1 The Added Value of the Plural Form Evidence from Dutch Pharmacy Chains
2 TITLE CHAPTER NYENRODE BUSINESS UNIVERSITEIT The Added Value of the Plural Form Evidence from Dutch Pharmacy Chains Proefschrift ter verkrijging van het doctoraat aan de Nyenrode Business Universiteit op gezag van de Rector Magnificus, prof. dr. E.A. de Groot en volgens besluit van het College voor Promoties. De openbare verdediging zal plaatsvinden op dinsdag juni 008 des namiddags om vier uur precies door Rosalie M. Aldewereld-Duijvis geboren op april 9 te Zaanstad
3 TITLE CHAPTER Leescommissie Acknowledgements Promotores: Overige leden : Co-promotor: Prof. dr. H.R. Commandeur Prof. dr. E. Peelen Dr. F. Langerak Prof. dr. ir. A.K. Hajdasinski Prof. dr. R. Huijsman Prof. dr. H.S.J. Robben Prof. dr. ir. C.A.G.M. van Montfort Writing a doctoral thesis is something that I never imagined myself doing. I actually believed it to be boring and something for nerds. After my graduation I wanted to work in business. My graduation thesis was my first real encounter with science. I wrote this thesis, which was part of somebody else s Ph.D. research, at Nyenrode Business Universiteit. During the process of writing, I realized that science was not so boring after all! I actually considered it to be very challenging. I liked to try to get to the core of things and to crack my brains. Contrary to expectations I therefore decided to conduct my own Ph.D. research. The Ph.D. period has appeared to be a very valuable and interesting one; a period in which I have been given the opportunity to develop myself further, intellectually as well as personally. Despite all positive things it has not always been an easy period for me. Many times, I have seriously considered quitting. Luckily, I haven t. The completion of this doctoral thesis would not have been possible without the help of many people. I am deeply indebted to them all and I would like to take this opportunity to thank them. First of all, I want to thank my supervisors, Harry Commandeur, Ed Peelen, and Kees van Montfort, for their guidance during the project. Each of them has contributed in a different and very valuable way. Harry was involved from the very beginning. Whenever I was lost, he pointed me in the right direction. I very much appreciate his unconditional support and belief in my research. Ed s ability to quickly point out cause and effect were very important in analyzing my data. He pushed me when I really needed to be pushed. Without his focus on the bigger picture, my thesis would not have been finished yet. Finally, Kees was a great help to me in the statistical analysis. I don t know how I would have completed this analysis without his guidance. Second, I want to thank the members of the promotion committee. I am grateful for their valuable suggestions and comments. Special thanks go to Henry Robben, who was very helpful in constructing my conceptual frameworks. My gratitude also goes to the pharmacists that participated in the pre-test of the survey and all interviewees. Of these interviewees, Peter de Jong from Kring-apotheek deserves special thanks. I also want to thank my former thesis student, Bert Hendriks. His knowledge of the pharmacy sector has been very useful to me. Furthermore, I want to thank Robert van der Zwart. Without him I wouldn t have started this Ph.D. research in the first place. Third, I have received great support from my colleague, friend, and former roommate, Mr. Reddy. He has always been there to exchange ideas, to talk about other things than
4 TITLE CHAPTER research, or to calm me down with some wise words. Vijay, thank you and I miss having you as a roommate. I am looking forward to your defense! I also want to thank my other roommate, Mr. Zaka. With such great sense of humor, you will definitely be able to win the heart of your own blonde bombshell! I am also very thankful to my parents, whose support I could have not done without. Whenever the end seemed beyond reach, they were there to listen and to offer an encouraging word. Last, but certainly not least, I want to thank Jelle, who stood by me throughout the entire process. Thank you for being so patient with a girlfriend (and now wife) who always felt the need and the pressure to finish her Ph.D! I know it was difficult to understand that the difference between a two-week and three-week holiday was not just that I would finish my Ph.D. a week later. I hope that the three of us will enjoy a lot of three-week holidays and weekends away in the future! Rosalie Aldewereld-Duijvis Table of contents Chapter Introduction to the research questions Chapter Introduction to the research questions. Introduction.... Research questions.... Research methodology.... Objectives.... Limitations of of the thesis thesis.... Outline of of the thesis... Chapter Theoretical framework: Plural Plural governance 8. Introduction Characteristics Introduction of governance structures Firms Characteristics governance of choice: governance Either-or structures Chain Firms organizations governance governance choice: Either-or choice: Franchise or company- owned outlets..... Firms Chain governance organizations choice: governance And-and... choice: Franchise or company-owned outlets.. Structure-Conduct-Performance... Firms governance choice: And-and.. Conclusions Structure-Conduct-Performance.... Conclusions Chapter Empirical setting: The Dutch pharmacy sector 8 Chapter. Introduction Empirical...8 setting: The Dutch pharmacy sector. Pharmaceutical care policy in the Netherlands Introduction Controlling drug expenditure Pharmaceutical The role of care health policy insurers the in Netherlands pharmaceutical care market 0. Sector.. Analysis... Controlling drug expenditure..... Suppliers The role of health insurers in the pharmaceutical care market.. Sector New Analysis entrants Substitutes Suppliers.... Buyers New entrants.... Competitive Substitutes rivalry. Situation.. in Buyers other countries.... Conclusions.. Competitive...8 rivalry. Situation in other countries. Chapter Conclusions Research methodology and results: Case study 0 9. Introduction...0 Chapter. Case study method... Research methodology and results: Case study.. Why a case study?... Introduction Case study design.. Dutch Case plural study pharmacy method chains.... Unit.. growth... Why a case study?
