Supersize me? Franchisee size and voluntary compliance with corporate brand‐building initiatives

• Author: Brett Massimino,Benjamin Lawrence
• DOI: http://doi.org/10.1002/joom.1056
• Date: 01 October 2019
• Published date: 01 October 2019

RESEARCH ARTICLE

Supersize me? Franchisee size and voluntary compliance

with corporate brand-building initiatives

Brett Massimino

1

| Benjamin Lawrence

2

1

School of Business, Virginia

Commonwealth University, Richmond,

Virginia

2

Robinson College of Business, Georgia

State University, Atlanta, Georgia

Correspondence

Brett Massimino, School of Business,

Virginia Commonwealth University,

Richmond, VA 23284.

Email: bjmassimino@vcu.edu

Handling Editor: Gopesh Anand

Abstract

We examine the effects of a franchisee's size, distance from headquarters, and local

competition on voluntary compliance with corporate brand-building initiatives at

the outlet level. Specifically, we consider compliance with a corporate social

responsibility effort to solicit charitable donations at the time of retail checkout,

measuring compliance performance as the amount of donations received at each

outlet. Our analysis utilizes an objective, longitudinal sample of 777 franchised

outlets in a national quick-service restaurant chain. Surprisingly, we find that dis-

tance from headquarters is positively related to compliance; we relate this finding

to recent, extant research on geographic distances and franchisee behaviors. We

find the beneficial effects of larger, multiunit franchisees are mitigated as franchi-

sees' geographic distances from headquarters increase; we relate these findings to

horizontal agency within franchising systems. We further find that franchised out-

lets in more competitive markets comply less with brand-building initiatives, even

less so when part of a larger franchisee network. Our results underscore the impor-

tant moderating role franchisee size plays in outlets' compliance, which we link

back to extant perspectives on agency theory. Supplemental analyses consider ten-

sions between compliance and operational efficiency, as well as effects of hypothe-

sized factors on another mandatory form of compliance.

KEYWORDS

brand equity, competition, compliance, location, multiunit franchising

1|INTRODUCTION

Franchising, a vital form of distribution in the U.S. service

economy, comprises 52.1% of percent of limited-service res-

taurants, 10.7% of full-service restaurants, and 21.1% of lodg-

ing outlets (PWC, 2016). Even though franchising-based

businesses contribute $541 billion to the U.S. economy

(PWC, 2016), this organizational arrangement has received

little attention from operations management scholars (Zhang,

Lawrence, & Anderson, 2015). Compared to other vertically

integrated distribution channels, franchising systems are

unique for the relationships between the corporate entity that

own the brand (i.e., franchisors

1

) and downstream outlet oper-

ators (i.e., franchisees) (Brickley & Dark, 1987; Lafon-

taine, 1992).

Although contracts tend to govern franchisor-franchisee

relationships (Lafontaine, 1992), they generally are limited

to a small set of legal and financial agreements such as

branding, profit sharing, and market exclusivity (Federal

Trade Commission, 2017). Franchisees work to maximize

individual outlets' profitability and maintain substantial lati-

tude in their daily operations (Kaufmann & Eroglu, 1999).

The franchisor, meanwhile, aspires to maximize equity

across its entire network (Brickley & Dark, 1987). These

Received: 4 January 2018 Revised: 17 July 2019 Accepted: 26 July 2019

DOI: 10.1002/joom.1056

J Oper Manag. 2019;65:659–684. wileyonlinelibrary.com/journal/joom © 2019 Association for Supply Chain Management, Inc. 659

differing goals give rise to two general types of agency

issues (Combs, Michael, & Castrogiovanni, 2004): vertical

(unit-level shirking) and horizontal (free riding on the trade-

mark). Although profit-sharing incentives may ameliorate

vertical agency issues with respect to financial performance,

shared branding incentivizes franchisees to underinvest in

brand-building initiatives and consequently cause horizontal

agency issues (Brickley & Dark, 1987; Combs et al., 2004).

Franchisors may respond with corporate monitoring and

enforcement, but this undermines a primary advantage of

franchising: The substitution of profit-sharing incentives for

costly micromanagement (Combs et al., 2004; Rubin, 1978).

