The Theory of Franchising
Chandra S. Mishra. 2017. The Theory of Franchising. In Creating and Sustaining Competitive Advantage: Management Logics, Business Models, and Entrepreneurial Rent, New York: Palgrave Macmillan.
58 Pages Posted: 29 Nov 2015 Last revised: 4 Jun 2017
Date Written: September 1, 2016
Abstract
Franchising is a business model decision. The franchise business model provides leveraged growth and entrepreneurial flexibility when the firm’s cash flow appropriability is uncertain. The theory of franchising provides firm-specific and location-specific conditions that explain when and why some firms franchise and others do not. The firm-specific conditions suggest that when the cost of capital is high or the business model appropriability is more uncertain, the firm may choose to franchise the outlets; thus the rate of franchising will be higher. The location-specific conditions suggest that unless the demand variability in a region is low and the demand externality high, the franchisor will choose to franchise the outlets, not own them. The franchising mechanism provides entrepreneurial leverage to enhance and sustain the firm’s competitive position when the cash flow appropriability is more uncertain and the firm’s economic rent is subject to competitive dissipation. Franchisees possess powerful entrepreneurial incentives to earn an entrepreneurial surplus, which enhances the franchisor’s value appropriability.
Keywords: Franchising Strategy, Business Model
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