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...counterbalance loss control inherent to autonomy with relational governance mechanisms. The empirical results provided strong support for this presumption. In addition, and most notably, we found that the more relational governance becomes important, the weaker agents' incentives are aligned with the interests of the entire network. The moderating effects of five franchisee characteristics influencing goal congruencies were considered: multiunit ownership, age of the relationship, geographic distance, franchisee success, and the level of perceived intra-chain competition. Implications for chain management are provided.
Introduction
Franchising is an attractive organizational form to pursue growth strategies. It does not only permit realizing economies of scale through system-wide standardization in various functional areas such as marketing, purchasing, and product development. Relative to company operations, franchising additionally allows profiting from the expertise and responsiveness of small-scale entrepreneurs to continuously adapt to local markets (for example, Bradach 1997). For their specific knowledge to be leveraged, franchisees should be granted autonomy in decision-making in various operational aspects of the business.
Perceived leeway for independent action is furthermore important to the prospect of the whole chain since it upholds franchisees' satisfaction in the relationship, and hence, their motivation to deliver performance (Dant and Gundlach 1999; Schul, Little, and Pride 1985). That is, franchisees often choose the franchise option in order to become their own boss and run a business according to their own decisions while profiting from a proven business concept (Elango and Fried 1997; Peterson and Dant 1990). Placing too narrow restraints on outlets' operations increases the risk of disappointing hopes for entrepreneurial behavior.
Notwithstanding the just described benefits, increasing levels of autonomy equally raise the potential costs from agency problems present in any franchisee-franchisor dyad (for example, Pizanti and Lerner 2003). In consequence, autonomous decision-making by downstream stores may or may not lead to increased performance from the franchisor's perspective. Success eventually hinges on chains' ability to counterbalance the loss in control inherent to autonomy with mechanisms that achieve goal congruence between the exchange partners. Only under conditions of common economic interests between the parties can the full economic potential of decentralized dyadic decision-making be realized.
A growing body of literature analyzes the importance of social interactions in the governance of channel structures. In particular, the functionality of trust and relational norms--or, more generally, the role of relational governance--in coordinating vertical relationships has been subject to scholarly attention (Poppo and Zenger 2002; Noordewier, John, and Nevin 1990; Kaufmann and Stern 1988; Palay 1984). In this paper, we empirically explore franchisors' reliance on relational governance as a control mode to attenuate the agency problems resulting from franchisee autonomy. Most notably, we hypothesize that the more relational governance becomes important to accompany autonomy, the weaker franchisees' incentives are aligned with the franchisor. Hence, individual franchisee-franchisor dyads from different networks are the units of analysis. We focus on the moderating roles of five franchisee characteristics, which have previously been proposed to affect agency issues in the dyad: (1) multiunit ownership, (2) age of the franchisee-franchisor relationship, (3) geographic-distance between the outlet and the company's head office, (4) the franchisee's economic success, and (5) the level of intra-chain competition perceived by the storeowner.
Our study contributes to the literature in the following ways. First, although past work has investigated appropriate functional areas for independent action by franchisees (Kaufmann and Eroglu 1999), little is known about the governance of behavior within these limits. Relative to Kaufmann and Eroglu's conceptual study and earlier empirical literature, which has been concerned with the question of "who makes decisions" in chains (for example, Windsperger 2004), this paper shifts the research focus to the question of "how to assure that autonomy is not abused." Our interest therefore is to investigate empirically how companies assure--through relational forms of governance--that franchisees use their autonomy in ways such that it leads to better performance and greater satisfaction at the outlet while also benefiting the viability of the system as a whole.
Second, by incorporating franchisee characteristics such as single versus multiunit ownership in the analysis, this study extends and corroborates earlier research, which found incentive effects of these characteristics to be important for channel management (for example, Dant and Nasr 1998). Asking how a chain can achieve cooperation with outlet owners of differing expectations and orientations is crucial for small business management (Grunhagen and Mittelstaedt 2005). By focusing on the specific characteristics of each outlet, we advance the theoretical understanding of agency issues in franchising. This knowledge might also provide conceptual guidance to managers when structuring decision and control mechanisms.
