RSM 490S (ALL SECTIONS): SESSION 8

GLOBAL PARTNERING & STRUCTURING

2019-2021

1
 AGENDA
• Alliances & Acquisitions, featuring Real Options & Due Dilly

• Strategy & Structure

• Break

• Case: Eli Lilly JV in India

• Case Summary Learning Points

LEARNING OBJECTIVES
• Understand the spectrum of international market alliances

• Comprehend the concept of real options as it relates to international business

opportunities for growth

• Appreciate how mergers and acquisitions can used and implemented as an effective
internationalization strategy

• Review international organizational structure alternatives and rationale

• Review the roles of the corporate centre and Chief Strategy Officer in international
business

• Comprehend the decision-making process complexities in a joint venture dissolution

case situation
Alliances & Acquisitions

4
“DEALS” AS A GLOBAL
STRATEGY
• CEO’s like to “do deals” (M&A) as it’s seemingly easier to attain global scale, reach
targets, enter new markets that are too time-consuming, too difficult, and too unknown to
allow for successful organic growth strategies

• M&A opportunities are both planned and opportunistic

– the former including self-scouting and deals served by i-bankers
– the latter being marketplace driven such as Competition Bureau rulings resulting from
other, bigger M&A

• While the goal of all deals should be swift, accretive-to-earnings performance, the reality is
that some motivation for deals is simply down to the President’s whim….”we need to be in
that country/market!”

• Provide an alternative (option) to organic growth

 ACQUISITIONS & ALLIANCES
• Strategic alliance, contractual alliances, equity alliances

• Most M&A is actually just “A”

• Most M&A fails

• Widely used mode of entry, especially with “opening-Up” of formerly-closed

economies and resultant privatizations
SPECTRUM OF GLOBAL M&A
• Lots of famous examples: Tata buying Jaguar, etc.
REAL OPTIONS REALIZED
THROUGH ACQUISITION/DEALS
• Provide Globalizing Firms w/ Alternative Courses of Action/Π

• A decision tree is a diagram of sequential decisions and the possible

outcomes of such decisions

• Decision trees help companies determine their options by showing the

various choices and outcomes
 REAL OPTIONS & FLEXIBILITY

Success
Test (Invest Pursue project
$200,000) NPV=$2million

Failure

Stop project
Don’t test NPV=0
NPV=0

Courtesy: © 2012 Brealey

 GENERIC REAL OPTIONS

• A corporation typically has the following four options regarding an investment

projects it has decided to undertake:

– Option to expand
– Option to abandon
– Timing option
– Flexible production facilities

Courtesy: © 2012 Brealey

 REAL OPTION EXAMPLE
O U T C O M E S
• Decision Tree $ 2 ,2 3 5
t = 3
A
$ 2 ,2 0 0
t = 2
$ 2 ,1 4 5
t = 3 B
$ 1 ,8 3 5
t = 3 C
$ 1 ,8 0 0
t = 2
$ 1 ,7 4 5
t = 3
D
$ 1 ,5 3 5
“s u c c e s s ” $ 8 0 0 t = 3 E
I n it ia l 0 .6 5 t = 1 $ 1 ,5 0 0
in v e s tm e n t t = 2
($ 1 ,3 0 0 ) $ 1 ,4 4 5
t = 0 t = 3 F
$ 1 .5 0 $ 1 .5 0
“ f a ilu r e ” $ 1 .0 0
t = 2 t = 3 G
0 .3 5 t = 1

$ 0
S T O P - a b a n d o n H
t = 2 p r o je c t

Courtesy: © 2012 Brealey

 REAL OPTION EXAMPLE: JOINT
PROBABILITY CALCS
• Joint Probability Calculations (for outcomes A through H):

– (A & B) 0.65 x 0.3 x 0.5 = 0.0975

– (C & D) 0.65 x 0.5 x 0.5 = 0.1625
– (E & F) 0.65 x 0.2 x 0.5 = 0.065
– (G) 0.35 x 0.6 x 1.0 = 0.21
– (H) 0.35 x 0.4 = 0.14

Courtesy: © 2012 Brealey

 REAL OPTION EXAMPLE:
DECISION (YEAH OR NAY?)

Courtesy: © 2012 Brealey

ALLIANCES: BEHAVIOURAL
OBSERVATIONS
• A Key Success Factor is the development and leveraging of Relational (or collaborative)
capabilities; those abilities to manage interfirm relationships

• A caution for both sides surrounds running the Learning race; a situation in which alliance
partners aim to outrun each other by learning “tricks” from the other side ASAP

• Management of these behaviours will dictate outcomes and perspective on the following
pros/cons of alliances
HIGH-LEVEL ALLIANCE
CRITERIA
• Acquisition premium
– Difference between the acquisition price and the market value of target
firms

• Strategic fit
– Effective matching of complementary strategic capabilities

• Organizational fit
– Similarity in cultures, systems, and structures
 HIGH-LEVEL ALLIANCE
DECISION PROCESS
• Consider how
relationship originated
(evolved or dictated)
• Known or Unknown
partner
• Can you get away with
no equity?
• In practice, small %
ownership differences
+/- 50% don’t seem to
matter
ALLIANCE ADVICE: GUARD
YOUR INTERESTS
• Despite contracts miles long and even with many years of successful
partnership on the books, individual alliance partner firms can combat the
threat of opportunism by two primary methods:
– Sealing-off critical capabilities; a.k.a. do not share
– Hedging critical capability leakage through similarly-valued knowledge
transfer, commitment of resources to the alliance entity

