Identification &
Realization of a suitable
growth strategy for a
small firm: The case of a
Dutch company
Master thesis Small Business &
Entrepreneurship
Wilhelm Richard Mijnheer
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Abstract:
Small firms can grow in many different ways. One type of categorizing the different growth paths taken by SMEs, is by defining the mode of growth. Firms can grow organic, non-organic and through hybrid modes of growth. Strategic decision making for the mode of growth can be a incredibly difficult task. This research provides a framework through which small businesses can assess which mode of growth fits best to their organization. To identify the difference between the types of growth, this research first reviews the available literature
to summarize the reasons and risks associated with the different types of growth. Understanding the reasons and risks is the first step in selecting a suitable growth strategy. The next step taken in this research is the identification of the necessary capabilities for the different types of growth. These capabilities are compared on 5 dimensions: technological, financial, human resource, organizational and network. We developed a measurement tool which can help managers assess their companies’ capabilities. We argue that an understanding
of the possessed capabilities is an important input for the strategic decision-making process of the selected mode of growth of the firm. As a proof-of-concept, we used a case-study to apply our developed framework. This shows how such a framework could help small firms in the
identification and realization of a suitable growth strategy.
Keywords: Growth strategy, Modes of growth, organic, non-organic, hybrid, capabilities,
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Index
Abstract: ... 2 Introduction: ... 6 Research Questions: ... 7 Literature Review: ... 8The measures of SME growth: ... 8
Strategy of growth: ... 9
The growth of the firm ... 9
Organic growth: ... 10
Reasons:... 10
Growth through innovation ... 11
Growth through effective marketing: ... 12
Risks: ... 13
Non-organic Growth: ... 15
Reasons:... 16
Risks: ... 17
Hybrid modes of Growth: ... 18
Franchising ... 19 Reasons:... 19 Risks: ... 20 Licensing ... 20 Reasons ... 21 Risks ... 21
Strategic Alliances & Joint Ventures ... 21
Reasons ... 22
Risks ... 22
Reflection on the Reasons and Risks for different modes of growth: ... 23
Developing an Identification Framework: ... 25
Conceptual Development: ... 31
Capabilities & Organic Growth ... 33
Capabilities & Non-organic Growth ... 35
Capabilities & Hybrid modes of Growth ... 37
Reflection on the capabilities & the modes of growth ... 39
Methodology ... 42
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Data Collection ... 43
Measures: ... 44
Results: ... 47
Interview results ... 47
The growth of Ofichem: ... 47
Current capabilities of Ofichem: ... 50
Technological capabilities: ... 50 Financial capabilities: ... 51 HRM capabilities: ... 51 Organizational capabilities: ... 51 Network capabilities: ... 52 Questionnaire results ... 52 Discussion: ... 60
The Growth of Ofichem: ... 60
Reasons for growth: ... 61
Risks of growth: ... 62 Organic growth: ... 62 Non-Organic growth: ... 62 Hybrid modes: ... 63 Capabilities ... 63 Technological: ... 63 Financial ... 65 HRM ... 66 Organizational ... 67 Networking ... 68 Conclusion: ... 69
Recommendation for the firm in our case-study: ... 73
Theoretical implications: ... 78
Managerial implications: ... 78
Limitations: ... 79
References: ... 80
Appendices: ... 89
Appendix A: Case description ... 89
Appendix B: Interview guide ... 93
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List of Figures:
FIGURE 1: Risk of Innovation. Source: Booz, Allen & Hamilton (1982) ... 14
FIGURE 2: Conceptual Model ... 33
FIGURE 3: The Ofichem Group ... 43
FIGURE 4: Capability Radar Chart ... 60
FIGURE 5: Bar Chart Product/Process Patents ... 64
List of Tables:
TABLE 1: Reasons of the different modes of growth ... 23TABLE 2: Risks of the different modes of growth ... 24
TABLE 3: Capabilities for growth ... 28
TABLE 4 Capabilities comparison ... 29
TABLE 5: Ranking Capabilities for modes of growth ... 41
TABLE 6: Selected Measures of Growth Capabilities ... 46
TABLE 7: Mean of Capabilities... 54
TABLE 8: Technological Capabilities Report ... 55
TABLE 9: Financial Capabilities Report ... 56
TABLE 10: HRM Capabilities Report ... 57
TABLE 11: Organizational Capabilities Report ... 58
TABLE 12: Network Capabilities Report ... 59
TABLE 13: Possessed level of Capabilities ... 75
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Introduction:
Progress of academic literature on life-cycles of SMEs has come to a halt (Levie & Lichtenstein, 2010). Researchers in search for the determinants of growth, have reached a point that lead to no consensus. From the sixties there have been a dozen of studies on the growth-stages of firms, but researchers still disagree nowadays about the amount of stages a firm passes through (Levie & Lichtenstein, 2010). There is still no stable explanation for the growth phenomena in small & medium enterprises (SMEs), and studies have been unable to find consistent results (Davidsson & Wiklund, 2000; Delmar et al., 2003; Shepherd & Wiklund, 2009). Therefore, the study on growth phenomena has to take a new direction.
Both McKelvie and Wiklund (2010) and Gilbert et al. (2006) address that the question is not why some firms grow faster than others. Instead, researchers first have to understand how SMEs grow (McKelvie and Wiklund, 2010; Gilbert et al., 2006). Without understanding how firms grow, researchers are likely unable to understand why firms differ in their growth rates. Not only for academic researchers the question “how to grow” is an interesting one, also for small business owners this is a very interesting topic. The entrepreneurs are the ones that have to make the real-life decisions about the mode of growth.
McKelvie & Wiklund (2010) recommend that a comparison of the challenges of the different modes of growth could make a valuable contribution to the literature. In their
recommendations they state that future research could study the similarities and differences of the managerial implications of different modes of growth. Chen et al. (2009) studied the influence of certain capabilities on the strategic choice for the mode of growth. We will build upon the work of Chen et al. (2009), and will also address the importance of capabilities in the decision-making for mode of growth. We will study the similarities and differences of the modes of growth from three dimensions: First, we focus on the reasons for the modes of growth. Second, we will focus on the risks involved, and last, we focus on the capabilities necessary for the different modes of growth. Comparing which reasons and risks are involved, and which capabilities are needed for the different modes of growth, can help entrepreneurs in their decision making.
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up with a specific problem they have to deal with. The firm recognizes that they have
different opportunities to grow, which can be identified as the different modes of growth. But they do not know which mode of growth is best suitable for them. This research will deal with that problem, and will identify and realize a framework on which small firms, such as the firm in our case-study, can base their decision-making about which mode of growth to pursue.
