Multi-unit Franchising: A Comparative Case Analysis

The Journal of Applied Business Research – January/February 2011
Volume 27, Number 1
Multi-Unit Franchising:
A Comparative Case Analysis
Dildar Hussain, University of Vienna, Austria
Josef Windsperger, University of Vienna, Austria
ABSTRACT
The objective of this study is to explain the franchisor‟s choice between single-unit and multi-unit
franchising. We employ a comparative case analysis method to compare the theoretical patterns
with the empirical patterns of the governance forms. We selected two multi-national franchise
networks based in Austria. Our findings suggest that franchisor‟s multi-unit franchising strategy
can be explained by monitoring costs, franchisee‟s transaction-specific investments, franchisor‟s
system-specific assets, and franchisor‟s financial resources scarcity.
Keywords: Multi-unit franchising; agency theory; transaction cost economics; resource-based and organizational
capabilities view; comparative case analysis
1
INTRODUCTION
T
he role of franchising in national economies is becoming more and more important (Kaufmann &
Dant, 1996) by creating employment opportunities and service prevision (Spinelli, Rosenberg, &
Birley, 2004). Franchising is the fastest growing form of retailing and a major portion of the recent
growth can be attributed to the emergence of multi-unit franchising (Grünhagen & Dorsch, 2003; Kaufmann, 1993).
Multi-unit franchising (MUF) refers to an organizational arrangement where one franchisee operates two or more
franchised outlets in the same franchise system (Kalnins & Mayer, 2004). On the other hand, single-unit franchising
(SUF) refers to the traditional format where one franchisee operates only one franchised outlet.
In the recent years, MUF has been examined from agency-theoretical, transaction cost and resourcescarcity perspectives. MUF can address a number of agency problems in a more effective way compared to SUF
(Garg, Rasheed, & Priem, 2005; Kalnins & Lafontaine, 2004; Kalnins & Mayer, 2004; Vázquez, 2008). Especially,
multi-unit franchisees are better motivated to reduce the monitoring costs. Geographical contiguity of franchised
units positively influences the use of MUF (Gomez, Gonzalez, & Vázquez, 2010). The franchisors prefer MUF as
compared to SUF to reduce the risk of free-riding at the local outlets. Bercovitz (2003) investigates MUF from a
transaction cost perspective. She argues that MUF increases the franchisee’s quasi-rents based on higher outletspecific investments and thereby increases the self-enforcing range of the franchise contract (Klein, 1995). If the
self-enforcing range is higher under MUF compared to SUF, the opportunism risk is lower, and the franchisor less
frequently uses disciplinary measures (litigation and termination) for contract enforcement. Consequently, MUF
reduces the hold-up risk due to the stronger incentive effect compared to SUF. Furthermore, MUF-systems have a
relative advantage over SUF-systems (Kaufmann & Dant, 1996) under the resource scarcity view. The positive
relationship between MUF and system growth has been evidenced in the previous research (Bradach, 1995;
Kaufmann & Dant, 1996; Kaufmann & Kim, 1995). Conversely, MUF-systems have lower local market capabilities
compared to SUF-systems, due to SUF’s higher degree of local responsiveness (Bradach, 1995). Contrary to the
predictions of resource scarcity theory, the use of MUF increases with size and maturity of the franchise system
(Weaven & Frazer, 2007a; Weaven & Herington, 2007). MUF increases the organizational capabilities (such as
monitoring, knowledge transfer, and innovation capabilities) and, consequently, strengthens the competitive position
of the system. System uniformity, system wide adaptations, and system corporatization are examples of the
organizational capabilities (Bradach, 1995; Weaven & Frazer, 2007a; 2007b). Therefore, franchisors that focus on
system uniformity, system corporatization, and system wide adaptations are more likely to use MUF.