• If no new legal entity formed, then all existing patent and ownership rights to
assets and IP are as they were pre-alliances, while legal entities can accept
assets (incl. intangibles) as initial infusions of capital
MEASUREMENT
• Often one party or the other will run alliance administration, such as
reporting, so verifying partner/alliance financial/operational details is critical
to realizing on investments, especially where critical capabilities may have
been sacrificed for the betterment of the alliance
METHODS TO IMPROVE
ALLIANCE SUCCESS
• Meetings? Alliance Blog?
Fancy Alliance Name?
• Symptoms vs. causes
– Causes are lack of
skills, keeping
commitments,
imbalances in
knowledge contribution,
too few resources, late
paying, late reporting, +
+
– Peng is showing
 ENDING THE ALLIANCE:
WHEN TO CALL IT QUITS?
• It is expected that alliances do
not go on in perpetuity, but
rather will reach a logical
“stopping point”

• Initiator: Party who begins the

process of ending the alliance

• Often, both parties feel the tug

to “go it alone” or to find new
partners
International M&A

21
MOTIVES FOR ACQUISITIONS
• Equity engenders control

• Hubris
– Over-confidence in one’s capabilities
– Follow-the-leader management

• Managerial Motives
– Managers’ desire for power, prestige, and money, which may lead to
decisions that do not benefit the firm overall in the long run
 M&A AS A STRATEGY
• CEO’s like to “do deals” as it’s seemingly easier to attain scale, reach targets, enter new markets
that are too time-consuming, too difficult, and too unknown to allow for successful organic growth
strategies

• M&A opportunities are both planned and opportunistic, the former including self-scouting and
deals served by i-bankers, the latter being marketplace driven such as Competition Bureau rulings
resulting from other, bigger M&A (Wasteco took advantage of some such opportunities)

• While the goal of all deals should be swift, accretive-to-earnings performance, the reality is that
some motivation for deals is simply down to the President’s whim….”we need to be in that
market!”…..leading to ”ok, boss, if you say so!”
 DEAL-MAKERS AND
BREAKERS
Makers
• Solid industry and i-banker/PE relationships; getting to know the vendor, but not too well
• Knowledge of Comparables…..current ones that are relevant; not old, wrong-industry, etc.
• Modeling skills, strategic skills, integrative thinking skills of planners/implementers
• Knowing what you want and what you’ll be buying
• Knowing why the vendor/acquiree wants to sell and sell now
• Having a solid speculative – and objective – price range (not just, “Joe won’t sell for less than $X mill”) for the current
period

Breakers
• Overpaying….Rich Dad, Poor Dad: You make your money on the buy, not the sell / corollary is: people don’t lend on
goodwill!!!
• Ego and wanting to do the deal only for the deal’s sake, as opposed to accretive strategy
• Poor and/or rushed due diligence
• Letting the lawyers run the show….get your CA’s & CFA’s, general manager industry old-gurus, and operations people in
there, and tell the lawyers to just get the paperwork done!!!
• Building a business case on initial assumptions or an “assumption wish list” which is changed mid-deal and/or could never
be implemented, then expecting the same ROI
 Strategy

MERGERS & ACQUISITIONS

<> STRATEGY PER SE
• Can M&A can be a source of strategic advantage?
• Do CEO’s overvalue it?

Revenue Growth  Brand equity capitalization  New market entry

 Competitive synergy

Cost-Saving  Organizational streamlining  Facility consolidation

Synergy  Technology transfer
The
Achievement

Drivers
Business  Customer Stabilization  Management of “Day 1” items
Disruption  Governance implementation  Phased implementation
Minimization  Initiative prioritization

Operational  Elimination of duplication

Integration  Use of best practices

Leadership &  Leadership transition  Employment & HR transition

Workforce  Line manager responsibilities
Integration
 MERGERS & ACQUISITIONS:
LIFECYCLE
• The Entire Acquisition Lifecycle is Complex and Can Span Multiple Months/Years, outlive
many-a-CEO, face ups-&-downs, all of which can affect the original rationale and mandate
from the Board
Business Strategy / Candidate
Selection
4 High level assessment of
Description
strategic value, financial value
and integration needs
4 Definition of goals and potential
targets
4 Screening of potential targets
based on fit with strategy
4 Highly analytical, research
Nature
driven, small team, varying
intensity, Multiple months
Due Diligence
4 Comprehensive, repeatable
process for assessing the overall
complexity of the proposed
merger
4 validation of the economics of
the acquisition and high level
preparation for the merger
integration
4 Highly intense & practical,
80/20, Multiple small teams,
data driven, few days or weeks
Merger Integration
4 Planning and driving the merger
to achieve desired strategic
results
4 Tools, techniques and structures
for accelerating the integration
of the acquired organization
4 Pragmatic, complex, Intense,
extended burn, multiple large
teams, multiple months
Post Merger
Rationalization
4 Legal entity rationalization,
platform rationalization and
systems decommissioning
4 Performance improvement
activities
4 Benefits rationalization and
focus on growth
4 Fine-tuning, longer timeframes,
end-state oriented, multiple
months / years
 M&A: DUE DILLY &
INTEGRATION
• Caveat Emptor
Merger and Integration Focus
Business Strategy / Due Diligence Merger Integration Post Merger
Candidate Selection Hi-level Detailed Planning Execution Rationalization

