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In 1990, there were more than 500,000 franchised units across the United States, with sales of more than $7 billion. Moreover, franchises contributed approximately 6.9 percent to total nonagricultural employment (Franchising in the Economy: 1988-1990). Yet research is still in its nascent stages concerning this clearly significant dimension of our economy.
Franchising is a "business opportunity by which the owner (producer or distributor) of a service or trademarked product grants exclusive rights to an individual for the local distribution and/or sale of the service or product, and in return receives a payment or royalty and conformance to quality standards" (Justis and Judd 1989, 6). Product and trade name franchises are those in which dealers (franchisees) identify with and sell products produced by a supplier (franchisor), e.g., automobile dealers, gasoline stations, and soft drink bottlers. Business format franchises encompass most business operations in addition to the product or service itself. This study focused on business format franchisors because they control 74 percent of total franchised establishments, and they are expected to continue growing (Franchising in the Economy: 1988-1990).
One important stream of franchising research seeks to explain why this hybrid form of organization exists in our society and to understand why franchisors choose to franchise some units while maintaining company ownership over others (Brickley and Dark 1987, Carney and Gedajlovic 1991, Caves and Murphy 1976, Hunt 1973, Inaba 1980, Martin 1988, Norton 1988a, Norton 1988b, Oxenfeldt and Kelly 1968-69, Rubin 1978). This article strives to combine these various theoretical explanations to provide a general model of the franchisor's decision to expand through franchising versus company ownership. In this article, franchisor strategy refers to the aggregate pattern among these decisions attained by a franchising firm (Carney and Gedajlovic 1991).
Although franchisors can clearly benefit by better understanding how to achieve a healthy balance between company owned and franchised units, the study has implications for franchisees as well. For example, some have argued that franchisors buy back their most profitable franchises as they mature (Carney and Gedajlovic 1991), while others have expressed concern over franchisor ability to terminate or at least refuse to renew franchise contracts without cause (Klein 1980). Together these arguments suggest that a franchisee sometimes may be forced to give up a franchise that he/she...