). These problems were especially present at Kaldi. For a few franchisees the alignment of interests with headquarters was exceptionally low, leading to a lot of conflict. As a result of conflicting interests, one of the interviewed franchisees (secretly) changed several things to his store. While according to Szulanski and Jensen (2008), local modifications to a franchise-formula work detrimental to performance and innovation for the firm as a whole.

Additionally, when a change is not in the interest of a franchisee, they could even outright boycott the change. If firm-wide changes are not accepted by franchisees, who are necessary for its implementation, overall firm-innovation is unlikely to take place. Changes orchestrated by the franchisor such as replication of a successful, uniform formula increase growth of the franchise while local innovation could hurt the franchise (Szulanski & Jensen, 2008). On the other hand, when the reorganization is in the perceived interest of franchisees, they are more likely to accept the changes which are implemented to improve firm as a whole and thus increasing overall innovation despite reorganizing.

While the importance of communication is adequately discussed in the fields of organizational change and innovation, the findings suggest that in a franchise setting

communication and persuasion is even more important. Szulanski & Jensen (2008) state that a uniform franchise is superior for growth and innovation, however in practice many

franchisees tend to resist changes which are not in their interest. In the case of Kaldi it became very clear that there is a certain tension and friction between the franchisor and franchisee. The franchisor has to communicate very clearly and listen as well in order to ‘sell’

innovations to the franchisees.

Proposition 4: An increase (decrease) in communication quality and frequency will lead

to an increase (decrease) in firm-innovation despite reorganizing.

Reorganization: a strategic tool that hurts firm innovation? A franchise case study