Due Diligence Framework Integration

88 Improves
Improves ability
ability of
of the
the organization
organization to to rapidly
rapidly provide
provide an
an 88 Using
Using aa detailed
detailed plan,
plan, business
business units, IT,
IT, processes,
processes, and
and
assessment
assessment of of the
the target
target in
in terms
terms ofof costs,
costs, timeframes
timeframes andand roles
roles are
are brought
brought together
together and/or
and/or rationalized
rationalized
Objectives

synergies
synergies 88 Focused
Focused onon capturing
capturing merger
merger knowledge
knowledge and and automation
automation
88 Identifies
Identifies all
all critical
critical elements
elements of of end-to-end
end-to-end unit
unit integration
integration to
to help
help accelerate
accelerate the
the integration
integration process
process andand reduce
reduce risk
risk
complexity
complexity 88 “Best
“Best practice” tools and templates that are ‘plug-n-play,’
88 Enables
Enables assessment
assessment of of the
the cumulative
cumulative effect
effect of
of multiple
multiple easy
easy to
to use,
use, update
update and
and share
share across
across multiple
multiple media
media &&
factors
factors that
that might
might impact
impact thethe offer
offer price
price teams
teams
88 Modular, cross-referenced,
8Modular, cross-referenced, comprehensive,
comprehensive, easy easy to
to use,
use, 88 “Menu”
“Menu” of tools
tools updated
updated and
and improved with each
each merger
improvedManagement merger
Financial Assessment 8 Merger Execution Structure/Program Office
update
8update
and
and share
share across
across multiple
multiple media
media & teams
teams
Sample

High Level Integration Plan Plain-old talking with staff, signage, utilities, set-up location
Results

8
8 Detailed Project Plan 8 Dress Rehearsals for Go-Lives, testing scripts
8 Asset & Application Inventory 8 Command Center and Handbook
8 Customer & Vendor Assessment & Summary 8 Problem Management Log
8 Supply Chain & IT Network High Level Overview 8 Decommissioning Dashboard
8 Divisional Synopsis 8 KPI’s, measurable goals, and associated dollar-values
 LEGAL RATIONAL FOR DUE
DILIGENCE
• Legal rational for due diligence
– comply with laws and regulations
– identify and solve legal problems
– protect an interested party from any legal liability
– due diligence as used as defense in any lawsuit
– enable a legal claim against a defaulting party

• Also, fiduciary duty of directors

Courtesy: Picharn Sukparangsee, 2010

DUE DILIGENCE COMMITMENT
• Rome wasn’t built in a day, nor should your due diligence be done in one!
• Are you getting the full story? Translated properly?
 M&A: INTEGRATION
CHALLENGES
• The primary determinant of M&A success is ability to execute
• Get “down with the people”..meet the union guys 1-on-1 to chat
Principal Challenge
Desired Outcomes Integration Findings* How do you capture
• Synergies not while integrating …
• Reinvent and synergies …
achieved in 70% • Systems
redefine • Personnel reduction
• Customers
competitive of cases • Sourcing/purchasing
• Management
• Only 23% earn • Facilities consolidation
landscape • Suppliers
• Capture synergies their cost of capital • Processes
• 47% of executives and building a without negatively
• Employees
• Protect current strategic platform … impacting …
customer and leave year one;
• New customer value • Customers
revenue base 75% by year three
proposition • Employees
• Execute an issue- • First 4 to 8 months • New processes • Shareholders

free day one productivity • New organization • Vendors/Suppliers

reduced by 50% • Financial performance
All the time maintaining current business momentum
and operating within regulatory constraints
Integration is not conceptually difficult, but it requires a ruthless focus on execution,
appropriate cadence, and an ability to avoid being overwhelmed by the enormity of the effort.
M&A: MAKING A
SUCCESSFUL MARRIAGE
• What makes for a successful business merger? Acquisition? JV?
Partnership? Vendor Relationship?

• How are these things similar to successful and unsuccessful marriages?

