Hybrid forms and franchising Flashcards
(22 cards)
Hybrid form?
Set of organisations such that coordination between those organisations takes place by means of the price mechanism and various other coordination mechanisms simultaneously - Douma and Schreuder
Hybrid forms are efficient for intermediate levels of asset specificity
Shows low asset specificity - transaction cost lowest for market, if high transaction costs lowest with hierarchies
Hybrid forms placed on line between markets and organisations
Franchising?
Define franchise agreement as one lasting for a definite or indefinite period of time in which the owner of a protected trademark grants to another person/firm, for some consideration, the right to operate under this trademark for the purpose of producing or distributing a product/service - its central features are the rental of a decentralised production or distribution process
Have to sign a contract thus is a market element
High degree of coordination, needs high degree of standardisation
Core types of franchise?
- Company sells right to use brand name etc. – looking at this type
- Privatisation – right to provide public good e.g., rail – won’t be covering this type
Why examine?
- Overcoming Principal agent problems?
- Halfway house between internalisation and the market
- Rapid growth of the form
- Why is it different? –
- Not a technology licensing agreement due to central role of trademarks
- Differs from an agency relationship as franchisee cloaks himself in ID of the franchisable trademark
- Not a multi-unit enterprise bc franchisees operate as independent firms
Common in sectors such as?
- Fast foods – McD
- Hotels and restaurants – Holiday Inn
- Car rentals – Hertz
- Petrol stations – Esso
- Retailing – Bodyshop
2 characteristics in common –
* Provide services which have to be produced locally while customer is present
* Large adv in developing and maintaining a business formula and brand name
Assets involved –
* Could be a name, idea, secret process, product, equipment
Is developing of franchising something to do with current economic environment?
- Reaction to increasing market concentration – spar competing w Tesco
- Well suited to service and human intensive economic activities
- Changing structure of economy – more value added in services, gov encouragement for individual entrepreneurship and self-employment
- Rapid product life cycles
- The outsourcing culture
Core facts - headlines?
- Growth in numbers and income
- British Franchising Association figures
- International dimension
Franchising industry turnover (£bn)
1984 - 0.9
2018 - 17.2
Number employed in UK franchising (000s)
2001 - 407
2018 - 710
Franchising types - from Stern and Stanworth?
- Manufacturer – retailer – Esso
- Manufacturer – wholesaler – coca cola – may franchise independent bottlers who supply retailers
- Wholesaler – retailer franchise – Spar
- Trademark, trade name, licensor – retailer franchise – Hertz business format printing etc.
Franchising types - Porters retailing analysis?
- Helps understanding of intersectoral distn of franchising and distribution of bargaining power
- Nature of PA problem arising
- Convenience – goods bought frequently, quality of transaction regarded less important – production must take place at site of consumption (fast food) or where locational convenience serves as sales promoting function (petrol)
- So only require standardisation and quality control in local outlets – franchisor has more power
- Non convenience – important transactions – seek info from retailer – retailer has local knowledge and expertise in selling – cars
- Franchisee may have more bargaining power in relationship
- Franchisor acts to share risk
Advantages for franchisor?
- Enables to achieve national and international coverage for product more quickly
- Provides capital to franchiser – i.e. fees paid by franchisee
- Franchisees self employed so usually motivated to work hard and build up business – ensuring success for franchisor
- Can benefit from knowledge the franchisee has of the local market
Advantages for franchisee?
- Chance to run own business w less risk
- Use of established trade name
- Head office advice
- Benefits of continuous market research etc. by HQ
- But – how autonomous/independent – swaps independence for security and fewer opp to diversify, growth limited
Why franchise in economic terms?
- Why don’t firms integrate forwards
- Why don’t franchisee integrate backwards
Resource scarcity thesis?
- Scarce financial and managerial resources
- An explanation for small service sector firms
- But cannot explain why large established companies continue to use franchising when they expand further
Why franchise - administrative efficiency ideas?
- Analysed from agency theory and transaction cost perspective
- PA problems/ moral hazard/ opportunism/ free rider problem/ bounded rationality
- Also links to whole issues of why firms do/don’t exist
- Franchising allows one to test hypothesis regarding nature and limits of firm as type of organisation
- Advantages of reducing costs or increasing net revenues resulting from division of activities between independent enterprises
- Best way of dealing with TC/PA type problems
- Franchising is then almost vertical dis-integration – by contract
Why franchise - the franchising decision?
- The franchisee and franchiser must agree, in great detail, how the franchisee shall embody and present the asset – as this will determine its value
- In bargaining, parties encounter sorts of difficulties reaching in arm’s length contract – Williamson advanced as VI explanation
- Firms or markets – dep on cost/benefit
Why franchise - overcoming control problems?
- Preferable to VI in minimising coordination costs but providing for entrepreneurial discretion and flexibility
- E.g., lack of incentives for company owned outlets to min costs- agency problem
- Hired internal manager less incentive to monitor workers and does not bear full cost of sharing profits w workers – moral hazard
Evidence?
- Kreuger 1991
- Steeper time profile of wages in company ownership – to reduce shirking and provide higher incentives
- Also franchising tends to prevail in larger organisations where monitoring outlets perhaps more difficult
- Substantial agency costs connected w co. ownership – restaurants under co ownership less profitable than franchised ones
- Franchisees generally work longer hours w more effort than company owned outlets – 90% new franchisees report much higher profits in yr1 than new starts – ideally franchisee obj same as franchisors – franchisees could then be considered like profit sharing managers
Key issues - free riding?
- Value of franchisors asset dep on use made by franchisee
- E.g., franchised goods bought by people outside usual environment – just assume trademark implies quality
- Cheating by providing lower quality good, franchisee does not bear full cost of poor quality
- Result – returns to asset globally slowly reduced
- Compulsory input purchases?
Franchisor may need to act as discriminating monopolist - how?
- Franchisee fees/non-returnable deposits – i.e. high initial payments force self-selection process in potential franchisees
- Royalties on gross sales – less variable than profit – reduces franchisor risk
- Tax on inputs – i.e. selling inputs at higher than MC
- Franchisor supplies fixed facilities – have key requirements for building design, transaction – specific investment
Company ownership v franchisee?
- Minkler paper
- Both co-exist – i.e. one organisation runs both
- Company outlets and franchised outlets can be found in same town/city where monitoring costs would be the same – plural form symbiosis
- Life cycle – franchises more significant early on when firms face capital constraints – management economies early on
- Is there a point at which franchising replaced by direct monitoring
- Resource scarcity issues again
Minkler 1990?
- Restaurants in the US–why some outlets owned and others not using monitoring and search theories.
- Monitoring hypotheses
- Ownership tenure (franchise or company-owned) is related to distance from monitoring HQ.
- Locations along motorways more likely to be company-owned Ownership tenure related to density of outlets.
- Search explanations:
- Company owned and franchised outlets exist in the same market at the same time – the franchisor can learn from the franchisee. Vertical integration occurs if the franchisor learns about a market from franchisee (life-cycle again)
- Distant outlets more likely to be franchised because these are more likely to be in markets unknown to the franchisor
Conclusions?
- In summary the administrative efficiency thesis suggests that franchising exists because of supervision/monitoring PA problems of internal organisation, and the existence of transaction-specific investments – franchising then becomes a more efficient market form.
- However, there are potential problems for the franchisor– the franchisee and moral hazard – may engage in opportunistic behaviour - free ride- which could ultimately reduce the value of the common asset.
- The franchisor (maybe acting with limited information-bounded rationality) then uses the contract to overcome or limit these problems and to extract maximum rents. Importance of incentives.
