Evidence from the research literature and the trade press suggests that advertising is a common source of controversy between channel partners in franchised chains. A theoretical rationalization for this argument is that venture in an asset will be less when that asset is public. Hybrid managerial forms such as franchised chains own a brand name among the franchisor and its franchisees, therefore, advertising that brand name is envisaged to be lower in a franchised chain than in a company chain. To examine the hypothesis, this paper evaluates empirically advertising degrees based on the scope of franchising in restaurant chains and in hotel chains. Advertising drops with the degree of franchising in the two industries, estimating for magnitude of chain and other variables. Implications for theory and marketing practice are discussed.
Comparative to the unitary corporate form, hybrid organizational forms such as strategic alliances, channel partnering, joint ventures and franchised chains are growing in significance in the economy (e.g., Dwyer and Oh, 1988; Snow et al., 1992; Stern,
el–Ansary, and Coughlan, 1996). Researchers have evaluated the motivations of such forms for numerous marketing and competitive initiatives. This paper will evaluate the motivations to advertise designed by one hybrid organizational form, franchising. Hypothesis concurs that franchised chains use less finance on advertising than corporate chains due to spillover effects. Due to shared trademark, advertising done by one product spills over to give positive impact on sales in other products with the same trademark. In all cases, this spillover is overlooked by each franchisee since it does not affect individual product or service profits, therefore franchisees advertise less frequently; however, a corporate chain makes use of the spillovers, and advertises even more. The empirical result of this paper validates this hypothesis: franchise chains in both the hotel industries and the restaurant advertise less.
As Bond (1996) observes, there are several reasons that interests franchising. Foremost, it is a wide and growing section of the local and international economy. For instance, in the United States there are over 475, 000 franchised businesses. Michael (1996) in an evaluation done on industry-by-industry provided that franchised chains features in between one-third and two-thirds of the sales in most service industries and retail trade, including copy shops, restaurants, auto repair, hotels, and specialty vending. These areas are heavy users of advertising services. Second, franchising has been extensively studied and its supportive properties and problems are well known. Finally, it is a good example of the hybrid organizational forms proliferating in the economy today.
Discussion in this paper is organized as follows. Necessary background in franchising is presented in the first section. The second part examines the theoretical arguments suggesting underinvestment in advertising by franchised chains.
According to Rowe (1998), John Sweetwood president of Holiday Inn Express and veteran of the consumer marketing wars through Ralston Purina and Everyday, observed that the industry of hotels is under-marketed compared to others. Part of the reason is the industry’s relative lack of marketing dollars. Models and theoretical arguments forecast underinvestment in shared assets. For instance, models and arguments are able to predict in a brand due to opportunism and free riding among franchisees and franchisor. Results of conflict in the trade exert support for both motive and method of opportunism. Most specifically, cooperative marketing seems to arouse conflict.
In this paper, marketing is indicated to be negatively linked to the function of franchising in the restaurant and hotel industries, quality, controlling for other variables such as market segment, lifecycle whether alcohol was served, geography and size of the chain. Consequently, a temporary conclusion is that franchised chains do not market well enough. However, two significant caveats must be featured. Foremost, the research has implicit that the promotional and advertising mix is similar between owned chains and franchised in the same industry as well as in comparable size and scope.
Our controls for this issue were relatively coarse
Comparing private versus public chains, as well as comparing chains of geographic scope and similar size, the trade press did not identify and recommend differences in promotional activities neither did it in ad mix. However, considering chains at a national level might present shrouded a difference in competition among owned chains and franchising. In addition, evaluations done by way of survey comparing advertising mix at location approach might find out whether owned chains or franchised compete variedly. In the future, this research might be in position to apply broader samples which do not encompass quality that is a renowned costly feature to estimate since this paper is not to demonstrate that does not affect advertising degrees.
Besides, another valuable advance might evaluate industries where franchising is common against those industries in which it is not so as to distinguish whether advertising spending is not the same. Lastly, a different investigation approach could be used to examine whether value of ads differ by private and franchised chains. In conclusion, franchised chains might advertise variedly but will still need to.
