Last week, I mentioned the Ansoff Matrix and the four strategic options for growing a business it proposes. What is clear from the matrix is that each of the options contains an increasing level of risk. Several of the options will involve significant level of expenditure. Diversification can be expensive; as is the process of new product development.
With NPD you can spend fortunes on prototype products which never go to market. It is estimated that James Dyson spent £2 billion on his electric car project before pulling the plug (sorry for the pun) on the concept. Dyson, when announcing that the car wasn’t going into manufacture said that production would not be financially viable. I also suspect his experimental solid state battery technology was incapable of powering the vehicle.
One way to reduce the costs of, and to some extent the risk of business growth, is to enter an alliance or joint venture. One wonders that if Dyson had viewed his electric car project as a joint venture with an existing motor manufacturer, instead of slagging them off at the concept launch, his car might have seen the light of day in the marketplace.
Dyson forgot the mantra, ‘No business is an island’. Businesses operate in complex markets where it is likely suppliers, distributors and retailers are shared.
If you are looking to expand your market, either geographically or by moving from commercial markets to consumer markets,, you may well need the expertise and knowledge of those already operating within your expansion target.
When creating new products you may want to spread development costs, or you may need specialist technical know-how.
Diversification is the highest risk and potentially the most expensive growth option for a business. You may need guidance from those who already know the proposed product category.
At a strategic level alliances should add value by leveraging the optimal level of assets and competencies.
It is increasingly unlikely that a single business can keep all these assets and competencies in-house. ‘No business is an island’. Exclusivity costs.
A partnership or alliance may be the best way to maximise economies of scale.
So a telecommunications firm may choose to partner with an IT firm to create integrated systems. Computer manufacturers partner with manufacturers of VDUs, processing chips and graphics cards. Car manufacturers share production platforms and car ‘chassis’ designs.
And it isn’t just in production that an alliance can create economies. You can build alliances with retailers, distributors and suppliers.
Alliances are not just for big multi-nationals. take the example of McKean Foods, a Haggis producer. McKean started selling haggis online and received lots of interest from the United States of America. However, the USA bans imports of haggis as a measure against the spread of the disease Scrapie, which affects sheep. this ban is completely non-sensical as McKean operates in the UK/EU where animal welfare and food standards regulations are amongst the most comprehensive in the world.
So as McKean Foods cannot export Haggis to the USA, clearly an alliance with a US manufacturer would allow growth through market expansion.
In modern markets there are the following motivations for alliances and joint vewntures:
- Globalisation: Many companies are now compelled to work on the world stage. Globalisation has also led to shorted product lifecycles. the mobile phone market is a clear example of product lifecycle contraction. Contrary to the argument for Brexit, the world is becoming a smaller place and around the world nation states are joining forces to create economic blocs e.g. Mercosur and the South African Development Alliance.
- Assets and Competencies: As stated above, a single company cannot be good at everything. It is almost certain you are going to need specialist knowledge and expertise available through alliances. An alliance can allow your company to concentrate on its core attributes whilst ancillary functions are outsourced to external specialists. So, for example, fast food chains link with firms operating home delivery apps such as Just Eat and Deliveroo.
- Risk: Alliances can work to reduce risk. Financial commitments can be shared. Going it alone could mean isolation from industry and technical standards. For example, small food producers wanting to supply UK supermarket chains are expected to meet British Retail Consortium standards which often go beyond EU and UK legislation.
- Learning and Innovation: Alliances and joint-ventures allow businesses to learn. that learning can help firms develop sustainable competitive advantage.
For joint-ventures to be successful, you need more than a strategic fit. You need a cultural fit as well. You must be able to work with your chosen partner. If your business is risk averse, a partnership with a buccaneering high risk operator will be unlikely to succeed. A fine example is the failed joined venture between BP and the Russian oil firm TNK. That partnership became distinctly frosty and hostile and in the end BP could no longer work with TNK.