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Although several empirical studies exist on MUF, transaction-specific investments (Klein, 1995;
Williamson, 1983), system-specific assets, local market knowledge assets, and financial assets as determinants of
the ownership strategy have not been investigated. Starting from this deficit, there is a need to apply multiple
theoretical perspectives to explain this network form (Hussain & Windsperger, 2010). In this article, we develop a
set of hypotheses by extending the existing literature in the following way: First, we apply the agency theory by
investigating the influence of monitoring cost; second, we examine the bonding and scale efficiency effects of the
higher transaction-specific investments from a transaction cost perspective; third, we examine hypotheses based on
resource-based view. The article is organized in five sections. In section two, we develop a theoretical framework to
explain the franchisor’s choice between single-unit and multi-unit franchising. The details of research methodology
and the findings are presented in sections three and four. The last section includes discussion and conclusion.
2
DEVELOPMENT OF HYPOTHESES
2.1
Monitoring Costs
According to the agency theory (e. g., Brickley, Dark, & Weisbach, 1991; Lafontaine, 1992), monitoring
costs result from behavioral uncertainty due to shirking of the network partners. The franchisor has two possibilities
to reduce the agency costs: On the one hand, to reduce the residual loss by increasing the monitoring activities and,
on the other hand, to increase the incentive by allocating a higher fraction of residual income to the franchisee.
Higher motivation of the franchisees at the local outlets results in lower shirking under MUF compared to SUF. On
the other hand, additional monitoring costs may arise, due to agency problems between franchisees and their outlet
managers in the mini-chains. However, economies of monitoring and coordination of the mini-chains may mitigate
this effect (Grünhagen & Mittelstaedt, 2002; Weaven & Frazer, 2003).
Hypothesis 1: The franchisor‟s expectation of higher monitoring costs results in a higher tendency toward multi-unit
franchising.
2.2
Franchisee’s Transaction-specific Investments
Transaction-specific investments of the franchisee have the following effect on the governance structure: If
the franchisee is a multi-unit owner he has to undertake higher transaction-specific investments to open up the local
network compared to SUF. On the other hand, the additional investment costs are decreasing with the number of
units in the mini-chain. This bonding effect increases the franchisee’s dependency and hence his motivation to act
cooperatively. In addition, franchisee’s investments also increase the franchisor’s dependency if these investments
have both a selfish and cooperative element (Che & Hausch, 1999). This latter effect results from synergies between
franchisee’s and franchisor’s investments that increase the self-enforcing range of franchise contracts (Klein, 1995).
Furthermore, the cost of higher transaction-specific investment is mitigated by the franchisee’s expectation of higher
residual income due to the scale efficiencies (Grünhagen & Mittelstaedt, 2002). Decreased marginal cost for opening
additional outlets and increased franchisee’s economic rents due to economies of scale (for example, lower royalties,
centralizing of purchase) and splitting operational costs (for example, monitoring and advertising expenses) result in
higher motivation of the franchisee.
Hypothesis 2: The higher transaction-specific investments by the franchisee increase franchisor‟s likelihood to use
multi-unit franchising due to bonding effect and scale efficiencies.
2.3
Franchisor’s System-specific Assets
The franchisor's system-specific assets refer to brand name capital and the system-specific know-how
(Hall, 1993; Klein & Leffler, 1981). MUF increases the organizational capabilities and hence the competitive
position of the system by more efficiently deploying the system-specific assets. MUF results in higher monitoring
and knowledge transfer capabilities for the network compared to a system with SUF because the franchisor can
delegate some tasks to the multi-unit franchisee that has special market knowledge and realizes economies scale.
These higher organizational capabilities enable the franchisor to more efficiently exploit the system-specific assets.
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Hypothesis 3: The franchisor‟s system-specific assets are positively related to the use of multi-unit franchising.
2.4
Franchisee’s Local Market Assets
According to the resource-scarcity view, the franchisor does not have enough local market knowledge at
the beginning of the life-cycle of the franchise system (Kaufmann & Dant, 1996; Oxenfeldt & Kelly, 1968).
