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Resource Scarcity Theory Analysis

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(Alon, 2001). By doing this, franchisees are highly motivated to maximize the performance of their outlets. These franchisees are the residual claimants of their outlets profits which reduces the monitoring costs that the franchisors must incur (Castrogiovanni et al., 2006; Bradach, 1997; Norton, 1988; Rubin, 1978). In addition, the substantial part of the investment into franchised outlet is bear by the franchisee thus the anticipated profit from the investment is dependent on the best efforts of the franchisee (Castrogiovanni et al., 2006; Klein, 1995). Researchers have also highlighted that the main cause of the agency problem is information asymmetry and moral hazard. Information asymmetry is a problem in the agency relationship when the …show more content…

Andrews (1971) stated that the main strengths of a company comes from its organizational competencies and resources, when these are different or superior to those of its competitors, it becomes the base of its main advantage over other companies, if used appropriately within the …show more content…

This theory supports the fact that companies offer the possibility of franchising at a greater degree in their early years because of their managerial expertise and their lack of sufficient capital to open more outlets by themselves (Castrogiovanni et al., 2006). The managerial expertise is an intangible resource that is gained by the company when its mangers acquire market experience by operating through time. Castrogiovanni et al. (2006) stated that according to the resource scarcity theory firms decide to turn towards the franchising mode of entry when they want to achieve economies of scale. This puts pressure on them to expand beyond their financial capacity, so their own resources are not enough for this purpose. Oxenfeld and Kelly (1969) affirmed that, companies franchise when they do not have the necessary capital to own their own subsidiaries. The availability of essential resources constitutes one of the main reasons of franchising. The scarcity of capital decreases as the franchise becomes more successful over time and as the franchisor is able to self-finance his own operations. Additionally, the availability of a supply of managerial talent to substitute existing franchisees or administer new

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