A Model of Organizational Antecedents to Franchise Revenues

Transcription

1 A Model of Organizational Antecedents to Franchise Revenues Arne Nygaard Robert Dahlstrom ABSTRACT. This study investigates antecedents to financial outcomes in franchised distribution channels. A model is developed which implicates authoritative and normative control as antecedents to franchise revenues. The model is tested with data from two hundred sixteen franchises in the Norwegian distribution system of a multinational oil refiner. The results indicate that authoritative control engenders normative control and control mechanisms are associated with franchise revenues. Implications for franchise management and channels research are outlined. [Article copies available for a fee from The Haworth Document Delivery Service: address: <getinfo@haworthpressinc. com> Website: < Financial returns are fundamental to the long-term viability of franchised distribution systems. Franchisees, as residual claimants to system revenues, prosper as financial returns increase. Furthermore, franchisor royalties and contributions to advertising increase with revenues. Despite the inherent importance of franchise revenues to system viability and development, scant marketing research has investigated mechanisms for raising performance. The purpose of this study is to gain an understanding of the influence of Arne Nygaard is Associate Professor, Norwegian School of Management, School of Marketing, Box 4676 Sofienberg, 0506 Oslo, Norway ( Arne.Nygaard@ mb.bi.no). Robert Dahlstrom is Associate Professor, School of Management, College of Business and Economics, University of Kentucky, Lexington, KY ( mkt341@pop.uky.edu). The Research Council of Norway provided funding for this study. The second author received a fellowship from the U.S. -Norway Fulbright Foundation that facilitated completion of the project. The order of the authors is at random. Both authors contributed equally to the development of this research. Journal of Marketing Channels, Vol. 7(4) 2000 E 2000 by The Haworth Press, Inc. All rights reserved. 109

2 110 JOURNAL OF MARKETING CHANNELS managerial controls on revenues in franchised distribution channels. Because managers of franchised systems have a variety of control mechanisms at their disposal, research that identifies the returns available from control systems would benefit franchise management. Analysis of control properties would also contribute to marketing research by providing insight into the influence of socio-political processes on economic performance (cf. Arndt, 1983; Stern and Reve, 1980). Nevertheless scant research has addressed the relationship between franchise control and financial performance. In their compelling assessment of relationship marketing in distribution channels, Weitz and Jap (1995) outline three forms of control exercised within interorganizational systems. According to their framework, control may be exercised through contracts, authoritative mechanisms, and normative properties. Numerous studies have examined the motivations underlying alternative contracts (e.g., Brickley and Dark, 1985; Slade, 1996) as well as the returns associated with alternative contracts (e.g., Dahlstrom and Nygaard, 1994). These studies offer insight regarding the: ex ante design of interfirm contracts. The duration of franchised relationships and their associated contracts, however, often makes it infeasible to make modifications to legal agreements (Keating, 1991). Franchising agreements provide explicit guidelines that regulate many aspects of future interorganizational behavior (Keating, 1991). Interorganizational problems arise after the parties have signed the contract because it is impossible to anticipate all contingenciesand implement them into a complete enforceable contract (Milgrom and Roberts, 1992). Management needs mechanisms to enhance performance in existing agreements other than the explicit contract. When the formal franchise contract drifts out of alignment, the question is whether more implicit elements of the relationship such as norms, trust, and cooperation can augment the franchise document. Our research focuses on the use of authoritative and normative controls in established franchise relationships. Authoritative controls refer to efforts on one party s part to exact power over another. For example, franchisors often mandate procedures for training new employees in franchised outlets. Normative controls, by contrast, consist of shared principles that coordinate activities performed by parties to the relationship. These controls take on many forms and are exemplified by joint expectations of franchisees and franchisor concerning the implementation of a new sales campaign. Although both modes of control are employed, research is needed that seeks to enhance our understanding of the relationship between these mechanisms (Weitz and Jap, 1995). Furthermore, research that addresses the relationships among authoritative and normative properties augments the theory of interorganizational control (Jaworski, 1988; Ouchi, 1979). Our research investigates the influences that authoritative and normative

