JOINT VENTURES & STRATEGIC ALLIANCES

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Business Alliances

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± Joint Ventures & Strategic Alliances
Context: Blurring of boundaries between competition and cooperation in certain industries (particularly in automobiles, computers, aerospace & telecommunications)

Riddle of the Sphinx: Who is my customer in the morning, my rival in the afternoon, and my supplier in the evening? Jack Welch, former Chairman of G.E.

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Supply agreements & marketing alliances 4. Alliances of oil exploration & mining companies to reduce risk Now: 1. Cartels in US & Europe 2. Cross shareholdings in Asia (Keiretsu) 3. Reciprocal distribution & promotion arrangements Explosive growth in the number of business alliances in recent years Strategy: Focus on core business and seek out strategic networking initiatives for peripheral/support functions through varying degrees of capital and/or operational linkages 3/20 . Joint ventures (multi-purpose & limited purpose) 2.Types of Business Alliances Earlier: 1. Collaborative research programmes & technology swaps 3.

Joint Ventures A joint venture is usually a separate/new business enterprise (company) formed with equity contribution by two or more participating firms.: Maruti Udyog ± Jt.joint venture between TVS and Suzuki Joint venture of Samsung & Texas Instruments to manufacture semiconductors in Portugal Samsung-HP joint venture to market HP¶s products in Korea 4/20 . managerial and marketing skills of the participating firms to meet common business objectives with greater advantage.g. venture between Govt of India & Suzuki TVS-Suzuki . technological. A joint venture brings together complementary strengths such as financial resources. e.

Technology transfer: Berg. the other has finances to commercialize it 2.. To gain endorsement from government authorities: (Better chances of approval from anti-trust/monopoly prevention agencies because JVs lead to creation of more firms. while mergers reduce them) Contd. To bring together complementary advantages: One firm has a product idea. To enlarge one¶s business by sharing investment & business risk (thereby reducing the exposure of each partner) 4. Duncan & Friedman (1982) report that 50 % of all JVs take place for knowledge acquisition. Learning-by-doing & teaching-by-doing (L/TBD) is the most appropriate means of knowledge transfer 3.Rationale for Joint Ventures 1. 5/20 .

7. The partners¶ original companies are not at direct risk. Tax advantage: If a patent or technology is contributed to a joint venture..Rationale for Joint Ventures (Contd. To gain economies of scale/critical mass 6. multiple taxation. To obtain access to distribution channels or raw material supply 6/20 . 8. etc. the tax consequences may be less than on royalties earned through a licensing agreement. Issues relating to operating loss carryover. Partners¶ risk is limited only to the extent of their investment in the JV.) 5.

Reasons for Failure of Joint Ventures Studies by McKinsey & Co and Coopers & Lybrand: .The average JV does not even last half of the term stated in the JV agreement 7/20 .70 % of JVs are either disbanded or fall short of expectations Other Studies: .

inability to give sufficient time and management attention to the JV 3. Opportunistic behaviour: Lack of mutual trust and willingness to cooperate in achieving common goals 8/20 . Hence. Partners concerned with their respective businesses.Reasons for Failure of Joint Ventures Reasons for failure: 1. Issues of leadership. Rigid contract which does not provide flexibility to permit adjustments in tune with changing circumstances 2. cultural incompatibility and inability to deal with rapid changes in the environment 5. Conflict of interest between partners. with both later on wanting to expand independently in the same business 4.

To reduce the risk of entering into a foreign environment 2.International Joint Ventures Reasons for international joint ventures: 1. Legal requirement: In some countries. For competitors to cooperate in developing a cutting edge technology which can transform the industry (Fuji-Xerox JV to develop photocopiers) 9/20 . To get access to proprietary technologies from a foreign company (IBM¶s JV with Toshiba for the latter¶s flat panel display technology) 5. A local partner may be vital for the success of the project (due to knowledge of local business conditions) 4. joint venture (with a local firm) is the only way for a foreign company to set up operations 3.

10/20 . A strategic alliance may even be formed with potential or actual competitors (often in non-competing lines or markets). in a strategic alliance.Strategic Alliance A strategic alliance is a cooperative business relationship between two (or more) firms to attain a limited objective. vertical or diagonal linkages. Usually. no new company or legal entity is formed and there is no specific pooling together of equity contributions towards a joint enterprise. thereby creating horizontal. suppliers or customers. while maintaining their independence.

: 1. IBM. GM¶s components division supplies components to Toyota 2. Alliances of major US airlines with smaller carriers in Europe 4. Canon produces medium volume copiers for sale in Kodak¶s name 3. Siemens & Toshiba working together to create new generation memory chips 5.Strategic Alliance e.g. GM & Hitachi collaborating to produce electronic components for automobiles 11/20 . Du Pont & Sony developing optical memory storage products 6.

they become weaker because of inability to provide adequate capital and managerial resources. Alliance of the weak: When weak companies join hands to improve their position. Alliances among small airlines in the US/Europe eventually led to their being taken over by larger airlines Contd.Types of Strategic Alliances Bleeke & Ernst¶s classification (1995) according to power of companies entering into the alliance and the likely outcome: 1. 12/20 . This is particularly true of scale intensive businesses. Alliance between General Electric and Rolls Royce in jet engines broke up 2. They break-up or end in an acquisition. Collision between competitors: Strong companies in direct competition enter into an alliance for synergy (consolidation of products & markets). but leads to conflict. Such alliances with overlapping capabilities are short-lived.. and are likely to be acquired by a third party.

