Internal environment, organizational form and their impact on financial performance of hotel chains

The primary objective of this study was to investigate the relationship between internal environment, organizational form, and financial performance in hotel chains. Using a contingency framework, this study investigated the match between internal environmental factors--such as capital scarcity, monitoring cost, and asset specificity--and organizational form--such as company owned, franchised, or combination of both--in an attempt to distinguish between high and low performing hotel chains.

The key findings of this study indicate that hotel chains which showed a "match" between the monitoring cost of their internal environmental factors and organizational form performed better than if those elements did not match. The other finding of this study indicates that hotel chains operating under different organizational forms, such as company-owned, franchised, and combination of both, did not differ in their financial performance levels which were measured in terms of return on investment and growth in unit sales.

This study contributes to the body of knowledge in the lodging industry by introducing the contingency theory in investigating the interrelationship between internal environment, organizational form, and financial performance. In other words, this study utilized internal environmental factors such as capital scarcity, monitoring costs, and asset specificity as moderators in order to measure their impact on organizational forms and financial performance relationship. Specifically, this study provides unique ways to measure the internal environmental factors, organizational form, and financial performance: (1) capital scarcity was measured using financing activities data included in the statement cash flows, (2) organizational form of the firm was categorized into company-owned, franchised, and combination of both, and (3) financial performance was measured using return on investment (ROI) and growth in unit sales. From the industry point of view, the findings of this study will aid in recognizing organizational form in conjunction with internal environment and financial performance. This study provides empirical support with regard to the relative models in predicting appropriate organizational form that will show better financial performance. In other words, the firm that evaluates and analyzes its internal environmental factors could have the adequate organizational form that generates high profitability. From the theoretical point of view, this study provides a body of knowledge in franchising by providing empirical findings with regard to internal environmental factors in explaining the relationship between organizational form and financial performance. Furthermore, this study contributes to the existing agency theory literature in franchising by providing empirical research to the evaluative contingency theory.