3 Arne Nygaard and Robert Dahlstrom 111 control have on the financial revenues of franchised enterprises. Research linking socio-political properties to financial outcomes is rarely performed, yet this research is informative to interorganizational theory and channel management. The political economy approach to distribution systems (Stern and Reve, 1980) calls for the simultaneous analysis of economic and sociopolitical dimensions of interfirm exchange. Progress has been made in analysis of economic factors and sociopolitical processes, but relationships among these properties are not well established. Our study seeks to augment political economy research with a model of organizational antecedents to financial outcomes. As an application of the political economy model to franchising, our study also contributes to channel management. The authoritative dimensions in our study serve as formal properties (Jaworski, 1988) controlled primarily by the franchisor. By contrast, normative mechanisms are informal properties that develop in the relationship between channel partners. Analysis of authoritative control identifies action that management can implement to enhance performance. Similarly, analysis of normative control illuminates properties that management should monitor in their efforts to raise performance. Analysis of the relationships among control properties and their influences on revenues underscores the breadth of control mechanisms available to managers of long-term contractual alliances. The remainder of the manuscript is structured to enhance our understanding of the role of control mechanisms in interfirm exchange. The next section presents our theoretical model and hypotheses. We subsequently outline atest of the model in the Norwegian distribution system of a multi-national oil refiner. The manuscript concludes with a discussion of the implications of our work for interorganizational theory and channel management. MODEL AND HYPOTHESES Our model of determinants of franchise revenues is grounded in the control perspective presented by Weitz and Jap (1995). These authors recognize that control mechanisms are used in tandem to exact performance, but they do not characterize the relationship between these mechanisms. Rather than frame all aspects of control as direct antecedents to channel outcomes, we offer a model in which normative controls mediate the relationship between authoritative controls and performance. In franchised channels and other unilateral contractual arrangements, structural control is exercised through formalized rules and procedures and concentrated decision-making. These structural properties precede the development of coordinative processes (cf. Jaworski, 1988). Formalized rules and procedures refer to fixed policies, role relationships, and protocols governing

4 112 JOURNAL OF MARKETING CHANNELS interfirm exchange (Stern and Reve, 1986). Franchise systems have complex, formal operating systems designed to regulate the activities of franchisee and franchisor (Heating, 1991). We investigate franchisees perceptions regarding the extent to which the interfirm relationship is regulated by thesepolicies and procedures. Concentrated decision making refers to the extent to which one of the two parties to a relationship has unilateral power to make and implement decisions on its own (Aldrich, 1976; Marrett, 1971; Van de Ven and Ferry, 1979). To varying degrees, the franchisor wields control over decisions related to the operations of the franchised outlets. Our study captures franchisee perceptions of concentrated decision making on the part of the franchisor. The franchisor s structured efforts to exact authority should influence normative controls operating between the two firms. Weitz and Jap s (1995) normative controls are embodied in interfirm cooperation and interpersonal trust. Interfirm cooperation characterizes the frequency of exchange and the magnitude of interaction between agent and principal (Reve, 1980). These interactions are vertical flows of resources and information in the channel dyad (Van de Ven, 1976). Interpersonal trust refers to one s willingness to rely on a trading partner in whom one has confidence (Moorman, Zaltman, and Deshpandé, 1992). Our model suggests that these normative controls are derived from authoritative control and yield desired outcomes for the franchised system. The model is outlined in Figure 1. Antecedents to Normative Control Interfirm Cooperation. Authoritative control should have a strong influence on the development of interfirm cooperation. Formal rules and procedures are designed to ensure that franchise managers represent the brand consistently throughout the retail network. For example, franchisor directives outlining the procedures for training new personnel help to ensure that customer contacts are uniform throughout the distribution system. Formal mechanisms that solely emphasize conformance to rules and procedures alienate transacting partners (John, 1984) and thus impair the desire to work together. Nevertheless, formal procedures that incorporate role responsibilities as well as operating procedures should have a contrasting effect on cooperation (Dwyer and Oh, 1987). In franchised systems, the franchisor and franchisee have complementary responsibilities that must be performed to obtain desired performance. Formal mechanisms that clarify obligations and distribution of tasks illuminate the value derived from working together. Consequently, these formal procedures should foster interfirm cooperation. Concentration of decision-making authority should also influence the level of interfirm cooperation. Firms elect to concentrate decision making at one level in the channel because it is perceived to be efficient and facilitates quick