5 VIII TITLE table of contents 8 9 table of contents CHAPTER IX..... Constraints Case study on design unit growth.. Dutch Plural plural dynamics: pharmacy Speeding chains up the unit growth process.. Local Unit responsiveness growth Pharmacies Constraints limited on unit local growth responsiveness Local Plural responsiveness: dynamics: Speeding Franchise up pharmacies the unit growth vs. company-owned process pharmacies Local responsiveness Plural Pharmacies dynamics: limited Achieving local higher responsiveness levels of local responsiveness 0. Creating.. uniformity Local responsiveness:... Franchise pharmacies vs. company-owned.. Generating pharmacies ideas.... Plural Plural dynamics: Generating Achieving more higher ideas levels and of more local varied responsiveness ideas 8... Creating Testing uniformity and evaluating ideas Plural Generating dynamics: ideas A more thorough testing process Decision-making Plural dynamics: Generating more ideas and more varied ideas.... Plural Testing dynamics: and evaluating Persuading ideas franchisees and pre-decision learning Implementation Plural dynamics: A more thorough testing process..8.. Plural Decision-making dynamics: Persuading franchisees and post-decision learning. Maintaining.. Plural uniformity...8 dynamics: Persuading franchisees and pre-decision learning.... Plural Implementation dynamics: Achieving higher levels of uniformity 80.8 Conclusions..8 Plural...8 dynamics: Persuading franchisees and post-decision learning. Maintaining uniformity 9 Chapter.. Conceptual Plural dynamics: framework Achieving and hypotheses higher levels of uniformity 8.8. Introduction Conclusions...8. Structural characteristics: Franchise pharmacies vs. company- owned pharmacies..8 Chapter. Conceptual Conceptual frameworks...8 and hypotheses.. Conceptual framework : Local responsiveness 8... Introduction Conceptual framework : Generating ideas Structural Conceptual characteristics: framework Franchise : Testing pharmacies ideas 90 vs. company-owned.. pharmacies Conceptual framework : Decision-making 9... Conceptual Conceptual frameworks framework : Implementation 9. Conduct:.. Franchise Conceptual pharmacies framework vs. : company-owned Local responsiveness pharmacies...9. Performance:.. Conceptual Plural pharmacy framework chains : Generating vs. pure pharmacy ideas chains Performance:.. Conceptual Plural chain framework pharmacies : Testing vs. pure ideas chain pharmacies Conclusions.. Conceptual...99 framework : Decision-making 8.. Conceptual framework : Implementation 8. Chapter Conduct: Research Franchise methodology: pharmacies Survey vs. company-owned 0 pharmacies 8.. Introduction Performance:...0 Plural pharmacy chains vs. pure pharmacy chains 89.. Why Performance: a survey?...0 Plural chain pharmacies vs. pure chain pharmacies 9.. Sampling Conclusions frame Pretest...0 Chapter. Data collection...0 Research methodology: Survey. Structure of the survey Scales...0 Introduction 9. Why a survey? 9..8 Conclusions Sampling frame Pretest 9. Chapter Data collection Research results: Survey Introduction Structure of...0 the survey 9.. Correspondence Scales between the observed and the actual distribution The Conclusions measurement model: Confirmatory factor analysis Construct validity 0 Chapter. Structural characteristics: Research results: Franchise Survey pharmacies vs. company- owned pharmacies. The structural model Introduction Assessing overall structural model fit Correspondence Local responsiveness: between the Relationships observed and among the actual structure, distribution conduct, and performance The measurement model: Confirmatory factor analysis.... Testing Construct hypotheses validity Structural Generating characteristics: ideas: Relationships Franchise pharmacies among structure, vs. company-owned conduct, and performance. 0 pharmacies.. The structural Testing hypotheses model Testing Assessing ideas: overall Relationships structural among model structure, fit conduct, and performance Local responsiveness: Relationships among structure, conduct, and Testing performance hypotheses Decision-making: Testing hypotheses Relationships among structure, conduct, and performance Generating ideas: Relationships among structure, conduct, and Testing performance hypotheses..0.. Implementation: Testing hypotheses Relationships among structure, conduct, and performance.. Testing ideas: Relationships among structure, conduct, and.. Testing performance hypotheses. Conduct:.. Franchise Testing hypotheses pharmacies vs. company-owned pharmacies.... Performance:..8 Decision-making: Plural pharmacy Relationships chains vs. pure among pharmacy structure, chains... conduct, and.8 Performance: performance Plural chain pharmacies vs. pure chain pharmacies Conclusions..9 Testing...0 hypotheses..0 Implementation: Relationships among structure, conduct, and Chapter 8 Conclusions, performance contribution, and suggestions for further research 9 8. Introduction.. Testing... hypotheses Answering Conduct: research Franchise question pharmacies... vs. company-owned pharmacies. 8. Answering Performance: research Plural question pharmacy and chains... vs. pure pharmacy chains Performance: Local responsiveness: Plural chain pharmacies Relationships vs. pure among chain structure, pharmacies conduct, and performance Conclusions 8.. Generating ideas: Relationships among structure, conduct, and performance Chapter Conclusions, contribution, and suggestions for further research Testing ideas: Relationships among structure, conduct, and performance 8. 0 Introduction Answering Decision-making: research question Relationships among structure, conduct, and performance 8. Answering research questions,, and
