How do you re-create business success in another location? This issue is especially important for franchise businesses. Companies like McDonald’s, Supercuts, Ace Hardware and Super 8 Motels have succeeded or failed based on their abilities to transfer their business templates. Some experts advocate copying the original operations as clearly as possible. Consider Intel Corp., which believes that painting the walls of all of its chip plants the same color will minimize manufacturing defects. Others contend that localization is crucial. Local markets have nuances and peculiarities, which means some practices and procedures should be retained while others should be altered. If you’re a Western company selling shampoo in India, for instance, you should shrink your packaging to sell smaller unit quantities at cheaper prices.
A team of researchers recently looked into transferring business success from one locale to another. They investigated nearly 2,500 large franchise outlets of an organization that specializes in business services, office supplies and photocopying. The franchise has operations in all 50 U.S. states and its customers come primarily from the small-offices and home-offices markets. For each franchise location, the researchers collected revenue data that they broke down by product type or service. All the outlets opened between 1991 and 2001 -- the study period -- and during that time 111 of them closed.
The researchers looked at the mix of products and services each outlet offered. In particular, they compared how this mix differed from what the franchise headquarters recommended. This official recommendation was specific, calling for 12 standard products and also indicating the relative importance of each. For instance, revenues for the list’s number one product should be 36% of total sales; revenues for the 12th product should be 2%. The franchise trained new outlet owner-managers to replicate that product mix because of its success in the original location and at other sites.
Those conducting the study controlled for outlet size (larger outlets were less likely to close), past performance (higher growth rates increase the chances of survival) and ownership (transferring ownership also improves survival chances). They also controlled for the local market environment, since the presence of nearby competitors lowers an outlet’s chances of success.
The results were unequivocal: The more the outlets deviated from the recommended product mix, the higher their risk of failure. These outlets had purposely moved away from the business template, selling products that weren’t on the 12-item standard list. And regardless of product mix, those outlets that derived more revenues from nonstandard products also were more likely to fail.
How to explain these results? Changes in product mix and selling nonstandard items might seem insignificant, but they can have larger than intended ramifications. They might, for instance, lead to operational routines changing -- how an outlet recruits and trains its new employees. By locally adapting, managers can unintentionally undermine an organization’s business model, tampering with variables that, while not overtly, still lead to success.
They might, for instance, lead to changes in certain operational routines, such as the recruitment and training of new employees. Local adaptation can unintentionally undermine the very business model of an organization unless managers know exactly what they’re doing. And therein lies the rub. With any company of sufficient complexity, the specific chain of activities that truly generates value isn’t always obvious, and managers who deviate from an official template run the risk of tampering with variables that are crucial to the organization’s success.
For more information on this topic is available at http://sloanreview.mit.edu/smr/issue/2008/spring/03/