Brief on Business Networks

Moving Ahead with Business Networks
What is a Business Network
Why Network
Which Network
Starting a Network
Business Network Structures
Finding Potential Network Members
Managing a Network
Supporting a Network
Business Network Programs

Moving Ahead with Business Networks

The business landscape is becoming more complex for small businesses as the challenges of a global marketplace, swiftly changing technology, aggregated purchasing and competitive pressures increase.

A growing number of businesses are negotiating this complexity by joining or forming networks to tackle the scale and capability limits inherent in operating a small business.  Network goals are as varied as increasing market share, reducing costs through bulk purchasing, sharing staff and winning larger contracts than would have been possible by working alone.

Networks are largely an underdeveloped resource in the business world and a strategy choice when businesses face complex issues in the domestic, interstate and international marketplace.

The logic is compelling - building on the strengths of others while nurturing one's own business strengths will develop competitive advantage.  Networking is a proven process in many parts of the world.

This information is designed to help small business owners and operators understand what business networks are, their variety and their potential advantages for business development and growth.  You will be introduced to some of the dynamics of successful networks, as well as how they can be created and sustained.

The Brief on Business Networks includes snapshots of several established networks and background on the program of assistance available from the NSW Department of State and Regional Development (DSRD) to assist business networks to form and develop.

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What is a Business Network

"Networking" is a term that is familiar to most of us and one with many meanings and applications, ranging from getting to know those who might be of use to us, to creating linked computers to improve office communication.  In this Brief we are addressing its meaning in the commercial sense - the business network.

One helpful definition of a business network is a group of firms using their combined talents and resources to co-operate for joint functions.

Another excellent definition of a business network is the "infrastructure of collaboration", described as "pathways by which people and organisations come together to exchange ideas, solve problems or form partnerships".  (Rosabeth Moss Kanter, 1996)

There are many different types of networks and each is shaped by its objectives and membership.  Existing networks in NSW encompass a wide variety of activities, including the following:

• A broad, non-industry specific network of companies or businesses that co-operate to varying degrees on issues of concern in their locality.
• A "cluster" of companies or businesses in the same or complementary industries which co-operate in a more defined manner.
• More formal "strategic alliances" that focus on commercial outcomes and which may incorporate one or more joint ventures on an ongoing or ad hoc basis.
• Supply chain initiatives/lead firm networks that are built around a dominant company in an industry or region wanting to build more efficient supply capabilities.
• Business communication networks that focus mainly on providing education and business development opportunities for members. 

The unifying theme is businesses co-operating and sharing knowledge or resources to increase their competitiveness.  Businesses seek benefits from participating in networks to achieve outcomes beyond their individual business capabilities.

The key driver and asset in any successful business network is people.  Most recent studies into this form of relationship have found that the ultimate success of any network will depend on its internal cohesion and strengths and this returns to the nature of its constituent parts - not organisations but individuals within them working together for mutually beneficial outcomes.

The following details five steps to a better understanding of business networks:

• Why network;
• Which network;
• Starting a network;
• Managing a network;
• Supporting a network.

In most cases, the decision to get involved in a network is driven by the need to solve a problem that may not be possible by going it alone;  to combat a threat;  or to take on a major opportunity that is beyond the resources of a single firm.  A network eventuates when several businesses in a particular geographic or virtual community come to a similar conclusion.

The business operator who considers joining a network will have judged that the benefits outweigh any perceived associated costs or risks.  In many cases, there may be an initial inherent reluctance to associate too closely with other businesses in the same industry or to provide too much sensitive information.  These concerns should be addressed in the early stages so that the network can develop from a firm base.

The reason for joining or creating a network can stem from individual, communal, regional or even global needs, including those listed below.

Solving a Problem or Crisis

Networks commonly result from the limited choices individual businesses face when presented with a challenge or an opportunity.  This need or catalyst will vary from region to region and from industry to industry, but the forming of the network can be a first step towards finding a solution to a problem.

Advancing a Common Viewpoint

Networks provide an excellent platform for businesses to project their viewpoints in a collective manner to policy makers in public and private enterprises.

Growing the Business

Expanding or diversifying a business is often an expensive option and difficult for small business to sustain, particularly when specialist staff and/or equipment are required.  Network members can use each other's strengths and resources to expand their own businesses, create production flexibility, enter new markets, delve into research and develop or launch new products.

Building Scale to Win Bigger Projects

A small group of businesses may band together to bid for a large contract not accessible to the businesses individually.

Enhancing Resources

Joining a network provides the opportunity for individual businesses to pool, exchange, share and integrate specific business resources and costs for mutual gain.  Joining together in a supply chain to a larger company can result in sharing production costs with nearby businesses.

Improving the Image of the Region

In regional areas a strong incentive for joining or starting a network is the marketing advantage to be gained from developing and leveraging the image of the region as an area specialising in a particular skill, product range or service capability.

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Which Network

People with common needs or interests and a strong motivation to improve their business prospects are the ones who join or help create business networks.  Typical examples are the builders' hardware and newsagent buying groups and the real estate co-operative marketing organisations.