6 XTITLE table of contents 0 CHAPTER CHAPTER Implementation: Local responsiveness: Relationships Relationships among structure, among structure, conduct, conduct, and performance and performance Conduct: Generating Franchise ideas: pharmacies Relationships vs. among company-owned structure, conduct, pharmacies and 8.. Performance: performance Plural pharmacy chains vs. pure pharmacy chains Performance: Testing ideas: Plural Relationships chain pharmacies among vs. structure, pure chains conduct, pharmacies and 8. Contribution performance to science and practice Scientific Decision-making: contribution Relationships among structure, conduct, and 8.. Practical performance contribution 8. Limitations 8.. Implementation: and suggestions for Relationships further research... among structure, conduct, and performance References Conduct: Franchise pharmacies vs. company-owned pharmacies 8.. Performance: Plural pharmacy chains vs. pure pharmacy chains 0 Appendix 8..8 A List Performance: of people interviewed Plural chain pharmacies 8 vs. pure chains pharmacies 8. Contribution to science and practice Appendix 8.. B Cover Scientific letter contribution and survey Practical contribution 8. Appendix Limitations C Descriptive and suggestions statistics for further 98 research 9 References Appendix D Test statistics of multi-item constructs 0 Appendix A E Removed List of people items interviewed 0 Appendix Nederlandse B samenvatting Cover letter 0 and survey Appendix C Appendix D Appendix E Descriptive statistics Test statistics of multi-item constructs Removed items Nederlandse samenvatting Curriculum vitae Chapter Introduction to the research questions. Introduction Most empirical work on governance decisions focuses on explaining firms choice among governance structures. These works consider this choice as a function of circumstances. Under certain circumstances, one governance structure does better than another. As the circumstances vary, so do the governance structures that are observed. Nevertheless, in practice very different governance structures often exist side by side. Many retail chain organizations, for example, use both franchise and company-owned outlets (i.e. outlets that are owned by the chain operator). Well known retail chains active in different industries such as Albert Heijn, McDonald s, Etos, and Benetton all have franchise outlets as well as their own outlets. Also in other marketing settings, firms use different governance structures simultaneously. For example, firms often make and buy parts (Heide, 00); alternatively, they sometimes use a direct sales force and third party distributors (Anderson and Schmittlein, 98). In the literature the simultaneous use of different governance structures for the same function is referred to as the plural form (Bradach and Eccles, 989). The first explanations concerning the use of the plural form have been limited to specific conditions. For instance, according to Brickley and Dark (98), the combination of franchise and company-owned outlets within a system is based on monitoring costs. As company-owned outlets incur higher monitoring costs, they are located near company headquarters, while as franchise outlets incur lower monitoring costs, franchising occurs in more distant locations. Some researchers have started to shed the assumption that one particular governance structure is obviously superior under certain conditions. Rather than (just) the product of micro level conditions, they argue that the plural form is the product of the synergistic potential of different governance structures. The synergistic benefits of the plural form have been highlighted by a number of research works (e.g. Bradach and Eccles, 989; Dant et al., 99; Lafontaine and Kaufmann, 99) and then have been further developed and empirically validated by Bradach (99, 99). In his exploratory research, Bradach studied how restaurant chains use a plural form to better meet their key strategic objectives (e.g. uniformity and local responsiveness). He As As described described by by Heide Heide (00), (00), the the term term plural plural form form is is used used somewhat somewhat differently differently by by researchers. researchers. Cannon Cannon et et al. al. (000), (000), for for example, example, define define a plural plural form form as as a mixture mixture of of different different control control mechanisms mechanisms used used for for a single single exchange. exchange. Bradach Bradach (99), (99), on on the the other other hand, hand, considers considers a plural plural form form to to be be a combination combination of of distinct distinct governance governance structures. structures. Bradach Bradach and and Eccles Eccles (989) (989) allude allude to to both both uses uses of of the the term. term. In In this this thesis thesis we we adopt adopt Bradach s Bradach s use use of of the the term. term.
