Joint development strategies

When formulating their strategy businesses will consider which markets they should be in (for example, by using Ansoff's matrix) and how they should compete in those markets. In addition they will also need to consider the method of expansion:

• If 100% ownership is wanted then the choice is between acquisition or organic growth
• The alternative is to undertake some form of joint development strategy.

This page recaps some of the arguments for the first of these (further detail can be found here) but then looks in more detail at the second option.

Acquisition and organic growth

Acquisition

Potential sources of synergy

Synergistic gains refers to a position where the combined entity is worth more than the sum of the value of the companies prior to acquisition. This can come from areas such as improved combined profitability, a better financial position or better market position.

Improved profitability

Combined profits can be higher due to:

• Sales synergies. These can come from sharing databases, selling products which are complimentary, sharing distribution channels etc.
• Cost synergies. Combined costs may be lower through sharing staff (and making excess staff redundant), gaining economies of scale, sharing premises, sharing central services (such as accounting) etc.

Improved financial position

The financial position of the combined company may be better due to:

• sharing assets (and selling off excess assets)
• using assets better
• shared working capital management
• finding cheaper financing
• stabilising cash flows (e.g. removing seasonality)

Improved market position

This can come from:

• sharing skills or knowledge
• risk reduction from a portfolio effect
• improved management / better corporate parenting
• better focus

Organic growth

Joint development methods

General considerations

Joint development methods include:

• strategic alliances (including joint ventures)
• franchising
• licensing
• using agents

In any joint arrangement key considerations are

• sharing of costs
• sharing of benefits
• sharing of risks
• ownership of resources
• control/decision making.

Strategic alliances (including joint ventures)

A strategic alliance can be defined as a co-operative business activity, formed by two or more separate organisations for strategic purposes, that allocates ownership, operational responsibilities, financial risks, and rewards to each member, while preserving their separate identity / autonomy.

• Alliances can allow participants to achieve critical mass, benefit from other participants' skills and can allow skill transfer between participants.
• The technical difference between a strategic alliance and a joint venture is whether or not a new, independent business entity is formed.
• A strategic alliance is often a preliminary step to a joint venture or an acquisition. A strategic alliance can take many forms, from a loose informal agreement to a formal joint venture.
• Alliances include partnerships, joint ventures and contracting out services to outside suppliers.

Seven characteristics of a well-structured alliance have been identified.

• Strategic synergy - more strength when combined than they have independently.
• Positioning opportunity - at least one of the companies should be able to gain a leadership position (i.e. to sell a new product or service; to secure access to raw material or technology).
• Limited resource availability - a potentially good partner will have strengths that complement weaknesses of the other partner. One of the partners could not do this alone.
• Less risk - forming the alliance reduces the risk of the venture.
• Co-operative spirit - both companies must want to do this and be willing to co-operate fully.
• Clarity of purpose - results, milestones, methods and resource commitments must be clearly understood.
• Win-win - the structure, risks, operations and rewards must be fairly apportioned among members.

Some organisations are trying to retain some of the innovation and flexibility that is characteristic of small companies by forming strategic alliances (closer working relationships) with other organisations. They also play an important role in global strategies, where the organisation lacks a key success factor for some markets.

Franchising

The mechanism

• The franchiser grants a licence to the franchisee allowing the franchisee to use the franchiser's name, goodwill and systems.
• The franchisee pays the franchiser for these rights and also for subsequent support services the franchiser may supply.
• The franchisee is responsible for the day to day running of the franchise. The franchiser may impose quality control measures on the franchisee to ensure the goodwill of the franchiser is not damaged.
• Capital for setting up the franchise is normally supplied by both parties.
• The franchiser will typically provide support services including: national advertising, market research, research and development, technical expertise, management support.

The advantages for the franchiser are as follows:

• Rapid expansion and increasing market share with relatively little equity capital.
• The franchisee provides local knowledge and unit supervision. The franchiser specialises in providing a central marketing and control function, limiting the range of management skills needed.
• The franchiser has limited capital in any one unit and therefore has low financial risk.
• Economies of scale are quickly available to the franchiser as the network increases. For example, with the supply of branded goods, extensive advertising spend are justifiable.

The advantages for the franchisee are as follows.

These are mainly in the set-up stages where many new businesses often fail.

• The franchisee will adopt a brand name, trading format and product specification that has been tested and practised.
• The learning curve and attendant risks are minimised.
• The franchisee usually undertakes training, organised by the franchiser, which should provide a running start, further reducing risk.

Disadvantages

• A franchisee is largely independent and makes personal decisions about how to run his operation. In addition, the quality of product, customer satisfaction and goodwill is under his control. The franchiser will seek to maintain some control or influence over quality and service from the centre but this will be difficult if the local unit sees opportunities to increase profit by deviating from the standards which the franchiser has established.
• There can be a clash between local needs or opportunities and the strategy of the franchiser, for example, with respect to location.
• The franchiser may seek to update/amend the products/services on offer whilst some franchisees may be slow to accept change or may find it necessary to write off existing stock holdings.
• The most successful franchisees may break away and set up as independents, thereby becoming competitors.

Licensing

The right to exploit an invention or resource in return for a share of proceeds. Many of the issues surrounding franchising apply to licensing as well. The main difference from a franchise is that there will be little central support.

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