08-091
Copyright © 2008 by Dennis Campbell, Srikant M. Datar, and Tatiana Sandino
Working papers are in draft form. This working paper is distributed for purposes of comment and
discussion only. It may not be reproduced without permission of the copyright holder. Copies of working
papers are available from the author.
Organizational Design
and Control across
Multiple Markets:
The Case of Franchising
in the Convenience Store
Industry
Dennis Campbell
Srikant M. Datar
Tatiana Sandino
1
Organizational Design and Control across Multiple Markets:
The Case of Franchising in the Convenience Store Industry
Dennis Campbella, Srikant Datara, Tatiana Sandinob,∗
aHarvard Business School, Harvard University, Boston, MA 02163
bMarshall School of Business, University of Southern California, Los Angeles, CA 90089
Abstract:
Many companies operate units which are dispersed across different types of markets, and thus
serve significantly diverging customer bases. Such market-type dispersion is likely to
compromise the headquarters' ability to control its local managers' behavior and satisfy the
divergent needs of different types of customers. In this paper we find evidence that market-type
dispersion is an important determinant of delegation and the provision of incentives. Using a
sample of convenience store chains, we show that market-type dispersion is related to the degree
of franchising at the chain level as well as the probability of franchising a given store within a
chain. Our results are robust to alternative definitions of market-type dispersion and to other
determinants of franchising such as the stores' geographic distance from headquarters and
geographic dispersion. Additional analyses also suggest that chains that do not franchise at all,
may cope with market-type dispersion by decentralizing operations from headquarters to their
stores, and, to a weaker extent, by providing higher variable pay to their store managers.
JEL Classification: D82, D86, L22, M41
Keywords: Control, Market Dispersion, Decentralization, Incentives, Franchising, Retailing
∗ Corresponding Author. Tel: 213.740.4842; Fax: 213.747.bv2815; email: sandino@marshall.usc.edu
2
Organizational Design and Control across Multiple Markets:
The Case of Franchising in the Convenience Store Industry
I. Introduction
Many companies operate multiple business units that serve widely diverse types of markets
(i.e., customers). Companies expand into different markets for many reasons: to leverage the
organization’s competencies, to diversify risks, to strengthen the company’s brand name, to
achieve economies of scale, etc. The most common types of organizations serving multiple
markets are chain organizations. For example, a bank may diversify risks by offering credit and
savings services to different communities; a hotel chain may achieve economies of scale by
operating in different countries; and a supermarket chain may replicate its basic business model
by opening multiple stores in markets that serve a broad range of customers.
Despite the advantages of serving multiple markets, companies that serve a diversity of
clients face significant control problems due to the information asymmetries between the units
facing the customers and the headquarters. In these settings, the relative expertise of
headquarters is likely to be diminished vis-à-vis local management. This study focuses on
describing the control problems that emerge from serving customers in a diversity of markets,
and explores ways in which companies respond to this problem through their organizational
design and control choices.
We define the variation in customer demands across different locations as market-type
dispersion. Market-type dispersion is not necessarily associated with geographic dispersion
because (1) a company’s units can be close to each other geographically but still have sharply
diverging types of customers (e.g. convenience stores in the ethnic neighborhoods of Chicago
3
serve customers of entirely different ethnicities, despite being just a few blocks apart), and (2) a
company’s units can be geographically distant among each other and yet have similar customer
bases.
While unit managers typically have authority over some operational decisions such as
managing inventory levels or client relationships, significant strategic and operational decisions
are often retained by the headquarters, such as advertising, purchasing, or selecting the service or
product mix. However, it is more challenging to retain control over these overarching decisions
at the headquarters when market-type dispersion is high. Specifically, market-type dispersion
leads to two control problems: First, from a corporate perspective, relative differences in local
conditions make it more difficult for the headquarters to monitor and control managers serving
different markets (Landier et al. 2006). Second, from a demand perspective, a company with
wide ranging customer bases will have a harder time appealing to all its customers (Anderson
and Mittal 2000).