7 TITLE chapter i n t r o d u c t i o n t o t h e r e s e a r c h q u e s t i o n s CHAPTER explained that differences in the organization and management of franchise and companyowned restaurants can cause certain processes, which he calls plural dynamics, across these restaurants. For instance, due to their stronger financial incentives, franchisees are motivated to search for revenue enhancing ideas, which can be used later in companyowned restaurants. According to Bradach, these plural dynamics enable operators of plural restaurant chains to better meet their strategic objectives. Hence, he predicts that plural chains outperform pure chains (i.e. chains that consist only of franchise outlets or companyowned outlets). After Bradach, a number of scholars have conducted empirical research on the synergistic benefits of the plural form. For instance, Cliquet and Croizean (00) studied the advantages of having both franchise and company-owned outlets for cosmetic chain organizations, and Lewin (99) examined the implications of a mixture of franchise and company-owned outlets for innovation within restaurant chains. Some other scholars have studied the benefits of the plural form outside the context of franchising systems. For example, in the context of industrial purchasing, Heide (00) investigated whether firms can better manage information asymmetry problems by augmenting market relationships with internal organization. In this thesis we investigate the benefits of the plural form for Dutch pharmacy chains. In the Netherlands the pharmacy sector has been characterized by considerable consolidation in the past years. Approximately 9% of the Dutch community pharmacies are currently part of a chain organization. The reasons for this chain development are diverse. For example, since 999, it has become considerably easier for non-pharmacists to exploit pharmacies in the Netherlands. In reaction to this measure, various parties, particularly pharmaceutical wholesalers, have started to acquire pharmacies. The measures imposed by the Dutch government to control the expenditure on pharmaceutical aid have also played an important role in the development of pharmacy chains. These measures have caused the margins of pharmacies to be under increasing pressure. In combination with uncertainty about future measures, this has made many pharmacies to opt for the security of a large organization. Dutch pharmacies chains are organized in different ways. Two chains use a mix of franchise and company-owned pharmacies. Other pharmacy chains consist either of franchise pharmacies or of company-owned pharmacies. Operators of these chains often In the Netherlands prescription drugs are dispensed by community pharmacies, hospital pharmacies, and dispensing doctors (i.e. general practitioners that usually cover rural areas). Only community pharmacies are part of chain organizations. Therefore, whenever we use the term pharmacy in this thesis, we mean a community pharmacy. Dutch pharmacy chains make use of business format franchising. This is a form of franchising in which the franchisee operates under a complete business format that is structured by the franchisor. This format includes, for example, trade names, trademarks, operating methods, marketing techniques, and the franchisor s knowhow. consider extending their chains with company-owned pharmacies respectively franchise pharmacies. In this thesis we base our work on Bradach s qualitative research (99, 99). We examine to what extent his findings with respect to the benefits of the plural form can be applied to the Dutch pharmacy sector. In addition, we investigate whether the plural form offers any other benefits in this sector. Broadening Bradach s work to other retail sectors will create a more complete understanding of the added value of the plural form. To study the benefits of the plural form, we make use of the Structure-Conduct-Performance (SCP) paradigm. Rather than adopting an industry (meso) perspective in using the SCP paradigm, we adopt a pharmacy chain/pharmacy (micro) perspective. After Bradach, we start by examining how operators of pharmacy chains have structured their relationship with franchise and company-owned outlets. Cliquet and Croizean (00) have also investigated the applicability of Bradach s findings to another sector (i.e. the cosmetic sector). Rather than beginning with the how question, they, however, only studied why cosmetic chains make use of the plural form. We believe that the how question is essential in fully understanding the dynamics that exist within plural pharmacy chains, and in understanding why these dynamics are similar to or different from those identified by Bradach in the restaurant sector. In addition to studying the structural characteristics of franchise and company-owned pharmacies, we examine the relationship that exists between these characteristics and the conduct (behavior) of pharmacies within the chain organization. More specifically, we study pharmacies conduct with respect to the chain s strategic objectives. As described by Bradach (99), differences in the structural characteristics of franchise and companyowned restaurants cause these restaurants to make distinctive contributions to the chain s strategic objectives. In combination, these contributions of franchise and company-owned restaurants lead to certain plural dynamics. That is, the contribution of franchise restaurants sometimes positively affects the contribution of company-owned restaurants and vice versa. On the other hand, franchise and company-owned restaurants both make specific contributions that are not made by the other. After Bradach, we examine the plural dynamics that arise when franchise and company-owned pharmacies are used concurrently. Finally, similar to Sorenson and Sorenson (00) and Srinivasan (00), we study the performance implications of the plural form. A distinction is made between two types of performance: the performance of chain operators (i.e. the effectiveness of chain operators in achieving their strategic objectives and their contribution to the performance of pharmacies through products and services) and the performance of pharmacies (i.e. financial and nonfinancial performance). We examine the indirect effect of conduct on pharmacy performance (via chain operator performance) and the direct effect. By investigating pharmacy performance, we can determine whether pharmacies benefit from being part of a plural chain. Thus, whether plural dynamics lead to enhanced pharmacy performance.