By adopting a problem-solving approach in combination with a case-study, we will contribute to the effort to bridge the gap between “scholarly interest and entrepreneurial practice”
identified by Achtenhagen et al. (2010). Entrepreneurship research is often from a policy makers perspective, because a lot of studies (especially in Europe) are funded by governments Merz et al. (1994). It is important to research growth patterns in the setting of the SME, because this phenomenon is still much unexplored in this context (Delmar et al., 2003). This study takes the perspective of the business owner of an SME, in order to make it useful in entrepreneurial practice. Also, by taking a qualitative research approach, it helps in
understanding how growth occurs in a small business. Achtenhagen et al. (2010) remarked the lack of qualitative research on growth, so this study will also help to fill this gap in literature.
Research Questions:
The goal of this study is to refine our understanding of the decision of the mode of growth in the case of a small firm. We try to get insight in what is important in practice for the decision-making for the mode of growth. The problem we try to solve leads to the definition of our main research question. Ofichem does not know which mode of growth is best suitable for them. This problem can be translated in the following research question:
RQ 1: Which mode of growth is best suitable for a small firm?
To find the answer to this question, we have to compare the different modes of growth. This comparison is based on three levels. First, we compare the reasons and risks associated with the different modes of growth. We ask ourselves the question:
RQ 2: Which reasons and risks are associated with the different modes of growth?
8 RQ 3: Which capabilities are important for the different modes of growth?
In this section, we focus on the identification of capabilities that will influence the choice for mode of growth. Based on these questions, we would like to come up with an identification of the reasons, risks and capabilities that are of interest for all small businesses in general for deciding about which mode of growth to pursue.
After the general identification of important factors in the decision for mode of growth, we will focus on our subject of the case-study. We will try to answer the questions from the insight we have in the company, and will ask ourselves what the best suitable growth strategy for the company in our case-study. We will try to get insight into the capabilities using our developed framework. The outcome of applying our knowledge on the case-study will lead to both a recommendation specific for the firm in our research, but will also contribute to the literature by testing our developed framework in a business setting. It will demonstrate how the framework can be used, and how the capabilities can affect a firm in a specific setting. The three research questions we ask ourselves for the case-study are:
RQ 4: Which reasons and risks are of interest for the firm in our case-study? RQ 5: What are the capabilities of the firm in our case-study?
RQ 6: Which mode of growth is most suitable for the firm in our case-study?
Literature Review:
The measures of SME growth:
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Smallbone, 1993). In this study, we focus on employee growth because it is has the most important implications for management.
Strategy of growth:
The growth of the SME and its performance is largely affected by the strategy chosen
(Pasanen, 2007). Strategy is defined as a pattern of strategic variables (Galbraith & Schendel, 1983), or as the collection of the firm’s business-related decisions and actions (Mintzberg, 1978). The strategy of the firm must support the decision making in pursuit of the growth of the enterprise (Bhide, 1996). The choice for the mode of growth can be identified as a strategic variable, or as a business-related decision. The choice for the mode of growth is a very important strategic decision in the pursuit of growth for the firm.
The growth of the firm
According to Penrose, (1959), a firm is an administrative entity that consists of many valuable resources. These resources can be used by firms in myriad ways. The task of the manager is to make decisions about the deployment of those resources, and has to think of new
combinations of resources that can lead to new opportunities. Here growth depends on the manager’s perception of those opportunities and the willingness to act upon them (Penrose, 1959). The larger the “set of opportunities”, how higher the potential for growth.
To achieve growth, a firm has to have two capabilities: entrepreneurial and managerial (Penrose, 1959). Entrepreneurial capabilities are necessary for the identification of growth opportunities, and are a function of imagination (McKelvie & Wiklund, 2010). Managerial capabilities are the capabilities concerned with the execution of these ideas, coming forth from the imagination. According to Penrose (1959), entrepreneurial capabilities are necessary in the first place to be able to spot opportunities for growth, while managerial capabilities are necessary to be able to exploit this opportunity and create growth. In short, Penrose (1959) recognized a link between the capabilities of a firm and firm growth. But, Penrose (1959) did not only recognize two types of capabilities, she also recognized two modes of growth for firm growth: organic growth and non-organic growth. Growth depends not only on
capabilities, but is also influenced by the mode of growth chosen. These recognitions of Penrose (1959) are the starting point for our research.
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endogenous entity, while non-organic growth is growth of the company through merger and acquisition. Internal and external growth use different competencies, and therefore may require different capabilities of the entrepreneur and his company. McKelvie and Wiklund (2010) acknowledge that growth is being studied as either organic or non-organic, but they also propose the addition of hybrid modes of growth. We will now discuss these three types of growth.
Organic growth:
SMEs growing organically use mechanisms that are internal to the firm to achieve growth. Organic growth can be defined as ‘the organization’s growth rate excluding any scale increases from M&A’ (Dalton & Dalton, 2006). The online Business dictionary defines organic growth as: “the expansion of a firm's operations from its own (internally
generated) resources, without resorting to borrowing or acquisition of other firms”
(Businessdictionary, 2013).These definitions already highlight the importance of the link between organic and non-organic growth. Organic growth builds upon the company’s own strengths, while non-organic growth tries to make use of others companies strengths and resources. Penrose (1959) already acknowledged that organic growth is possibly slower, but also more constant compared to non-organic growth.
Reasons:
11 Growth through innovation:
Innovation is a key driver of organic growth in today’s businesses (PWC, 2014). But
innovation is also a very complex process. It requires both creativity and technical knowledge from the entrepreneur and his employees to achieve (Abernathy & Clarck, 1985). Innovations can be radical or incremental. A radical innovation is an innovation which is new to the firm, but also new to the market: it creates a new category of products or services. An incremental innovation is new to the firm, but not new to the market. It is an improvement or refinement of an existing category of products/services (Amason et al., 2006). In the case of a new venture, a more radical innovation has a stronger potential to create growth in terms of market share than a more incremental innovation (Banbury & Mitchell, 1995). But, in the case of a more grown firm, the incremental introductions with the focus on speed of introduction become more and more important for sustaining growth (Banbury & Mitchell, 1995). This does not mean that radical innovations are not suitable for established firms. Literature still shows that established firms with a more radical innovation, which are new to the market, are able to gain a better position in the market, which can lead to higher success of the firm (Bruton & Rubanik, 2002).
New Product Development (NPD) was already mentioned by Schumpeter (1934) as being crucial for firm growth and for firm survival. Although NPD is the most known way to innovate for a manufacturing company, innovation can also occur through process
development. Process development and product development are strongly interconnected, as they often go hand in hand. While product development focuses on the improvement of the product itself, process development focuses on the improvement of the process the product passes through. Although there is a difference in these types of innovation, from a managerial perspective of growth, they are relatively the same. Therefore, we choose to handle
innovation as a total concept in this research, which can refer to both product and process development.