Disguised sale: When a weak and a strong company form an alliance. Rover improved its productivity and reduced its defect rate by more than half. It later sold 80 % stake to BMW for $1.2 billion 5. Evolution to a sale: Though an alliance may start with compatible partners. completely taken over 4. it would be short-lived. the latter was gradually acquired by Siemens and finally. The alliance can succeed if the weak company can achieve tangible improvement. 13/20 .Allis Chalmers alliance in the US.Types of Strategic Alliances (Contd. Contd. In the Siemens .. In the Rover ± Honda alliance.) 3. competitive pressures change the balance of power and in the end one partner sells out to the other. The weak company is likely to be eventually acquired by the strong one. Bootstrap alliance: A weak company joins with a strong company and tries to improve its capabilities with the help of the latter..

Types of Strategic Alliances (Contd. Some examples: Dow . Alliance of complementary equals: An alliance of strong and complementary partners..Corning (> 50 years) Fuji ± Xerox (> 30 years) Siecor ± Siemens & Corning.) 6. fibre optic cables (> 15 years) Pepsico & Lipton (canned ice tea) KFC & Mitsubishi (KFC chain in Japan) Ericsson & HP (network management systems) Japanese companies learn quickly from their partners and buy them out once they have acquired their partners¶ skills & expertise. 14/20 . which usually lasts longer than the other types mentioned above.

Types of Strategic Alliances (Contd.. Alliance for acquisition of knowledge by working together or observing each other: GM ± Toyota: GM to learn Toyota¶s lean manufacturing system & Toyota to learn GM¶s superior designs 15/20 . Doz & Gary Hamel: 1.) Classification based on framework provided by Yves L. Alliance between potential competitors to neutralise rivalry: Airbus consortium by European govts to create a formidable competitor to Boeing 2. Alliance between companies that have separate specialized resources: Hitachi & Texas Instruments for development of 256 MB DRAM chip Hitachi & GE for gas turbines 3.

16/20 . Partner selection 2. market.Making alliances work Success of an alliance depends on: 1. Alliance structure 3. Hill): a) Helps reach strategic goals ± product. Partner selection: Three principal characteristics of a good partner (Charles W. Manner in which the alliance is managed 1. Daewoo wanted to use GM¶s technology & distribution system Contd. without having a separate agenda c) Will not exploit the alliance for selfish ends ± to gain more & give less GM-Daewoo alliance: GM¶s agenda was to use Daewoo as a low cost production base.. core competency b) Shares the common visions of the alliance. L.

.Making alliances work (Contd... how it can be maximized for both partners d) Set out mechanisms for conflict resolution e) The risk of giving away too much to the partners should be minimized ± transfer only what is meant to be transferred & ³wall off´ sensitive technologies f) Built-in contractual safeguards to reduce scope for opportunism by: i) arranging to swap skills & technologies & through cross licensing agreements ii) credible financial & other commitments in advance 17/20 Contd. location & control b) Alliance should be designed such that there is reasonable consistency with the strategic objectives of both partners c) There should be potential for value addition & address questions like how the alliance can create value. Alliance structure: a) Firm up financial & operational aspects such as: i) Percentage of ownership ii) Mix of financing iii) Technology & machinery to be contributed by each partner iv) Sharing of activities & responsibilities v) Staffing.) 2.

Making alliances work (Contd.) 3. Doz & Prahalad studied 15 strategic alliances over a period of five years ± focusing on alliances between Japanese companies & their western partners: a) The major determinant of how a company gains from an alliance is its ability to learn from its alliance partner b) Japanese companies made greater efforts to learn and emerged stronger than their western partners c) Western companies considered the alliance purely as a cost & risk sharing device and not an opportunity to learn from a potential competitor d) Most learning takes place at lower levels of an alliance. set a framework of meetings to discuss matters pertaining to the alliance and also provided for ³non-work´ time to build better relationship Hamel. Operating employees should therefore be well informed of the strengths of the partner and the importance of learning e) To maximize learning benefits from an alliance. Managing the alliance: To maximize benefits from the alliance. the partners need to a) Build trust b) Learn from each other c) Build inter-personal relationships between the firms¶ managers The Ford-Mazda alliance. learn from the partner and apply the knowledge within one¶s own organization 18/20 ..

Helps firms to establish technological standards for the industry Philips & Matsushita established the Digital Compact Cassette system as a new technological recording standard in the consumer electronics industry 19/20 .Advantages Of Strategic Alliance Ohmae. Kawasaki & Fuji) shared the costs of developing the Boeing 767 3. Help in sharing costs & risks associated with development of new products or processes a) Motorola & Toshiba shared costs & risks in the microprocessor business b) Boeing & Japanese firms (Mitsubishi. and Toshiba in turn helped Motorola to get government approvals to market its cellular phones in Japan 2. Strategic alliances facilitate entry into foreign markets Motorola helped Toshiba build microprocessors. Doz & Prahalad: Firms form alliances with actual or potential competitors for various strategic purposes 1. Hamel. Companies can combine skills & assets that neither can develop on one¶s own AT&T and NEC swapped technologies for CAD and advanced computer chips 4.

Disadvantages Of Strategic Alliance Strategic alliances give competitors a low cost route to technology and markets 1. Success of Japanese firms in machine tool & semiconductor industries is largely due to technology acquired from US firms through strategic alliances 20/20 . Japanese firms gained from project engineering & production process skills from US firms. but kept high paying. value added jobs in Japan 2.

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