8 TITLE TITLE chapter i n t r o d u c t i o n t o t h e r e s e a r c h q u e s t i o n s CHAPTER. Research questions As noted earlier, we start our empirical research by examining how operators of pharmacy chains structure their relationship with franchise and company-owned pharmacies. Hence, we pose the following research question: R How do operators of pharmacy chains structure their relationship with franchise and company-owned pharmacies? Once we have analyzed the structural characteristics of franchise and company-owned pharmacies, the next step in this thesis is, as described, to determine the link between these characteristics and the conduct of pharmacies within the chain organization. We examine the contribution of franchise and company-owned pharmacies to the chain s strategic objectives, the differences in their contribution, and the plural dynamics that result from these differences. Our second research question is as follows: R What is the effect of the way in which chain operators structure their relationship with pharmacies on the conduct of pharmacies within the chain organization? The final step is to investigate the link between the conduct of pharmacies and performance. As described, we study the indirect effect of conduct on pharmacy performance (through chain operator performance) and the direct effect. In addition to the link between conduct and performance, we also investigate the differences in the performance of operators of plural pharmacy chains and those of pure pharmacy chains, and the differences in the performance of pharmacies of plural chains and those of pure chains. We have formulated the following two research questions: R What is the effect of the conduct of pharmacies on the performance of chain operators, and what is the effect of this performance on the performance of pharmacies? R What is the effect of the conduct of pharmacies on their performance?. Research methodology In this thesis we combine different research methods, that is, literature research and different types of empirical research. In our literature research, we draw a link between theory on the plural form and several related theories (e.g. Transaction Cost Economics and the Resource-Based View of the Firm). The empirical data in this thesis is gathered through both qualitative and quantitative research. The first part of the empirical research consists of a case study. This case study is conducted among pharmacy chains that have adopted the plural form. The objective of the case study is to examine the relationships between the structural characteristics of franchise and company-owned pharmacies, their contribution to the chain s strategic objectives, the plural dynamics, and the way in which these dynamics enable plural pharmacy chains to better meet their strategic objectives. The second part of the research consists of a survey. The survey is not sent to the operators of pharmacy chains but to their pharmacies (both pharmacies of plural chains and of pure chains). In conducting the survey, we thus take a pharmacy-level focus rather than a chain operator-level focus. This is due to three reasons. First, by taking a pharmacy-level focus, we create a more indepth insight into pharmacies structural characteristics, their behavior, their performance, and the relationship between these variables. Second, it allows us to test whether the chain operator s view (that we determine by means of the case study) corresponds with pharmacists view. Pharmacists may, for example, perceive their relationship with the chain operator to be structured differently from what is assumed by the chain operator. Third, a practical reason is that the number of Dutch pharmacy chains is simply not sufficient to make statistical inferences on the chain operator-level.. Objectives This thesis has both scientific and practical objectives. Scientific objectives:. Providing detailed insight into the benefits of the plural form in the pharmacy sector and the realization of these benefits, and demonstrating why and to what extent these benefits are similar to or different from those identified by Bradach (99, 99) in the restaurant sector.. Presenting statistical evidence on the relationship among the structural characteristics of pharmacies, their contribution to the chain s strategic objectives, the plural dynamics, and the performance of pharmacies. To the best of our knowledge, these relationships have not previously been statistically investigated. Studies on these relationships have only taken a qualitative approach (Bradach, 99, 99). Studies on the plural form that have taken a statistical approach have either investigated the effect of certain conditions such as incumbency/lock in problems and performance ambiguity (Dutta et al., 99) and the firm s recognition of the synergistic benefits of the plural form (Dant and Kaufmann, 00) on the mix of governance structures, or they have investigated the effect of a mix of governance structures on intangible firm value (Srinivasan, 00) or firm performance (Sorenson and Sorenson, 00), thereby making theoretical assumptions about the benefits of the plural form. Only Heide (00) investigated the relationship between the mix of governance
9 TITLE chapter i n t r o d u c t i o n t o t h e r e s e a r c h q u e s t i o n s CHAPTER structures and the dynamics between these structures, but thereby he focused, as noted earlier, on solving information asymmetry problems and not on meeting strategic objectives.. Providing insight into the differences between pharmacies of plural chains and pharmacies of pure chains. In his study Bradach (99, 99) only examined plural restaurant chains, thereby making assumptions about pure restaurant chains. By also including pharmacies of pure chains in our survey sampling frame, we can compare the conduct and performance of these pharmacies with that of pharmacies of plural chains. Ultimately, such a comparison is needed to ascertain whether differences indeed exist between these two types of pharmacies. Practical objective:. Assisting the operators of Dutch pharmacy chains in making optimal use of the plural form and in increasing the performance of their pharmacies.. Limitations of the thesis This research is characterized by two different limitations.. We only focus on pharmacy chains and not on other retail chains in this thesis. This allows us to deepen our theoretical understanding of the plural form phenomenon. Such a deepening is necessary because theory on this phenomenon is only emerging. governance structures. In the second part, we delineate a number of theories that treat the choice of governance in either-or terms. Moreover, we discuss research that treats the choice of governance in and-and rather than in either-or terms, and we elaborate on the Structure-Conduct-Performance paradigm. Chapter explores the empirical setting of this thesis: the Dutch pharmacy sector. To fully understand the movements that take place within this sector, we start by describing the pharmaceutical care policy in the Netherlands. Subsequently, we analyze the structure of the pharmacy sector. This analysis is essential as it enables us to create a better insight into the behavior of pharmacies. Chapter reports on the findings of the case study. We start this chapter by elaborating on the case study method. Next, we discuss the key strategic objectives of pharmacy chains. For each of these strategic objectives, we explain how certain dynamics across franchise pharmacies, company-owned pharmacies, and the chain operator do lead plural pharmacy chains to be more effective in meeting them. Chapter presents five different conceptual frameworks and related hypotheses. These conceptual frameworks link structure, conduct, and performance to each other and are based on theory and the results of the case study. Moreover, hypotheses are presented regarding the differences in the structural characteristics and conduct of franchise and company-owned pharmacies and regarding the differences in the performance of plural and pure pharmacy chains and the performance of plural chain and pure chain pharmacies. Chapter elaborates on the second research method that is used in this thesis: the survey method. Subsequently, chapter reports on the results of the survey. Through the use of Structural Equation Modeling, we test the hypothesized relationships among structure, conduct, and performance. Furthermore, we test the hypotheses