5 Arne Nygaard and Robert Dahlstrom 113 FIGURE 1. Antecedents to Franchise Revenues Formalized Rules & Procedures H1 Interfirm Cooperation H2 H3 H5 H6 Franchise Revenues Concentrated Decison Making H4 Interpersonal Trust Authoritative Normative Channel Control Control Outcomes response to marketplace conditions. For example, franchisors may mandate delivery schedules for new products entering the franchised outlets. Such mandates, however, are likely to lower the franchisee s motivation to cooperate during the new product promotional campaign. The rationale underlying our example is consistent with prior research of centralization and cooperation. Concentration of decision-making by the principal tends to lower the agent s desire to collaborate with the principal. Thus, Dwyer and Oh (1987) report a negative association between principal centralization and agent participation in decision making (cf. Reve and Stern, 1986; Spekman and Stern, 1979). The principal s concentration of decision making indicates that the agent s input is neither desired nor necessary for marketing strategy. Consequently, the agent has limited motivation to cooperate with the franchisor. Therefore, the following are proposed: H1: Formalized rules and procedures are positively associated with interfirm cooperation. H2: Concentration of decision-making authority is negatively associated with interfirm cooperation. Interpersonal Trust. Formal procedures designed to regulate interfirm behaviors have been shown to constrain and enhance the quality of working

6 114 JOURNAL OF MARKETING CHANNELS relationships. Several researchers recognize that rules enable one party to wield authority over another. For example, Ferrell and Skinner (1988) illustrate that rules governing marketing research agreements enable one party to control the actions of another. Formalization that solely underscores the rules governing the relationship should undermine one s confidence in the trading partner (cf. John, 1984). By contrast, formalization can also accentuate the complementary responsibilities of parties to a contract. For example, franchisors often design employee-training programs, but the franchisees ensure that employees complete each phase of the training process. Formal mechanisms that identify procedures as well as complementary responsibilities underscore the roles played by both parties to the contract. Thus, Dwyer and Oh (1987) report that formal rules and procedures raise trust, and Reve and Stern (1986) indicate that formalization enhances the transaction climate in interorganizational relationships. Research in a variety of interfirm settings has reported a negative relationship between centralized decision making and interpersonal trust. In their analysis of the auto industry, Dwyer and Oh (1887) indicate that centralization inhibits relationship quality (trust, minimal opportunism, and satisfaction). Similarly, Reve and Stern s (1986) research into wholesale-manufacturer relationships indicates that trust in the trading partners is depleted as decision making becomes more concentrated. The concentration of authority alienates the franchisee, and the franchisee is less willing to rely on the franchisor. Thus, the following are proposed: H3: Formalized rules and procedures are positively associated with interpersonal trust. H4: Concentration of decision-making authority is negatively associated with interpersonal trust. Antecedents to Performance Franchisee Revenues. Our model of antecedents to performance maintains that informal control mechanisms mediate between authoritative control and financial performance. We suggest that cooperation is pivotal to franchisee performance. Franchisees that work together with the franchisor to exploit local market opportunities should outperform those that do not. Franchisees, by their nature, do not have the resources to develop effective market campaigns or advertising programs. Franchisors, by contrast, can mobilize resources to develop programs, but without the support of the franchisees these efforts are unlikely to be successful. Cooperative interaction enables the franchisor and franchisee to pool their resources in effort to serve the needs of the market (Ruekert and Walker 1990).

7 Arne Nygaard and Robert Dahlstrom 115 Two views have been expressed concerning the role of trust in interfirm exchange. First, research in related areas of marketing suggests that high levels of confidence in trading partners can constrain performance. Analyses of the relationship between departments in the new product development process indicate that quality-working relationships can lower product performance (Ayers et al., 1997; Souder, 1988). These studies indicate that strong working relationships can foster an environment in which professional discourse over contingencies is not presented. Similarly, high levels of interpersonal trust can foster a group think environment characterized by the minimization of arguments, acceptance of majority views, and suppression of adverse information (Janis, 1972). As a consequence of strong personal bonds, the parties to the relationship do not express marketplace contingencies. In addition, the pursuit of quality working relationships precludes parties from questioning the viability of marketing programs in a trade area. To the extent that it inhibits voicing of opinions and questioning of market programs, trust should constrain performance in the channel. Although group think conditions can constrain interfirm dialogue, we suspect that franchise relationships characterized by trust will foster heightened interfirm productivity. Trust has been consistently shown to enhance perceptions of effective working relationships. For example, Moorman et al. (1992) report positive association with perceived quality of working relationships in the procurement of marketing research services (cf. Dwyer and Oh, 1987). As strong relationships characterized by effective interaction and trust develop, marketing programs are developed that effectively serve consumer needs. As a result, trust fosters higher levels of performance. Therefore, the following are proposed: H5: Interfirm cooperation is positively associated with franchise revenues. H6: Interpersonal trust is positively associated with franchisee revenues. Procedure METHOD AND RESULTS The Norwegian distribution system of a multinational oil refiner served as the sampling frame for the study. Interviews with four members of the franchised distribution staff were performed to construct the items in the survey. In addition, the survey was pre-tested on five service managers before it was administered to the members of the franchised system. Four hundred thirtytwo managers were sent surveys along with appeals for compliance from the corporate director of franchising and the dealer union president. In addition, the managers were contacted four and six weeks after receipt of the survey

