Divisionalization, Franchising, or Mixing: A Market Competition Perspective

Abstract

This paper considers strategic delegation for analyzing the optimal retail-organizational form for a firm. Our results indicate that expansion by a mix of divisions and franchises is possible,_x000D_ provided that there exists hierarchical conflict, the market is medium-sized, and the products are imperfect substitutes. The sales maximization for divisionalization plays an important role in the choice of retail-organizational form. This stems from the fact that the equilibrium outcome of profit delegation is more competitive than that of market share delegation, which itself is more_x000D_ competitive than that of sales delegation, where firms rely on expansion by a mix of divisions_x000D_ and franchises. Consequently, firms do not franchise to avoid a cost disadvantage, provided that top managers are guided by profit maximization. When the objective of each top manager is market share maximization, all top managers expect their rivals will retaliate, and this reduces the temptation to be aggressive in the first place. Accordingly, firms do not divisionalize to relax interbrand competition.