According to Flamholtz (1995) innovation is of vital importance for the success of an organization. Innovation can be a great source for growth because it offers the firm new opportunities to compete in the market. First of all, innovation can focus on product
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through process innovation, it can offer other benefits, such as faster production times or lower production costs.
Growth through effective marketing:
Kling et al. (2009, p. 277) address the other method of creating organic growth: “Effective
marketing can contribute to a firm’s organic growth through better anticipation of market opportunities and calibration of risks, a tighter linkage of technological possibilities with market concepts, faster adjustments to shifting market needs and competitive moves, and winning and retaining customers”.
Marketing effectiveness is focused on better serving the customer and market needs. Another field of literature focusing on growth through better adjustment to the market is the theory on market orientation. Kohli & Jaworski (1990) define market orientation as “the
organization-wide generation of market intelligence, dissemination of the intelligence across departments and organization-wide responsiveness to it". (p. 6) Narver & Slater (1990) performed an
empirical study on 140 firms, and found out that the firms employing a market orientation had a larger profitability on average. Also, in a study specifically of small businesses, this result was supported (Baker & Sinkula, 2009). Although profitability is a different goal compared to growth, entrepreneurs often look for a combination of profitability and growth as a goal.
According to Das (2005), business-to-business marketing is known to be different from business-to-consumer marketing by having fewer customers, longer and more complex selling cycles, and a higher need for customization. A study of Singh & Koshy (2011) on SMEs empirically studying 249 firms in a B2B market, found evidence that also in this setting, a customer-orientation of the sales people has positive effects on relationship development and customer satisfaction. Because of the customer orientation, the firm is able to deliver a higher value and perceived value to the customer, which increases customer satisfaction. This would have a positive impact on organic growth as a result.
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Choosing a market approach to growth can be useful. First of all, a firm can benefit from the growth that occurs in the market. The growth is generated externally, and the firm can capture it by focusing on selling to the market. Second, by using the existing distribution channels, the firm can approach new customers (Von & Cusumano, 2001). This could lead to economies of scale. Third, by developing into new markets, the firm can duplicate its business model with the same market into a new geographical area.
Risks:
While organic growth in general is seen as the mode of growth with the least amount of risk, there are still specific risks attached to this mode of growth. The first risk of organic growth is that organic growth is very slow. In some markets, were the pace of growth is high, this can be a problem. The second risk is that the growth may be limited. This risk was already noticed by Penrose (1959). Organic growth can limit the company in acquiring specific resources and capabilities, which can be necessary for further innovation. The third risk of organic growth is the growth pains that can rise with organic growth. Flamholtz (1986) wrote a book about dealing with the challenges of organic growth. He identified that the challenges of organic growth can be described by using the analogy of growing pains. An organization will face problems if its internal development is too far out of step with its size. “The greater the degree of incongruity between an organization’s size and the development of its operational systems, the greater the probability that the firm will experience the onset of growing pains”
(Flamholtz, 1986, pp. 44–45). Also Kazanjian (1988) studied the problems of growth in a study in technological firms, and the most important findings from them were that issues with human resources management and organizational structure were among the most important issues for organic growth. Phelps, Adams & Bessant (2007) summarized the problems recognized in stage-growth models into 6 categories: Organizational systems, Sales & Marketing, People, Production, Strategic Positioning and External relations.
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making comes also the decentralization of the authority. Employees need authority to make the relevant decisions. Therefore, management need to ensure that authority is also delegated.
Innovation Risks:
While innovation is a possible source of long-term benefits, there is a drawback to this benefit. The term benefit also means that the investment in innovation is rather long-term. This means that innovation places demand on financial capabilities for a long time. In the meantime, all sorts of things can happen which will render the innovation useless from a business perspective. Necessary resources for innovation can range from having an extra R&D employee to building a new R&D facility to support new research techniques in-house. The amount of risk of the NPD innovation projects for example, depend on which type of innovation the company pursues. Booz, Allen & Hamilton (1982) have illustrated this:
FIGURE 1: Risk of Innovation. Source: Booz, Allen & Hamilton (1982)
The risk of an innovation project depends on two dimensions. How new the innovation is to the company, and how new it is to the customer. The newer the innovation or NPD project, the higher the risk involved (Booz, Allen & Hamilton, 1982).
Effective marketing Risks:
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with new risks. Entering a new market comes with a lot of uncertainty, because the firm has no knowledge yet about the market. You need to find new market segments for your product. This demands entrepreneurial capabilities: new opportunities in terms of possible market segments have to be identified. Also, serving new customer segments demand for knowledge about these new segments. And a third important consideration for market development is the need for product development. These new segments may have special demands regarding the product. Therefore, in some cases a certain degree of product development is needed to meet those special demands of the customer segment.
Non-organic Growth:
Non-organic growth is defined as the growth of a firm that comes from mergers and
acquisitions (M&A) (Gilbert et al., 2006). A study focusing on high-growth ventures, found out that 10% grew primarily through acquisition activities (Delmar et al., 2003). SMEs, compared to large firms, are more likely to use M&A as an external growth option. Also, they tend to withdraw from a deal earlier, and finance M&A more often with equity, instead of debt (Weitzel & McCarthy, 2011).
Non-organic growth is often used as a strategy to gain access to resources and capabilities possessed by other firms, which can enable a firm to improve their product offerings (Penrose, 1959). Non-organic growth, like acquisitions, is especially strong in acquiring resources that are complementary instead of similar (McKelvie & Wiklund, 2010). It can help firms acquire resources that will enable it to break away from the existing set of opportunities. Non-organic growth is a method of creating growth when the firm lacks the capability to expand organically (March, 1991). It is also useful to rapidly gain access to a new market, without having to develop the necessary resources organically. One of those resources for example is the reputation that a firm has established in the market (Banbury & Mitchell, 1995). By purchasing an existing business, the firm that is expanding through the acquisition is able to gain access to that reputation, which gives the firm the capability to establish itself in a new field. This is also already apparent in the theory of Penrose (1959), who writes:
Acquisitions can be a means of obtaining the productive services and knowledge that are necessary for a firm to establish itself in a new field” (Penrose, 1959; p. 126). The acquired
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Mergers are often talked about in one breath with acquisition. While the goal of a merger and acquisition is the same, there is a slight technical difference between them. This difference can be clearly pointed out from a legal point of view. An acquisition means that one firm buys all assets of another firm, the target firm. All activities go on under the name of the
acquisition firm, with the assets of both firms combined. In a merger, there is no dominant firm buying the other. Often, these businesses have roughly the same size. The resources are simply combined and the legal entities (the two independent firms) are merged into a new legal entity (Investopia, 2013). In practice, a real merger often does not really happen, because there is almost always a firm dominant to the other. Since these terms are used together in important works on growth research (Penrose, 1959; McKelvie & Wiklund, 2010; Gilbert et al. 2006), and the difference from a business perspective are so small, we will combine them.