8 116 JOURNAL OF MARKETING CHANNELS and reminded to complete the questionnaire. After eight weeks 218 usable surveys had been obtained (50% response rate). Analysis of early versus late responses indicated no significant difference on survey instruments or demographic factors. Thus, non-response was not viewed as an issue in the study (Armstrong and Overton, 1977). Measures All measures in this study have been used in prior distribution channels research. Formalized rules and procedures refer to perceptions regarding the extent to which fixed policies, rules, and programs guide interorganizational exchange (cf. John, 1984; Reve and Stern, 1986). The construct is measured via three, seven-point Likert items derived from prior interfirm studies (Dwyer and Welsh, 1984; John, 1984). Concentrated decision making addresses the perceived level of asymmetrical decision making over a variety of marketing and promotional issues. Six, seven-point Likert items derived from previous channel studies (Dwyer and Welsh, 1984; Haugland and Reve, 1993) were designed to reflect the construct. Interfirm cooperation and interpersonal trust were assessed via five, seven-point Likert scales. The measure of interfirm cooperation is drawn from Reve s (1980) wholesaling-manufacturing study. The measures address the vertical flow of resources between principal and agent in the channel (cf. Van de Ven, 1976). Moorman et al. s (1992) measure of interpersonal trust was modified for use in a franchising context. The items capture the willingness to rely upon an exchange partner in whom one has confidence. Franchise performance was assessed via franchisee reports of total revenues in the previous fiscal year (Chandler and Jansen, 1992; Chrisman and Leslie, 1989). Instead of using a traditional satisfaction with performance index or a relative to competitors performance index (Deshpandé, Farley and Webster, 1993), we have used an objectively defined performance criterion. Although this method can cause certain problems (e.g., unwillingness to disclose financial information), objectively defined performance criteria appear to be content valid (Chandler and Hanks, 1993). When objective measures of performance are available, their use is strongly supported and encouraged instead of subjective measures (Dess and Robinson, 1983). Therefore, consistent with previous studies we have used sales revenues as a performance measure (Ruekert and Walker, 1990). In franchising, sales revenue is applied as an observable proxy for performance that determines franchisor royalty as well as contributions to advertising. Sales revenue includes profit elements from both sides of the dyad and is not biased by tax motivated cost strategies. Thus sales revenue is applied as a performance indicator both for practical and research purposes.

9 Multi-Method Approach Arne Nygaard and Robert Dahlstrom 117 Criticism has been raised against psychometric measures and perceptual data gathering. Spurious answers and inflated response can influence relations between constructs (Campbell, 1982). In order to control the potential systematic bias caused by method and measurement features we have gathered via Likert scaled psychometric data and accounting data. Psychological measures often include systematic shared method variance that affects the test results (Campbell and Fiske, 1959). Although previous research emphasizes that shared method variance can exceed trait variance, few initiatives have been taken to constrain this threat to validity (Churchill, 1979). Construct Validity Analysis of the measures followed the procedures outlined by Churchill (1978) and updated by Gerbing and Anderson (1988). Initial analysis of the scales was performed via item-to-total analysis and coefficient alpha. Based on item-to-total correlation analysis, one item was deleted from the concentration of decision making scale (Influence over advertising, sales concepts, and marketing). The coefficient alpha for each scale exceeded the (.70) benchmark for basic research (Nunnally, 1978). The scales were subjected to confirmatory factor analysis via EQS (Bentler, 1993). The chi-squared statistic is significant ( 2 = , d.f. = 129, p <.01), and other fit parameters suggest a less than acceptable fit of the model (RMSR =.05; NFI =.853; CFI =.918). Consequently, scale items were examined for significant loadings on multiple factors. Two items were eliminated from the centralization (Influence over sales prices on other products than gasoline and influence over the determination of salaries to the employees at the station) and cooperation (We cooperate with the refiner to plan the future of the station and The refiner helps us to plan or modernize the store) scales. The chi-square statistic is significant for the measurement model ( 2 = , d.f. = 71, p <.04), yet the other fit parameters indicate a reasonable fit of the model (RMSR =.03; NFI =.926; CFI =.981). We assessed discriminant validity by comparing the measurement model with a series of models in which the covariance of the constructs was set to unity. In each case discriminability is evinced by a significant chi-square test between the models. For example the test of discrimination between interfirm cooperation and interpersonal trust is significant ( 2 = 5.108, d.f. = 1; p <.05). Together the tests suggest that the data are of acceptable quality to evaluate the hypotheses. Table 1 provides descriptive statistics and correlations among the measures.