Previous literature in management control suggests that one way to deal with information
asymmetries between the headquarters and a business unit manager with local expertise is by
delegating decision-making authority and incentives (Baiman et al. 1995). In chain organizations
serving different locations, this solution may be achieved internally by delegating higher
responsibility to the manager and by allocating higher compensation risk at the local unit, or
externally by franchising some of the company’s units. Franchising is a solution that achieves
simultaneously both decentralization of decision rights and provision of incentives. For example,
Brickley and Dark (1987) suggest franchising control mechanisms are used to provide incentives
to the managers running the franchised units and to cope with higher monitoring costs in
geographically dispersed stores. Interviews with chain managers also reveal that franchising
4
mechanisms have other advantages over internal control systems when dealing with market-type
dispersion. First, they attract franchisees with entrepreneurial and market-sensing skills that are
superior to those possessed by company owned-store managers. Second, they attract
entrepreneurs who are better able to bear risk. Third, they allow the company to allocate risk to
local franchisees who, thanks to their superior knowledge of the market and their flexibility to
adapt their operating procedures to local conditions, perceive lower risk in operating the store
than the risk perceived by the headquarters. As the Chief Operating Officer of a large
convenience store chain in the Northeast U.S. explained
Franchisees are more entrepreneurial and would have more control over difficult
situations such as adapting merchandising to local market conditions, and
managing theft, shrinkage, and other aspects required to maintain performance.
In this paper we examine whether chains use organizational design solutions (in the form of
franchising and decentralization) to minimize the control problems arising from market-type
dispersion. We focus on convenience store chains and conduct analyses both at a chain and at a
store level. In the first analyses, we use 2004 TDLinx data (obtained from A.C. Nielsen
Company) from 420 convenience store chains to explore the effect of market-type dispersion on
chains’ decisions to franchise all, some or none of its stores. Employing an ordinal logit model,
we find that market-type dispersion is positively associated with the chains’ decisions to
franchise stores. This result is robust to other determinants previously explored in the literature
including monitoring concerns arising from the chain’s geographic dispersion (Brickley and
Dark 1987; Norton 1988) as well as chain size—a proxy used to capture the maturity of the firm
and its need to raise money—(Caves and Murphy 1976; Lafontaine 1992).
In the second part of our analyses, we focus on the 43 chains in our sample that own some
stores and franchise others, and the 34,892 stores operated by those 43 chains. Conditional on a
5
firm’s decision to franchise only some of its stores, we use a fixed-effects logit model to explore
the decision to franchise or not franchise individual stores as a function of the store-specific
market-type divergence (i.e., the extent to which a store’s market characteristics diverge from the
most prevalent characteristics of the chain as a whole). We find evidence supporting an
association between the decision to franchise and the store’s market-type divergence that is
robust to chain fixed effects as well as the store’s demographic characteristics. These latter
findings are consistent with chains systematically choosing to franchise individual stores when
market-type divergence is high and suggest that our chain-level results are not solely driven by
more extensive franchising leading to expansion into multiple markets.
Finally, we use chain-level survey data from the National Association of Convenience Stores
(NACS) to investigate how non-franchisor chains manage market-type dispersion. Using data
from 53 non-franchisor chains, we find strong evidence that non-franchisor chains with higher
market-type dispersion decentralize operations more extensively than those with lower markettype
dispersion by employing less corporate and supervisory staff relative to the number of storelevel
employees. We also find weak evidence suggesting that these chains provide higher
variable pay to their store managers (estimated by dividing the store manager's bonuses by their
total compensation). These tests are robust to other determinants of decentralization and variable
pay, namely the chain’s geographic dispersion and size.