• What is unique about international M&A? How might this be like a cross-
cultural marriage?
 MERGERS & ACQUISITIONS:
SYNERGIZING
• Synergies must be uncovered by a thorough analysis of what value lies within each area of the
organization
Type Example
Initial Assessment Category Duplication Avoidance Human Resources
• Capital Avoidance Created Economies of Scale Operations
Savings Expenditure Avoidance Information Systems
• SG&A “Would not be
available except Operational Efficiency Logistics
• R&D for the merger”
Enabled Skill Transfer Product Development
• Transaction Cost Savings Practices Adoption Technology Transfer
“Potentially
• Distribution unlocked through Organizational Streamlining Spans of Control
the merger”
• Cross Selling Work Reduction Activity Avoidance
Developed
Performance Realignment Centralization
• Plant and Product Savings
Optimization “Could be Contractual Arrangements Outsourcing
accomplished
absent the merger” Best Practices Information Systems
• Redundancies
WASTECO’S ACQUISITIONS
OF WSI-BFI ROUTES
JUNE/JUL Y
• Pursuant to Competition Bureau

• Small for vendors, but big for Wasteco (about 20% of annual pre-deal revenue);
opportunity to jump-start into new markets

• Started with President meeting incumbent President at trade show where pending deals
were identified

• Immediately researched past deals at WSI & BFI, reported EBITDA, got a sense of
expected margins

• Researched markets, competition, understood better in-house assets values (valuation on

cash flow, but with sanity-check against realizable values was anticipated); obtained
similar-industry multiples
WASTECO’S ACQUISITIONS
OF WSI-BFI ROUTES (CONT’D)
JULY-DEC

• Provided high-level revenue by product line, number of customers, & a few other bits of
“early release” information, on which an initial bid was based….so, vendor gave virtually
nothing, making valuations tougher

• Prepared valuation model with ranges of EBITDA’s and across comparable ranges
based on initial high-level, aggressive assumptions

• Submitted bids per stipulated timeframe on three of six jurisdictions (some Ontario, but
no Alberta…concerned to ”bite off more than could be chewed”)
WASTECO’S ACQUISITIONS OF
WSI-BFI ROUTES (CONT’D)
JULY-DEC

• Selected preferred bidder on two key areas, third if “we wanted” was message from
vendor
– Why selected: Relationship / price premium / Transition Smoothness / Other ???
• Due diligence
– Data room set-up by incumbent visited
– Documents review; quite sparse, no electronic copies available
• Sudden change by Execs in operating model assumptions that would add cost
• Developed DCF based on current, plus new locations, with costs by service line, using
new assumptions in an iterative process as financing was finalized; new assumptions
turned model from a one answering “what will this do to earnings” to one saying
“this is what you need to achieve to ensure deals are accretive”
WASTECO’S ACQUISITIONS
OF WSI-BFI ROUTES (CONT’D)
JULY-DEC
• Close delayed 3 months….par-for-the-course in these deals
– In meantime closed another couple smaller deals
• Co-owner went back to ask for a substitution of customers on the customer list; asked for a price
reduction and got it
• Evaluated staff as to who should be offered a role
• Worked with incumbent’s US IT group to get copy of system
• Routed all calls, working with actual drivers for efficiency
• Closed the deals mid-month, so needed to re-jig how accounting for this would occur….who bills
customer, do we charge each-other back, just start fresh mid-month???
• Lots of pre-close headaches, like licensing trucks, utilities at sites, site remediation from incumbent and
landlord, etc.; Lots of post-close site visits, getting to know team, encouraging non-union approach;
measured expected revenue for earn-out purposes
STAKEHOLDER CONCERNS
NEED TO BE ADDRESSED
• Stakeholders may be more plentiful and unknown to you, exacerbated in the
international arena
Strategy & Structure

38
TODAY’S STRATEGY: “BE ALL
THINGS TO ALL PEOPLE”
• Pressures for Cost Reductions while simultaneously benefitting host countries

• Integration-responsiveness framework
– Allows managers to deal with the pressures for both global
integration and local responsiveness

• Local responsiveness
– Necessity to be responsive to different customer preferences around
the world
FOUR GENERIC GLOBAL
STRATEGIC CHOICES
• Home replication strategy
– Duplicates home country-based competencies in foreign countries

• Localization (multidomestic) strategy

– Focuses on a number of foreign countries/regions, each of which is regarded as a
stand-alone local (domestic) market worthy of significant attention and adaptation
4 GENERIC GLOBAL STRATEGY
CHOICES (CONT’D)
• Global standardization strategy
– Market Focus: Development and distribution of standardized products worldwide
in order to reap the maximum benefits from low cost advantages
– Center of excellence: subsidiary is explicitly recognized as a source of important
capabilities, with the intention that these capabilities be leveraged by and/or
disseminated to other subsidiaries

• Transnational strategy
– Aims to capture the best of both worlds by endeavoring to be both cost efficient
and locally responsive
 STRATEGIC CHOICE DRIVES
STRUCTURAL RAMIFICATIONS IN
GLOBAL SETTING
• Strategy usually drives structure

• As much as strategy drives structure,

structure also drives strategy

• Neither strategies nor structures are

static

• It is often necessary to change

strategy, structure, or both
 STRUCTURING ALTERNATIVES:
INTERNATIONAL DIVISION
Headquarters
• Abandon when diverse
products are too
complex Domestic Division Domestic Division Domestic Division International Division
General Manager General Manager General Manager General Manager
Product Line A Product Line B Product Line C Area Line
• Lack of localization

Functional units
• Can’t utilize economies Country 1 Country 2
and/or knowledge General Manager General Manager
(Product A, B and/or C) (Product A, B and/or C)

Functional units

Courtesy Dr. Nini Yang

 THE INTERNATIONAL
STRUCTURAL STAGES MODEL

Worldwide Global Matrix

Product (“Grid”)
Foreign
Division
Product
Diversity
Alternate Paths of
Development
International Area
Division Division