10 118 JOURNAL OF MARKETING CHANNELS TABLE 1. Correlations Among Constructs Mean Standard Deviation Formalized Rules and Procedures Concentrated Decision Making Interfirm Cooperation Interpersonal Trust Franchisee Revenues Correlations are in hundredths with decimal places omitted. Correlations greater than.12 have p values <.05. Coefficient alphas are on the diagonal. Results Structural equation modeling via EQS (Bentler, 1993) was employed to assess the proposed relationships. The iterative process outlined by Anderson and Gerbing (1988) was employed to compare the theoretical model with other models. Our theoretical framework treats the normative control processes as mediators between normative controls and franchise revenues. We compared this model with a series of models that implicated authoritative controls as direct determinants of revenues. The results indicate that framing concentrated decision making as an antecedent to revenues enhances the fit of the theoretical model ( 2 = 9.389, d.f. = 1; p <.05). Formalization, by contrast, does directly influence channel outcomes ( 2 = 0.618, d.f. = 1; p >.05). Our analysis also investigates whether the fit of the model is affected by deleting paths proposed in the conceptual framework. The analysis indicates that the fit of the model is not impaired by eliminating. the path between concentrated decision making and interpersonal trust ( 2 = 1.524, d.f. = 1; p >.05). Table 2 provides the results of the iterative analysis. The theoretical model provides estimates of the six hypotheses outlined in the conceptual framework. Results of the iterative process indicate that an augmented model ( 2 = , d.f. = 84; p <.07; CFI =.983) provides a better fit to the data than the theoretical model. The augmented model incorporates a path form concentrated decision making to franchise revenues and deletes the path from concentrated decision making to interpersonal trust. The initial set of hypotheses addressed antecedents to cooperation in the channel. Consistent with the hypothesis, formalized rules and procedures raise interfirm cooperation ( =.352; t = 3.982, p <.01). Concentrated decision making was hypothesized to constrain interfirm cooperation. Nevertheless, the relationship between the variables is significant and positive ( =.335; t = 4.040, p <.01). Thus, H1 is supported, but H2 is not. Hypotheses 3 and 4 treated formalized rules and procedures and concentrated decision making as antecedent to interpersonal trust. Formalization

11 Arne Nygaard and Robert Dahlstrom 119 TABLE 2. Antecedents to Franchise Revenues Structural Equation Models Initial Model Augmented Model Hypotheses Structural Structural Parameters T-values Parameters T-values H1: Formalized rules and procedures are positively associated with interfirm cooperation H2: Concentration of decision-making authority is negatively associated with interfirm cooperation H3: Formalized rules and procedures are positively associated with interpersonal trust H4: Concentration of decision-making authority is negatively associated with interpersonal trust H5: Interfirm cooperation is positively associated with franchisee revenues H6: Interpersonal trust is positively associated with franchisee revenues Concentration of decision-making authority is associated with franchisee revenues Summary Statistics (d. f.) p - value CFI raises interpersonal trust ( =.240; t = 2.670, p <.01), yet centralization does not significantly influence interpersonal trust. The final set of hypotheses framed normative controls as antecedents to financial performance. Consistent with H5, interfirm cooperation raises the level of performance ( =.186; t = 2.281, p <.01). In contrast to H6, interpersonal trust is negatively associated with financial performance ( =.187; t = 2.406, p <.01). In addition, concentrated decision making is positively associated with retail revenues ( =.253; t = 2.953, p <.01). DISCUSSION The purpose of this study has been to examine the influence of authoritative and normative control on franchise revenues. The study offers preliminary evidence to suggest that retail sales emerge due to authoritative control and normative processes. In addition, authoritative mechanisms guide interaction between franchisor and franchisee. In this section we recognize some of the limits in our study and outline implications for channel management and research. Limitations The results of our research must be viewed in light of the limitations in the research method. The dependent measure is drawn from franchisee reports of

