Striking Alliances For Growth

Topical research suggests that only one out of five firms still exists 10 years after start-up. Growth is rare in Canada. Only two new firms in 10,000 reach a level where they have 100 or more employees.

Every year, 10% of small businesses–a half million or so–shut down for good; a quarter of all businesses never make it past their second year; 60% close after six years.

Startling statistics?

Successful small business owners are realizing that if they are going to make it, they are going to need help. One of the places they are finding help is through the formation of small business alliances.

Small- to medium-sized enterprises (SMEs) are faced with an increasingly challenging environment due to rapid technological evolution, globalization, and progressively more sophisticated competitors. For firms with a minimum of resources, the challenge of surviving and prospering in this new setting is difficult, but it is attainable with suitable investment decisions.

However, many SMEs do not directly control sufficient resources to make the necessary investments, and find themselves at a competitive disadvantage with their larger rivals. In an effort to build competencies necessary to navigate a profitable course in this demanding environment, SMEs should investigate the possibility of leveraging strategic alliances.

SMEs comprise the largest proportion of businesses in most economies and often offer the greatest potential for job creation.

For example, in the United States, small businesses employing less than 20 people were the major source of new jobs during the late 1990s. A similar scenario played out here in Canada.

But when a business is successful, it will reach a crucial stage where decisions about growth–how and if–can determine future success.

There are two key scenarios. In the first, the business is deemed to be economically strong and has sufficient size and market penetration to sustain its current position in the marketplace. The owner must decide either to grow or not.

If the decision not to grow is made, it often results in the business being sold.

If the decision is made to grow the business, often the business lacks the resources on its own to accomplish that growth, resulting in stagnation and complacency.

There are many reasons why owner-managers avoid decisions on growth, including fears of taking on debt and loss of personal control to professional managers. Other major barriers to SMEs’ growth are found inside the business, including lack of technical and managerial skill, inadequate adaptability and an inability to acquire or use technology.

To remedy these barriers, many SMEs recognize that substantial benefits may be acquired through the development of partnerships or alliances with other businesses, sometimes within the same industry. A recent study suggested that high-growth small firms with strategic alliances experienced growth rates 20% higher than those without such alliances.

Strategic alliances enable founding owner-managers to gain competitive advantages through access to a partner’s resources that include markets, technologies, capital and people.

Furthermore, it is important for founding owner-managers to keep in mind that family ownership creates value only when the founder serves as the firm’s CEO or as its chairman with a hired CEO. This point has been borne out by recent research conducted by the Wharton School of Business at the University of Pennsylvania.

Thus, creating partnerships and alliances while maintaining a direct link to management control is the preferred choice.

For most SME owner-managers, the task of identifying suitable partners or alliances can seem daunting.

As these small businesses grow and the owner-managers realize the importance of accepting new professional managers and expertise, this realization now extends to the engagement of an expert to pursue this approach to growth.

Mark Borkowski is president of Toronto-based Mercantile Mergers & Acquisitions Corporation. Mercantile specializes in the sale of privately owned companies to strategic buyers. He can be contacted at mark@mercantilema.com or (416) 368-8466 ext. 232