Surviving Economic Adversity: Governance of Franchise Clusters

Despite research on clustering strategies in franchised systems, little is known about its impact on outlet survival during times of economic adversity. In this research, the authors identify two governance mechanisms used by franchisors that vary at a cluster or outlet level— franchisee ownership fragmentation and franchisor on-site supervision —and develop a framework to suggest the efficacy of these mechanisms in mitigating the negative effect of economic adversity on the survival of franchised outlets operating in a cluster. They test this framework using a novel clustering algorithm and survival analysis on a uniquely constructed dataset of 8,677 outlets across 18 franchisors over 14 years. They find that when economic conditions deteriorate, franchisee ownership fragmentation, which reflects greater diversity in cluster composition and knowledge sources, reduces franchised outlet failure hazard within denser clusters. In contrast, franchisor on-site supervision, which denotes lower franchisee autonomy, intensifies outlet failure hazard in such clusters. This research offers actionable insights for franchisors on managing in-cluster outlets during economic adversity and introduces FranClusterer, a practical app-based tool for cluster identification and governance.