12 120 JOURNAL OF MARKETING CHANNELS revenues in the previous year. Although prior research indicates that organizational properties are likely to converge across dyads (John and Reve, 1982), corroboration of the franchisee reports would be beneficial. Complementary information drawn from corporate accounting records or franchisor surveys would lend greater confidence to the results obtained for the relationship between trust and revenues. Furthermore, revenues do not capture all aspects of performance and focus only on short-term economic incentives. Accounting measures of performance address return on equity, profit margins, rations of turnover to fixed assets, and other facets of financial returns. In addition, Kumar, Stern, and Achrol (1992) identify multiple aspects of effectiveness that are highly germane to interfirm relationships. A broader analysis of performance would incorporate financial aspects of performance and dimensions of effectiveness featured in multiple research traditions. A second limitation of the study concerns the focus on organizational properties (i.e., authoritative and normative control) as mechanisms that exact revenues in interfirm alliances. Correlation of organizational properties with sales figures does not necessarily imply that efforts on the part of the organization yield higher performance. Our results provide evidence to suggest that the nature of relationships between firms is associated to franchise sales, yet factors extrinsic to this study also have a strong influence on channel outcomes. Future research should augment our study by incorporating data on the number of local competitors, the location of retail outlets, and other environmental factors that influence franchise sales. The results are also limited by the cross-sectional nature of the research design. The theoretical model considers the long-term development of interorganizational relationships, yet the data were collected at a single point in time. The presumption is made that the influence of authoritative and normative control mechanisms emerges over the course of the relationship. The findings should be corroborated by additional research plotting the influence of control structures over multiple periods. Furthermore, the study of gasoline dealers might limit its generalizability. Empirical evidence from a broader context is needed. Norms also has been related to cultural values both on an organizational level and national level (Deshpandé, Farley, and Webster, 1993). Therefore, empirical evidence from other countries is needed to analyze cross-national effects of franchising. Franchising has become an important global growth strategy but little is known about its viability and limitation in multinational settings. Implications for Channel Management The counter-intuitive results of some of the findings and the idiosyncrasies in our context preclude us from making widespread managerial recommendations. Our study does, however, provide some insight into issues that

13 Arne Nygaard and Robert Dahlstrom 121 managers should assess in their efforts to raise performance in the channel. Notably, our study underscores the role of normative and authoritative controls. Normative processes are developed between the franchisor and franchisees and consist of shared principles for interaction. Franchisors cannot dictate the level of normative control, but they can regulate and influence the level of normative control. Because these controls are directly linked to performance, management should monitor their development. In particular, managers should assess the level of cooperation in the channel. Franchises that view the strategy development process as a dialogue with the franchisor provide input that addresses local constraints on the market. Consistent with Ruekert and Walker (1990) our results indicate that interfirm cooperation increases franchise revenues. Our results also suggest that trust should be monitored in the working relationship between franchisors and franchisee. Our study finds evidence to suggest that as the level of trust increases, the short-term performance of the channel fades. It would, of course, be reckless to recommend system-wide strategies to lower the quality of working relationships in the channel. Nevertheless, franchisors should monitor the level of trust operating in relationships with franchisees. High levels of trust can foster conditions under which meaningful dialogue and discussion of relevant environmental conditions is ignored (Janis, 1972). Consequently, managers should seek relationships that prompt discussion of local market conditions while also maintaining strong long-term relationships. Authoritative controls are instruments used by management to direct the interorganizational system toward desired objectives. Our results indicate that these mechanisms can directly raise performance. Franchised operating systems often emphasize the complementary tasks performed by franchisees and the franchisor (Heating, 1991). Formal policies that underscore the responsibilities of franchisor and franchisee foster greater cooperation in the channel, and cooperation leads to higher levels of performance. In their effortsto formalize channel responsibilities, franchisors should continue to emphasize the complementary tasks performed by the partners to the agreement. Implications for Channels Theory We employ Weitz and Jap s (1995) framework to characterize formal rules and procedures and concentrated decision making as authoritative controls and interfirm cooperation and interpersonal trust as normative controls. Our findings indicate that this control perspective is an informative framework for analysis of distribution channels. Consequently, the framework should be employed in future analyses of interfirm alliances. Our findings also have implications for the analysis of the discrete elements of authoritative and normative control in distribution channels. Our