Our study contributes to the literature in accounting that describes organizational design
solutions to control problems (such as dispersion) that are difficult to solve with internal
information-based control systems. Sev
08-091
Copyright © 2008 by Dennis Campbell, Srikant M. Datar, and Tatiana Sandino
Working papers are in draft form. This working paper is distributed for purposes of comment and
discussion only. It may not be reproduced without permission of the copyright holder. Copies of working
papers are available from the author.
Organizational Design
and Control across
Multiple Markets:
The Case of Franchising
in the Convenience Store
Industry
Dennis Campbell
Srikant M. Datar
Tatiana Sandino
1
Organizational Design and Control across Multiple Markets:
The Case of Franchising in the Convenience Store Industry
Dennis Campbella, Srikant Datara, Tatiana Sandinob,∗
aHarvard Business School, Harvard University, Boston, MA 02163
bMarshall School of Business, University of Southern California, Los Angeles, CA 90089
Abstract:
Many companies operate units which are dispersed across different types of markets, and thus
serve significantly diverging customer bases. Such market-type dispersion is likely to
compromise the headquarters' ability to control its local managers' behavior and satisfy the
divergent needs of different types of customers. In this paper we find evidence that market-type
dispersion is an important determinant of delegation and the provision of incentives. Using a
sample of convenience store chains, we show that market-type dispersion is related to the degree
of franchising at the chain level as well as the probability of franchising a given store within a
chain. Our results are robust to alternative definitions of market-type dispersion and to other
determinants of franchising such as the stores' geographic distance from headquarters and
geographic dispersion. Additional analyses also suggest that chains that do not franchise at all,
may cope with market-type dispersion by decentralizing operations from headquarters to their
stores, and, to a weaker extent, by providing higher variable pay to their store managers.
JEL Classification: D82, D86, L22, M41
Keywords: Control, Market Dispersion, Decentralization, Incentives, Franchising, Retailing
∗ Corresponding Author. Tel: 213.740.4842; Fax: 213.747.bv2815; email: sandino@marshall.usc.edu
2
Organizational Design and Control across Multiple Markets:
The Case of Franchising in the Convenience Store Industry
I. Introduction
Many companies operate multiple business units that serve widely diverse types of markets
(i.e., customers). Companies expand into different markets for many reasons: to leverage the
organization’s competencies, to diversify risks, to strengthen the company’s brand name, to
achieve economies of scale, etc. The most common types of organizations serving multiple
markets are chain organizations. For example, a bank may diversify risks by offering credit and
savings services to different communities; a hotel chain may achieve economies of scale by
operating in different countries; and a supermarket chain may replicate its basic business model
by opening multiple stores in markets that serve a broad range of customers.
Despite the advantages of serving multiple markets, companies that serve a diversity of
clients face significant control problems due to the information asymmetries between the units
facing the customers and the headquarters. In these settings, the relative expertise of
headquarters is likely to be diminished vis-à-vis local management. This study focuses on
describing the control problems that emerge from serving customers in a diversity of markets,
and explores ways in which companies respond to this problem through their organizational
design and control choices.
We define the variation in customer demands across different locations as market-type
dispersion. Market-type dispersion is not necessarily associated with geographic dispersion
because (1) a company’s units can be close to each other geographically but still have sharply
diverging types of customers (e.g. convenience stores in the ethnic neighborhoods of Chicago
3
serve customers of entirely different ethnicities, despite being just a few blocks apart), and (2) a
company’s units can be geographically distant among each other and yet have similar customer
bases.
While unit managers typically have authority over some operational decisions such as
managing inventory levels or client relationships, significant strategic and operational decisions
are often retained by the headquarters, such as advertising, purchasing, or selecting the service or
product mix. However, it is more challenging to retain control over these overarching decisions
at the headquarters when market-type dispersion is high. Specifically, market-type dispersion
leads to two control problems: First, from a corporate perspective, relative differences in local
conditions make it more difficult for the headquarters to monitor and control managers serving
different markets (Landier et al. 2006). Second, from a demand perspective, a company with
wide ranging customer bases will have a harder time appealing to all its customers (Anderson
and Mittal 2000).
