An Examination of the Persistent Effects of Franchising Strategy on Large Chains

Abstract

In the US economy, retail chains are extremely important since they account for a very high share of GDP relative to manufacturing sector. Retail is dominated by large franchised chains, particularly in the restaurant industry. A proven business format comprising a differentiated menu, exterior and interior design of the outlet, logos, etc., draws the interest of many prospective franchisees simultaneously, especially to large chains because it reduces their risk. Theoretical arguments are built, supported in relevant research, to present three hypotheses. Together, they form a theory of how franchising helps large chains despite abating of resource scarcity and escalation of threat from agency problems. Developing such a theory is important because extant research does not adequately address the boundary condition of large chains, even though many of them have been becoming from large to mega for many years. This theory is tested in a longitudinal sample from Quick Service Restaurant magazine, which has been publishing a list of top 50 restaurant chains for many years. All of three hypotheses are strongly supported. The paper closes with discussion of results and their implications for practice and research.