14 122 JOURNAL OF MARKETING CHANNELS study is consistent with prior research linking formalized rules and procedures with the quality of working relationships (e.g., Reve and Stern, 1986), yet it stands in contrast to prior analyses implicating formalization as a detriment to interorganizational relationships (e.g., John, 1984). We suggest that formal mechanisms that identify the complementary responsibilities of parties, rather than just an agent s obligations, foster greater levels of cooperation and trust. Our measure of formal rules and procedures, however, does not distinguish rules from complementary responsibilities. A refined test of formalization would separate the influence of hierarchical procedures from complementary responsibilities. Our results stand in contrast to prior studies (e.g., Dwyer and Oh, 1987) that frame centralized decision making as a detriment to relational quality. Given the nature of franchised systems, a high level of centralization is necessary to ensure consistent delivery of the franchised concept to the consumer. Our measures attempt to capture the general level of control in the channel. The intensity of decision making control over discrete facets of the marketing mix has not been analyzed. Franchised concepts consist of many decision making areas such as procurement policies, advertising allowances, training programs, and new location criteria. Research is needed to examine the extent of franchisor control over multiple facets of decision making and the influence of these controls on channel performance. Our findings also have implications for research into normative controls. Relational contract theory (e.g., Dwyer, Schurr, and Oh, 1987) and interorganizational research (e.g., Moorman et al., 1992) focus on the merits of interpersonal trust, yet our study suggests that trust can constrain short-term performance. These findings point to three avenues for future analyses of trust. First, Granovetter (1985) recognizes that trust may provide the occasion for malfeasance and inequity in long-term relationships (cf. Williamson, 1993). Franchisees may find that quality working relationships provide an environment in which they can shirk responsibilities, and the shirking of responsibilities may lead to lower revenues. A second aspect of the relationship between trust and performance concerns the possibility that group think is operating in franchisor-franchisee relationships (Janis, 1972, Moorman, Deshpandé, and Zaltman, 1993). Our measures of trust capture the willingness of the franchisee to rely on the franchisor to make decisions in the franchisee s absence. Franchises with higher levels of trust are more willing to rely on the franchisor. This willingness to allow the franchisor to make decisions for the franchise may reflect a desire for consensus, and an undesirable consequence of consensus seeking is the failure to question or challenge the decision maker. The franchisees with the strongest working relationships may withhold marketplace information that is vital to the franchisee s performance. By contrast, franchises with low

15 Arne Nygaard and Robert Dahlstrom 123 levels of trust may speculate that local market conditions require their input and cannot be made by the franchisor. These franchises are likely to engage in healthy dialogue with the franchisor. The franchises have less confidence in the franchisor s ability to make decisions for the local retailer, but local market needs are well served. Research is needed to identify conditions under which high levels of trust preclude long-term partners from vocalizing issues that inhibit performance. Although the relationship between trust and performance may emphasize some negative consequences of consensus seeking, the results may also reflect the age of the franchise. Fichmann and Leventhal (1990) recognize that social contracts can endure after the economic benefits of the relationship have expired. Consequently, these franchises may report quality working relationships in spite of the dwindling economic incentives. Investigation of the influence of age on economic incentives would contribute to interorganizational research and has implications for the design of long-term contracts. CONCLUSION This study has incorporated elements of control theory to explain interorganizational antecedents to franchised revenues. The results indicate that management-controlled mechanisms and normative controls influence channel revenues. We hope that our study is. informative to managers of franchised distribution systems and analysts of interorganizational relationships. REFERENCES Aldrich, Howard E. (1976), Resource Dependence and Interorganizational Relations: Local Employment Service Offices and Social Service Sector Organizations, Administration and Society, 7, Armstrong, J. Scott and Terry S. Overton (1977), Estimating Nonresponse Bias in Mail Surveys, Journal of Marketing Research, 14 (August), Anderson, James C. and David W. Gerbing (1988), Structural Equation Modeling in Practice: A Review and Recommended Two-Step Approach, Psychological Bulletin, 103(3), Arndt, John (1983), The Political Economy Paradigm: Foundation for Theory Building in Marketing, Journal of Marketing, 47 (Fall), Ayers, Doug, Robert Dahlstrom, and Steven J. Skinner (1996), An Exploratory Investigation of Organizational Antecedents to New Product Success, Journal of Marketing Research, 24(1), Bentler, Peter M. (1993), EQS: Structural Equations Program Manual, Los Angeles, CA: BMDP Statistical Software. Brickley, James A., and Dark, Frederick H. (1987), The Choice of Organizational Form, The Case of Franchising, Journal of Financial Economics, 18, pp