Reasons:
According to Salvato, Lassini & Wiklund (2007), we can distinct the potential benefits of M&A into value capture and value creation. Value capture is the benefits from the transaction itself, while value creation is based on the synergy created from the M&A. The recombination of capabilities will lead to value creation (Jemison & Sitkin, 1986). We will focus on the value creation, as this is the most strategic benefit of growth. In line with the theoretical model build by Capron (1999), we argue that there are two long-term value creation benefits of M&A that define the reasons. The first stream is rooted in the resource-based view (RBV) (Barney, 1991), in which firms are looking for revenue enhancements through the capture of resources and capabilities by M&A. The second stream comes from cost efficiency theory and reasons that firms follow M&A in order to create economies of scale and scope. In both types, the main reason to engage into M&A is synergy, which is based on the assumption that the sum of the parts is higher than the value of the parts.
‘Merger and acquisition activity is a critical means by which technology firms obtain the resources needed to compete in global market.’ (Graebner, 2004; p. 751). Although this study
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as resources, could be divided into resources & capabilities. The difference between them is that the resources can be traded, while capabilities are more embedded into the firm and its systems. Resources are engaged by the capabilities, resources are the input for the processes managed by the capabilities of the firm (Makadok, 2001).
M&A can lead to the achievement of a (sustained) competitive advantage (Barney, 1991). By improving the opportunity set (based on possessed resources & capabilities), the chance of creating an unique set which is able to deliver a (sustainable) competitive advantage, increases. For example: by buying a firm with a high-tech lab facility and the capable researchers running that lab, the firm is able to combine that with their own resource of a large customer base and their capable marketers. The resources are complementary and can lead to abnormal returns (King et al., 2008). M&A can both enhance the resources & capabilities of the firm and improve the leverage from those resources & capabilities. M&A for example can enhance innovation capability of the firm (Hagedoorn & Duysters, 2002), but also can increase the leverage, because of the market expansion generated by the M&A. A pharmaceutical company for example can increase both the product portfolio (more products to sell) and the possible leverage (more customers to sell to) by the acquisition of another company (Cloodt et al., 2006). In general, it comes down to the fact that synergies are created by the combination of the resources & capabilities through the M&A. These synergies can be both operative and allocative (Chatterjee, 1986). Allocative synergies are based on the
combination of complementary capabilities, while operative synergies are based on economies of scale and scope.
M&A offers a better possibility to grow fast, compared to organic growth. This leads to the opportunity for the creation of operative synergies (Chatterjee, 1986). By growing fast, a firm is also able to create bigger economies of scale and scope, which will have a positive impact on the performance of the firm (Chandler, 1990). Therefore, an important reason to choose for growth through M&A is that it is a fast method of growth.
Risks:
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positive impact on (financial) performance. This finding reflects the point that the possible benefits do not always turn out to increase the performance, because of the difficulties with managing a M&A activity. The risks of acquisition identified for SMEs are linked to the large financial consequences, and the difficulty of managing the integration process (Salvato, Lassini & Wiklund, 2007).
In M&A literature it is also often argued that a strategic and organizational, cultural fit is essential for success (Jemison & Sitkin, 1986). To create synergies between two firms, there should be a strategic fit. Practically, this means that the resources are complementary and can be combined in order to transform it into a competitive advantage (King et al.; 2008).
Organizational and cultural fit between the organizations is also important for the realization of synergies. Differences between organizational systems and cultures are often the main source of problems in the integration process. For the synergies to emerge, people from two different cultures should be able to work together after the merger or acquisition (Schein, 1985). The identification of this fit requires a thorough due diligence investigation which involves time and cost (Harvey & Lusch, 1995).
Another large risk involved with M&A is the financial risk (Zollo & Singh, 2004). When a firm acquires another firm, it is almost always by buying all of the other firm’s assets. This will likely involve a large sum of money that has to be invested. Something to take into account when growing through M&A, is the fact that the firm does not have as much control over the growth rate compared to organic growth. Like with organic growth, growth pains will likely arise with growth through M&A. The rise of growing pains indicate that the infrastructure of the firm (management systems, culture) has not kept up with the increase of size (Flamholtz, 1986; 1995). The faster the growth, the faster the infrastructure should develop to keep up with the increased size. With M&A, this growth is often very fast. Although, Flamholtz (1995) recognizes that non-organic modes of growth may decrease the pressure on the management and human resources. This is likely because with a M&A, also organizational and human resource capabilities can be acquired, in comparison to organic growth, where these capabilities have to be developed by the firm itself.
Hybrid modes of Growth:
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they add hybrid modes of growth. This mode is a distinction of the former two modes of growth: it is a combination of the elements of these two modes of growth (Williamson, 1991). A hybrid mode of growth is a contractual relationship that binds external actors to the firm, while maintaining a certain amount of ownership and control over the use of the assets involved (Shane, 1996). Examples of hybrid modes are e.g. franchising, licensing, and joint ventures or strategic alliance. We will focus on these three types of hybrid modes, because these three types of hybrid modes are the most obvious and mentioned in the literature (McKelvie & Wiklund, 2010).
Franchising
One very distinctive type of a hybrid mode of growth is franchising. Especially in retail, franchising is used by up to 40% of businesses as a growth strategy (Combs, Ketchen & Hoover, 2004). In franchising, the franchisor (the owner of the franchise) grants the
franchisee the right to use his name, as well as certain business systems and processes, or to produce a good according to certain specifications, in return for financial compensation. (Businessdictionary, 2013). The franchisor and franchisee have a legal agreement that settles which intellectual property can be used, which financial compensation is needed and on what the responsibilities are for each party (IFA, 2009). The financial compensation is generally the combination of a lump-sum payment and a royalty fee, based on a metric defined in the
agreement (Miller & Grossman, 1990). The terms of the agreement often set the requirements of the franchisor, which the franchisee has to meet. These requirements are typically the quality standards, the procedures for operation and the product mix offered (Combs, Ketchen, & Hoover, 2004).