Most businesses will not easily locate a ready-to-join network.  The choice is to search widely and hope to locate a suitable business group to join, to use another kind of association to develop a business network or to become the prime mover in starting a new network.

Joining an Existing Network

There may be an existing network that suits an individual business's needs or one that could benefit from your input and expertise. 

To find out about existing networks in an industry a good starting point is the local chamber of commerce, the relevant industry association or DSRD.  An existing business group could be used to develop a network for a specific commercial purpose.  Some examples of existing networks are included as brief case studies throughout this Brief.

Starting a New Network

Joining an existing network avoids the challenges a new network faces, but it may not be the ideal "fit" for your business nor have the marketing impact of a completely new initiative.

An effective means of stimulating the formation of a network is to ask prospective members in your industry or locality "Where do you want to be in five year's time?"  While the detailed answers are likely to vary considerably, if a common theme can be found it is likely that the basis for a network exists.  This approach is particularly relevant when a group of existing companies is considering doing business together to increase sales.

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Starting a Network

Successful business networks most often consist of people who share common needs or interests.  It is this organic element, built on human relationships, that determines how they should be constructed.  There are several key steps that prospective participants should consider when establishing a network or developing an existing relationship into a more ambitious joint business exercise.

Be Realistic

Each person joining their business to a network will have expectations of perceived benefits from participation.  It is critical at the outset to establish achievable objectives, rather than highly specified goals to suit each participating business.  Prospective members need to appreciate that the initial focus should be on shared strategies for growth and improvement with specific opportunities emerging over time.

Allow it Time to Evolve

It is best to avoid any pre-conceptions about the final shape of the network.  Allow the structure to evolve, taking into account both the particular business environment and the needs and capabilities of members or individual businesses.  Start slowly and with deliberation.

Look to the Long Term

Do not become entangled in legalities or overly bureaucratic detail.  The network should focus more on its longer-term viability rather than its initial legal structure.  The real key to success in the early stages is to recognise the need to build internal cohesion.  The technicalities can be clarified later.

Build Synergy and Trust

Experience has shown that potentially valuable network members will be frightened off if a formal or rigid agreement is proposed from the outset.  The members need to get to know each other and to each realise for themselves the potential benefits before an appropriate structure can be developed and agreed.

  

Case Study - Ecologically Sustainable Development Pty Ltd (ESD) The two principals of the ESD network first met in 1997 to explore the advantages of working together to develop their respective landscaping businesses.  DSRD provided assistance for a feasibility study into the advantages of incorporation and a business plan.  The process identified clear benefits in trading as a legal entity, particularly the enhanced ability to bid for large projects. ESD began trading soon afterwards with a clear objective to win large landscaping assignments.  Both organisations worked well together and there was a strong level of mutual trust under the leadership of one of the partners. The benefits gained from a networking approach include shared environmental plans and OH&S procedures and the successful completion of a number of significant projects, including an award-winning job that protected a Green Frog habitat. Contact:  Jeremy Wyner on phone 9486 3944

Recruit a "Champion"

People on a mission need an effective leader and this certainly applies to business networks.  It is very important to have a respected industry champion or champions to express the common needs, stimulate interest and to provide confidence in the value of the network.  This person can help build trust between the members, which is the key ingredient for the sustainability of the network.

Business Input Sourcing

The identification of cheaper or more reliably sourced materials and business inputs for members (a commonly-perceived network benefit) should not be promoted as a goal at the outset unless the detailed and time-consuming work of putting it together is well under way.

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Business Network Structures

The structure of a network will be shaped by the objectives, size and sophistication of the member companies.  Most networks in Australia tend not to be wholly commercial entities given the regulatory and practical difficulties involved and, most significantly, because of a desire by most members to maintain individual independence.

No Structure

This is the least formal type of network and quite common.  The network members form a loose association.  They may agree to share knowledge and resources or co-operate on projects of mutual interest.

Not-For-Profit

In Australia many networks have chosen to operate as a "not-for-profit" incorporated association for both regulatory reasons and to facilitate Government funding support.

Commercial Activities through the Individual Members

This is quite common and the high levels of common capability within some networks result in network members agreeing to share contracts, resources or costs on an agreed basis through one member's business structure.

"Spin-Off" Commercial Entities

Some more established networks operate as a completely "spun-off" commercial entity.  Financial management in commercially active networks is simpler if they develop their own formal legal structure.  These organisations can be a co-operative, a joint venture company or a formalised strategic alliance. 

Finding Potential Network Members

Potential network members don't grow on trees, but they are likely to be closer than you think.  They can be drawn from competitors, suppliers and customers.

Quality counts.  There is no ideal number for network membership.  It will depend on the nature of the network and, in most cases, on the determination and shared focus of the individual.  A network has to be relevant to business needs to maintain member loyalty.  However, in those cases where the network has broader objectives that impact on a wide cross-section of companies or suppliers, it may be better to have a larger number of members.

For business networks with specific commercial activity in mind a minimum number will be evident on the basis of volume of suppliers to purchases needed to sustain viability.

Your local DSRD office, industry association or chamber of commerce may be able to assist in identifying potential members: