THE CONTINGENCY THEORY IN A FRANCHISE CONTEXT A Literature Review on Franchise System Performance

THE CONTINGENCY THEORY IN A

FRANCHISE CONTEXT

A Literature Review on Franchise

System Performance

By

Jordi Fijnenberg

University of Groningen

Faculty of Economics and Business

Postbus 800, 9700 AV Groningen

Msc BA Master Thesis

Small Business & Entrepreneurhsip

Abstract

The main goal of this research is to get insights in clusters of organizational characteristics which determine franchise system performance. We have looked at several franchise characteristics like the positioning of the system, the degree of standardization, the degree of franchisee strategic participation, the rate of innovation and the growth objectives of franchise systems. We distinguished two organizational types; the franchise system with only franchised units and the plural franchise form. We propose that fully franchised systems have the highest performance in changing heterogeneous environments with a high positioning, a low degree of standardization and a high degree of participation. We further propose that plural franchise systems have the highest performance in changing homogeneous environments, with a low positioning, a high degree of standardization and a low degree of participation. These propositions need further empirical support in future research.

Keywords: Performance, Franchise system, Plural form, Fully franchised system,

Content Page 1. Introduction 4 1.1 Problem Definition 5 1.2 Thesis Outline 6 2. Literature Review 8 2.1 System Performance 8 2.2 Contingency Theory 8 2.2.1 Strategic fit 10

2.3 Contingencies traditional organization 12

2.3.1 External organizational contingencies 13

2.3.1.1 Environment 13

2.3.2 Internal traditional organizational contingencies 15

2.3.2.1 Organization 15

2.3.2.2 Technology 16

2.3.2.3 Strategy 17

2.3.2.4 Leadership 18

2.3.2.5 Decision making and Power 19

2.3.2.6 Resources 21

2.3.3 Conclusion traditional organizational contingency theory 22

2.4 Contingencies franchise/chain organization 24

2.4.1 External organizational contingencies franchise systems 25

2.4.2 Internal franchise contingencies 27

2.4.2.1 Organization 27 2.4.2.2 Technology 28 2.4.2.3 Strategy 30 2.4.2.4 Leadership 32 2.4.2.5 Decision making 33 2.4.2.6 Resources 34

2.4.3 Conclusion contingency theory franchise system 36

2.5 Hypotheses 38

3. Ideas for future research methodology 40

3.1 Research method 40 3.2 Data collection 41 3.2.1 Expert survey 41 3.2.2 Focus group 42 3.2.3 Case study 42 3.3 Validity 42 3.4 Concepts/measures 43 4. Conclusion 43 5. Discussion 45 References

Appendix I Definitions organizational contingencies

Appendix II Definitions strategic characteristics franchise systems

Appendix III Operationalization measures

1. Introduction

Michael (2002) argues that in today‘s business landscape the traditional corporation has been augmented by new species, such as strategic alliances, joint ventures and also franchise chains. Figures show that the number of franchise chains tripled over the past 15 years in the Netherlands (FranchisePlus, 2009). These figures imply that the popularity of franchising has increased enormously the past few years.

Franchising can be seen as ―a business opportunity by which the owner

(producer or distributor) of a service or trademarked product grants exclusive rights to an individual for the local distribution and/or sale of the service or product, and in return receives a payment or royalty and conformance to quality standards" (Combs,

1994; p. 2). In the past, franchising focused more on product-distribution and trade-mark franchising. Later the second generation of franchising became more popular; business format franchising (Kneppers-Heijnert, 1988). Whereas product-distribution and trade-mark franchising only included the product, service and the trademark of the franchisor, business-format franchising also includes the marketing strategy plan, operating manual and standards, quality control and a continuing two-way communication (Falbe and Welsh, 1988).

The portfolio of all the operating (franchised) units together with the headquarters of the system can be defined as a franchise system (Anderson, 1984). As in any organization, organizational performance is also important in franchise systems. Chandler (1962) argues that matching the organization‘s structure variables to the organization‘s strategy is fundamental to get high organizational performance. In this research we focus on which structural variables of franchise systems can be matched to the strategies franchise systems can follow to achieve high franchise system performance.

Several researchers have searched for structural variables that influence franchise system performance. Sorenson and Sørenson (2001) argue for example that a mix of company-owned and franchised units positively affects the balance of organizational learning and thereby influencing chain performance. Yin and Zajac (2004) argue that franchised stores that have a more flexible and decentralized structure will enjoy subsequent performance benefits. Although these researchers give a first insight in variables that influence franchise system performance, it could be imagined that there are more structural dimensions that play an important role in a certain strategy.

get more insight in structural dimensions aligned to the organizations‘ strategy is through the widely accepted contingency approach described by amongst others Burns and Stalker (1961), Woodward (1965) and Lawrence and Lorsch (1967). Donaldson (2001) argues that the essence of the contingency theory approach is that organizational effectiveness results from fitting characteristics of the organization, such as its structure and strategy, to contingencies that reflect the situation of the organization. If organizations fit their organizational characteristics to the different contingencies, high organizational performance will follow (Donaldson, 2001).

1.1 Problem Definition

Although the contingency theory is an interesting theory to get insight in how to achieve the highest organizational performance, it should be noted that the contingency theory only describes the consequences of the contingencies for traditional organizations. Alternative structures, like the popular franchise structure, are not described. According to Yin and Zajac (2004) franchise structures are more complex than structures of traditional corporations. Yin and Zajac (2004) argue that not much research has been done on the structural features of franchise systems, the strategies they can follow, and the fit between the structural features and the strategy, which together lead to high franchise system performance. Therefore, the following research question can be defined; “Which clusters of organizational

characteristics of franchise systems lead to high franchise system performance if a contingency approach is applied?” To give an answer to the research question, this

thesis is divided into different sections. The following sub questions are designed and are answered in the different sections:

 What id the contingency theory and how can we use it?

 What are the important contingencies in traditional organizations?

As argued in the problem statement, not much is written about how to achieve high organizational performance in a franchise context if a contingency approach is applied. In this part we look at the characteristics that are important in traditional corporations and how these characteristics lead to high organizational performance in traditional organizations. These outcomes are used as input for the contingencies in a franchise context.

 What are the important contingencies in franchise/chain organizations?

After identifying the important contingencies in traditional organizations, we try to put these outcomes in a franchise context. By answering this question, we try to get insights in which situations which aligned franchise characteristics lead to high franchise system performance. Because franchise systems are a more complex form of traditional chain organizations, we build upon knowledge of characteristics of traditional chain organizations. After identifying the most important contingencies and their alignment to organizational characteristics, we develop hypotheses on the effect of franchise configurations on high franchise system performance.

1.2 Thesis Outline

Chapter 1: Introduction Chapter 2: Literature Review Chapter 4: Conclusion Outcome: Gestalts traditional organization Outcome: Gestalts franchise systems Section 2.3 Describes contingency theory in traditional organization Chapter 5: Discussion Chapter 3: Methodology Section 2.1 & 2.2 Describes system performance and contingency theory Section 2.5 Describes hypotheses for future research

Outcome: Hypotheses for further research Section 2.4 Describes contingency theory in franchise context

Figure 1 Structure of thesis

2. Literature Review

This literature review is, as argued earlier, mainly based on the traditional contingency literature, the organizational chain literature and the franchise literature. In this literature review we give an answer to the sub questions as described in section 1.1. In the following sections we give an answer to how the traditional contingency theory can be described followed by the important contingencies in traditional organizations. In section 2.4 we try to put these outcomes in a franchise context. Because the dimension ―(organizational) system performance‖ is essential in this research, we first give a short description of how we define ―system performance‖.

2.1 System Performance

As mentioned earlier, organizational performance is, as in any organization, also important in franchise systems (Snow and Hrebiniak, 1980). Snow and Hrebiniak (1980) argue that there are numerous routes to optimal organizational performance; organizations may pursue a strategy that is different from its competitors but nevertheless achieve the desired organizational performance. Cummings and Worley (2005) refer to organizational performance as ability to reduce costs, increase productivity, and/or improve quality.

Currie et al (2007) argue that organizational performance includes a wide range of measures like financial measures and indicators for effectiveness, such as rate of innovation or stakeholder satisfaction. The dictionary defines performance as

an action or process of fulfilling a task or function. If we apply this definition of

performance to organizations, increasing organizational performance can be defined as increase or fulfill the organizational actions or measures like financial measures and indicators for effectiveness, such as rate of innovation or stakeholder satisfaction. This definition of organizational performance will be used further in this research and linked to the several structural contingencies.

2.2 Contingency Theory

literature gives several definitions of a contingency. A contingency can be defined as

“an event that might occur and must be planned for” (Jones, 2007; p.11), as “one thing depends on other things” (Daft, 2006; p.26), or as ―any variable that moderates the effect of an organizational characteristic on organizational performance” (Donaldson, 2001; p.7). The dictionary defines a contingency as ―an uncertain occurrence, an unexpected event, or an emergency‖. Because the main

goal of this research is getting insight in the effect of organizational characteristics on organizational performance, it seems that the definition of Donaldson fits best for this research; therefore, his definition of a contingency will be used further in this research.

Richard (2006) states that the contingency theory predicts that a dependent variable is influenced by the interaction between multiple independent variables. In other words, the contingency theory argues that the effect of one variable (X) on another (Y) depends on a third variable (W) (Donaldson, 2001). For example, the effectiveness of an organization with a mechanistic structure will increase when there is a centralized decision-making, while an organization with an organic structure will be more effective when there is a decentralized decision-making. The underlying logic of this theory is that there is no one best way to structure your organization (Venkatraman, 1985). This third variable (W) moderates the relationship between variable X and Y. Although a contingency can be seen as a moderator, a contingency plays a more specific role, because a contingency specifically determines which characteristic produces high levels of effectiveness of an organization (Donaldson, 2001; Currie et al, 2007; Ginsberg, 1985). So it can be said that not all moderators are contingencies (Donaldson, 2001).

According to Currie et al (2007) an organization contingency is best understood as one of the variables in a three variable relationship. The other two variables are organizational structure and organizational performance (see figure 2). The organizational structure includes organizational characteristics like the degree of formalization or centralization (Currie et al, 2007). Organizational performance includes measures like financial measures but also indicators for effectiveness, such as rate of innovation or stakeholder satisfaction.

contingency literature. Examples are the leadership contingency theory of Fiedler (1972), the use of resources (Lengnick-Hall, 1988; Delery and Doty, 1996; Sirmon and Hitt, 2009) and power/decision making (Mintzberg, 1980; Blackburn, 1981; Saunders, 1990). The essence of the organizational contingency theory is that organizational effectiveness results from fitting characteristics of the organization to contingencies as described above (Donaldson, 2001). In section 2.2 these contingencies are described more extensively.

Figure 2 Three -way relationship organizational contingency

2.2.1 Strategic fit

Based on the former section, it can be concluded that fit is a key concept in the contingency theory; the context and the structure must fit if an organization wants to perform well. Structure can be defined as ―the design of an organization through

which the enterprise is administered” (Chandler, 1962). Organizations must search

for a fit between the context and the structure, because fit of organizational characteristics leads to high performance, while misfit between two important factors is likely to have a negative influence on firm performance (Venkatraman, 1984; Donaldson, 2001; Sirmon, 2009). Donaldson (1987) argues that once an organization achieves fit and a contingency changes, an organization can move into misfit. This will lead to the adaptation of the structure of the organization to regain fit and restore performance.

table 1). According to Miller (1981) it is inadvisable to only look at the congruence between context and structure of just one or two organizational characteristics because organizations are too complex and too different in their characteristics. As Miller (1981) argues, only by looking at the complex interaction of many variables, manifested by a stream of decisions and events, and by distinguishing types of strategies, only then useful predictive models can emerge. Based on this, it can be concluded that only the systems approach is able to get insights in a set of aligning characteristics that together will affect performance. Miller (1981) argues further that the main task for the theorist and researcher adopting the systems definition of fit is to identify the feasible set of organizational structures and processes that are effective for different context configurations, also called ―gestalts‖. Venkatraman (1984) also argues that the system elements should be fitted with other elements to achieve high organizational performance.

Table 1 Definitions strategic characteristics franchise systems 1. Fit in selection approach Fit between context and structure; does not look at how this fit affects

performance

2. Fit in interaction approach Fit is the interaction of pairs of organizational context structure factors; looks at how this interaction affects performance

3. Fit in systems approach Fit is the internal consistency of multiple contingencies and multiple structural characteristics; looks at how this consistency of

characteristics affects performance (Derived from Drazin and Van der Ven, 1985)

way they do. So if one wants to postulate statements regarding organizational configurations, one has to search for statistically significant clusters and search for changes over time.

In this research we search for these clusters of organizational characteristics found in the traditional contingency and the franchise/chain literature. The outcomes of this research are hypotheses based on this literature. We are not executing the empirical part to search for the statistically significant clustering of these variables argued by Miller. The hypotheses of this research can be used as input for later studies in which the hypotheses can be statistically tested. In the following section we first look at clusters of organizational characteristics in the traditional organizations and how these lead to high organizational performance. In section 2.3 we use these outcomes as input for clusters in a franchise context.

2.3 Contingencies traditional organization

As argued in section 2.2, the main definition of a contingency used in this research is ―any variable that moderates the effect of an organizational characteristic on

organizational performance” (Donaldson, 2001; p.7). Organizational contingencies

can be divided into two separate groups; contingencies internal to the organization, like organizational size, technology and strategy, and those external to the organization. The external contingencies are those covered by the environment of the organization (Donaldson, 2001; Currie et al, 2007).

further described. In appendix I the definitions of the different contingencies presented in table 2 are given.

Table 2 Internal and external organizational contingencies traditional organizations Contingencies

External Author(s)

Environment;

Uncertainty, Complexity

Burns & Stalker (1961), Mintzberg (1980), Jones (2007)

Internal Author(s)

Technology;

Task uncertainty, Task interdependency, Production processes

Donaldson (2001), Woodward (1965), Currie et al (2007), Burns & Stalker (1961)

Strategy;

Diversification, Entrepreneurial Orientation

Donaldson (2001), Mintzberg (1980), Currie et al (2007), Wiklund and Shepherd (2005)

Power;

Leadership, Decision making, Power

Fiedler (1972), Lengnick-Hall (1988), Delery and Doty (1996),

Resources;

HRM, Capital

Lengnick-Hall (1988), Delery and Doty (1996), Sirmon and Hitt (2009)

2.3.1 External organizational contingencies

As argued earlier in section 2.1, Burns and Stalker were one of the founders of the traditional organizational contingency theory (from now on referred to as the TOC-theory). They found that the uncertainty of environmental variables determine several variables of the structure of the organization leading to a mechanistic structure or an organic structure. Because, according to Burns and Stalker (1961), the uncertainty of the environment determines the structure of the organization, the external environment is described first.

2.3.1.1 Environment

include the customers, suppliers, and competitors. The number of these environmental variables, both the general and specific variables, and the stability of these variables have a lot of influence on the structure of the organization.

Burns and Stalker (1961) found that uncertainty of environmental variables has an influence on the structure of the organization. This environmental uncertainty is linked to a set of two typologies. The first typology is linked to the mechanistic organization and the organic organization. While mechanistic organizations tend to perform better in a stable organization, organic organization tend to perform better in organizations with a dynamic environment (Burns and Stalker, 1961; Donaldson, 2001; Currie et al, 2007). Lawrence and Lorsch (1972) measured the certainty of sub environments by i) the rate of change in environmental conditions, ii) the certainty of information at a given time about environmental conditions, and iii) the time span of definitive feedback from the environment. They found that the greater the certainty of the relevant sub environments, the more formalized the structure of the subsystem is, which is a characteristic of a mechanistic organization. Other characteristics of the mechanistic and organic organization argued by Burns and Stalker are further described in the following sections.

The second typology is related to two organizational characteristics; i) differentiation, and ii) integration (Currie et al, 2007;, Lee and Miller, 1996; Lawrence and Lorsch, 1967). Lawrence and Lorsch (1967) found that organizations that perform well in uncertain environments have high levels of differentiation and integration, while organizations that perform well in more certain environments have lower levels of differentiation and integration. Lee and Miller (1996) found that the more uncertain the environment is, the more useful it is to employ differentiation strategies based on marketing or product-market innovation. This is because in uncertain environments the demands are changing fast, which leads to the need to innovate different products in different markets.

internal contingencies are described. The mechanistic and organic structure as described above form the coat rack for the coming variables.

2.3.2 Internal traditional organizational contingencies

Besides the contingencies external to the organization, also contingencies internal to the organizational, like organization, technology and strategy, are described in the TOC-theory. The following paragraphs describe the contingencies internal to the organization.

2.3.2.1 Organization

Several authors state that age and size have important effects on the structure of an organization (Mintzberg, 1980; Blau, 1970 in Donaldson, 2001, p.21). Also the span of control has an effect on the structure and the performance of an organization (Richard, 2006; Jones, 2007). Regarding the age of the organization, it can be said that the older organization is, the more formalized the behaviour of the organization will be (Mintzberg, 1980; Blau, 1970 in Donaldson, 2001, p.21).

Regarding the size of the organization, Currie et al (2007) argue that organizational size is linked to a typology of two organizational structures; the simple structure (centralized, low on functional specialization and formalization) and the bureaucratic structure (decentralized, high on functional specialization and formalization). Child (1988) states that small organizations tend to perform better with a simple structure, while a higher degree of bureaucracy positively correlates with a better performance when organizations grow beyond a certain size. Based on Meijaard et al (2005) the statement of Child can be toned down. They found that also smaller firms can have a more bureaucratic structure and have high organizational performance, which implies that not all statements regarding organizational structure are as black and white as presented in the literature.

In order to keep the organization effective, also the span of control of an organization should be considered (Jones, 2007). The span of control refers to ―.. the

number of managers and officials as a proportion of total employees, and could be indicative of how many subordinates a manager can or should supervise, or a measure of the closeness of contact between managers and subordinates” (Richard,

there are, the narrower the span of control and vice versa. Richard (2006) argues that the effectiveness of a broad or narrow span of control is contingent on organizational tasks and the requirements of the group process. He says that broad spans are most effective if tasks are simple, the environment is stable and communication requirements are not highly relevant to performance. A narrower span of control is most effective in opposite situations. According to Jones (2007) a broader span of control leads to a flat organization, while organizations with a smaller span of control lead to a steeper organizational structure.

Based on the TOC-theory it can be concluded that in the case of the size of the organization, small organizations tend to perform better with a simple structure, while larger organizations tend to perform better when they have a more bureaucratic structure. Besides that, organizations with a higher complexity of the tasks tend to perform better when there is a smaller span of control. When the complexity of the tasks is lower, organizations tend to perform better when the span of control is broader.

2.3.2.2 Technology

According to Mintzberg (1980) also the technical system of an organization affects certain design parameters of the organizational structure. The technology contingency is linked to two contrasting structures; the mechanistic structure and the organic structure which are described earlier in section 2.2.1.1 (Burns and Stalker, 1961; Lawrence and Lorsch, 1972; Donaldson, 2001; Currie et al, 2007). The main structural contingencies concerning the technology of the organization are task uncertainty and task interdependency (Lawrence and Lorsch, 1972).

The uncertainty of tasks in an organization depends on the instability in the environment and large changes in technology. If the stability in the environment is high and the technological changes are low, the task uncertainty will be low. In these situations organizations will perform best when the tasks are designed under strict rules, strict control and hierarchy. If the changes are large in the environment and the technology, the task uncertainty will be high. In these situations organizations will perform best when tasks are designed with fewer rules, less control and less hierarchy.

diversification of unrelated products, the organization will have high performance when the task interdependency is low. When an undiversified organization produces just one product, there will be close connections among the departments because they are all involved in the same product, which means that the organization performs best when the task interdependency is high. Based on the complexity of the technology, Woodward (1965) divided production processes into three different kinds of processes; i) unit production (small batches), ii) mass production (large batches) and iii) process production (continuous flow of production like gases). Woodward (1965) argues that organizations with low task uncertainty and high tasks interdependency perform best in mass production processes, while organizations with high tasks uncertainty and low task interdependency perform best in unit en process productions.

Based on the TOC-theory as described above, it can be concluded that organizations with high task uncertainty and low task interdependency tend to have high organizational performance when there are less rules, less control and less hierarchy. Furthermore, these organizations tend to have high organizational performance when they have unit and process production. Organizations with low task uncertainty and high task interdependence tend to perform best when there are strict rules, strict hierarchy and strict control. These organizations tend to perform best with mass production processes.

2.3.2.3 Strategy

Besides organizational size, age and technology, also the organizational strategy has an influence on the structure of an organization. Miles and Snow (1978) define strategy as “a pattern or stream of decisions taken to achieve the most favourable

match or alignment between the external environment and the organization‟s structure and process” (Miles and Snow, 1978). Venkatraman (1984) argue that

organizations should focus on a fit between the content of strategy making (what should be done) and the process of strategy making (how should the strategy be developed). In designing the strategy, organizations should focus on the process of arriving at the desired configuration of the structure, which depends on both external as on internal variables.

(Currie et al, 2007). Currie et al (2007) explain that in functional strategies activities are grouped by task (e.g., marketing or finance), while in divisional structures activities are grouped by output (e.g., activities for product 1, activities for product 2 etc). While functional structures are better suited to a strategy that focuses on the production of a single product or service (undiversified strategy), divisional structures are more suitable to a strategy of diversification (Jones, 2007).

Besides the generic strategies discussed by Porter (1980), also the strategic orientation of a firm can have an influence on the performance of an organization. Several authors for example argue that the entrepreneurial orientation of a firm can have an influence on the organizational performance (Lumpkin and Dess, 1966; Wiklund and Shepherd, 2005). Wiklund and Shepherd (2005) found that firms that face performance constraints, in terms of a stable environment and limited access to capital, can have high organizational performance if their firm has a high entrepreneurial orientation. They furthermore suggest that small firms in dynamic environments with easy access to capital might have higher performance if they have a more inward focus on efficient exploitation. Lumpkin and Dess (1996) propose though that the higher the innovativeness of an organization, the higher the performance will be if the organization becomes more organic. In section 2.2.1.1 we saw that organic structures are more suitable in dynamic environments. This seems to be in contrast with the entrepreneurial orientation argued earlier by Wiklund and Shepherd who argue that firms in more stable environments should have a higher entrepreneurial orientation.

Based on these findings, it can be concluded that in choosing the strategy, organizations should align the internal and external variables to end at the most favourable configuration. The choice to diversify has an influence on the structure of the company. Organizations which choose for a diversification strategy perform best with a divisional structure, while organizations with an undiversified strategy perform best in a functional strategy.

2.3.2.4 Leadership

leadership as a contingency. He proposes two different kind of leaders which have high performance in different situations; i) the task-motivated leader and ii) the relationship motivated leader). The task-motivated leaders are able to perform best in situations in which they have a high degree of control and influence, as well as in situations in which their control and influence is relatively low. Relationship-motivated leaders perform best in situations in which they have a moderate degree of control and influence. Furthermore, the Contingency Model (Fiedler, 1979) suggests that it is easier for a leader to modify the leadership situation than to change his personality and motivational structure. Besides the leadership styles argued by Fiedler, also general manager characteristics can be considered as important in achieving high leadership performance (Gupta, 1984). Gupta found a strong association between the innovativeness/riskiness of the firm strategy and the magnitude of the CEO‘s internal locus of control. The higher the internal locus of control, the higher the innovativeness/riskiness of the firm strategy will be.

Based on the theory of Fiedler and Gupta, it might be implied that task motivated leaders have higher performance in situations in which they have a high degree of control and influence, as well as in situations in which their control and influence is relatively low. Relationship-motivated leaders have higher performance in situations in which they have a moderate degree of control and influence. Besides that, innovative organizations perform best when the leader has a high internal locus of control and greater tolerance for ambiguity.

2.3.2.5 Decision making and Power

According to Mintzberg also the need for power of different members can influence the decision making authority in an organization. Saunders (1990) describes that “power is based upon a department‟s ability to deal with actual or

potential organizational problems”. This power is derived from a combination of three

determinants; i) a departments ability to reduce or cope with uncertainty, ii) the centrality or the flow of information and work between departments and iii) the non substitutability of activities performed by another department. The more a department controls activities of another department, the more power the department has over a (strategic) contingency (Saunders, 1990). From the resource dependence perspective it can be said that the department power derives from the ability to control resources on which others depend.

While Saunders (1990) describes the power of departments, Blackburn (1981) argues the power of participants. He proposes that the more contingencies can be controlled by the lower-level participant, the more power the lower participant has within the organization. Mechanic (1962, in Blackburn, 1981, p.128) argues that the power of lower-level participants arises from i) the individual‘s access to persons and information, ii) the unique expertise of the individual and iii) the individuals effort. The ability of lower participants to control strategic organizational contingencies can be best controlled by acquiring levels of expertise not available elsewhere and by increasing one‘s activities beyond levels adopted by higher-level participants. Based on this, it may be said that the more dynamic the environment is, the more decision have to be made by the lower participants. This implies that the power of lower participants is higher in organic organizations, while the department power in mechanistic organizations will be higher.

2.3.2.6 Resources

Next to the leadership contingency theory and the decision-making/power contingencies, also resources have been subsumed with the contingency theory (Currie et al, 2007). Luthans (1977) sees resource variables as tangible and intangible factors over which management has direct control. According to Luthans, resource variables can be separated into human and non-human resources. Human resources include characteristics as skills, knowledge, and the number of members, race and age of members. Non-human resources include elements of capital, materials, plants and equipment (Luthans, 1977). Both human and non-human resources can be seen as a gives set of variables at any point in time, so they also should be treated as independent variables in a contingency function (Luthans, 1977; Currie et al, 2007).

Regarding the human resources, several authors propose that in order to be effective, organizations‘ HR policies must be consistent with other aspects of the organization (Lengnick-Hall, 1988; Delery and Doty, 1996; Werbel, 2005; Delery and Doty, 1996). Delery and Doty say that; ― .. organizations should implement HR

practices that encourage the employee behaviours that are consistent with the organization‟s strategy. This alignment of strategy and HR practices allows organizations to achieve superior performance” (Delery and Doty, 1996, p. 808).

Delery and Doty (1996) used Miles and Snow‘s (1978) theory of strategy, structure and process to specify how the individual HR practices interact with firm strategy to result in organizational performance. In their framework, the strategic position of all firms is characterized by a single contingency variable; innovation. The framework shows that the highly innovative companies have high performance if they hire talent from outside and their employment system is based on short term commitment. The rarely innovative companies perform best when they have a long term commitment with their employees, while the moderately innovative companies perform best if they have characteristics of both the prospectors and the defenders.

Next to the human resources, also the non human resources, like capital, are important variables influencing the organizational performance (Luthans, 1977). Sirmon and Hitt (2009) researched for example the interdependent effects of resource investment and deployment on firm performance. They say that firm performance suffers when managers‘ investment decisions differ from the norms of rivals. They found in their research that ensuring a fit between resource investment and deployment decisions is more important to firm performance than maximizing either decision alone, especially when investments differ from the norms of rivals. Low investments relative to rivals in both physical capital and human capital negatively affects firm performance. Matching high investments relative to rivals positively affects firm performance positively.

Resuming these insights, it might be concluded that human resources should be aligned to the rate of innovation of the organization if they want high organizational performance. Next to that, organizations with a narrow span of control with gender diversity might have a higher performance than organization with gender diversity but a broad span of control. Besides that, organizations earlier in their life cycle that have diversity might have higher performance than those that have diversity in later stages. Regarding the non human resources, organizations should match high investments relative to rivals if they want to affect firm performance positively.

2.3.3 Conclusion traditional organizational contingency theory

small span of control, high task uncertainty, low task interdependency and an undiversified strategy. The other characteristics are proposed variables. In the following section we use this table as an input for the structural configurations of fit in a chain/franchise context.

2.4 Contingencies franchise/chain organization

As argued in the problem definition, the traditional contingency theory is an interesting theory to get insight in organizational characteristics that lead are expected to lead to the highest organizational performance, but is restricted to performance on firm-level. The TOC-theory does not describe any alternative structures like the popular franchise structure. In this section we attempt to put the traditional contingency theory as described in the former section into a franchise context.

Franchise systems can be seen as a more complex form of traditional chain organizations because franchise systems have to deal with independent business owners. The most common definition of a traditional chain organization is the definition of Ingram and Baum (1997); ―Chains are collections of components that

produce similar goods and services in several markets and link together as larger „superorganizations‟ that make considerable effort to standardize and coordinate the behaviour of their components”. Winter and Szulanski (2001) define strategies of

chain organizations as a replication strategy in which a large number of similar outlets are created and operated which deliver a product or perform a service. A very important aspect in chain organizations is that the replicated services are supervised under common ownership (Ingram and Baum, 1997). As Kruzich (2005) state;

“Chains represent the complete ownership form of multi-institutional systems, with two or more institutions providing similar services under one ownership”.

This characteristic of ownership in traditional chain organizations immediately exposes the difference between the traditional chain organizations and the popular franchise system; in franchise systems the assets of the franchised units are owned by franchisees instead of by the headquarters (Bradach, 1998). Whereas in fully corporate owned chains all the exploited units are owned by the system, in franchise systems two kinds of franchising can be found; fully franchised chains and a plural form of franchise chain (Bradach, 1998; Cliquet, 2000; Yin, 2001). In fully franchised chains all units are franchised units, while in plural form the franchisor also owns and manages its own units.

discusses differences between the franchised and company owned structure. Examples of these differences in structure are decision rights, operating flexibility and incentive structures. These differences in the structure can be explained through the ownership of assets (Yin and Zajac, 2004).

Bradach (1998) argues that the choice for a combination of franchise and company owned units is contingent upon to three factors; i) the strategy of the chain in terms of development and adaptation, ii) the size of the chain which corresponds more or less to the life cycle stage, and iii) the competitive dynamics of the industry. The challenges are; i) adding new units, ii) maintaining uniformity across units, iii) responding locally when appropriate, and iv) adapting the system when threats and opportunities arise (Bradach, 1998). Croonen (2006) build on these four challenges of Bradach (1998) and found five strategic characteristics of franchise systems; i) the positioning of the system, ii) the degree of standardization, iii) the rate of innovation, iv) the degree of strategic participation and v)the growth objective (See appendix II for definitions of these five characteristics). In the following sections we look at how these different characteristics and challenges can be related to the contingencies found earlier in the traditional organizations. Based on these outcomes we propose configurations in which the different franchise structures have the highest franchise system performance.

In the main research question franchise system performance is an important variable. In section 2.1 we defined organizational performance as fulfilling organizational actions or measures like financial measures and indicators for effectiveness, such as rate of innovation or stakeholder satisfaction. As mentioned earlier, the portfolio of all the operating (franchised) units together with the headquarters of the system can be defined as a franchise system (Anderson, 1984). Gassemheimer et al (1996) define franchise system performance as franchisees‘ assessment of franchisor relations and the system‘s competitive position. This definition of franchise system performance is broad. Combining these two definitions, the following definition of franchise system performance can be made; fulfilling

organizational actions or measures like financial measures and indicators like the rate of innovation, the franchisees‟ assessment of franchisor relations and the system‟s competitive position. This definition of organizational performance will be

2.4.1 External organizational contingencies franchise systems

In the TOC-theory we saw that the characteristics of the environment had an influence on the structure of the traditional organizational forms. Usher (1999) examined different environmental conditions of the strategy different forms of chain organizations. In his article, he separates three kinds of chain organizations; the multi-unit specialist, the multi-unit generalist and the polymorph form. All three organizations profit from economies of scale and the specialist and the generalist have identical units. The main difference can be found between the specialist en the generalist; specialists exploit a narrower niche, while generalist address varying demands. Polymorph multi-units are characterized by local adaptation and differentiated subunits (Usher, 1999).

Usher (1999) proposes in his article that when the environment is relatively homogeneous and stable, multi-unit specialists are best in achieving economies of scale in advertising and orders, with large numbers of similar focused outlets. This is also argued by Sorenson and Sorensøn (2001); ―Corporate ownership functions best

in homogeneous environments. Exploitation represents the dominant learning strategy for an organization facing homogeneous local markets” (Sorenson and

Sorenson, 2001). When the environment shows some small changes and becomes more heterogeneous, it becomes harder for the multi-unit specialist to adapt a single strategy (Usher, 1999). When the changes in the environment become large and the environment is more homogeneous, it is better to become a multi-unit generalist (Usher, 1999). Instead of focussing on a smaller offering of products and services like multi-unit specialist, multi-unit generalist focuses on a broad offering when there are large changes. Usher (1999; p. 147) say that ―the broader niche width of the

generalist makes adaptive change feasible across varying environments”. These

outcomes show some similarities with the degree of diversification of the strategies argued in section 2.3.1.3.

Table 3 External environment of system level Uncertainty environment Structure environment

CO Structure Stable Environment Homogeneous Environment

Plural Structure Changing Environment Homogeneous Environment

Franchised Structure Changing Environment Heterogeneous Environment

Author(s) Usher (1999), Sorenson Usher (1999), Sorenson and Sorensøn (2001) and Sorensøn (2001) 2.4.2 Internal franchise contingencies

2.4.2.1 Organization

In section 2.3.2.1 we saw that firm size and span of control had an influence on the performance of traditional organizations; small organizations perform better with a simple structure, while larger organizations perform better when they have a more bureaucratic structure. Next to that, traditional organizations with a higher complexity of tasks perform better when there is a smaller span of control and vice versa. In the chain and franchise literature not much literature can be found regarding the size and the consequences it has for the organizational performance. It may be assumed though that the franchise and chain systems are larger organizations due to a certain number of different outlets which need to be monitored. This might imply, based on TOC-theory, that chain organizations perform better when they have a more bureaucratic structure. This bureaucracy also may relate to the standardization in franchise systems; because at least some uniformity in franchise systems is needed, a certain degree of standardization is necessary. Standardization is one of the characteristics of bureaucratic structures as argued in the TOC-theory.

also explains this wider span of control in franchise structures by the local autonomy; because of the local autonomy, there is reduced need for the chain‘s involvement. Yin and Zajac (2004) also argue that the main objective for franchise consultants should be to persuade franchisees to adopt new programs and improve instead of monitoring them. It should be noted though that a certain degree of monitoring is always necessary to keep the business format uniform (Michael, 2002)

Although it is clear that chains with only corporate units need a smaller span of control and chains with only franchised units a broader span of control to perform well, the literature does not give any insights in the span of control in the plural form. It might be assumed that the higher the number of company owned units in the plural form, the more monitoring is necessary to keep the uniformity of the chain high. This implies that a smaller the span of control is necessary if the system wants to perform well if it has a high number of company owned units. When there is a high number of franchised units in the plural form, the local authority also will be higher, which may imply that the span of control is broader if the system is to perform well.

Based on these insights, it may be assumed that, due to their larger size, franchise and chain organizations perform best in more bureaucratic structures. This also relates to the degree of standardization to keep the system uniform. Next to that, it may be assumed that plural chain systems with a large amount of franchised units have higher organizational performance with a broad span of control over the different units. Chain systems with a large amount of company owned units may perform better with a smaller span of control because they need more monitoring than franchised units.

Table 4 Organizational structure on system level Organizational structure Span of control

CO Structure Bureaucratic structure Small span of control

Plural Structure Bureaucratic structure Small span of control

Franchised Structure Bureaucratic structure Broad span of control

Author(s) Currie (2007) Yin and Zajac (2004), Bradach (1998)

2.4.2.2 Technology

and interdependency of tasks can be found. Looking at the characteristics that follow from the degree of task uncertainty and task interdependency (fewer rules, less control and less hierarchy versus strict rules, strict control and strict hierarchy) a link can be made to the degree of standardization proposed by Croonen (2006). Croonen argues that the degree of standardization can vary from very low (fewer rules and procedures) to very high (almost every aspect of a unit‘s operations is formulated).

Linking these insights to the degree of ownership and control, it might be assumed that chains with a high number of company owned units are characterized by ownership and control by the headquarters. This is supported by Campbell (2009) who argues that the headquarters in these chains control and monitor the actions of the store managers of the company owned units. This may imply that they are characterized by more strict rules, hierarchy and control. Besides that, Bradach (1998) argues that to achieve/increase uniformity in a chain, a stricter hierarchy and control is necessary. This assumes that chains which pursue high uniformity in the chain perform better when the degree of standardization is high and when a higher number of company owned units is present in the chain.

When there are more franchised units in the chain, most of the assets are owned by the franchisees (Bradach, 1998). In the former section we saw that these franchisees have a higher level of local autonomy and control and need less monitoring than company owned units (Yin and Zajac, 2004). This may imply that for chains with a high number of franchised units, it is harder to control and monitor these units because of the ownership, which implies that chains with a high number of franchised units perform best when there are fewer rules and producers and the degree of standardization is lower.

degree of standardization is high. Systems that pursue a low rate of innovation perform best when the degree of standardization is low.

Based on this outcome, it might be assumed that chains with a higher number of company owned units have a higher performance when the degree of standardization is high. Systems with a high number of franchised units may have higher performance when the degree of standardization is lower, due to the ownership of assets. Furthermore, it might be assumed that systems that want to introduce a high rate of innovations perform best when the degree of standardization is high. Systems that are not aiming at introducing a high rate of innovations perform better when the degree of standardization is low.

Table 5 Technology on system level Degree of standardization Rate of innovation CO Structure High degree of standardization High rate of innovation

Plural Structure High degree of standardization High rate of innovation

Franchised Structure Low degree of standardization Low rate of innovation

Author(s) Campbell (2009), Bradach Bradach (1998),Yin and

(1998), Yin and Zajac (2004) Zajac (2004)

2.4.2.3 Strategy

In section 2.3.2.3 we discussed the three generic strategies of Porter (1980) which can lead to a diversified or undiversified strategy. According to Croonen (2006) the positioning of a franchise chain can be related to these generic strategies of Porter (1980). She argues that the positioning of a franchise chain depend on the quality and prices in the chain; the format can have a positioning of high prices and a high value-added format, or the format can have a low positioning with relatively lower added value and prices. Michael (2002) states that the positioning of the products and/or services in a franchise context is determined by the marketing mix. The marketing mix includes the same elements that Croonen discusses; the price, product quality and promotion in the franchise system (Michael, 2002).

different views. Singh (1997, in Yin and Zajac, 2004), states that more complex strategies are more likely to lead to conflicting demands and can create uncertainty and instability in organizations. Besides that, complex strategies also have higher levels of information and competency requirements for implementations (Yin and Zajac, 2004). Based on their research, Yin and Zajac state that when there is a more tightl company ownership, it is more likely to implement a strategy with unitary demands. When the degree of standardization is lower, then companies are better of pursuing more complex strategies. Yin and Zajac argue that the higher motivated and autonomous the franchisees are, the better they are in making strategic decisions that have more complex and conflicting demands. This may imply that chains with a high degree of franchised units perform best pursuing more complex strategies.

If we relate this to the diversification story earlier in this section, we may assume that the simple strategies, with more predictability and standardization, fit best in a strategy which focus on a single product or service (the undiversified strategy). The more complex strategies, with higher levels of information and competency requirements, fit maybe more in a strategy of diversification. This is unfortunately not further discussed in the franchise literature, and needs further research. Neither has it been clear which positioning fits best in which context. With regard to positioning, it may be easier for the franchisor to have a low positioning when he has a tighter control over its franchisees and thereby force them to offer their products at the lowest prices. When the franchisees control more contingencies, it may be assumed that they are able to have more influence on their margins, which makes it harder to position the whole chain in the lowest price range. If the chain has a higher degree of company owned units, it may be easier, due to a higher control by the franchisor, to choose a low positioning.

Based on these insights, it seems that chains with a high degree of company owned units perform best pursuing a simple and undiversified strategy. Chains with a high degree of franchised units might perform best pursuing a complex and diversified strategy. Regarding the positioning of the system, it seems that chains pursuing a low positioning perform best when they have a high degree of company owned units. Chains with a high degree of franchised units perform best pursuing a high positioning.

Plural Structure Simple strategy Low positioning Franchised Structure Complex strategy High positioning

Author(s) Yin and Zajac (2004),

2.4.2.4 Leadership

Koene (2002) examined different kinds of leadership in chain organizations. In his research he found a relationship between local and charismatic leadership and financial performance in a chain. He found that local and charismatic leadership and the willingness to help members had a positive effect on the climate and financial performance of the separate units of a chain. Koene (2002) does not look at a the ownership structure of these units; franchised units or company owned units. It may be proposed that because systems with a high degree of company owned units are less characterized by local adaptation (Bradach, 1998), these units perform best with more charismatic leadership. System with a high degree of franchised units are more characterized by local adaptation (Bradach, 1998), which might imply that these units perform best with local leadership.

In section 2.4.2.2 we furthermore saw that chains with a high number of company owned units are assumed to perform best with a high degree of control and influence, while chains with a high number of franchised units perform best with fewer rules and procedures. If we link this to the characteristics of the leaders discussed by Fiedler (1979) (see section 2.3.2.4), it may be assumed that in both situations a task-motivated leader will perform best; the task-motivated leaders are able to perform best in situations in which they have a high degree of control and influence, as well as in situations in which their control and influence is relatively low (Fiedler, 1979).

Next to the different leadership styles mentioned above, we concluded in section 2.3.2.4 that when an organization wants to be more innovative, a leader with a high internal locus of control will lead to higher performance. In the section 2.4.2.2 we proposed that the rate of innovation in more standardized franchise systems will be higher than in less standardized systems.

Table 7 Leadership on unit/system level

Leadership system Leadership unit Locus control level level system level CO Structure Task motivated Charismatic High internal locus

leadership leadership of control

Plural Structure Relational leadership Charismatic High internal locus leadership of control

Franchised Structure Task motivated Local leadership Lower internal locus

leadership of control needed

Author(s) Fiedler (1979) Koene (2002)

2.4.2.5 Decision making

In section 2.3.2.5 we argued that the more contingencies are owned by the head quarters, the higher the centralized the decision making will be (Saunders, 1990). The more contingencies are owned by the lower participants the more decentralized decision making (Blackburn, 1981). If we place this in a franchise context, it may be concluded that ownership is an important factor because it influences the control of the resources and thereby the decision making process of the chain (Kruzich, 2005; Yin and Zajac, 2004). As argued earlier, regular chain organizations are characterized by central ownership and centralized decision making. This is also supported by Windsperger (2004) who says that the higher the franchisor‘s portion of intangible knowledge assets relative to the franchisee‘s, the more decision rights should be assigned to the franchisor, and the higher the degree of centralization will be. Based on this, it can be said that chains with a higher degree of franchised units perform better with a decentralized decision making process. In the case of a high number of company owned units, it can be said that more contingencies are controlled by the franchisor, which makes that they perform better if the decision making is more centralized.

Another important issue regarding the decion making in a franchise context is the degree of strategic participation of franchisees. Cochet (2008) says that; ―In

chains where the franchisor makes important decisions and hence his ongoing performance is required, franchisees should be concerned about misbehaviors and are expected to adopt, possibly in collaboration with the chain‟s management, a franchisee council‖. If the chain operator is making strategic decisions, a certain

strategic decision making (Croonen, 2006). According to Cochet & Ehrmann (2007) it is more likely that a FAC will be appointed when more decision rights are allocated to the franchisor. Moreover, they say that it is less likely to set up a FAC in chains with a high proportion of company-owned outlets than in chains with a low proportion of company ownership, because in these chains the decision making is centralized. Based on this, it can be said that in chains with a high degree of franchised units perform best if the strategic participation is high.

Based on these different insights, it might be proposed that chains with a high degree of company owned units have a higher performance with a centralized decision making, while chains with a high degree of franchised units have a higher performance with a decentralized decision making. This may be linked to the degree of standardization; the higher the degree of centralized decision making, the higher the standardization of the system will be and vice versa. With regard to the strategic participation in the system, it may be said that chains with a high degree of company owned units perform best if the strategic participation is low, while chains with a high degree of franchised units perform best if the strategic participation is high.

Table 8 Decision making on system level

Decision making Degree of strategic participation CO Structure Centralized decision making Low strategic participation

Plural Structure Centralized decision making Low strategic participation

Franchised Structure Decentralized decision making High strategic participation

Author(s) Yin and Zajac (2004), Cochet and Ehrmann (2007)

Windsperger (2004)

2.4.2.6 Resources

In section 2.3.2.6 we concluded that the highly innovative companies perform best if they hire their human resources from outside. In chain organizations the human resources are managed by two different kinds of mangers; a store manager or a franchisee. Company owned units are always managed by company store managers, so the parent company controls the outcome of the units (Yin and Zajac, 2004). The advantage of company store manages is that they have to comply and follow the routines set by the parent company. According to Yin and Zajac these kinds of human resources are effective in strategies that emphasize predictability and standardization. They state that ― (…) the operational conformity, more centralized

decision rights, and weaker financial incentives of company-owned stores are better aligned with the strategic choice that values routinization and efficiency” (Yin and

best with strategies that have unitary demands. Based on these authors it can be concluded that company store managers perform best in strategies that emphasize predictability and standardization.

Regarding the franchised units, several authors say that when the monitoring costs rise, due to uncertainty and opportunism, franchised outlets are more efficient (Bradach, 1998; Yin, 2002; Botti, 2006). Barthélemy (2008) argues that franchisees have, compared to company owned outlets, a stronger incentive to work hard, because their reward is directly related to the performance of their own outlets. Yin and Zajac (2004) furthermore argue that, besides the higher incentives, franchised units tend to have a higher level of autonomy and operational flexibility than company owned units. These capabilities lead to the development of local management skills, which are more appropriate for complex strategies as argued in section 2.3.1.3. These outcomes imply that the company owned units perform best with store managers, while franchised units perform best operated by franchisees.

Besides the monitoring costs of franchised units versus company owned units, also other resource constraints can be an important issue in a chain‘s strategy and structure (Cliquet, 2000). Cliquet (2000) argues that the resource constraint is based on the assumption that a retailer prefers to own its outlets. If this retailer wants to implement a new retail format, and it lacks the resources, the retailer can turn the chain into a franchise chain. According to Cliquet (2000) franchising brings speed, human resources and financial resources in the form of fees, royalties and investments. Besides that, franchisees have a better knowledge of local markets, which lead can lead to local adaptation. Botti (2006) furthermore says that franchising the units is a less costly strategy for the retailer then calling for investors, because investors can demand higher profits than those expected by franchisees. Besides that, choosing for investors can be more risky, because they can generate problems in the board of directors (Botti, 2006).

fit certain criteria. While Croonen (2006) focuses here on the selection criteria like the location or the floor area of a unit, Cliquet (2001) also argues that the quality and capabilities of the franchisees should be considered. The quality and capabilities of the attracted franchisee should not only fit the quantitative growth objectives of the franchisor, but also the qualitative growth objectives (Cliquet, 2001). Characteristics which are important in the quality of franchisees are entrepreneurial and market-sensing skills, and the ability to bear risk (Cliquet, 2000).

Based on this, it can be concluded that company owned units perform best if they are managed by company store managers. Regarding the quantitative growth objective, and the retailer experiences resource constraints, then franchised units are also more suitable. And if the retailer wants to increase its quality, it should not only consider improving the location or the floor area, it should also consider the quality and capabilities of the attracted franchisees.

Table 9 Resources on unit/system level Resources on unit level Systems growth objective CO Structure Company store manager Qualitative growth objective

Plural Structure Company store manager Qualitative growth objective

Franchised Structure Franchisees Quantitative growth objectives

Author(s) Yin and Zajac (2004), Croonen (2006), Botti (2006) 2.4.3 Conclusion contingency theory franchise system

Based on the different insights described in the former sections, configurations in chain organizations are to be designed. As argued in section 2.3, three kinds of chain system can be distinguished; i) the fully corporate owned chains, ii) the plural form and iii) fully franchised chains. Figure 4 gives the proposed configurations of the different chain systems. Just as in the traditional organizations, the environment seems to play a moderating role in the configurations of the chain organizations. The degree to which the environment is stable or unstable seems to determine which characteristics leads to high franchise system performance.

chain versus the changing homogeneous environment in the plural form. Besides that, franchisees in the plural form are able to make than the company owned managers in the fully corporate owned chain.

Figure 4 shows the patterns as described above. It should be noted that these configurations need further research and not all these characteristics together have to lead to high organizational performance. It might be though that some clusters of these characteristics together do lead to high organizational performance. In section 2.4 we design hypotheses of such clusters. The bold characteristics in the figure are the characteristics of these clusters.