Foreign Sales as a Percentage of Total Sales

Courtesy Dr. Nini Yang
 STRUCTURING ALTERNATIVES:
WORLDWIDE AREA
Headquarters

Regional VP Regional VP Regional VP

North America Europe Far East

Regional VP Regional VP
Latin American Middle East/Africa

President
President President
President President
President
Subsidiary
Subsidiary Subsidiary
Subsidiary Subsidiary
Subsidiary
11 22 33
STRUCTURING ALTERNATIVES:
WORLDWIDE PRODUCT DIV’N
Headquarters

Worldwide Worldwide Worldwide

Product Group Product Group Product Group
or Division A or Division B or Division C

Area 1 Area 2
(domestic) (international)

Functional units Functional units

 STRUCTURING ALTERNATIVES:
TRANSNATIONAL “WEB”
Po rtu -
El
g al Ec u a d o r
Sa l v a d o r

Nordic
Au s tr ia Canada
Pe ru Ch i l e
Bra z i l

Switz er-
land U.S.A. Bo li v i a

Be lg iu m Ve n e z u
Mexico e l a -l a

U.K.
Arg e n - Co lu m-
Gre e c e
Holland ti n a
Uru g u a y
bia

Ire la n d

Spain So u th
Afri c a
Ke n y a
Eg y p t Za ire
France
Tu n i s i a
L u x e m- Zi mb a -
b u rg b we
Germany Za mb i a

Mo ro c c o

Ni g e ri a Ta n z a n -
ia
Italy

Japan Ba n g l a -
Pa k i s ta n
desh Tu rk e y

In d o n e - Taiwan
s ia Ph i l ip -
In d i a
p in e s
Is ra e l
Au s tra -
li a Ko re a
Ma l a y s i
Ira n
a
Sy ri a
Th a il a n d
Ne w Ho n g Ira q
Ze a l a n d Si n g a - Ko n g
p o re
L eba non

Source: Sumantra Ghoshal & Christopher A. Bartlett, "The multinational corporation as

an international network," Academy of Management Review, 15, 1990, 605.
STRUCTURING ALTERNATIVES:
REAL WORLD PRODUCT LINK
Board of
Management

Domestic Industrial
Informa- Commun-
appliances Consumer Medical & Electric
tion ication Lighting
& personal electronics systems Acoustic
systems systems
care systems

Austria,
United States, Belgium,
United Kingdom, Brazil,
Netherlands, Canada,
France, Italy, Mexico,
e.g., Nordic, Spain
Germany, Japan
Nigeria, Switzerland, "Large
"Key Countries" Tunisia, "Local Taiwan Countries"
Local Peru Business Local Sales
manufacturing
and Sales
Products Coun- Products Some
tries" Manufacturing
World Wide
Sales Some World Wide
Production
Production
Products
INSTITUTIONAL
“INVESTMENTS” SUPPORTED
• Governments have sway of voters and often media, so succumbing to
influence of foreign governments can be seen as “bowing” or as “making an
investment in the future”

• Doing business with your suppliers and allocating “business” to various parties
in a reciprocal informal relationship is the norm at home &
abroad…..sometime the seller, sometime the buyer

• Modern, professional procurement standards are eliminating this at larger,

public entities in Canada, but at smaller ones, it is still the norm as it is abroad
STICKS-N-BOXES:
THE WHO’S
• It’s not what you know…..

• Overseas MNE top-Brass are most often home country people

• No globalization of pay-cheques yet

• Your passport still seems to show your underlying allegiances

• Meeting of the Minds: A movement toward horizontal peer affiliations and away
from the vertical peer affiliations that have characterized people in the years up
to the recent period of globalization…..now, professionals relate to their global
peers first, and their old hockey buddies second…quite an about-face on years of
nationalistic affiliation
ORGANIZATIONAL MODELING
• A first principles approach to organizational structuring typically aligns roles &
competencies to individuals

• Institutional barriers can prohibit the otherwise tacit knowledge from being shared among
locals and expats, turning it into lost opportunity

• Home country senior user access to each MNE’s section of the knowledge network will
help ensure key information is shared and allowed to evolve

• Build-in the formal integrating mechanisms like direct contact, liaison roles, governance
teams, and cultural/bureaucratic pressures, to support the formal delegation/lines of
authority
 GLOBAL KM
• Use of Communities of Practice, enabled by social media, can ensure that
global peers (functional, product, etc.) can stay connected despite choice of
strategy
 PROBLEMS & SOLUTIONS IN
KNOWLEDGE MANAGEMENT
• Absorptive capacity • Social capital
– Ability to recognize value of new – The informal benefits individuals and
information, assimilate it, and apply it organizations derive from their social
structures and networks
• Global virtual team
– Teams that do not meet face to face • Micro-macro link
– The micro, informal interpersonal
relationships among managers of
various units may greatly facilitate
macro, inter-subsidiary cooperation
WHAT IS THE ROLE OF THE
CORPORATE CENTRE?
• Regional head offices are now typical and are the solution to facilitate the
global-local split