Reasons:
Often, franchisees own a part of their business, and they have made a personal investment in the franchise. This makes that their goals are often more the same as the goals of the
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are brought into the firm. But not only financial resources are brought in, each franchisee accepted in the system is a new competent manager brought into the firm (Oxenfeldt & Kelly, 1968). These franchisees bring valuable knowledge of the local market, which can help the firms to better adapt themselves to the local market. This helps the franchisor establish their franchise in a geographically expanding market (Minkler, 1992).
Risks:
The most obvious drawback of franchising is that the franchisor gives up some level of control and ownership when using a franchising model to expand their business. Franchisees own a part of their business, and are to some extend entrepreneurs on them own. They have a certain level of freedom in managing their franchises. In such a situation principal-agent problems between the franchisor and franchisee may occur (Eisenhardt, 1989). Opportunistic behavior of a franchisee can have negative effects on the whole system of franchisees, and therefore on the franchisor (McKelvie & Wiklund, 2010). A franchisee may take actions that will be beneficial for themselves, but may damage the brand of the franchise (Brickley & Dark, 1987). To avoid such problems, the franchisor has to monitor his franchisees (Rubin, 1978). The third problem is the transfer of knowledge. Some specific knowledge is extremely hard to transfer; this can create problems in successfully expanding the franchise as a system to franchisees (Darr, Argote, & Epple, 1995).
Licensing
Licensing involves a licenser selling rights to a licensee to use a specific piece of the intellectual property of a firm, which often means the right to produce a good under
21 Reasons
An important benefit for the licenser is that he can exploit its intellectual property without doing any manufacturing, marketing or distribution themselves (Fosfuri, 2006). These activities can be very demanding on the capabilities of the firm, so outsourcing them to a licensee can be a very suitable option. The costs of the development of the intellectual
property are for the licenser, while the costs for the marketing, manufacturing and distribution are for the licensee. For small firms, this strategy can be very useful. They can gain access to complementary assets like a production facility (Arora et al., 2001). A positive cash-flow can also be quickly acquired, because licensing an intellectual property does mean much less investments. Also, they are able to work together with large, established firms that have knowledge, experience and legitimacy in the process of market entry and recognizing
customer needs (Gans, Hsu, & Stern, 2002). Especially innovative firms generate substantial sales growth through licensing (Kline, 2003). Probably, these innovative firms generate a lot of intellectual property, but are unable to exploit those all by themselves. For them, licensing is a useful mode to generate sales growth. For the licensee, there is also a benefit. The
licensee is able to make use of existing intellectual property, without having to invest in the development of those properties (Arora et al., 2001).
Risks
The problems of licensing are mainly based on contractual issues. The gaps in the contract can lead to opportunistic behavior. This risk of licensing is rooted in the fact that there can be principal-agent problems in this situation (Eisenhardt, 1989). The licensee can have different objectives or expectations from the mutual agreement than the licenser, or make use of the agreement only in the interest of the licensee itself. Just as franchising, the licensee for example can damage the reputation of the licenser. The licensee can produce products that would have not met the specifications of the licenser itself, but due to gaps in the contract it is still able to sell these products. This will likely damage the perception of quality of the
name/brand as a whole. Also, valuable knowledge can be leaked through licensing-out of intellectual property (Teece, 1988).
Strategic Alliances & Joint Ventures
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(Das & Teng, 2000). In literature, most studies on alliances in the field of growth literature have a focus on technology firms (Park & Kim, 1997). Those studies recognize that small firms can use a strategic alliance as a mode to gain access to technological capabilities. Strategic Alliances can bring complementary technological capabilities of firms together, which can increase the opportunity set (Penrose, 1959). They are able to benefit from each other’s complementary capabilities, which gives them the opportunity to grow more quickly or/and less expensively because of the leverage effect on the partners resource base (Deeds & Hill, 1996).
Reasons
In studies from academic literature, most businesses involved in a joint venture used it as specific mode of growth to enter a new foreign market (Lu & Beamish, 2006; Zahra, Ireland, & Hitt, 2000). For the firms involved, joint ventures and alliances are less costly modes of achieving growth compared to organic or acquisition growth (Pearce & Hatfield, 2002).From a viewpoint of the RBV literature, the benefit of a strategic alliance & joint venture (SA&JV) is the creation of value. Just as in M&A, we can argue that SA&JV can lead to two types of value creation: Operative synergies and allocative synergies (Chatterjee, 1986). Operative synergies for example can be achieved because both firms can set-up a joint-venture that handles a production line, which delivers a operative synergy. In such a way, economies of scale can be achieved through the joint venture. Both firms lack the technological resource of a production facility in the current conditions, and to overcome this lack technological resource, they engage in SA&JV (Hagerdoorn & Schakenraad, 1994). Also, the recombination of capabilities could lead to an allocative synergy. For example, an
international SA&JV can improve the knowledge of the local market (Lu & Beamish, 2006).
Risks
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created together with the types of collaboration or design of a new organizational form, in order to overcome agency problems (Reuer, Arino & Mellewigt, 2006).
Reflection on the Reasons and Risks for different modes of growth:
Now we have addressed all the reasons and risks of the modes of growth, we will reflect on that point and compare those points. In the following table, the identified reasons and risks for the different modes of growth are summarized. The first table represents the reasons orbenefits of the different modes of growth, and the second table reflects the risks of the different types of growth.
Reasons:
Organic Non-Organic Hybrid
Control the pace of growth Fast mode of growth Relatively fast growth with low investments
Build upon own capabilities Acquire complementary capabilities
Gain access to
complementary capabilities Create growth through
innovation
Capture value through access to new market/customers
Gain access to new markets and market knowledge Create growth through
marketing effectiveness
Create value through allocative and operative synergies
Create value through allocative and operative synergies
Build upon current culture and management
Create growth from slack resources such as intellectual property
24 Risks:
Organic Non-Organic Hybrid
Slow growth High failure rate Opportunistic behavior Innovation is risky and needs
large investments
Large financial investment Leaking valuable knowledge
Marketing demands
increased effort and depends to some extent on innovation
Difficult to identify and realize strategic and organizational fit
Difficult to identify and realize strategic and organizational fit Can be limited because of
lack of capabilities
Due diligence demands specific capabilities
Monitoring and control of partner can be very expensive
Growth pains Integration of organizations and culture is very difficult
Design a new organizational form
TABLE 2: Risks of the different modes of growth
Penrose (1959) argued that organic growth will lead to the development of more similar resources, which are added to the existing opportunity set of the firm. Over the long term organic growth can reduce the set of capabilities possessed that are necessary for future growth (Kogut & Zander, 1992). At a certain moment, firms could need resources or
capabilities that lie out of the reach of organic growth. At that moment, other modes such as non-organic growth or hybrid modes of growth become interesting. M&A and SA&JV can complement the resources or capabilities of the firm, which will lead to a larger opportunity set.