In the context of quick service restaurants (QSRs), fran-

chisees' principal concerns typically involve increasing their

units' sales volume while controlling costs. To this end, ser-

vice speed has been identified as a primary driver of both

customer satisfaction and repeat purchase intent (Gupta,

McLaughlin, & Gomez, 2007). This performance driver may

motivate franchisees to ignore the franchisors' attempts to

insert additional steps into the service sequence that fail to

result in increased sales or lower labor costs.

Meanwhile, corporate brand owners must ensure consis-

tency across outlets operated by independently owned fran-

chisees (Davies, Lassar, Manolis, Prince, & Winsor, 2011),

which can be difficult even with relatively well-codified

requirementsand straightforward compliance (Anand,Gray, &

Siemsen, 2012). Achieving such compliance remains espe-

cially challenging for franchising initiatives that incur unit-

level costs but largely benefit the corporation and aggregate

franchise network. For example, initiatives that help build

brand equity—including corporate social responsibility (CSR)

initiatives—may result in higher labor cost s or slower service

speeds at the unit level (Verseman, 2017). These challenges

are likely exacerbated when compliance is voluntary in

nature—that is, it is requested by the franchisor but not bound

to the contractual terms between franchisees and the franchi-

sor. Further complicating these challenges is the idiosyncrasy

of the franchisees' outlets, which vary in size, age, and geo-

graphic location. Franchisee networks, in particular, have

steadily grown to encompass an increasing number of opera-

tional units (Jindal, 2011). Larger franchisees offer several

benefits, including those tied to cost and profitability, but the

relationship of franchisee size to other non-financial perfor-

mance dimensions remains unclear. Given these trends, we

focus our investigation on the impact a franchisee's size may

have on its voluntary compliance with brand-building

programs.

Within a typical franchise system, outlets are also widely

dispersed geographically. As a result, the franchisor can

encounter a wide range of operational contexts when seeking

to maximize compliance. Despite their propensity to signifi-

cantly influence compliance levels (Gray, Roth, & Leiblein,

2011; Sousa & Voss, 2002), these contextual characteristics

are poorly understood (Gray & Massimino, 2014; Handley &

Benton, 2012). In this study, we consider two location-

specific factors for which extant research offers mixed indi-

cations and theoretical projections: the intensity of an outlet's

local competition and its distance from corporate headquar-

ters. Both factors have played prominent roles in developing

agency theory in the context of franchising (Kalnins &

Lafontaine, 2013; Kosová & Sertsios, 2018). We contribute

to this literature by examining an important but often over-

looked variable, franchisee size, as moderating the effects of

competition and distance.

To test our hypotheses, we consider a form of voluntary

compliance—adherence to charitable donation programs—

explicitly separated from a unit's financial performance and

novel to extant research. We find a positive relationship

between the size of a franchisee's network and its voluntary

compliance levels; we relate this finding to franchisees'

knowledge-processing and incentives vis-à-vis agency the-

ory. Surprisingly, we find a strong, positive linear relation-

ship between distance from headquarters and compliance,

counter to our hypothesis that geographic distances hinder

voluntary compliance performance. However, we find strong

evidence that the role of distance and competition intensity

is contingent on a franchisee's size. Specifically, we find that

smaller franchisees' compliance levels tend to increase at

greater distances from corporate headquarters; meanwhile,

the opposite is true for large franchisees. We also find that

compliance among larger franchisees tends to drop as local

competition intensifies, while compliance among smaller

franchisees remains relatively unchanged. Our findings evi-

dence the importance of considering contextual elements

when attempting to achieve operational compliance in geo-

graphically distributed settings.

2|LITERATURE REVIEW

2.1 |Horizontal and vertical agency issues

within franchise networks

Agency theory remains closely linked to channel partner

behaviors within franchise systems (Lafontaine, 1992) and

may be parsed into two forms, vertical and horizontal. Verti-

cal agency issues relate to conflicts of interest between a cor-

porate entity and its individual outlets; these often arise

because of the natural divergence in utilities between front-

line managers and the corporate entity. The corporate entity

can address vertical agency either by (a) improving incentive

alignment between the outlet managers and the corporate

entity or (b) performing costly employee monitoring

(Bradach, 1997). Franchising typically incentivizes the

owner/operators by allowing them to retain residual profits,

660 MASSIMINO AND LAWRENCE