Olav Sorenson and Jesper B. Sørensen
Franchising provides an increasingly important vehicle for entrepreneurial wealth creation and accounts for a large and growing share of business in the retail and service sectors. Chains—which operate in dispersed markets—most frequently use this form of governance. These ﬁrms must balance the centralization and standardization required for efﬁciency with the adaptation needed for success in varied local markets. By adopting an organizational learning perspective, we argue that the mix of company-owned and franchised units affects this balance, thereby inﬂuencing chain performance. In particular, the different incentives facing company managers and the entrepreneurs that manage franchises encourage distinct patterns of organizational learning. Franchised establishments provide better opportunities for the ﬁrm to learn through experimentation; however, companies ﬁnd it easier to diffuse this information and enforce standards through their company-owned units. Analyses of franchised restaurant chains in the United States provide empirical evidence of this trade-off.