Alternative Profitability Measures and Marketing Channel Structure: The Franchise Decision

to maximize the long-term economic value of the firm. In this article, we a business enterprise (Li and Li, 1996). Theoretically, markets consider an alternative accounting-based objective function. We explore value a firm with reference to long-term economic profit, and some circumstances that might lead to the use of an accounting-based economic value and financial market value should be one and objective function, including the incentive structure faced by non-owner the same. Although we do not contest the fact that in the long managers, the life cycle of the firm including an impending initial public run the market will reflect economic value, we suggest that offering, and data availability considerations. A simple model of franchisor there may be circumstances in the short run that lead the performance is developed and several scenarios of franchise system expanmarket (and firm management) to attend to accounting measion examined. Decisions to open franchised or company-owned outlets sures of performance (AV measures). In doing so, we show are compared using the competing objective functions. J BUSN RES 2000. how a franchisor’s choice of EV or AV measures is related to 50.217–224.  2000 Elsevier Science Inc. All rights reserved. its decisions concerning the mix of franchised and companyowned outlets. The choice of financial measures, therefore, is closely linked to a marketing decision: the design of the firm’s distribution channel. One of the most important methods of distribution in In subsequent sections, we also examine the implications the United States is franchising. Because it provides of the finance–marketing link with respect to an important a quasi-integrated alternative to markets or hierarsub-issue: the strategic conversion of franchised to companychies, it raises interesting questions involving marketing chanowned channels (i.e., ownership redirection). We develop a nel structure decisions. The most central and unresolved quessimple model of franchise system economics and simulate the tion is “What factors influence a retailer to distribute its products expansion of the system under various scenarios. The model or services through company-owned vs. franchised units?” shows the choices of an optimal mix of franchised and comWhile this question can be examined using a variety of pany-owned outlets may turn on whether a firm uses EV or approaches (e.g., behavioral, economic/financial, or manageAV measures. We end by discussing the importance of these rial), most of the research addressing the question has been findings to the ownership redirection issue. conducted within an economic/financial framework (Rubin, 1978). The economic/financial framework assumes that business firms seek to maximize their long-run profits and wealth Comparison of AV and EV Measures (Koutsoyiannis, 1982), using performance measures that focus AV measures, such as net income (NI) and earnings per share on the firm’s economic value (EV). (EPS), are calculated using Generally Accepted Accounting This assumption is critical because of the influence that Principles (GAAP). GAAP “encompasses the conventions, rules, and procedures necessary to define accepted accounting practice Address correspondence to Patrick J. Kaufmann, Marketing Department, at a particular time” (AICPA, 1995, p. 485). School of Management, Boston University, 595 Commonwealth Ave., Boston, MA 02215. E-mail: [email protected]. In a franchising firm with a simple capital structure, NI