• Subsidiary initiative
– When subsidiaries actively pursue their own, subsidiary level strategies and
agendas
 WHO OR WHAT IS THE CHIEF
STRATEGY OFFICER?
• Two dimensions
– Formulation vs. Implementation
– Facilitator vs. Enactor

• Four Roles
– Internal Consultant
– Specialist
– Coach
– Change Agent

© 2012 Courtesy: Taman H. Powell and Duncan N. Angwin, MIT Sloan Management Review
EIU.com: India

56
EIU.COM: INDIA
• Impact of Mother Nature: Good rains mean bigger rural incomes

• Will not support an International Trade Facilitation Agreement (ITFA) unless its concerns
about protecting its food subsidies are addressed
– Subsidies to be capped (by WTO) at 10% of production
– $12B spent on subsidies for inventories transferred to poor areas
– India will be at > 10%

• Only grew by at 4.5% YOY

– Growth “not been one of coherent national expansion—it has been one of scattered tales
of development”

• Dynamics of coalition politics is crucial for an effective institutional framework in the

world’s largest democracy
EIU.COM: INDIA
• Gujarat, Maharashtra, Punjab and Haryana are the Ivy League states
– Former x2 = exports of industrials
– Latter x2 = Bread basket
– Upcomer Karnataka is known for IT hubs

• Since 1996, like in China, the World Bank has targeted certain states (those above) making
them more successful

• BRICS development bank and currency reserve fund  perhaps source and fund new
investments

• Gov’t want to raise money from privatization

• External and internal political realignment (Kashmir and middle east)

Case: Eli Lilly in India:
R e t h i n k i n g t h e J o i n t Ve n t u r e
Strategy

59
CASE: ELI LILLY IN INDIA
Q’S

• Did Eli Lilly pursue the right strategy to enter the Indian market?

• Carefully consider the evolution of the joint venture. Evaluate the three successive IJV leaders -
Identify the unique challenges faced by each.

• How would you assess the overall performance of the JV? What did the partners learn from the
JV?

• What action would you recommend regarding the Ranbaxy partnership? What are the
implications of your recommendation? How would you implement this?
CASE: ELI LILLY IN INDIA
TRIGGER FOR REVIEW

• New Int’l Prez

• Ranbaxy internationalizing & needs $
• Good relations
• What are the options ahead?
– JV still?
– WoS?
– Other
• What assets have been acquired over life of JV?
• Assignment:
– Class split into 3 groups (EL, Ranbaxy, ELR-JV)
CASE: ELI LILLY IN INDIA
QUESTIONS TO PONDER
• Was this JV the best way to get into the Indian market?
– Objectives for the JV
• Evaluate the progress made by the JV

• Critically evaluate each of the JV leaders and their performance/responses

• Evaluate the JV performance as a whole

• What did each JV partner learn from the JV?

• Recommendation regarding the partnership going forward, implications &

implementation steps
CASE: ELI LILLY IN INDIA
EL’S ENTRY TO INDIA STRATEGY
• No FDI allowed @ 100%; only went from 40% • Ranbaxy was ethical & had high standards
to 51% allowed when Singh changed in 1984 • JV allowed for foothold in India, got to know the
• Manufacturing restrictions right associations, gov’t people, trades, legal
• Large country, distribution issues (no central environment, etc.
distributor) – “Learning by being there”
• Unions
• No IP protection (except for process protection
for ~5 years)
• Therefore, a strong, local partner was needed,
like Ranbaxy, leveraging:
– Relationships
– Mfg
– Dist’n
CASE: ELI LILLY IN INDIA
SHAKEOUT PHASE – MANAGING THE CRISIS OF IDENTITY
• Volunteer managers (or assigned against • Integrate all the pieces
their will)
• Creation of separate JV mission
• Allegiances? Old co,’s? JV? Who to – Avoid reversion to old alliances
report to? Who to ask for help?
– Setting of JV goals aligned with, but
independent of, partner goals
• Entrepreneurship
– Andrew Mascarenhas & Raj Gulati • Get it up & running from scratch
did it all from scratch
– How would you feel with Andrew
being offered this role? • Alignment between Andrew & Raj

• Comfort with ambiguity….personal traits • Hiring; small team; 7 days/wk  200 by

‘93
– Comfortable w/ people
– Build a team fast
• Use Ranbaxy’s dist’n network
CASE: ELI LILLY IN INDIA
SHAKEOUT PHASE – MANAGING THE CRISIS OF IDENTITY
• High turnover was an issue

• Avoid Unions

• Promote from within

• Train

• Values of Lilly; Red Book code of ethical conduct  tell MD’s the truth; no bribes
CASE: ELI LILLY IN INDIA
CONSOLIDATION PHASE – MANAGING CRISIS OF CONTROL
• All good • Organizational memory needs to be
reinforced to keep everyone aligned
with the original reason for a JV (lots of
• Chris Shaw (96) other things will have happened at each
– Systems, process, teams, partner in the intervening years)
streamlining sales
– Increased knowledge of salespeople • Parent spends less time on successful JV
– 8 % growth mgmt

• Who caused this success….EL or • Acknowledge each partner

Ranbaxy? Both?