Franchising enables him to overcome this scarcity problem. The question to ask is: Does MUF additionally mitigate
this scarcity problem for the franchisor and hence contribute to explain the tendency toward franchising? Local
market knowledge can be more efficiently acquired by single-unit franchisees compared to employees of the multiunit network because the single-unit entrepreneur (as residual claimant) has higher entrepreneurial capabilities and is
more motivated to exploit the profit opportunities at the local market environment than the multi-unit employee.
Hypothesis 4: The franchisee‟s local market knowledge assets are negatively related to the franchisor‟s tendency
toward multi-unit franchising.
2.5
Financial Assets
Empirical studies show that MUF and system growth are positively related (Bradach, 1995; Kaufmann &
Dant, 1996; Kaufmann & Kim, 1995). MUF offers additional growth opportunities for the franchisor compared to
the MUF strategy because multi-unit franchisees are often less constrained to finance the local outlets compared to
the single-unit franchisees.
Hypothesis 5: Higher financial resources scarcity at the franchisor‟s end is positively related to franchisor‟s
tendency toward multi-unit franchising.
3
METHODOLOGY
The objective of this study is to link the theoretical predictions with the empirical patterns on MUF. Case
study methods are appropriate for the emerging research topics that have not been researched enough yet (Bradach,
1995; Eisenhardt, 1989; Eisenhardt & Graebner, 2007; Kaufmann & Dant, 1996; Kaufmann & Kim, 1995). We use
a comparative case study method for this investigation as this research design provides multi-dimensional evidence
and allows the researchers to match theoretical patterns with empirical patterns (Choo, 2005). Pattern matching is
not always simple process of agreement or disagreement; the analysis may take new directions and also generate
novel results (Dubois & Gadde, 2002). Therefore, we argue that the use of comparative case study method is an
appropriate research design for this investigation.
3.1
Case Selection
The investigation was designed as a comparative case study and an extensive desk research was conducted
to purposely select two appropriate cases for this study from a population of 266 franchise systems in Austria. “ACOM” and “B-COM” (names changed for confidentiality reasons) were selected keeping in mind that they could
provide us with some best insights about the phenomenon being investigated. As suggested by Yin (2008), case
studies can generate rich qualitative data. The basic idea behind selection of these two franchise cases rests on the
fact that the both systems are of the same age i.e. established in 1999, have multi-national franchise networks, are
operating in the same business sector, and have comparable sizes. Additionally, both companies had a vast
experience in roasting and selling coffee and subsequently decided to enter into gastronomy business. A-COM
dominantly employs a MUF strategy and Barison of these two franchise
systems could provide a useful and in-depth view of the factors influencing franchisor’s choice between MUF and
SUF strategies and enable us to make a valuable contribution to the literature by comparing these factors with the
theoretical predictions.
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3.2
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Data Collection and Analysis
The data were collected by interviews, documents, and online resources. The use of in-depth interviews has
been endorsed by researchers in franchising (Kaufmann, 1996; Kaufmann & Dant, 1999). The previous MUF
research lacks in theoretical foundations and well-defined constructs (Dant & Peterson, 1990); therefore, we
consider the use of in-depth interviews appropriate for this study. The documents included articles and information
about the companies available on their own and third party websites. Multiple resources of data strengthen the
positive points of qualitative data and contribute toward validity and reliability of the findings (Yin, 2008). Four indepth personal interviews in June-July 2009 were conducted with the top executives primarily responsible for
expansion and selection of franchising strategy. Some of the interviewees had very rich and diverse experience in
franchising operations gathered while working at McDonald’s, Pizza Hut, Burger King, and finally at the franchise
systems under study. The interviews were loosely structured and lasted for 30-150 minutes. The questions focused
on the general franchising strategy, the factors that influence franchisor’s choice between SUF and MUF, and finally
some of the unanswered research questions were presented for comments and discussion. One interview was
conducted in English while remaining three were conducted in German and later translated into English. The
respondents may be reluctant to provide sensitive information (Kaufmann & Dant, 1999) so anonymity and
confidentiality were assured to increase their comfort level.