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17 Arne Nygaard and Robert Dahlstrom 125 Haugland, Sven and Torger Reve (1993), Relational Contracting and Distribution Channel Cohesion, Journal of Marketing Channels, 2(3): Janis, Irving (1972), Victims of Groupthink, Boston, MA: Houghton and Mifflin. Jaworski, Bernard J. (1988), Toward a Theory of Marketing Control: Environmental Context, Control Types, and Consequences, Journal of Marketing, 52 (July) John, George (1984), An Empirical Investigation of Some Antecedents of Opportunism in a Marketing Channel, Journal of Marketing Research, 21 (August), and Torger Reve (1982), The Reliability and Validity of Key Informant Data from Dyadic Relationships in Marketing Channels, Journal of Marketing Research, 21 (May), Keating, William J. (1991), Franchising Adviser, New York, NY: McGraw Hill. Kumar, Nirmalya, Louis W. Stem, and Ravi S. Achrol (1992), Assessing Reseller Performance From the Perspective of the Supplier, Journal of Marketing Research, 29 (May), Marrett, C.B. (1971), On the Specification of Social Dimensions, Sociology and Social Research, 56, Milgrom, Paul and J. Roberts (1992), Economics, Organization and Management, Englewood Cliffs, NJ: Prentice Hall, Inc. Moorman, Christine, Gerald Zaltman, and Rohit Deshpandé (1992), Relationships Between Providers and Users of Market Research: The Dynamics of Trust Within and Between Organizations, Journal of Marketing Research, 29 (August), Nunnally, Jum C. (1978), Psychometric Theory, New York, NY: McGraw-Hill. Ouchi, William G. (1979), A Conceptual Framework for the Design of Organizational Control Mechanisms, Management Science, 25(9), Reve, Torger (1980), Interorganizational Relations in Distribution Channels: An Empirical Study of Norwegian Distribution Channels, unpublished doctoral dissertation, Northwestern University. (1986), Organizing for Distribution, in Research in Marketing, Louis P. Bucklin and James M. Carman, eds., Greenwich, CT: JAI Press. (1-26) and Louis W. Stern (1986), The Relationship Between Interorganizational Form, Transaction Climate, and Economic Performance in Vertical Interfirm Dyads, in Marketing Channels, Luca Pelligrini and Srinivas H. Reddy, eds., Lexington, MA: Lexington Books. Ruekert, Robert W. and Orville C. Walker, Jr. (1990), Shared Marketing Programs and the Performance of Different Business Strategies, Review of Marketing, Vol. 4, Valerie A. Zeithami, ed. American Marketing Association, Chicago, Slade, Margaret E. (1996), Multitask Agency and Contract Choice: An Empirical Exploration, International Economic Review, 37(2), Souder, William E. (1988), Managing Relations Between R&D and Marketing in New Product Development Projects, Journal of Product Innovation Management, 5(4), Spekman, Robert E. and Louis W. Stern (1979), Environmental Uncertainty and

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19 Arne Nygaard and Robert Dahlstrom 127 APPENDIX Measurement SCALE ITEMS Inltial a Trimmed a Model Model Formalization To what extent do you agree with the following: (strongly agree-strongly disagree) There is no clear distribution of tasks between us and the refiner (R)..518 b.523 b There are no clear routines for safety training for persons employed at our station (R) In general, the information routines from the refiner are very unclear (R) Centralization To what extent do you influence the following decisions: (no influence-complete control) Supplies of gasoline and mineral oil products..552 b.609 b Composition of product selection at your station Number of [refiner] products and services sold from you station Sales prices on other products than gasoline Determination of salaries to the employees at the station Interfirm Cooperation To what extent do you agree with the following: (strongly agree-strongly disagree) We cooperate with the refiner to plan the future of the station..822 b - - We cooperate with the refiner in local sales campaigns b We cooperate with the refiner to design market plans We cooperate with the refiner when we design advertisements The refiner helps us to plan or modernize the store Trust To what extent do you agree with the following: (strongly agree-strongly disagree) If my sales manager cannot reach me and have to take a decision affecting my station I am willing to take the decision without me..608 b.609 b I fully trust my sales manager and think he is doing the best for me and the other dealers I trust that the sales manager has an important position in the Shell distribution channel trust that the sales manager can handle things I cannot handle myself In general I do not trust the sales manager (R) Summary Statistics d.f p-value RMSR CFI a--all factor loadings have t-values that exceed 2.0. b--these items are fixed for the purpose of scaling. R--These items were reverse scored.

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