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Chapter 4Global strategic alliances 2

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Country based joint ventures

Used to be the main entry mode in emerging countries

Most legislations have changed to open the way to wholly-owned operations

Still required in some countries (e.g. India) or in some sectors (e.g. China, Indonesia, Thailand)

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What motivates a company to go in to a joint venture?

Administrative/legal Capabilities acquisitions

• Government industrial policies

• Investment laws

• Market complexity and cost of entry:- Resources, assets, competences- Culture

• Speed of entry

• Risks

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Framework for the analysis of M&A and strategic alliances

What are the benefits of thethe alliance, aquisition or

merger?What do we get from it?

Shape expectations

How workable is the deal?

Identify issues

How do we contribute to it,organize and manage it? Set the agreement

Strategic value• Defining the scope• Strategic objectives

• Value creation potential

Fit analysis• Strategic fit

• Capabilities fit• Cultural fit

• Organizational fit

Negotiation and design• Financial architecture• Operational scope

• Interface• Governance

Implementation

• Transition• Integration• Evolution

How do we work? Achieve results

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Value creation in strategic alliances

Value of the parent

AValue of parent B

RoyaltiesDividends

Management feesTransfer pricing

Learning from A

Cost saving due to combined operations

Increased revenues due to joint marketing and complementary products

Increased profitability from joint innovation

DIRECT VALUEValue coming from the

alliance

SYNERGY VALUEValue coming from joint

operations

Learning from B

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SuppliersCustomers/distributorsSame business Diversifiers

Investors GovernmentPoliticalpartner

+ -Capabilities Copying/

Learning

+ -Resources Dependence

Downwardintegration

+ -DependenceUpwardintegration

MarketAccess

+ -No operationalsupportOpportunism

ContactsImagePower

+ -

No operationalsupport

No operationalsupportPoliticking

Power+ -

No operationalsupportPolitical liabilityOpportunism

Access todecisionmakers

+ -

Freedomof action

Partner selection in country-based joint ventures

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Partner analysis

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• How strategically important is the business for partners?

• To what extent do partners need to achieve objectives (degree of capabilities autonomy)?

CRITICALITY

DIFFERENCES IN EXPECTATIONS

• How different are the partners’ expectations?

• To what extent are the differences compatible/workable?

Strategic fit

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STRATEGICIMPORTANCE

NEED FOR A PARTNER

+

+-

-

AB

CDAA = High commitmentBB = No partnershipCC = Low commitmentDD = Very low commitmentAB = Potential conflictsAC = Potential conflictsAD = High chance of conflicts

Strategic fit: criticality and degree of commitment

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VENTURING VIEW

EXTRACTIVE VIEW

SHARING VIEW

INVESTOR VIEW

POLITICAL PARTNER

$

$

Strategic fit: differences in expectations in joint ventures

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What local partnerslook for in a JV

MARKET• “1.4 billion pairs of shoes” (China)• Market access• Understand the market• Expand nationally• Distribution• Contacts

RESOURCES• Low labour cost• Regional export base• Components• Raw materials

MANAGEMENT• Integration with global/regional network• Control

KNOW -HOW• Product• Processes• Management

UPGRADE• Factory/equipments• Systems• Products• “Get out of the mess”

(Chinese SOE)

MARKETS• Export channels• Marketing expertise

RESOURCES• Experts• Financing• Reputation/ image/brand

Strategic fit: same bed but different dreamsWhat foreign partnerslook for in a JV

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What is neededto compete effectively?

Given marketopportunities and competitive context:

What resources, assets and competences are neededin our value chainto compete effectively?

What do webring?

What are ourcontributions to thejoint venture?• Financial and human resource• Other resources• Tangible and intangible assets• Competencies

What doesthe partner

bring?

What are thepartner’scontributions?

What otherinvestments need

to be made?

What new investmentsremain to be madein new resources,assets, competences?

What are the relative competitive strengths of partners ?To what extent does the coming together of partners create a

robust business model?• Complementarities• Overlaps• Gaps

Capabilities fit

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Corporatehistory

Corporateownership

Leaders

Industry

Experience

Nationalorigin

Corporatecultural

differences

Industrycultural

differences

Ethnicalorigin

Internationalcultural

differences

What are the differences in business objectives?

What are the differences in business concepts?

What are the differences in managing business?