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lower the financial investment, but also the amount of control. Also, we see that all hybrid modes of growth share the same risk of opportunistic behavior, which are rooted in the agency theory (Eisenhardt, 1989). Both in franchising and licensing, this plays an important role. Also, we recognize that these hybrid modes of growth are very specific. Franchising for example, is very useful in a context of a chain of retail stores. But for a manufacture of APIs, this option is rather irrelevant.
While an overview of the specific reasons and risks can help in identifying a suitable growth strategy, it is probably not enough. In the next section, we will direct our focus on
capabilities as a useful input for the decision-making on the mode of growth.
Developing an Identification Framework:
Business owners of SMEs have a freedom of choice, when it comes to the selection of growth strategy for their firm (Delmar et al., 2003). Because of this freedom, business owners have to choose between growing their companies organic, non-organic or through a hybrid mode of growth. We argue that next to the reasons and risks involved, the capabilities necessary for the different modes of growth, are of major importance for the strategic choice of mode of
growth. Resources (capabilities) define the core competences of the firm on which strategy should be based (Grant, 1991). Managers therefore have to understand the relation between capabilities and modes of growth. For the comparison of the different modes of growth and their need for capabilities, we need to identify categories of capabilities. Chen, Zou & Wang (2009) used three categories of capabilities necessary for firm growth, identified from a comparison between organic growth, partnership growth and acquisition growth. These three modes of growth relate to our modes of growth: Partnership growth is the hybrid mode of growth and acquisition growth is non-organic growth in our definition.
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Author Recognized Capabilities Measure
Chen, Zou & Wang (2009)
Technological capabilities • High-profile technology background personnel • Own product/process patents • Large financial investments in
R&D and product development • Active sharing of latest
technology and know-how with business partners
• The encouragement of innovative ideas and their implementation • Great emphasis on innovation
within the firm
Financial capabilities • Planning, exploration and utilization of
• Internal generated funds • Bank loans/debt
• Governmental funds • Public equity offers
Networking capabilities • Goal setting with collaborators • Close individual relationships to
secure HRM& Financial resources
• In advance judgment of possible partners for building relationships • Appointment of coordinators who
are responsible for the
relationships with collaborators • Regularly discussion with
collaborators about mutual support for success
• Dealing flexible with collaborators
• Constructive problem solving with collaborators
Philipsen & Kemp (2003)
Managerial capabilities • Strategy Formation • Skills Development • Ambition
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• Culture Enactment Output capabilities • Quality
• Reputation • Network
Barbero, Casillas & Feldman (2011)
Human resources capabilities
• Attraction and retention of executive and non-executive personnel
• Effective selection process • Adequate training
• Incentives aligned with company objectives
• Compensation
Organizational capabilities • Adequate organizational structure • Task delegation
• Culture aligned with company interests
• Existence and communication of a mission and vision
• Existence and communication of clear and concise objective • Existence of strong leadership • Introduction of control
mechanisms
• Operational planning
• Introduction of technology able to improve efficiency
Marketing capabilities • Search of new opportunities to grow
• New product development • Product improvement • Adequate strategic planning • Salesforce
• Customer knowledge
• Market orientation and ability to forge relationships and alliances • Adequate strategy
Financial capabilities • Budgetting and cashflow management
• Availability of financial capital • Financial reporting process • Analysis of the financial
statements
28 Raymond, St-Pierre,
Fabi & Lacoursière (2010)
Product capabilities • Product R&D budget / number of employees
• Process R&D budget / number of employees
• Number of R&D employees / • Number of employees
Market capabilities • Market study – present customers • Market study- potential
customers
• Prospecting for new customers/markets Network capabilities • Product design and R&D
partnerships
• Production partnerships • Marketing partnerships Technology capabilities • Assimilation of product
development technologies • Assimilation of process
technologies
• Assimilation of production management techniques
HRM capabilities • Development of HRM practices TABLE 3: Capabilities for growth
As we can notice from the literature on capabilities, Authors take different approaches in researching the capabilities when it comes to growth. If we reflect on the categories identified in the literature on growth problems, we see some capabilities that are re-occurring:
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Selected capabilities for our research framework Chen et al. (2009) Barbero et al. (2011) Philipsen & Kemp (2003) Raymond et al. (2010) Technological = Technological - Innovativeness
Technology acquirement
Technology Capabilities
Financial = Financial = Financial Capital acquirement
-
Human Resource - = Human Resource Skills development Learning Human Recruitment HRM Capabilities
Organizational - = Organizational Strategy formation Restructuring Culture enactment
-
Networking = Networking Network Network Capabilities Missing in our framework Marketing Ambition Quality Reputation Product Capabilities Market Capabilities TABLE 4 Capabilities comparison
We have selected capabilities that matched most closely with our understanding of the involved capabilities based on the literature review. In our opinion, these 5 capabilities cover most of the involved capabilities for decision for mode of growth. In the table, we compared the different categories of capabilities, and we placed the existing research and their
capabilities within our framework of capabilities. The sign = means that we directly adopted the definition of those authors. The sign – means that those authors do not deal with
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according to our interpretation. We are not able to place all of the capabilities mentioned by the authors in our framework. But we think that the most important capabilities are dealt with.
In our study, we have neglected market or marketing capabilities mostly, which are mentioned by both Barbero et al. (2011) and Raymond et al. (2010). Because we had to focus our efforts in this research, we decided to not incorporate these capabilities into our research, because the measures of Barbero et al (2011) on the marketing dimension already were covered to some extent in our measures. For example, the measures on new product development and product improvement are already taken into account by our measures on the technological capability, which deal with innovation in general. We see product development as a sublevel of
innovation, so we deal largely with this capabilities in the technological part. Also, the measures on strategic planning and adequate strategy are dealt with in our measures of organizational capability. The identified capabilities of Raymond et al. (2010) have helped us in identifying which types of capabilities are important, but because of our chosen research method, the measures used by Raymond et al. (2010) are very absolute measures. Because organizational capabilities are very hard to measure on an absolute level, we have chosen to keep all of our measures in the same direction. But we recognize 3 of the 5 identified capabilities by Raymond et al. (2010) directly in our study, but we chose other measures to test these capabilities. We believe that the product capabilities are partly dealt with in the technological capability of our research. The market capabilities however, are neglected in our study. The study of Philipsen & Kemp (2003) takes such a different approach, that it was difficult to integrate their capabilities with all the other researches. All the other researches mention roughly the same capabilities, categorized by type. Philipsen & Kemp (2003)
however categorize the capabilities as from a process perspective. The managerial capabilities of them, are not directly mentioned in our research. But we think that managerial capabilities are reflected in all other capabilities, because managers are responsible for the use of
capabilities. Strategy formation for example is dealt with in the organizational capability, and the definition and communication of mission and vision. The input capabilities are all three directly dealt with in our research. Transformational capabilities are also distributed among different capabilities. Innovativeness is dealt with in the technological capabilities, while learning is dealt with in the training of personnel. Restructuring is dealt with in the
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with in our research. But in our research, the output or external view is incorporated in our definition of network capabilities.