regarding the differences in structure, conduct, and performance that have been formulated in chapter. Finally, chapter 8 discusses the major findings, delineates the scientific and practical contribution of the research, describes the limitations, and suggests an agenda for further research.. In this thesis we only investigate Dutch pharmacy chains and do not consider foreign pharmacy chains. The reason for this is that country specific characteristics are also expected to play a role in understanding the behavior of pharmacies and thus in understanding the benefits of the plural form within the pharmacy sector. In the Netherlands the pharmaceutical care policy is different from that in other countries. As we will explain in chapter of this thesis, the pharmaceutical care policy has a severe impact on the structure of the Dutch pharmacy sector. This structure in turn is likely to influence the way in which pharmacies behave.. Outline of the thesis This thesis consists of eight different chapters. Chapter presents the theoretical framework. The first part of this chapter focuses on governance structures and the differences between the structural characteristics of franchise and company-owned
10 TITLE TITLE 8 8 Chapter Theoretical framework: Plural governance. Introduction Interfirm transactions can be managed by different governance structures. In the literature a broad range of governance structures have been identified. This broad range is often categorized into three basic types of structures: () markets, () hierarchies, () and hybrids. In market governance firms interact with each other at arm s length across a nameless, faceless market. To mediate their transactions, they rely on market-determined prices (Barney, 00). In hierarchical governance, on the other hand, external transactions are brought within the boundaries of the firm. Hierarchy rather than price is relied upon to control transactions. Finally, hybrid governance is traditionally viewed as a wide class of structures that combine characteristics of market and hierarchical governance. Examples of hybrid governance are R&D partnerships, franchising, and joint ventures. In the literature different definitions have been provided to the term governance structure. Williamson and Ouchi (98), for example, have defined it as a mode of organizing transactions. This is, however, a rather broad definition. Yin and Zajac (00) have delineated a governance structure as an organization design that incorporates systems of incentives, decision-making, and operational control. This is a more precise definition as it specifies the characteristics of the concept. According to Yin and Zajac, franchise (i.e. hybrid governance) and company-owned (i.e. hierarchical governance) governance structures differ significantly from each other with respect to these characteristics. The structure of this chapter is as follows. In paragraph. we describe the differences in the characteristics of governance structures. More specifically, as the focus of this thesis is on franchise and company-owned governance structures, we delineate the degree to which these structures differ from each other with respect to their characteristics. In the third paragraph, we broaden our focus to governance structures in general. We describe two theories that are often used in existing literature to explain firms choice among governance structures: Transaction Cost Economics and the Resource-Based View of the Firm. In the fourth paragraph, we narrow our focus once again to franchise and company-owned structures. We delineate two theories that explain the choice of chain organizations between franchise and company-owned governance structures: the agency cost theory and the ownership redirection theory. In paragraph. we describe research works that treat the choice of governance structure in and-and terms rather than in either-or terms. In the last paragraph, we provide an explanation of the Structure-Conduct-Performance paradigm.
11 CHAPTER CHAPTER chapter theoretical TITLE framework: plural governance 0. Characteristics of governance structures As described by Yin and Zajac (00), franchise and company-owned governance structures differ from each other with regard to incentives, decision-making, and operational control. Incentives Managers in company-owned outlets (i.e. company managers) have weaker financial incentives than franchisees. Company managers, who may have some incentive compensation, mainly receive fixed salaries (Brickley and Dark, 98). Franchisees rewards, on the other hand, are determined by the financial performance of their outlet(s). Except for a fixed or variable fee, franchisees appropriate the net income of their outlet(s). Because their compensation is more incentive-based than that of company managers, franchisees concern about the business is greater. They are motivated to maximize outlet sales through the effective management and promotion of the franchise concept (Carney and Gedajlovic, 99). Decision-making The decision-making structure that characterizes a dyadic relationship can be described in terms of three dimensions: () centralization, () formalization, and () participation (e.g. Dwyer and Welsh, 98). Franchise and company-owned outlets differ considerably from each other with respect to these dimensions. Centralization is the degree to which the power to make and implement decisions within the dyadic relationship is concentrated at one vertical level (John and Reve, 98). Company managers are employees and have little decision-making power. The decisionmaking authority resides with the chain operator. Franchisees, on the other hand, enjoy far more independence in this respect. This is at odds with the franchise contract, which seems to create the functional equivalent of the employee relationship (Bradach, 99). In practice, however, the character of the chain operator-franchisee relationship is often different from the terms of the contract. Contractual disagreements are rarely litigated. A reason for this is that it is difficult for the chain operator to win in court against a franchisee. Bradach (99) quotes a CEO of a restaurant chain who explained why: It is by no means clear who would win in litigation. The big company picking on the small entrepreneurs does usually not play well in front of the juries. Formalization is the degree to which decision-making is regulated by explicit rules and procedures (Dwyer and Welsh, 98). In case of franchising, the degree of formalization is high (Kneppers-Heynert, 988). Chain operators draw up many rules and procedures for franchise outlets. In franchise contracts and especially in operating manuals, chain operators explicitly describe in what way franchisees must exploit their outlets. The relationship between the chain operator and company-owned outlets is characterized by even more rules and procedures. The rules and procedures described in operating manuals also apply to company-owned outlets. Moreover, they have to obey rules with respect to budgets, targets, and reporting. Participation in dyadic decision-making is the degree of input to decisions (Hage and Aiken, 9), including ideas generation, decision-making involvement, and goal formulation (Dwyer and Oh, 988). Although the differences between franchise and company-owned outlets with respect to participation are not described as such in the extant literature, some authors do implicitly address them. For example, Bradach (99) describes that in the franchise