What are the differences in dealing with people?

• Entrepreneurship • Growth• Short versus long term

• Dominant logics• Ways to compete• Quality orientation• Importance of technology• Customer orientation

• Centralisation/decentralisation• Bureaucracy

Cultural fit

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Western multinational Family conglomeratein emerging countries

STRUCTURE

PEOPLE MANAGEMENT

SYSTEMS

JV 10

PaternalisticLoyaltyFamily orientation

LoosePersonalizedQuick decision-making

ConglomerateCentralizedAutocratic

TechnocraticPerformanceCareer Management

MultinationalmatrixDecentralizedBureaucratic

Well-defined systemsand processesPlanning and control

Organizational fit

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Types of agreements in joint ventures

INITIAL: • Memorandum of understanding• Letter of intent

• Joint venture agreement and articles of association

• Business plan? (Feasibility)

• Technology agreement

• Marketing agreement

• Procurement contracts

• Management contract

• Staffing and organization

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NEGOTIATION

SCOPE

CONTRIBUTIONSVALUATION

MANAGEMENTAND STAFFING

PROTECTION

CONFLICTRESOLUTION

• Product mix• Geography

(domestic/exports)• Capacity

• Equity sharing• Technology contributions• Facilities• Brand and goodwill• Additional contracts• Financing

• Assets• Price and remuneration of technology• Shares

• Board• Positions• Decision-making• Control• Recruitment• Careers• Remuneration

• Internal arbitration• External arbitration• Renewal• Extinction

JV 42

• Technology• Brand• Territories• New developments

Negotiating

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Empirical evidence…Survival rate: the joint venture decay

- Declining mutual benefit; divorce or reactivation

Behavioural issues

- Lack of understanding

- Lack of communication

- “Positional” bargaining

- Lack of cultural sensitivity

Too much emphasis on structure and not enough on processes

Death valley

Implementing

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The joint venture decay

MUTUALBENEFIT

TIME

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Death Valleylow

high

Emotionalstress,pressurefor change

high

low

Morale,optimism,productivity

Phase 1First contact betweenthe differentcultures• enthusiasm• “honeymoon” Phase 2

Friction for the first time after fusion• disillusionment• looking for scapegoats• self blame

Phase 3Crisis• confusion• massive conflicts• cultural antipathy• refusal

Phase 4Change ofmental patterns• problem solving• conflict management

Phase 5Creation of a newfused culturebased on culturalsynergies

Taking on the challenge

Defusion, return to themonoculture

JV 11

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1. Selecting your partner• Invest in a careful search

- Multiple sources of information- Check track record- If possible engage in up-front business dealings- Always (if possible) consider several alternatives

• Analysis of

- Strategic fit- Capabilities fit- Cultural fit- Organizational fit

is a “must”

• Due diligence in a joint venture is as important (if not more) than for acquisitions

• In emerging countries, partner analysis requires a good understanding of “business networks”

JV 115

General recommendations

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2. Feasibility and negotiation

• Joint feasibility study has to be taken very seriously

Should lead to a joint business plan

• Business planning is a parallel process to the formal legal and financial negotiations

• Operational people should be involved, and some “overlapping” is needed between the negotiation team and the managerial team

JV 116

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3. The Integration phase

• Careful selection of personnel appointed to the joint venture

- “Joint ventures are not a dumping ground for deviant managers”

- Cultural, relational and pedagogical skills are as important astechnical skills

• Integration teams in various operational fields

- Mixed teams- Concrete agenda (clear objectives)

• Invest in training

JV 117

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• Formal majority ownership is not a “guarantee” of control

• Control is actually experienced at the operational level

- It is important to be in charge of the key operational functionswhich determine business success (e.g. quality management, customer services)

• Control is closely linked to the ability to demonstrate its leadership, management, and ability to educate and produce results (e.g. Shanghai Volkswagen, Otis China)

JV 118

4. The issue of control

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5. Ending joint ventures

• Avoid “dramatic” endings

• Even in “tense” situations one should always look for a win-win solution

• Use “third party” in case of conflicts

• Take over is in most cases the way to end

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Trust in joint venture

• Demonstrate commitment to the joint venture

• Appoint competent and respectful managers and personnel

• Provide advance warning of your intention

• Keep communicating even in « tough » times

• Personalise the relationship

• In emerging countries coaching and training is seen as trust