Strategic Interactions in Franchising Systems When Anticipating Innovation: How to Develop Operational Strategies and Cooperative Alliance Models?

Abstract

Correctly responding to the arrival of unexpected innovative events can help franchise system members rationalize their operational strategies and cooperative alliance models to improve performance, while the exact timing of successful product innovation is often unknown. Based on this, we consider the impact of innovation success on the franchising system, find the optimal strategies and system profits under three modes of horizontal cooperative alliance, non-cooperative and vertical cooperative alliance in the system with the help of differential game theory, and explore the impact of uncertainty of innovation realization on the optimal operation strategies and cooperative alliance mode selection of system members. It is found that: the prediction of the likelihood of innovation realization changes the time preference of decision makers to focus more on current profits; both horizontal cooperative alliance and vertical cooperative alliance models are effective in achieving Pareto improvements in total system profits, regardless of before and after innovation, but the improvements are more pronounced for the vertical cooperative alliance model, and the improvements are more significant at high realization rates-high enhancement rates; regardless of before and after innovation, for franchisors, the franchisor's R&D innovation effort increases, while the cooperation or non-cooperation among franchisees does not affect their R&D effort. For franchisors, vertical cooperative alliances with franchisees are more likely to promote their local service level and advertising investment.