arrangement decisions are often made through face-to-face interactions between the chain operator s executives and franchisees, while in the company arrangement these decisions are made centrally. Similarly, Yin and Zajac (00) quote an executive director of a large restaurant chain who noted that franchisees typically have much more access to people who make decisions than company managers, and that the latter ones have little input. In summary, franchisees do thus experience more participation in decisionmaking than company managers Operational control Company-owned outlets are subject to more operational control from the chain operator than franchise outlets. The greater operational flexibility of franchise outlets is evident, for example, in a wider span of control. The field staff responsible for franchise outlets supervises a larger number of outlets than the staff responsible for company-owned outlets. In addition, mechanisms to reinforce compliance with the chain operator are used less frequently and less intensively for franchise outlets than for company-owned outlets (Bradach, 99). The difference in operational control between franchise and companyowned outlets is caused by the difference in incentives. Company managers have weak incentives and therefore pose a risk of shirking (Brickley and Dark, 98). Operational control is necessary in order to prevent these managers from reducing their efforts. In contrast, franchisees demonstrate a higher level of self-management due to their strong incentives. Hence, the need for operational control is much smaller in their case. In In addition addition to to these these three three dimensions dimensions of of decision-making decision-making structures, structures, Dwyer Dwyer and and Welsh Welsh distinguish distinguish a fourth fourth dimension: dimension: specialization specialization (i.e. (i.e. the the amount amount of of task task differentiation). differentiation). No No differences differences exist exist among among franchise franchise and and company-owned company-owned outlets outlets with with respect respect to to this this dimension. dimension. Both Both types types of of outlets outlets display display the the same same level level of of specialization, specialization, as as they they carry carry out out the the same same functions. functions. As As this this thesis thesis focuses focuses on on the the differences differences between between franchise franchise and and company-owned company-owned outlets, outlets, we we leave leave this this dimension dimension out out of of consideration. consideration.. Firms governance choice: Either-or Most current work on governance decisions has studied firms choice among governance structures: why do firms make or buy a part (Monteverde and Teece, 98), utilize direct
12 CHAPTER chapter theoretical TITLE framework: plural governance versus indirect channels of distribution (John and Weitz, 988), or select a direct or third party sales force (Anderson and Schmittlein, 98). Two theories have been used to explain the choice among governance structures: Transaction Cost Economics and the Resource- Based View of the Firm. Transaction Cost Economics Transaction Cost Economics (TCE) has received the most attention in scientific literature. TCE s central claim is that transactions will be managed by a governance structure that minimizes the costs involved in carrying out the transaction (e.g. negotiation and monitoring costs). TCE is based on two assumptions concerning human nature: bounded rationality and opportunism. The essence of bounded rationality is that human actors face constraints on their cognitive capabilities. Although human actors intend to behave rationally, these cognitive constraints prevent them from doing so (Simon, 9). Opportunism, on the other hand, is defined as self-interest seeking with guile (Williamson, 98). TCE further maintains that there are three dimensions with respect to how transactions differ. The first dimension is asset specificity, which refers to the extent to which the assets used in support of a particular transaction are specialized or non-redeployable. The second dimension is uncertainty. TCE distinguishes two types of uncertainty (Williamson, 98). The first type of uncertainty, environmental uncertainty, refers to the condition of being unable to anticipate unforeseen contingencies in the product-market environment of the firm, while the second type of uncertainty, behavioral uncertainty, refers to the difficulties associated with assessing the contractual performance of transaction parties. Finally, the third dimension of transactions is frequency, which concerns the number of times transaction parties engage in exchange with one another. According to TCE, the interaction between the two characteristics of human nature and these dimensions of transactions cause certain contracting problems (Speklé, 00). For instance, given opportunism, asset specificity creates a safeguarding problem. If a firm invests in specific assets, it experiences a lock-in effect. Its transaction partner may opportunistically exploit this situation by demanding various kinds of concessions from the firm. To prevent this from happening, the firm is forced to design expensive safeguards. Another example is that under the assumption of bounded rationality, behavioral uncertainty gives rise to a performance evaluation problem. Because of constraints on the rationality of human actors, non-compliance to contracts may remain undetected. To avoid this, a firm must closely evaluate the contractual performance of its transaction partners. The more elaborate a governance structure, the better it can deal with these contracting problems and thus the better it can economize on the associated transaction costs. If minimizing transaction costs were the only goal, hierarchical governance would always be chosen over non-hierarchical governance. However, the more elaborate a governance structure, the more costly it is. Therefore, TCE predicts that if a transaction is exposed to minor contracting problems, market governance will be the most efficient means to mediate the transaction. The costs of organizing the transaction within a firm (i.e. bureaucratic costs) would exceed the costs of conducting the transaction within the market. If a transaction is confronted with major contracting problems, however, hierarchical governance will minimize the costs associated with overcoming these problems. Finally, if the contracting problems to which a transaction is exposed are moderate, hybrid governance will be preferred to both market and hierarchical governance. On the one hand, this type of governance is more elaborate than market governance and therefore better able to economize on the transaction costs associated with overcoming these moderate problems. On the other hand, adopting hybrid governance is less costly than adopting hierarchical governance. The Resource-Based View of the Firm Another theory that has been used by some scholars to explain firms choice among governance structures is the Resource-Based View of the Firm (RBV) (e.g. Chi, 99; Conner and Prahalad, 99; Madhok, 00). Whereas TCE posits that exchange conditions determine the choice of governance structure, the RBV posits that a firm s relative resources determine this choice. Resources are defined as all assets, capabilities, organizational process, firm attributes, information, knowledge, and so forth that are controlled by a firm and