In the first step, we used the with-in case analysis approach (Miles & Huberman, 1994) and developed
detailed case study write-ups for each case. Despite being descriptive in nature, these write-ups help in getting
detailed insights (Gersick, 1988). Secondly, we coded the data in the light of hypothesis using Emergent Coding
(Stemler, 2001) for the ease of analysis. Finally, we make a comparison of cross-case patterns and examine the
model using these patterns.
3.3
A-COM
A-COM is a part of an Austrian family enterprise with its headquarters in Austria. The parent group brings
along almost 60 years of experience in manufacturing high quality coffee making machines and roasting and selling
coffee. They founded A-COM in 1999 and opened their first coffee shop in Vienna.
“We tried this concept because we had the coffee machines, and the coffee and all other knowledge to build this up
and then we wanted to see how it works. …People flooded our first shop and everybody wanted to know that how a
“to go” concept works. … We changed the typical self-service coffee shop concept to a full-service concept to get a
wider range of customers.”
As of September 2009, A-COM had 196 units in 14 countries in four continents (see table 1 for details) and
their network is continuously growing in existing markets and penetrating into new ones. They had only 20 units in
2004 and their network has grown up to 196 units in the last five years. A-COM dominantly uses MUF for its
expansion.
Sr. No.
1
2
3
4
5
6
7
Country
Germany
USA
Austria
Hungary
Poland
Slovakia
Russia
Table 1: A-COM Number of Outlets
Outlets
Sr. No.
70
8
38
9
34
10
10
11
9
12
9
13
7
14
106
Country
Czech Republic
Egypt
Turkey
Croatia
Macedonia
Bahrain
Saudi Arabia
Outlets
6
4
3
2
2
1
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B-COM
The parent company of B-COM has been roasting “Vienna Coffee” for around 100 years and the idea of BCOM was originated by a customer.
“The parent company sells about 5 different kinds of coffee. We blend and roast them at our own and then sell them
afterwards to gastronomy. This all begins with cheap breakfast coffee and goes further to high quality espresso. In
mid 90s we were present at the exhibition “GAST” in Salzburg, Austria and Mr. Gerlicher, a guy from Germany,
came to us and said „Wow, you have a great coffee, you should get more out of it‟. …We tried this and the first,
relatively small, store was opened in a shopping mall in 1999.”
B-COM had 65 outlets in 10 countries as of September 2009. The company exclusively employs SUF
strategy. Table 2 appended below presents the details of B-COM network.
Sr. No.
1
2
3
4
5
4
Country
Austria
Germany
Hungary
Italy
Turkey
Table 2: B-COM Number of Outlets
Outlets
Sr. No.
38
6
7
7
5
8
4
9
4
10
Country
UAE
Cypress
Egypt
UK
Romania
Outlets
3
1
1
1
1
FINDINGS
A-COM started with SUF and after sometime they realized that it could be difficult for them to efficiently
monitor the large number of franchisees and also that they may not achieve the targeted growth rate, therefore, they
shifted toward MUF as their expansion strategy. On the other hand, B-COM is sticking to its SUF policy. In
following sub-sections, we examine the factors that motivated these franchisors, with many similarities, to choose
different franchising strategies. Table 3 shows a summary of the findings.
No.
H1
H2
H3
H4
H5
4.1
Table 3: Summary of Findings
Variable
Predicted Effect
Franchisor‟s Expectation of Monitoring Costs
+
Franchisee‟s transaction-specific investments
+
Franchisor‟s system-specific assets
+
Local market knowledge assets
Franchisor‟s financial resources scarcity
+
A-COM
Supported
Supported
Supported
Supported
Supported
B-COM
Supported
Supported
Not Supported
Supported
Supported
Monitoring Costs (H1)
A-COM considers monitoring costs as an important determinant of franchising strategy.