• Questions of why can’t we just go it

alone and reap all the profits?
CASE: ELI LILLY IN INDIA
MATURITY PHASE – MANAGING THE CRISIS OF CONTINUITY & PURPOSE
• 1999, Raj Gulati Returns
• 150 hires, growth plans to $100M
• Set up approval process unit
• Ranbaxy changed ownership, new
CEO, questioned JV
• Continuity & Purpose is questioned
due to growth plans
• Again, go-it-alone, vs. a stronger
commitment
• New JV management needs to know
JV culture, history, biz model
• Knowledge-sharing needs to be
acknowledged
• New mission for JV created?
CASE: ELI LILLY IN INDIA
JV PERFORMANCE ASSESSMENT
• Done well
• 46th largest pharma co.
• Recognized as ethical
• Lilly managed, Ranbaxy in
background
– Got into therapeutic markets
(diabetes/oncology)
– Licensed molecules for value (Ceclor)
– Non-union efficient sales force
– Clinical trials team to int’l standards
– Max. returns
– Great knowledge base and scientific expertise
– Regulatory affairs expertise
– India became source of world-wide talent for
Lilly
CASE: ELI LILLY IN INDIA
WHY SEPARATE?
• Environmental changes in US & India

• New India strategy?

CASE: ELI LILLY IN INDIA
NOW
• 100% WoS allowed

• Buy out Ranbaxy…they were in favour….needed the cash

– Would require renegotiation of dist’n / mfg arrangements
– $ unclear

• Options
1. Status Quo: Ranbaxy is in a hurry and needs cash, so stalling could
hurt long-standing good relations
2. Liquidate: India is growing, so this makes no sense
3. Acquisition: Full or partial; price may be too rich; gain control
• What price?
CASE: ELI LILLY IN INDIA
GAINS ON EITHER SIDE
• Lilly
– Foothold into market
– Learned critical mass
– Learned to operate in low price, volume market
– Source of talent
– Source of best practices

• Ranbaxy
– Promoted company in eyes of global peers
– Gave credibility
– ROI
CASE: ELI LILLY IN INDIA
OPTIONS FOR ELR
Maintai
n Status
Quo

Partial
Liquidate
Options Buy-Out
for JV of
Ranbaxy

Buy-Out
Ranbaxy’
s Stake
CASE: ELI LILLY IN INDIA
WHAT IF ELI LILLY BUYS OUT THE JV?

Potential Potential
Firm
Gains Losses
Lose relationships
Control Lose Manufacturing &
Lilly
Independence Logistical Support
Pricing may be high

Revenue will equate to Cash

Flow Lose the pipeline
Ranbaxy Reallocate Cash to Negative reputation without
International Generics EL
Businesses
CASE: ELI LILLY IN INDIA
YOUR PLAN
• Decision? • JV Structure
• Reason to Revisit JV? • JV Leadership / management
• Implications? • Compare 1990’s vs. 2000’s
• Country concerns – Home and host country
• Partner vs. WoS? environments
• Partner Choice – JV partner strategies
WHAT ARE THE OPTIONS??
Scenarios – 100% buy out
• Status Quo Gains Losses
• Buy out Lilly Complete control Lose a good partner
Lose manufacturing /
• Partial buy out of Ranbaxy
logistics support
• Liquidate High price
Ranbaxy Boost cash flow Lose pipeline of innovative
Invest in other drugs
growing intl Reputation risk
markets (e.g.
generics)

75
CASE: ELI LILLY IN INDIA
WAS INDIA NO LONGER A PLACE TO BE FOR LILLY?
• Per capita income may be an inappropriate measure to use for large market
– Is there a significant segment within this economy to make it worthwhile for our efforts?
• Is that segment growing enough to justify investment?
• Five per cent of one billion (India population) is 50 million.
– (India eventually became one of the largest single markets for Lilly’s cancer drug!)

• Price control is not restricted to developing countries

– Canada, Japan, and several European countries use price control.
– Therefore, adjust strategy to suit to the market.

• IPR — Decision not to enter a market because of its IPR problems does not prevent potential misuse of
your product in the market (Indian patent protection in 2005)
– Choose product portfolio appropriately to capitalize on opportunities and minimize IP risks.
CASE: ELI LILLY IN INDIA
WAS PARTNERING REQUIRED?
• If no institutional requirement for a partner, would you use one?

• Partnerships provide legitimacy in foreign markets and can be a significant way

of overcoming the ‘liability of foreignness’.

• Partnership provides a way of balancing risk and control. If you insist on 100 per
cent control, you also assume 100 per cent risk.
CASE: ELI LILLY IN INDIA
CHOICE OF PARTNER GOOD? ANOTHER “5 C’S” LIST!
• Competence (rather than Convenience) — Two weaks do not make one
strong.
– Does the partner have what is needed to deliver results in this market?
• Complementarity (Resources) — Does the partner fill in the gaps well?
(If we are similar then one of us is not needed)
• Congruence (Goals) — Do our goals mesh well with those of the
partner?
• Compatibility — Do we share similar culture, values and worldview?
• Chemistry — Can I work with my partner?
CASE: ELI LILLY IN INDIA
SHOULD WE PARTNER WITH A FUTURE COMPETITOR?
• Coexistence of competition and cooperation is common in most settings
– The Olympic hockey team made up of NHL competitors

