Strategic Management Journal Strat. Mgmt. J., 22: 713–724 (2001) DOI: 10.1002/smj.185 RESEARCH NOTE FINDING THE RIGHT MIX: FRANCHISING, ORGANIZATIONAL LEARNING, AND CHAIN PERFORMANCE OLAV SORENSON 1 and JESPER B. SØRENSEN 2 * 1 Anderson Graduate School of Management, University of California, Los Angeles, California, U.S.A. 2 Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts, U.S.A. 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. Copyright  2001 John Wiley & Sons, Ltd. Franchising occupies a prominent position in con- temporary American business and increasingly provides a common vehicle for entrepreneurial wealth creation. Although franchising receives less attention than high-tech entrepreneurship, 40 percent of all U.S. retail sales passed through franchising organizations in 1996 (Bradach, 1998). Franchising appears particularly common among chains—including restaurants, hotels, and small business services—in the form of ‘business- Key words: organizational learning; incentives; franchising; restaurant chains *Correspondence to: Jesper B. Sørensen, Sloan School of Management, Massachusetts Institute of Technology, 50 Memorial Drive, Cambridge, MA 02142-1347, U.S.A. Copyright  2001 John Wiley & Sons, Ltd. format’ franchising. Under this model, entrepreneurs license the chain’s business con- cept: the right to use its brand name and access to its marketing strategies, organizational routines and operating manuals (Caves and Murphy, 1976). 1 In return, the franchisee pays the fran- chiser both an initial fee and ongoing royalties, but retains rights to the establishment’s earnings (Hunt, 1972; Rubin, 1978). Like other entrepreneurs, franchisees perceive opportunities for wealth creation and risk their own capital pursuing them. Unlike many other 1 In contrast, franchisees simply distribute a branded product produced by the franchiser, without any operational assistance, in traditional (product name) franchising.