that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness (Barney, 99). The RBV s domain of interest is the search for competitive advantage rather than the search for the most efficient governance structure (Madhok, 00). According to RBV logic, resources are at the center of a firm s competitive advantage. There are two basic assumptions underlying the RBV (Barney, 99). The first assumption is that firms are considered bundles of resources (Penrose, 98) and that these resources are heterogeneously distributed across firms. No two firms have had the same set of experiences, acquired the same assets and skills, or built the same organization culture (Collis and Montgomery, 99). The second assumption is that resources may not be perfectly mobile across firms. That is because they either may be very costly to copy or inelastic in supply. If a firm s resources are heterogeneous, imperfectly mobile, and if they enable the firm to exploit opportunities or neutralize threats, then they are considered as potential sources of (sustained) competitive advantage (Barney, 00). As described above, the RBV considers resource differences among firms a very important determinant in making governance choices (Barney, 00). According to RBV logic, if a firm possesses resources and capabilities which enable it to carry out a certain activity in a superior manner vis-à-vis other firms, the firm will internalize this activity (i.e. adopt hierarchical governance). However, if another firm possesses these superior resources, the firm will engage in market exchange (or it will acquire the other firm). Finally, if the focal firm possesses some but not all of the needed resources, a common response will be to
13 CHAPTER chapter theoretical TITLE framework: plural governance combine resources with an external firm (Combs and Ketchen, 999) using, for example, a joint venture.. Chain organizations governance choice: Franchise or companyowned outlets Two streams of research related to TCE and the RBV specifically focus on chain organizations governance choice between franchise and company-owned outlets: the agency cost theory and the ownership redirection theory. The agency cost theory The agency cost theory, which is closely related to TCE, argues that agency problems determine a chain organization s choice between franchise and company-owned outlets. Of these agency problems, shirking has received the most attention (Brickley and Dark, 98; Norton, 988; Rubin, 98). As described above, managers in company-owned outlets pose a greater risk of shirking and therefore need more monitoring. To curb monitoring costs, agency cost theory claims that company-owned outlets are observed in locations where the cost of monitoring is low, while franchise outlets are observed where the cost of monitoring is high. The distance between an outlet and corporate monitoring offices is often used as an indicator of the extent of monitoring costs (Brickley and Dark, 98). On the other hand, franchising also gives rise to two agency problems (Brickley et al., 99). The first problem is the potential for free riding. Because franchisees appropriate the net income of their outlet(s), they have incentives to reduce quality if the gains from such activities can be internalized and the costs externalized (Carney and Gedajlovic, 99). The danger of free riding is greatest at outlets where the number of repeat customers is low (e.g. outlets that are located along the highway). In that case the cost of reduced quality is born primarily by other outlets that lose the customer s patronage and by the franchisor whose trademark will be less valuable. Alternatively, the cost savings from providing lower quality go directly to the given franchisee (Brickley et al., 99). Consequently, the agency cost theory predicts that outlets that serve a large proportion of non-repeat customers are owned by chain organizations. The second agency problem inherent to franchising is inefficient risk-bearing. As franchisees have a large part of their wealth tied up in a single outlet, they are forced to consider the full risk of undertaking investments (Brickley and Dark, 98). Therefore, franchisees are likely to make less optimal investment decisions than decision-makers who have a more diversified investment portfolio. For example, local advertising campaigns have spillover effects on other outlets that are part of the system. Such spillovers mean that individual franchisees will not appropriate the full return of their investment. As a result, such investments may be foregone by franchisees and be left to others (Carney and Gedajlovic, 99). To facilitate optimal investment decisions, it is argued that when outlets are geographically concentrated and thus when spillovers are more common, the outlets should be collectively owned and operated (Carney and Gedajlovic, 99). In short, while franchising economizes upon monitoring costs, it involves other agency costs. The monitoring benefits of franchising must be traded-off against these other costs. It is this trade-off which leads organizations to own and franchise outlets in a discriminating way (Carney and Gedajlovic, 99). The ownership redirection theory The ownership redirection theory, which is couched in the RBV, claims that the choice between franchise and company-owned outlets is determined by the phase in the chain organization s life cycle and is thus transitory in nature. To penetrate the market as widely and as rapidly as possible, chain organizations rely mainly upon franchising early in their life cycle. That is because franchisees provide three essential resources that chain operators lack in this phase: capital, information about the desirability of particular locations and knowledge of local conditions, and skilled management (Oxenfeldt and Kelly, 98-99). If the franchise system is successful, these resources are expected in time to become more directly available to the chain operator. That is to say, the chain operator now experiences positive cash flows, accumulates and develops its own information bases (because of its intimate contact with franchisees), and the supply of managerial talent becomes more readily available. Moreover, once chain organizations have attained their desired size, they become more concerned with operational efficiency and the development and maintenance of an overall image (Oxenfeldt and Kelly, 98-99). As both objectives can best be attained through tight control, free of resource constraints, franchise systems will evolve into large company-owned chains. Only low-performing outlets in rural areas as well as outlets in new market territories where the chain operator has little local market expertise and where it is attempting to establish another critical mass of outlets will be franchised (Carney and Gedajlovic, 99).. Firms governance choice: And-and The theories described above are all based on the assumption that firms make mutually exclusive choices concerning governance structures as one governance structure does better than another under certain circumstances. Both TCE and agency cost theory search for variations in environmental circumstances to explain firms choice of governance structure. The unit of analysis in these theories is the individual transaction or outlet. The RBV and the ownership redirection theory, on the other hand, look for differences in firms resources to explain this choice. The unit of analysis in these theories is the firm rather than the individual transaction or outlet.