“When the partner is far away, it doesn‟t matter whether the partner is in Tyrol or in Russia, then you try to build
him up as an organization and you consult an organization. So you do visit the owner or the marketing boss or the
operations guy there. You don‟t have to visit 55 units and then talk to each of them. This reduces monitoring cost
and you cannot do a day to day monitoring in Cairo. … Monitoring cost is something that influences the decision on
doing single-unit or multi-unit franchising.”
On the other hand B-COM does not expect higher monitoring costs. Therefore, they do not realize any need
to provide additional incentive to the franchisees by offering them additional units.
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“…We have the lowest agency problems. …. As far as monitoring costs are concerned, we have almost the same
efforts, no matter whether we have single-unit or multi-unit arrangements.”
The franchising strategies at both of the franchise systems are compatible with our monitoring cost
hypothesis regarding the choice between single and multi unit franchising strategies. Hence, the results support our
hypothesis regarding the positive effect of monitoring costs on the use of MUF.
4.2
Franchisee’s Specific Investments (H2)
We predict a bi-dimensional effect of the franchisee’s transaction-specific investments (i.e., bonding and
economies of scale effect) on franchisor’s strategy. A-COM supports both effects of the transaction-specific
investments.
“Exactly, when we talk about multi-unit franchising, the initial investment is higher. … This has an influence on
fees, because if you know that development is coming up, usually you negotiate fees. … Higher investments have a
bonding effect because you cannot go out easily. You have your money there and nobody takes risk for money. You
will try harder to be successful.”
At B-COM, bonding effect of the franchisee’s transaction-specific investments is not very strong. On the
other hand, as far as economies of scale are concerned, at B-COM, the franchisees are obliged to buy all the products
from the franchisor. There is a little room to achieve economies of scale by centralizing purchases at the mini-chain
level. The findings are compatible with Hypothesis 2.
4.3
System-Specific Assets (H3)
This hypothesis predicts a positive effect of system-specific assets on the tendency toward MUF. A-COM
uses MUF to help transfer its USP to the local outlet level.
“Vienna has history, you know it‟s romantic, it‟s music, it‟s theatre, Vienna has a coffeehouse tradition since 1684
after 2nd Turkish invasion, it‟s something you can sell to people in every part of the world. So we took that part
stronger into our concept. We are able to put two cultures together and create symbiotic approach to the customer
that‟s why we are there in Saudi Arabia, Bahrain, Egypt, and even America with Carnival Cruise Line Ships. …We
have our own equipment, our own coffee machines, our own coffee, our own technology, and our own know-how;
we have a different strategic approach than that in other companies.”
B-COM considers system know-how very important for the success of their business. However, the
franchising strategy at B-COM is not influenced by the specificity of the system assets.
In addition, A-COM claims to integrate culture with coffee and consider the “Viennese Coffee Culture” as
an integral part of their system-specific assets that is difficult to transfer to local outlets.
“We transfer culture, history and a feeling, something that did not work for last 2000 years. … We have a handbook
that includes the important knowledge to be transferred to the franchisee but the most of the knowledge transfer is
done personally.”
Furthermore, B-COM considers its system-specific assets highly non-transferable; however, contrary to the
predictions, they do not use multi-unit franchising. The in-depth analysis of the detailed case write-up revealed that
they are facing severe problems in transferring their system-specific know-how. Hence their ownership strategy
might not be efficient, due to the importance of system-specific assets.
To conclude, the analysis of the A-COM data supports the hypothesis H3 that predicted positive effect of
system-specific assets on the use of MUF. On the other hand, we found a misfit between theoretical and empirical
patterns in the case of B-COM.
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Local Market Assets (H4)
The main product (i.e., coffee) and local service of A-COM do not vary with local market characteristics.
