Franchising and Other Operating Arrangements in the Lodging Industry

Abstract

The objective of this paper is to compare, along three strategic dimensions, franchising with other types of operating arrangements in the lodging industry. The operating arrangements studied are, in addition to franchising, chain-managed and independent hotels. The three strategic dimensions include: (1) the variability or volatility of the task environment facing a hotel; (2) the business strategy chosen by a hotel's general manager; and (3) the level of sales revenue and profit margin achieved by a hotel.

The strategic management literature argues that an organization can only achieve superior performance when the characteristics of its task environment, its business strategy, and its decision structure (i.e., operating method or extent of vertical integration) are coaligned. Thus, comparing franchising with the two other operating arrangements along these dimensions seems to be a first step in determining franchising's role in successful strategic coalignments. Hypotheses linking the different operating arrangements with task environment variability, business strategy, and performance were developed. A mail survey of hotel unit general managers, designed to test those hypotheses, was then described.

Chain-managed hotels were found to be more prevalent in stable and moderately stable environments than they were in volatile ones. A similar result was found for the independent units. Franchised units, however, were more prevalent in moderate and volatile environments.

Both chain-managed and franchised hotels predominantly followed the prospector business strategy while the independents were more closely associated with the defender strategy. A plausible reason for this is the importance chain managers and franchisors place on developing new markets and new products to achieve economies of scale. Evidently, in the lodging industry, the prospector strategy is best suited for achieving this.

Finally, no significant differences in the room revenue and profitability performance dimensions were found across the three hotel operating arrangements.

In terms of franchising in the hotel industry, the results indicated that franchised units: (1) were more prevalent in volatile and moderately volatile task environments, (2) more frequently pursued a prospector business strategy, and (3) did not earn average room revenue or net profits significantly different from either independent or chain units.

Keywords

Franchising hotel industry chain management business strategy

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