Second, profit effectiveness was not considered. Supplementary studies evaluating the effect of advertising on productivity in private owned and franchised should be considered. Since a considerable number of chains are private owned information might not be provide for calculating effectiveness. An alternative research method might be instituted so as to examine brand equity among consumer population by ways of experiments or surveys. Without examining conclusive decisions alluding that it is as an effect of under-advertising temporarily remain, and therefore warranting further research.
For practitioners, there are temporarily suggestive implications that arise from the theory of marketing strategy that are based on these provided limitations. The theoretical assumption that single ownership provides greater venture in the product is encouraged. Therefore, this might lead to production of poor quality product in hybrid organizational products.
Theory does offer a prescription for this situation
This theory categorically observes the ownership of brand. It states the assignment of brand to a body whose contribution is most valuable irrespective of the inefficient support it offers to its co-party (Hart, 1995). The outcomes provide details regarding the link between marketing strategy and marketing organization. It seems that hybrid organization type establishes challenges on marketing strategy. In the event that the supports of the hybrid organizational form makes the hybrid to advertise less than its competitors operating as single firms, then marketing method that rely on high level advertising is most likely to be less successful for hybrid products. Besides, other viable tools must be applied to secure competitive advantage and differentiation. Such aspects must be cautiously evaluated to identify if they also are vital to the risk of spillovers and free riding.
In franchising, organizational form might have offsetting advantages in other elements of marketing strategy that counter the difficulty in advertising. For instance, franchisees like local unit administrators have higher support than group employee managers, therefore marketing strategy of a franchised chain can be founded on the local knowledge and the ability of franchise and not on advertising. Bradach (1997) provided a second example conjecture that owning units and franchising might contribute to organizational spread and learning of excellent practice and might advocate for introduction of new products.
The magnitude and scope of these benefits and whether they counterbalance advertising challenges is a subject matter for supplementary evaluation. Outcomes of reduced advertising by franchised chains offer an interesting comparison Dwyer and Oh (1988), which examines the option of marketing strategy involving the distinct organizational forms in the hardware trade. The dealer cooperative is one such form where individual traders organize and a wholesale firm that executes distribution services for its constituents. This form of organization should have a competitive advantage in mass merchandising and differentiation through store advertising since the ownership organization of the cooperative system alleviates opportunism in the channel.
The significant difference between hardware dealer cooperatives and franchised chains is the organizational structure of the channel leader. In such organization, all the members as well as the leader of the cooperative are not profit oriented. On the other hand, the franchisor is an independent business entity, with different goals from franchisees. In future organizational form of a dealer coop might be an option for chains. Western Sizzlin, one organization in the information set, has in recent times become mostly franchisee-owned (Carlino, 1994).
The use of franchisee ownership, or the cooperative form, reduces the spillover between franchisor and franchisee although it retains the problem of free riding in franchisees. In a related setting, franchisee councils have increasingly become extremely prominent in recent times, and might be able to tackle free-riding between the franchisees, and conceivably even assist franchisor supervising of ad spending. Contrasting these hybrid forms and their performance might provide insight into the relative extent of the 2 dimensions of spillover, among franchisee and between franchisees and franchisor, besides how to efficiently approach the crisis.
The outcomes also have temporal implications for a firm deciding whether to structure as a franchised chain or not. Earlier study recognized that franchising is an excellent solution to the agency problem formed within a setup of decentralized operations, resulting from higher sales and profit, as well as inducing higher effort from the franchisee-site leader. The business press is similarly full of praise. But franchising
is not an organizational panacea. Organizations intending to base on long-run brand establishing might reasonably opt to avoid franchising, consequently sacrificing increase and sales in the short run for better outcomes from brand capital in the long run. Likewise, perhaps organizations that already franchise acknowledge lower advertising to emphasize other viable variables like increase and size, against nonfranchising competitors. The sudden development guaranteed by franchising might yield proceeds from first mover compensation in location or customers’ perceptions, as well as counterbalance losses from under-advertising. Finally, supplementary study to validate and expand these findings might be of significant value. One particular direction might encompass the examining of strong brands with diffuse ownership, like the McDonalds.
In conclusion, it would be appealing to see if marketing or managerial variables might overpower the effect of motivations to increase advertising. Additional work applying profitability information and other industry settings would be valuable to establish the total effect of hybrid organizational forms like franchising on marketing strategy, profitability, competitive positioning, as well as consumer benefit.
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