Selecting the 5 capabilities, we think that we deal largely with the mentioned capabilities of the other researches that also studied this topic. The 5 capabilities largely integrate most of the identified capabilities. For the measurement however, we have chosen to stick mostly to Chen et al. (2009) and Barbero et al. (2011). This is because of the fact that these authors provide clear measures already, which can be easily translated into a questionnaire. Philipsen & Kemp (2003) capabilities are also largely integrated, but we do not follow their rigid categorization of capabilities that is very different of the other authors. The only category of capabilities we did not recognize, were the capabilities concerning the market or marketing. We have chosen to neglect this type of capabilities for the purpose to keep the research within limits. We were unable to find a consolidating definition of these capabilities, because the authors that
mention these capabilities (Barbero et al, 2011; Raymond et al., 2010) take quite different definitions towards these capabilities. Also, the definition of marketing capabilities of Barbero et al. (2011) holds many measures that are already dealt with in other capabilities in our framework.
Conceptual Development:
We build upon the identified categories of Chen et al. (2009), and incorporate technological, financial and networking capabilities. We use their identified capabilities as a start, because they also researched capabilities in the perspective of the different modes of growth. Our incorporation of capabilities for the decision-making on mode of growth is largely based on the work of Chen et al. (2009). But because of our literature review, we also identified that these three types of capabilities do not cover the whole set of capabilities that play a role in the strategic decision making for growth. We argue that the three capabilities selected by Chen et al. (2009) do not account for the complete set of capabilities that affect the choice for organic or non-organic growth. While technological, financial and networking capabilities are certainly important for the choice of mode of growth, they lack a focus on the internal
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growth. Networking capabilities for example are mostly focused on non-organic growth or hybrid growth. As a capability that contrasts with network capabilities, we introduce organizational capabilities and HRM capabilities.
While Chen et al. (2009) recognize the network capability; we also add the organizational capability (Barbero, et al, 2011) as an important capability to consider in the strategic choice between the modes of growth. While the network capability is especially important for modes of growth that are external to the firm, so the non-organic and hybrid modes of growth, we also recognize the fact that the organizational capability is very important for growth that occurs within the firm. To some extent, they are substitutes. We argue that network capabilities are especially important for managing the growth of the company through external growth, while organizational capabilities are especially necessary for managing internal (organic) growth of the firm. Organizational capabilities enable firms to deal effectively with key organizational problems, which will likely emerge from growth (Dosi, Nelson & Winter, 2000) Organic growth is related to the rise of problems (Kazanjian, 1988; Flamholtz, 1986; Phelps et al., 2007), so the organizational capability is important for managing organic growth. Also, dealing with problems inside a company is a task which involves the management of humans. Therefore, we also find the HRM capabilities especially important for the consideration of the mode of growth. Together with technological and financial capabilities, HRM capabilities reflect three important resources recognized in literature which follows the RBV (Barney, 1991). The capabilities on these dimensions concern the achievement, development and exploitation of those resources. Together, these capabilities reflect the main resources which can be used by management to create
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For our comparison between the different modes of growth, we use 5 categories of
capabilities. These capabilities, together with the reasons and risks, provide a framework to compare which mode of growth is the best fitting strategy for the firm.
FIGURE 2: Conceptual Model
The decision for the mode of growth is affected by the reasons and risks that are associated with the different modes of growth. But not only do these affect the decision, also the capabilities identified in literature review affect the decision making. In the next section, we will try to define the relationship between the different modes of growth and identify the capabilities that are most important for that type of growth. We will discuss each of the types of growth and the important capabilities for that specific type of growth.
Capabilities & Organic Growth
When organic growth occurs, the organizational structure has to adapt in order to
accommodate the experienced growth. This is necessary to be able to sustain the growth that happens (Gilbert et al. 2006). In their study on growth, Kazanjian & Drazin (1990) recognized the need for specific functional expertise to manage the new roles that emerged due to the growth. The most important change of structure they found that was necessary in a firm that continues to experience growth, is the decentralization of the decision-making structure. This is important in order to remain flexible, even with the larger size. These needs place emphasis
Capabilities
Technological Human (HRM) Financial Organizational Networking Decision-making on suitable mode of growth Reasons for modes ofgrowth
Risks for modes of growth
+
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on the organizational capabilities of the firm, such as task delegation and organizational structure. Growth pains (Flamholtz, 1985) need to be managed in organic growth, the management of these problems also demands on the organizational capability.
Innovation
While innovation can occur in several forms (product, service, process), a firm has to have capabilities to be able to effectively generate and manage innovation. Technological
capability is strongly interrelated with innovation. If a firm possesses a strong technological capacity (Chen et al., 2009), it enables them to achieve growth through opportunity discovery (Banbury & Mitchell, 1995), new product introduction (Siegel et al., 1993), and product breakthroughs (Zahra, 1996). For pursuing organic growth through innovation, firms need to possess a high level of technological capability.
To manage innovation, it is important to create the right setting for innovation to thrive. According to Loewe & Dominiquini (2006), there are four dimensions on which a firm has to develop itself to support innovation: Leadership and organization, Processes and Tools, People and Skills and Culture & Values. For innovation, management should consider the importance of aspects such as hiring of the right mix of people, incorporating the right organizational structures, culture and processes, (Von & Cusumano, 2001; Bhide, 1996). Cardinal (2001) also recognizes the need for organizational control in innovation. What is apparent here, is that the management of innovation also places quite a demand on human resource capabilities and organizational capabilities.
Marketing effectiveness:
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organizational capability. This is because market orientation is a organization-wide approach, the firm should be capable of adapting the strategy (Kohli & Jaworski; 1990), culture (Narver & Slater; 1990) and related systems to support the market orientation of the firm.
Capabilities & Non-organic Growth
It can be argued that for the creation of value (synergy) from a merger or acquisition, the identification and realization of strategic fit is important. This process takes place both before (pre-merger) and after (post-merger) the M&A. According to a study of Deloitte (2008, p 1.)
“synergies are realized through effective planning and execution of pre- and post-merger activities” and synergy correlates strongly with the financial success of a merger. In the
pre-merger stage, the identification of a suitable target company is important. the post-pre-merger stage, the integration is essential for the realization of the synergy. We will identify the capabilities that are important in the pre-merger and post-merger phase.
