CONVERSION OF INDEPENDENT HOTELS

Conversion of Independent Hotels under a Franchise Company

Table of Content

CHAPTER-I: INTRODUCTION4

Objectives of the Study6

CHAPTER-II: LITERATURE REVIEW7

Defining Franchising7

Overall Framework: Explaining the Propensity to Franchise11

Underlying Theories: Transaction Cost and Agency Theories12

Are All Service Sectors Alike?15

Country Characteristics15

Country Risk16

Cultural Distance19

Level of Economic Development20

Foreign Business Presence in Host Nation22

Firm-Specific Factors Explaining the Propensity to Franchise23

Size24

International Experience and Degree of Globalization25

Firm Strategic Intent and Preferences27

Perceived Strategic Importance of Global Scale27

Perceived Strategic Importance of Control over Quality29

Perceived Strategic Importance of Size29

Perceived Strategic Importance of Global Reservation System & Brand30

Perceived Strategic Importance of Investment in Training33

CHAPTER-III: METHODOLOGY34

Data and Variable Definitions34

Variable Definitions and Data Sources35

CHAPTER-IV: RESULT AND DISCUSSION41

Statistical Analyses and Methodological Caveats41

Results42

Country-Specific Variables43

Firm-Specific Variables43

CHAPTER-V: CONCLUSIONS46

Implications of the Study for Strategy and Managerial Practice49

References54

CHAPTER-I: INTRODUCTION

Franchising is already an important component of global strategy in many service sectors such as hotels. This article asks, "Given a choice between a company-run and a franchised operation, what factors will tip the strategic selection toward franchising, for a particular hotel property?" The modal choice is influenced by both the environment or conditions in the market in which the hotel property is located-as well as the characteristics and strategy of the global hotel firm that is to decide whether to franchise, or run the property themselves. The propensity to franchise is shown to reflect a mix of factors, including: level of development of the intended foreign market; the extent of globalization and international experience of the firm; and strategic factors such as the degree of investment in its global reservations system and brand, as well as the size of its overall operations.

As a mode of business expansion, franchising has been making a considerable inroad in service sectors. In expanding internationally, a firm may replicate its organization in a foreign nation by using its own personnel and its own equity investment in an affiliate. Alternatively, for other locations, it may contract with local investors to franchise its brand name, corporate image, and business systems to them, collecting fees and royalties from the franchisee, instead of the returns on equity that it might have earned if it had made a foreign direct investment. Under what circumstances would a firm prefer to franchise its capability rather than run the operation itself? This is the key question tackled by this article.

The rapid growth in international franchising over the past twenty years, documented in several studies (FladmoeLindquist and Jacque 1995; Shane 1996; Kedia, Ackerman, Bush and Justis 1994; Huszagh, Huszagh and McIntyre 1992; Zietlow 1995) suggests that conditions which favor franchising over company-run operations have also grown. Though international franchising of services started in developed countries based on geographic proximity, language and cultural similarity (Steinberg 1991; Aydin and Kacker 1989), it is now spreading rapidly into other emerging markets such as Indonesia, Philippines, Thailand, and Mexico. The empirical study in this article focuses on one service sector, the global hotels business. While hotels are classified as a service sector, unlike most services, hotels have a very high capital intensity. The real estate and infrastructure of a large hotel ...