The paper is organized as follows. First, we define autonomy and discuss the agency issues related to it. Second, the construct of relational governance is introduced and hypotheses about the main and moderated relationships between autonomy and relational governance are derived. Third, an empirical test of our hypotheses is reported. Fourth, we discuss our findings and provide implications for practitioners. We conclude in the last section.
Franchisee Autonomy and Agency Issues
Autonomy can be conceived of as the extent to which a party, here a franchisee, is unconstrained to independently make decisions and to take action (Strutton, Pelton, and Lumpkin 1995; Feldstead 1991). Reflecting our interest in the governance of idiosyncratic franchise dyads within chains, our analysis builds on the observation that "in a single franchising chain the level of control and autonomy exercised may differ from one franchisee to the next" (Pizanti and Lerner 2003, p. 138). The degree of autonomy may vary across outlets because of differences in monitoring costs, anticipated gains from leveraging a particular franchisee's specific knowledge, and/or as a result of accommodating a focal franchisee's desire for autonomy (Dant and Gundlach 1999).
The extent of autonomy allocated to a particular dealer determines the potential costs resulting from goal conflicts (see, generally, Jensen and Meckling 1992), and thus, the need for relational forms of governance as controls. Though the organizational form of franchising circumvents an important agency problem, which would arise between a system's head office and an employee managing an outlet, namely insufficient effort (Rubin 1978), franchisees' residual claim status creates other malincentives. These inconsistencies in objectives between the franchisor and the franchisees are usually subsumed under the risk of free-riding on the chain's brand name. Examples of free-riding include underinvestment in advertising, failure to comply with production standards, and insufficient supervision of staff (Michael 2002, 2000, 1999). Franchisees cheating on investments in the brand name by lowering the quality of output reduce their costs and augment profits since they are unlikely to loose (short-term) sales if other units follow through with obligations. The reason is that, ex ante, mobile consumers credit the goodwill they attach to the trade name even to stores, which fail to deliver promised quality ex post.
The costs accruing to the franchisor from franchisee cheating imperil the value, which can be derived from granting autonomy to store-owners in terms of leveraging the agents' specific knowledge (Yin and Zajac 2004; Sorenson and Sorensen 2001; Bradach 1997) and enhancing their satisfaction (Schul, Little, and Pride 1985), and thus, motivation (Dant and Gundlach 1999). In sum, then, various degrees of autonomy across franchisees of a same chain represent a challenge for channel management as regards the governance function. In the following, we develop the argument that chains may rely on relational forms of governance to meet this challenge by aligning the economic interests of the dyadic partners.
Hypotheses
Controlling Franchisees: Relational Forms of Governance
We define relational forms of governance as norms of behavior and unwritten codes of conduct, which safeguard exchanges against potential conflicts. Norms, in turn, are defined as expectations of behavior shared by dyadic partners (Heide and John 1992). They emerge from the social embeddedness of a contractual relationship (Jones, Hesterley, and Borgati 1997; Ring and Van de Ven 1994; Granovetter 1985; Macneil 1980) and/or are conditioned by the prospect of realizing a higher transaction value in the future than would be possible without such norms (Baker, Gibbons, and Murphy 2002).
An intensification of norms conforms to more pronounced relational content in a business liaison (Macneil 1980). More precisely, we assert that relational governance in any dyad becomes more intense when the specific norms considered are increasingly perceived by a franchisee to be relevant for his behavior. Whereas the theoretical construct of interest is the franchisor's efforts at relational governance, the governance intensity perceived by storeowners should proxy well for these investments by the franchising firm. This is because efforts by the other dyadic partner are essential for building...
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