Pre-merger capabilities:
M&A can be compared to an investment decision. The buying company pays a financial amount of money for acquiring the other company. This financial amount is based on the perceived value the company is worth. What is important for the firm acquiring the target firm, is that the acquisition it will lead to a positive ROA = return on acquisition (Zollo & Singh, 2004). This financial measure is the most used accounting measure in M&A literature (Thanos & Papadakis, 2012). In order to create a positive ROA over time, the firm must be able to identify a suitable partner and integrate with this partner to create a synergy. For this, the acquiring firm needs to create a clear vision on strategy and fit (Epstein, 2005). The type of synergy (operative, allocative) the firm wants to create from the M&A is essential for the identification of strategic fit (Chatterjee, 1986). The next step is the actual selection of a partner (Harvey & Lusch, 1995). This step involves finding a suitable partner that fits the strategy. The firm must be able to have access to knowledge in order to find a suitable
partner. Networks can be used, but also documents like market reports will help in the process of finding a partner. When a possible suitable partner has been found, the firm should start up the process of Due Diligence (Epstein, 2005). Due diligence is ‘the process through which a
potential acquirer evaluates a target company or its assets for an acquisition’ (Hoskisson,
Hitt, & Ireland, 2004; p. 251). An important reason for due diligence is the avoidance of post-acquisition problems (Harvey & Lusch, 1995). The traditional goal of a due diligence
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important in the activity of assessing possible synergies, and what post-M&A activities it would take to integrate those synergies (Habeck, Kröger, & Träm, 2000; KPMG, 1999). A good due diligence investigation is very important, because it creates insights in the possible problems after the M&A, which helps the firm in preventing those problems from arising (Harvey & Lusch, 1995). Harvey & Lusch (1995) argued that an good audit does not only consist of an financial audit, but of a total of 7 audits, focusing on different dimensions. The firm should be able to have access to the expertise to exhibit a thorough due diligence
research, which meets these requirements. This increases the demand for network capabilities, because that expertise is likely not within the firm itself.
Post-merger capabilities:
The post-acquisition process has been pointed out as the most crucial phase of value creation (Epstein, 2004). Post-acquisition integration is where envisioned synergies and expectations are realized or broken. Capron (1999) found that post-acquisition integration is important to realize synergies such as cost savings and revenue enhancements. So, in order to realize synergies, management of the integration is important. The capabilities needed in the post-merger phase, have to deal with the integration of the newly acquired firms assets and
activities (Epstein, 2004). The type of synergy searched for depicts the amount of integration needed. For example, if a firm is acquired for the purpose of be able to cross-sell products in different regions, the level of integration needed to create this benefit is likely not that high. But, for creating economies of scale on the production line, a need for a higher level of integration could be argued. The production should be relocated to a new production facility to realize the synergy effects. The level of integration needed for synergies to take effect, depict the challenges of the integration process.
Another major part of integration is culture. A company has a specific culture, in which the people work together. After a M&A, two companies and two cultures have to become one (Schein, 1985). A good due diligence research which also checks for cultural differences, is an important starting point for leading a good integration after the M&A. Leadership is very important for managing the successful integration of culture (Schein, 1985; Schuler &
Jackson, 2010). In a survey from a consultancy firm (Aon Hewitt, 2011), the top three reasons for unsuccessful cultural integration where lack of leadership support, culture risks not
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culture are so important for successful integration, firms need a high level of organizational capability to manage this. The main goal of the integration process can be summarized as to overcome the gaps recognized in the due diligence investigation. The gaps in culture and knowledge should be overcome to successfully integrate the two firms and create synergies.
Some authors argue that the capabilities to manage acquisition processes are very specific capabilities, which can only be acquired by having prior acquisition experiences (Haleblian and Finkelstein, 1999; Hayward, 2002). Zollo and Singh (2004) remark that previous experience are not the only way to develop the necessary capabilities. Another stream of literature argues that the capabilities necessary for handling the acquisition process is based on the recombination of existing organizational capabilities (Kogut & Zander, 1992; Grant; 1996; Teece, Pisano & Shuen, 1997). Our approach supports this stream of literature, which means that existing organizational capabilities are indeed important for the management of acquisition processes.
The pre-merger phase especially demands network capabilities of the firm. To find suitable partners, a network capability is important. Also, to find the necessary expertise for doing a thorough due diligence research, the firm possibly needs external partners to help them with this. The capabilities necessary for the integration process can be trace back to strong
demands on the organizational capabilities and HRM capabilities of the firm. M&A is also a mode of growth that can acquire technological (Hagedoorn & Duysters, 2002) and human capabilities. Therefore, we can argue the demand on those capabilities for growth is lower, because they can be partially acquired. The demand for financial capabilities is high, both in the pre-merge and post-merger phase: not only the acquisition of the firm has to be financed, also the identification and integration process can place a high demand on financial
capabilities of the firm.
Capabilities & Hybrid modes of Growth Franchising
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(Darr, Argote, & Epple, 1995). Systems are methods to transfer this knowledge, but also training is a way of transferring knowledge to the franchisee. Although the franchising system has some characteristics that make principal-agent problems less likely (Castrogiovanni & Justis, 2002), this does not mean that those problems are totally dealt with. After the
institution of the franchising system, the firm must be able to manage the relationship with the franchisees. This demands strong networking capabilities of the firm, such as the capability to flexibly manage the relationship and manage the goals that are beneficial for both the
franchisor and the franchisee. Although, franchising also has some characteristics that ensure that capabilities are brought in. First, franchisees buy themselves into the system, which increases the financial capability of the franchisor. Also the management capability of the franchisee is brought into the agreement (Combs & Ketchen, 1999; Kaufman & Dant, 1996). This lowers demand for human and financial capabilities for franchising.
Licensing
When focusing on the licensing-out intellectual property, we can assume that this demands a high technological capability of the firm that is out-licensing the intellectual property.
Without a high technological capability, there is probably no intellectual property available to license to another firm. Second, the firm needs network capabilities (Penrose, 1959). These capabilities are needed to identify possible partners to which the intellectual property can be licensed. The identification of such a partner can be difficult, because we can assume there should also be a certain fit between the licenser and the licensee. Both must be able to benefit from the arrangement. Also, licensing is built upon a contract or agreement between two partners. A certain relationship is created by this contract, which has to be managed. Also here, network capabilities are very important for the management of such a relationship. Monitoring and controlling the relationship is important to minimize the risk of opportunistic behavior (Eisenhardt, 1989). They place demands on the financial capabilities of the firm, because monitoring the licensee will cost money.
Strategic Alliance & Joint venture
