In the modern business environment simply standing still is not enough, all businesses need to grow and develop simply to sustain their competitive position. More ambitious organisations recognise that success and prosperity is derived from strategic plans that take risks to capture market share and gain sustainable advantage over competition. Fundamentally there are two traditional ways that a business can attain this ‘planned’ growth.

Firstly, internally, by investing profits and/or raising other sources of finance to grow organically. This is the norm with retained profits being the main source for this type of internal growth. It is also the main reason for all business growth as all directors and managers must be able to demonstrate to shareholders that they have the capability to grow the business and deliver higher returns without always turning to external growth methods.

Secondly, grow via external means. An organisation can acquire or merge with another organisation, which will instantaneously deliver growth and wider market reach. Both acquisitions and mergers will permanently alter the structure and nature of a business, and if not successfully implemented could result in worsening performance.

Alternatives to the more traditional external growth methods above, which have become increasingly popular in many sectors, are alliances and partnering arrangements between two or more complementary businesses. Such approaches are not designed to be permanent but instead offer the flexibility to collaborate for a time period that is mutually acceptable and beneficial to all involved. There are several ways that these alternative external growth approaches can be organised

Strategic alliance

Strategic alliances are legally binding agreements between two or more completely independent businesses who agree to cooperate in the manufacture of products or the delivery of services to defined target markets. The particular type of strategic alliance best employed is largely determined by the length of the product or service life cycles.

• A long life cycle can protect a company’s competitive advantage for a relatively long time period, particularly if patents and other legal protections are able to shield offerings to the market. Strategic alliances can be used help to maintain operational stability and allow the company to exploit its products and/or services to gain further advantage.
• At the other extreme a short product or service life cycle reduces the security of any current competitive advantage, as it requires continual research and development of new replaced products or services is necessary to survive in the market. Strategic alliances can help to accelerate the development of new products and services, by sharing research knowledge and resources, and development costs.

Existing levels of business and financial performance can be improved from the learning experiences gained working with different partner(s), the sharing of risks and costs between the partner(s), and the economies of scale derived from operating with a larger presence in the market.

An example of a successful strategic alliance is the Oneworld Alliance which brings together a number of world-class airlines to deliver a high quality and seamless travel experience for passengers. This means that British Airways customers can, book a flight between Tokyo and Sydney and fly on this route with the alliance partner Japan Airlines. This effectively enables British Airways to offer its customers flights all over the world including routes that it doesn’t serve.

However, there are challenges to be considered that need effective management before a business decides to enter into a strategic alliance, otherwise the venture could prove to be a costly failure. It is possible that the alliance partner[s] may not possess the competences and capabilities required to complement and enhance business operations. Also, the partner[s] may fail to use their complementary skills or not fully commit their resources and capabilities to deliver the agreed aims of the alliance. This in turn is likely to result in a breakdown in relations between the partners and cause the alliance to disintegrate.

Joint venture

A joint venture is created when two or more companies create another legal entity in which each venture partner owns a share. This fundamentally differs to a strategic alliance, where each alliance partner collaborates without the need to create a separate legal entity. Joint ventures cover a wide variety of collaborative business arrangements and can exist for either a fixed or indefinite duration.

There are three main types of joint venture.

Project-based joint venture
This is a very common form of joint venture, set up for successfully delivery of a predetermined project where the partners contribute different skills and resources to the new legal entity. A key feature of this type of venture is that its purpose is both defined and limited by the project, which when completed triggers the end of the joint venture and closure of the legal entity. The main advantages of project-based joint ventures are the ability to leverage complementary resources, combine knowledge and expertise, and save costs.

An example of a successful project-based joint venture was when AstraZeneca and Oxford University joined forces in 2020 in order to develop a Covid-19 vaccine.

Functional-based joint venture
A functional joint venture is appropriate when a business intent on partnering know precisely what they are bringing to the venture as well as what they expect to get out of it. The joint venture acknowledges that partners businesses working together will result in better performance and results than each one operating independently. Therefore, it is mutually beneficial to each joint venture partner. The different types of functional expertise shared in the joint venture company can create synergies, save costs, and successfully getting products and services to market.

The joint venture between the European high street clothing retailer H&M and the waste management company REMONDIS is designed to recycle discarded used clothing retuned to H&M stores. This will improve the public’s opinion of this essentially fast-fashion retailer and generate revenue for both organisations.

Vertical joint ventures
This type of joint venture involves collaboration between buyers and suppliers operating in the same supply chain. This type of joint venture aims to optimise the operation of a supply chain by combining the capabilities and resources of each partner and ultimately enhance operational efficiency, reduce cost, and improve control and coordination of production and distribution processes. This means that the end customer [the consumer] will benefit from the pooling and effective management of resources as this should enable the joint venture to deliver higher quality products and services at more competitive prices. This in turn helps to develop and sustain customer loyalty and strengthen each partner’s competitive position in the supply chain.

