An agency perspective on service triads: Linking operational and financial performance

• DOI: http://doi.org/10.1016/j.jom.2014.10.005
• Date: 01 May 2015
• Author: Chris K. Anderson,Jie J. Zhang,Benjamin Lawrence
• Published date: 01 May 2015

Journal

of

Operations

Management

35

(2015)

56–66

Contents

lists

available

at

ScienceDirect

Journal

of

Operations

Management

jo

ur

nal

ho

me

pa

ge:

www.elsevier.com/locate/jom

An

agency

perspective

on

service

triads:

Linking

operational

and

financial

performance

Jie

J.

Zhanga,∗,1,

Benjamin

Lawrenceb,1,2,

Chris

K.

Andersonc,1,3

aUniversity

of

Vermont,

School

of

Business

Administration,

55

Colchester

Avenue,

Burlington,

VT

05405,

United

States

bCornell

University,

School

of

Hotel

Administration,

246

Statler

Hall,

Ithaca,

NY

14853,

United

States

cCornell

University,

School

of

Hotel

Administration,

565b

Statler

Hall,

Ithaca,

NY

14853,

United

States

a

r

t

i

c

l

e

i

n

f

o

Article

history:

Available

online

17

October

2014

Keywords:

Service

triads

Customer

satisfaction

Service

outsourcing

Agency

theory

Franchising

a

b

s

t

r

a

c

t

We

explore

one

prolific

type

of

service

triad,

the

franchise

triad,

involving

three

primary

stakeholders:

the

franchisor,

the

franchisee

and

the

customer.

In

this

triad,

franchisees

use

their

affiliation

with

the

franchisor’s

brand

to

attract

customers

to

their

local

outlets.

In

exchange

for

the

right

of

assuming

the

identity

of

the

brand,

the

franchisee

pays

the

franchisor

royalties

and

retains

residual

profits.

Applying

Agency

Theory,

this

paper

examines

the

inherent

conflict

of

interests

between

a

principal

(i.e.,

franchisor)

that

controls

and

manages

brand

equity

as

a

shared

resource

and

an

agent

(i.e.,

franchisee)

that

retains

pricing

right

and

profits

from

the

identity

of

the

brand

by

interacting

directly

with

customers.

We

empir-

ically

isolate

the

effect

of

triad

structure

on

outlet

performance

by

matching

two

unique

datasets.

One

set

of

data

captures

operational

performance

in

the

form

of

aggregated

online

review

scores

and

the

other

financial

performance

including

average

daily

hotel

rate

and

revenue

per

available

room.

We

find

that

franchisees

charge

higher

prices

than

their

corporate

counterparts

even

when

controlling

for

operational

performance.

Even

though

franchisees

charge

higher

prices

they

maintain

similar

financial

performance

in

terms

of

revenue

per

available

room.

These

results

suggest

that

the

triad

structure

plays

a

significant

role

in

franchisees’

ability

to

free-ride

on

shared

brand

equity

and

have

important

managerial

implica-

tions

for

effective

outsourcing,

contract

design

and

performance

evaluation

for

a

wide

range

of

service

industries.

©

2014

Elsevier

B.V.

All

rights

reserved.

1.

Introduction

Generating

USD

782

billion

or

3-percent

of

US

GDP

and

serv-

ing

customers

at

over

750,000

geographically

dispersed

outlets;

the

franchise

business

model

plays

a

vital

role

in

the

US

economy.4

Franchising

involves

three

major

stakeholders:

the

franchisor,

the

franchisee

and

the

customer.

Franchising’s

ubiquity,

as

a

form

of

distribution,

is

due

partially

to

its

ability

to

incentivize

indepen-

dent

local

agents

while

affiliating

them

with

a

widely

recognized

brand.

In

this

triadic

relationship,

franchisees

(i.e.,

the

agents)

rely

∗Corresponding

author.

Tel.:

+1

802

656

0495.

E-mail

addresses:

jie.zhang@uvm.edu

(J.J.

Zhang),

benlawrence@cornell.edu

(B.

Lawrence),

cka9@cornell.edu

(C.K.

Anderson).

1All

three

authors

contributed

equally

to

this

work

and

are

listed

in

reverse

alphabetical

order.

2Tel.:

+1

978

254

1669.

3Tel.:

+1

607

255

8687.

4Figures

obtained

from

The

Franchise

Business

Economic

Outlook:

2012

conducted

by

IHS

Global

Insight

for

the

International

Franchise

Association.

on

the

franchisor’s

brand

to

attract

customers

to

their

local

outlets.

In

exchange

for

the

right

of

assuming

the

brand

in

delivering

service

to

customers,

the

franchisee

pays

the

franchisor

(i.e.,

the

principal)

royalties,

typically

calculated

as

a

portion

of

total

revenue.

Cus-

tomers

interact

with

the

local

franchisee

who

is

the

direct

service

provider,

yet

associate

their

experience

with

the

franchisor

who

owns

the

brand.

For

instance,

McDonald’s

customers

typically

are

unaware

of

the

identities

of

the

franchisees

owning

and

operating

the

outlets.

The

principal–agent

relationship

embodied

in

this

triadic

struc-

ture

leads

to

potential

conflict

of

interests.

That

is,

the

franchisor

is

primarily

interested

in

building

brand

equity

while

franchisees

are

interested

in

maximizing

return

from

owning

and

operating

their

local

outlets.

Since

the

local

franchisees

control

both

opera-

tions

and

pricing

(Stewart

and

Davis,

2005),

franchisees

may

boost

return

by

improving

operations

(thus

gaining

customers

and

rev-

enue),

increasing

prices

to

inflate

margins

or

cutting

costs

at

the

expense

of

operations.

The

latter

two

responses

essentially

free-

ride

on

the

principal’s

brand

that

attracts

customers

to

the

outlet

(Brickley

and

Dark,

1987;

Lafontaine

and

Shaw,

2005).

http://dx.doi.org/10.1016/j.jom.2014.10.005

0272-6963/©

2014

Elsevier

B.V.

All

rights

reserved.