Previous literature in management control suggests that one way to deal with information
asymmetries between the headquarters and a business unit manager with local expertise is by
delegating decision-making authority and incentives (Baiman et al. 1995). In chain organizations
serving different locations, this solution may be achieved internally by delegating higher
responsibility to the manager and by allocating higher compensation risk at the local unit, or
externally by franchising some of the company’s units. Franchising is a solution that achieves
simultaneously both decentralization of decision rights and provision of incentives. For example,
Brickley and Dark (1987) suggest franchising control mechanisms are used to provide incentives
to the managers running the franchised units and to cope with higher monitoring costs in
geographically dispersed stores. Interviews with chain managers also reveal that franchising
4
mechanisms have other advantages over internal control systems when dealing with market-type
dispersion. First, they attract franchisees with entrepreneurial and market-sensing skills that are
superior to those possessed by company owned-store managers. Second, they attract
entrepreneurs who are better able to bear risk. Third, they allow the company to allocate risk to
local franchisees who, thanks to their superior knowledge of the market and their flexibility to
adapt their operating procedures to local conditions, perceive lower risk in operating the store
than the risk perceived by the headquarters. As the Chief Operating Officer of a large
convenience store chain in the Northeast U.S. explained
Franchisees are more entrepreneurial and would have more control over difficult
situations such as adapting merchandising to local market conditions, and
managing theft, shrinkage, and other aspects required to maintain performance.
In this paper we examine whether chains use organizational design solutions (in the form of
franchising and decentralization) to minimize the control problems arising from market-type
dispersion. We focus on convenience store chains and conduct analyses both at a chain and at a
store level. In the first analyses, we use 2004 TDLinx data (obtained from A.C. Nielsen
Company) from 420 convenience store chains to explore the effect of market-type dispersion on
chains’ decisions to franchise all, some or none of its stores. Employing an ordinal logit model,
we find that market-type dispersion is positively associated with the chains’ decisions to
franchise stores. This result is robust to other determinants previously explored in the literature
including monitoring concerns arising from the chain’s geographic dispersion (Brickley and
Dark 1987; Norton 1988) as well as chain size—a proxy used to capture the maturity of the firm
and its need to raise money—(Caves and Murphy 1976; Lafontaine 1992).
In the second part of our analyses, we focus on the 43 chains in our sample that own some
stores and franchise others, and the 34,892 stores operated by those 43 chains. Conditional on a
5
firm’s decision to franchise only some of its stores, we use a fixed-effects logit model to explore
the decision to franchise or not franchise individual stores as a function of the store-specific
market-type divergence (i.e., the extent to which a store’s market characteristics diverge from the
most prevalent characteristics of the chain as a whole). We find evidence supporting an
association between the decision to franchise and the store’s market-type divergence that is
robust to chain fixed effects as well as the store’s demographic characteristics. These latter
findings are consistent with chains systematically choosing to franchise individual stores when
market-type divergence is high and suggest that our chain-level results are not solely driven by
more extensive franchising leading to expansion into multiple markets.
Finally, we use chain-level survey data from the National Association of Convenience Stores
(NACS) to investigate how non-franchisor chains manage market-type dispersion. Using data
from 53 non-franchisor chains, we find strong evidence that non-franchisor chains with higher
market-type dispersion decentralize operations more extensively than those with lower markettype
dispersion by employing less corporate and supervisory staff relative to the number of storelevel
employees. We also find weak evidence suggesting that these chains provide higher
variable pay to their store managers (estimated by dividing the store manager's bonuses by their
total compensation). These tests are robust to other determinants of decentralization and variable
pay, namely the chain’s geographic dispersion and size.
Our study contributes to the literature in accounting that describes organizational design
solutions to control problems (such as dispersion) that are difficult to solve with internal
information-based control systems. Sev
การแปล กรุณารอสักครู่..