Of course, small-business owners often want to grow—but why, how and at what cost? What if the growth strategy distracts you from the core of your current business or requires large amounts of capital that can put the entire enterprise in jeopardy?
Here are three strategies that may help drive your business growth in a lower-risk and capital-efficient manner.
Build a Franchising Program
Over the last five decades, business format franchising has emerged as one of the leading growth strategies for product and service companies. The launch of a franchising program starts with an understanding of the strategic essence of this business structure. There are three critical components of the franchise system: the brand, the operating system and the ongoing support provided by the franchisor to the franchisee.
The brand helps create demand, allowing the franchisee to initially obtain customers, and may include the franchisor’s trademarks and service marks, its trade dress and décor, and all the intangible factors that create customer loyalty and build brand equity.
The operating system essentially tries to deliver on the promise, helping the franchisee to maintain customer relationships and build loyalty. Ongoing support and training helps provide the franchisee with the tools and tips to expand its customer base and build market share.
The responsibly built franchise system helps provide value to its franchisees by teaching them how to get and keep customers, and how to get those customers to consume as many products and services as possible.
Franchising may provide franchisors with the opportunity to:
- Obtain operating efficiencies and economies of scale
- Increase market share and build brand equity
- Build customer loyalty
- Achieve more rapid market penetration at a lower capital cost
- Reach the targeted consumer more effectively through cooperative advertising and promotion
- Sell products and services to a dedicated distributor network
- Replace the need for internal personnel with motivated owner/operators
- Shift the primary responsibility for site selection, employee training and personnel management, local advertising and other administrative concerns to the franchisee, licensee or joint venture partner
In the typical franchising relationship, the franchisee also shares the risk of expanding the franchisor's market share by committing capital and resources to the development of satellite locations modeled after the proprietary business format.
Create Joint Ventures and Strategic Alliances
Another capital-efficient growth strategy is the establishing of partnering relationships, in which two or more companies work together to achieve a specific purpose or attain common business objectives. Joint ventures, strategic alliances, cross-licensing and technology transfer agreements are all strategies designed to obtain one or more of the following:
- Direct capital infusion in exchange for equity and/or intellectual property or distribution rights
- A “capital substitute,” where the resources that would otherwise be obtained with the capital are obtained through joint venturing
- A shift of the burden and cost of development (through licensing) in exchange for a potentially more limited upside
These types of partnering arrangements have been used for a variety of business purposes and to meet intellectual capital leveraging objectives, including joint research and co-promotion, distribution and commercialization, and cross-licensing and sub-licensing of new technologies. The participants to these agreements could be at various points in the value chain or distribution channel—from agreements by and among direct or potential competitors, to agreements by and among parallel producers to widen or integrate product lines, and to parties linked at different points in the vertical distribution channel to achieve distribution efficiencies.
Here are the major differences between joint ventures and strategic alliances:
Joint ventures are typically structured as a partnership or newly formed and co-owned corporation (or limited liability company) where two or more parties are brought together to achieve a series of strategic and financial objectives. If you're considering a joint venture as a growth strategy, you should give careful thought to the type of partner you're looking for and the responsibilities each party will be contributing to the newly formed entity. As with raising a child, each parent will be making their respective contribution of skills, abilities and resources.
Strategic alliances are collaborative working relationships where no formal joint venture entity is formed but where two independent companies become interdependent by entering into a formal or informal agreement built on a platform of mutual objectives, strategy, risk and reward. The relationships are commonly referred to as teaming, strategic partnering, alliances, cross-licensing and co-branding.
Seek Co-Branding Opportunities
Co-branding consists of two or more established brand names combining to bring added value, economies of scale and customer recognition to each product. With a focus on brand equity, companies with strong, quality-oriented brands may seek to create new sources of revenue and leverage their largest intangible asset: their reputation.
However, the temptation to extend the equity and value of your brand into other areas may pose certain risks. There are quality-control issues, the risk of over-branding or misbranding from a consumer perspective, and product-liability issues. The key to successful co-branding often involves making sure the brand itself stands for something greater than the original product and that the consumers' perception of the extended brand is a natural one.
The information contained in this article is for generalized informational and educational purposes only and is not designed to substitute for, or replace, a professional opinion about any particular business or situation or judgment about the risks or appropriateness of any financial or business strategy or approach for any specific business or situation. THIS ARTICLE IS NOT A SUBSTITUTE FOR PROFESSIONAL ADVICE. The views and opinions expressed in authored articles on OPEN Forum represent the opinion of their author and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions (including, without limitation, American Express OPEN). American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any opinion, advice or statement made in this article.
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A version of this article was originally published on November 10, 2015.