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Franchising & Outsourcing Final 1

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Richard Gu

on 27 November 2013

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Transcript of Franchising & Outsourcing Final 1

Group 4
Franchising & Outsourcing

Business relationship whereby a franchisor permits a franchisee to use its brand name, product, or business system in a specified and ongoing manner in return for a fee.

Purpose of Study
International franchising

Non-equity-based expansion strategy

Decision making determinants

Agency-based theory
Organizational Factors
Market conditions

Let me tell a story
An agency relationship exists between the principal and the agent

Agency Theory
Examples One
Principal – Franchisor
Agent - Franchisee

Article 1
<Examining the determinants of hotel chain expansion through international franchising>
Examples Two
Principal – Hotel
Agent – Outsourcing company

Article 2
<An examination of factors motivating hotel outsourcing>

For franchisor, provide an opportunity for hotels to lower the risks and the level of investment to expand

For franchisees, obtain brand-name recognition, economies of scale, and managerial expertise from the franchisors

What have they discovered?
Franchising system in hotel industry


The need for world-wide thinking

Multi-unit franchising

Organizational and market conditions

Alon & McKee (1999a)model

Resource-based and agency variables
Size – the only significant variable

Agency-based theory

Four Hypotheses


Positive relationship

- franchise experience
- franchise percentage

Differing entry strategies

- characteristics of transaction

Other factors

- quality assurance
- free-riding

from Angela, Richard, Stephanie, Jason, Yvonne, Sojin

Nature of Hospitality
Contracting out of business
A third party

“part of the fabric of hotel operation”
the broad range of activities undertaken
the high labor content
the volatile nature of demand for a hotel’s services
Scale of hotel has been changed from 1990s
Trend of developing boutique hotel (<200 Rooms)

in Hong Kong
Outsourcing in Mainland China
Specialist subcontractors can provide a better service
Delegate risk to subcontractors

The activities are viewed as core to the business
Economies of scale can be achieved

Brief about the Article
Outsourcing - TCE
Outsourcing provides greater Flexibility. (Mean 4.39)
Outsourcing can yield significant savings.(Mean 4.14)

Agency Theory
Managers like to delegate risk to subcontractors.
(Mean 3.12)
They are unpredictable and we like to pass the risk to subcontractors.
(Mean 2.96)
A BBC News: Kempinski(Qingdao) & Intercontinental(Qingdao)& Ramada(Zhengzhou) 's SPA suspected of Prostitution

Accommodation operators or scenic site operators who have handed over part of its operating projects or sites to others engaged in accommodation, catering, shopping, sightseeing, entertainment, tourism, transportation and other operations, should bear jointly responsibility over the actual behaviors of the operator in case the business operations cause damages to the tourists.
-----"Tourism Law of the People's Republic of China"

Do you think it will influence outsourcing and franchise in the hospitality industry in mainland China?
Benefits of contracting
Market discipline
Cost Saving
Transaction Costs Economics
Full transcript