Hence, the franchisee’s entrepreneurial know-how is less responsible for the success of the system. The data from ACOM provide a weak support for this hypothesis. B-COM completely adapts to the local market. Although most of
their raw material is supplied by the franchisor, the product line at the local outlets is adapted to the local
requirements. Therefore, the local market knowledge of the franchisee is very important. Hence the findings are
compatible with Hypothesis 4.
4.5
Financial Resources (H5)
Financial resources scarcity is one of the major factors behind shifting from a single-unit to a multi-unit
dominated strategy. A-COM started initially with SUF; however, they realized soon that system expansion is limited
by the available financial resources. A-COM strongly supports the hypothesis that franchisor’s financial resources
scarcity leads to use a higher proportion of MUF. On the other hand, B-COM does not see any additional financial
benefit from multi-unit franchisees. Hence we conclude that the findings are compatible with Hypothesis 5.
5
DISCUSSION AND CONCLUSION
This study focuses on explaining the franchisor’s use of MUF by using a comparative case analysis. We
analyze the franchising strategies at A-COM and B-COM, two multinational franchise networks based in Austria.
Franchisor’s expectation of higher monitoring costs leads them to use a higher proportion of multi-unit franchised
outlets. The franchisors may realize economies of monitoring by delegating some monitoring tasks to the multi-unit
owners. However, sometimes the franchisors (for example, B-COM) fear that very large franchisees will not be easy
to control and they may create problems for them in future, such franchisors tend to use higher proportion of SUF.
The multi-unit franchisees have to undertake higher transaction-specific investments compared to single-unit
franchisees. The franchisee’s transaction-specific investments have a dual effect on the franchising strategy. They
increase the franchisees motivation to act cooperatively, due to the bonding effect and scale efficiencies. Grünhagen
and Mittelstaedt (2002) also confirmed the scale efficiencies of multi-unit franchisees. The cost of higher
transaction-specific investments can be mitigated by achieving scale efficiencies.
The data from the interviews suggest that transferring the system-specific assets to the local outlets is rather
difficult because system-specific assets at both A-COM and B-COM show a high degree of non-transferability. ACOM’s low degree of transferability of system-specific assets is an important factor for using a higher proportion of
MUF, particularly in the international markets. MUF helps A-COM transfer knowledge to their franchisees and
ultimately results in successful transfer of the “Viennese coffee concept” to the local market outlets. Inconsistent
with our prediction, B-COM applies a SUF strategy despite of having highly non-transferable system-specific assets.
However, B-COM faces serious problems in transferring their system-specific know-how. Hence their ownership
strategy might not be efficient. The use of MUF increases the franchisor’s control by supporting the transfer of
system-specific assets to the local outlets and enabling the standardization of administrative procedures and routines
at the local market.
On the other hand, the local adaptation capabilities under MUF are lower than under SUF. The findings
also suggest a significant effect of local market knowledge on the choice of franchising strategy. However, singleunit franchisees may not always have an advantage compared to multi-unit franchisees with regard to local market
adaptation. A-COM argues that there are no significant differences between the local market knowledge advantages
of single-unit and multi-unit franchisees. The reason behind this could be that the brand name of the A-COM is so
important for the success of the system that local market adaptations do not generate additional residual income for
the partners.
Although the study provides a detailed insight of the ownership strategies of A-COM and B-COM by
comparing theoretical predictions with empirical patterns regarding the choice of ownership strategy in franchising,
the findings of this study are subject to the standard limitations of case study research methodology. First, the major
limitation of case study research is that the findings are rarely generalizable. Second, there is a lot data for analysis
that sometimes leads to omission of some important information as it is difficult to use all the data at one time.
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AUTHOR INFORMATION
Dildar Hussain is writing his PhD at the Center for Business Studies, University of Vienna under a fellowship from
the Higher Education Commission (HEC) of Pakistan. The areas of his research interest include franchising,
entrepreneurship, and strategic networks.
Dr. Josef Windsperger is an associate professor at the Center for Business Studies, University of Vienna. His
research fields are strategy and organization, networks, and theory of the firm.
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