The collaboration between the car manufacturer Honda and the battery manufacturing division of LG Energy Solutions is an example of this type of joint venture. The two organisations will make batteries to enable Honda produce electric vehicles.

Horizontal joint ventures
Subtly different from the above this form of joint venture sees organisations in the same industry collaborating. In this case the partners may be competitors but for the venture will pool resources to gain competitive advantage.

For instance, Polaris, a leading manufacturer of all-terrain vehicles, joined forces with Zero Motorcycles, an established electric motorbike developer. This joint development was to integrate Zero's advanced electric powertrain technology into Polaris' off-road vehicles and snowmobiles. Polaris already had an electric offering but it used older lead-acid batteries, this joint venture allowed them to gain access to cutting edge battery technology.

‍Joint ventures can be very complicated and risky business arrangements. They can provide clear business advantages, but they can also be very problematic in terms of business trust issues, cultural clashes, and committing resources instead of using them on core business operations.

Franchising

A franchise is a commercial agreement where one business (the franchisor) contracts with another organisation or individual; (the franchisee) allowing them to trade using their brand, business model and other assets. This can be a very lucrative commercial arrangement for both parties where the franchisor can increase business reach rapidly by agreeing many franchises at the same time, and the franchisee able to profit quickly from using a well-known brand. This mutually beneficial arrangement incentivises the franchisee to attain high levels of performance, with research indicating that 97% of franchise-run businesses in the UK are profitable.

There are many brands that have successfully developed using the franchise model ranging from McDonalds and Starbucks to Kumon Education and Tax Assist Accountants.

There are several advantages to operating the franchising model, including:

Brand recognition
Any new business will need to invest significant amounts of time and money promoting itself to establish a presence in the market. With a franchise arrangement, the franchisee has a business brand that is already well known so customers already know what to expect. 

Business assistance
Franchisees are provided with business assistance from the franchisor, who offer knowledge and advice on how to best operate the business. This is also beneficial to the franchisor as it is a form of control that enables them to set minimum performance standards and train franchisees to consistently deliver the core business model to the required standard.

Low cost growth
A major difficulty when growing a business is the need to procure and invest a significant amount of capital. A franchising arrangement requires each franchisee to provide the necessary capital to set up and run each franchise. This means that the franchisor can significantly grow its business with less cash and at a lower risk than investing internally.

However, there are problems with franchising that need to be managed for the business arrangement to have a chance of success.

Potential for conflict
Although franchisees will be supported by the franchisor and receive business assistance, this can also be a source of conflict between the two parties. As the franchisee starts to understand their market better and wishes to exploit opportunities, they will be constrained by rules and procedures underpinning the franchising agreement that are enforced by the franchisor to protect the brand. This will limit the franchisee’s ability to make local changes, which can become a source of potential conflict. 

Lack of franchisee control
Franchisees have very limited control or influence over core business operations as they will be required to comply with existing management operations, procedures, standards, and even opening hours. Franchisees can only offer those branded products or services authorised by the franchisor and they are likely to be required to use the franchisor’s approved suppliers, which could be costly.

Initial capital outlay
The initial cost of buying into a franchising arrangement can be more than would be required to open an independent business. In addition to acquiring premises, machinery and staff, the franchisee must pay the franchisor a fee to cover the cost of accessing the rights to use their brand.

Licensing

Franchising and licensing are very different business models that companies can use to develop and expand their operations. Whereas franchising covers a wide range of business operations that are primarily targeting consumers, licensing has a far narrower scope. Also unlike franchising, the licensing model does not include ongoing support or training from the licensor to the licensee, reducing the cost to both parties.

Licensing involves formally agreeing to give a company (the licensee) the right to manufacture, distribute, sell, or otherwise use a product, brand, or technology for a limited time period that is owned by another company (the licensor) in return for a fee or royalty paid to the licensor by the licensee. The limited duration of the licensing agreement can be a disadvantage to the licensee if it’s not renewed, particularly if the licenced product is likely to be successful and highly marketable.

One of the most successful global businesses that extensively utilises licensing is Coca Cola, which has licensing agreements with many companies all over the world. This allows for its wide range of branded carbonated soft drinks to be manufactured and distributed local to the markets Coca Cola serves. Customers are likely to be unaware of the local licensees who are responsible for the licensed products as they are produced and packaged exactly the same way at all locations.

Conclusion

Although businesses will undoubtedly continue to employ more traditional and well recognised internal and external methods to grow and sustain their presence in the market, they may also be looking for the added flexibility and commercial benefits of collaborating with other businesses. Alliances and partnering arrangements could ultimately change the structure of industries and markets, with relatively small business working in partnership to take on larger competition, and possibly succeed in taking some of their market share.

Written by a member of the SBL examining team