08 May 2008Working Paper Summaries

Organizational Design and Control across Multiple Markets: The Case of Franchising in the Convenience Store Industry

by Dennis Campbell, Srikant M. Datar and Tatiana Sandino

Chain organizations operate units that are typically dispersed across different types of markets, and thus serve significantly different customer bases. Such "market-type dispersion" is likely to compromise the headquarters' ability to control its stores for two reasons: Relative differences in local conditions make it difficult to monitor a store manager's behavior, and a chain with wide-ranging customer bases will have a harder time serving its customers and will need to rely more heavily on store managers' ability to adapt to local needs. This study identifies market-type dispersion as a factor that is systematically related to firms' organizational design choices. The results may help managers and consultants who deal with control challenges related to a chain's geographic expansion into different markets. Key concepts include:

Chains experiencing higher levels of variation in customer demands across different locations are more likely to increase delegation and the provision of incentives through the organizational design choice of franchising.
Stores are more likely to be franchised when their location characteristics are more divergent from the most prevalent location characteristics of the chain as a whole.
Non-franchisor chains with higher levels of such market-type dispersion tend to decentralize operations to a greater extent. It is also possible that they provide higher variable pay.

Author 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.