• Coexistence of competitors has evolved to co-epetition

• Don’t rule out a potential collaboration just because they compete with
you in an area
– But, it may be necessary to draw appropriate boundaries
TEMPLATES
BUILD PERFORMANCE SCENARIOS

Performance
What went right
scenario (good)
Partnership
Performance What went
scenario 2 (bad) wrong

Tips: Discuss with internal cross-functional stakeholder. Create

different performance scenarios, brainstorm what factors drive
success versus failure.
This helps you determine the partner you have chosen can take
you towards the “success” path
80
TEMPLATES
YOUR BUSINESS OBJECTIVES
Prioritized objectives Description
Primary / Main

Others
1.
2.
3

Tips: Executives need to determine on THE MOST important

business objective and other priorities. Senior team must be
aligned
81
TEMPLATES
SET YOUR CRITERIA – KNOW WHAT YOU NEED AND THE PARTNER YOU WANT TO
WORK WITH
Criteria Description (Examples) Why it is important

Must Haves… System: Technology Competence Align criteria with objectives

Culture: Flexibility

Should haves Process: Distribution Transparency

Nice to haves… Customers: New Market Coverage

Consensus culture

Must NOT haves People: Knowledge

Tips: Identify a cross-functional team of stakeholders, facilitate a

brainstorming session to set criteria based on your objectives. Be
Free – soft or hard criteria.
82
TEMPLATES
FIT ASSESSMENT – DUE DILIGENCE
Criteria Examples

Strategic Fit Complementary strengths / capabilities

Strategic Vision / Market Aspiration
Market coverage
Operational Fit Processes
Systems
Labour
Cultural Fit Organizational Structure
Governance / decision making process
“Personality”

83
TEMPLATES
EVALUATE
Criteria Weight Score

Total X / 100

Tips: Scores are just means to get to a recommendation. Scores

cannot capture all the nuances of selecting a partner. Discussion
is important.
84
CASE: ELI LILLY IN INDIA
WHAT ABOUT THE STRUCTURE OF THE JV?
• Typical notion: 50-50 are hard to manage and 51-49 is easy to manage
– Actually, often overpay for a mere 1% control that doesn’t prove useful in
driving your agenda
– 50-50 also provides a good balance of control and risk.

• 50-50 forces collaboration and provides opportunity for creating value through
effective combination of capabilities.
• 51-49 may position you in a structurally advantageous way — but there is no
empirical evidence that 51-49 provides an easier alternative than 50-50.
– As a senior executive commented stated: “The moment you exercise your
CASE: ELI LILLY IN INDIA
EVOLUTION OF A JV

• Crisis of identity  Shakeout phase

• Crisis of control  Consolidation phase

• Crisis of continuity & purpose  Maturity phase

CASE: ELI LILLY IN INDIA
REQUIRED G.M. CHARACTERISTICS, ROLES & FUNCTIONS

• Entrepreneur, ambiguity-tolerant
Shakeout • Fxn: Communicate goals

• Mediator, implementer
Consolidation • Fxn: Set metrics

• Strategist, internal sales rep

Maturity • Fxn: Ensure learnings are understood
CASE: ELI LILLY IN INDIA
WHAT HAPPENED?
• On July 4, 2001, Eli Lilly bought the 50 per cent stake owned by Ranbaxy Laboratories in the
joint venture Eli Lilly Ranbaxy for $17 million.
• The deal included the brand name and shares, which would be transferred to Eli Lilly in
August’01
• Rajiv Gulati continued as managing director of Eli Lilly (India operations).
• EL had no plans to set up its own manufacturing base in the country. Ranbaxy would continue to
be a supplier to Eli Lilly and the company was also open to the idea of broad-basing the
relationship further with its former partner
• As of 2006, Lilly had several strategic alliances in India for clinical trials, and biotech research,
including an ongoing manufacturing alliance w/ Ranbaxy. Several of the senior executives who
worked at Lilly during the case had moved on to higher positions within Lilly. Chris Shaw moved
to China as the head of Chinese operations, and several other executives for overseas positions
were drawn from the Indian subsidiary. Rajiv Gulati was promoted to director, India/China
CASE LEARNING POINTS:
ELI LILLY IN INDIA
• Firm-level strategy and institutional environment impact a firm’s international strategic choices

• JV’s have a natural lifecycle and consideration of their wind-up and “life after the JV” needs to
be done to realize maximum value for both (all) JV members

• A local partner is an ideal way for a globalizing MNE to enter a market for which they have a
unique product proposition, but very little knowledge

• A host partner can gain much learning, marketing support, access to potential licenses, etc. by
pairing-up with a global entity – ultimately leading to becoming a competitor
CASE LEARNING POINTS:
ELI LILLY IN INDIA (CONT’D)
• Partnerships & alliances of all types go through a crisis mode at which time the participant
firms and respective people challenge the need to continue the alliance

• Making alliances work requires truthfulness and transparency on the part of the partners, with a
moderately-even splitting of the windfalls
LEARNING ACCOMPLISHMENTS
• Understood the spectrum of international market alliances

• Comprehended the concept of real options as it relates to international business opportunities

for growth

• Appreciated how mergers and acquisitions can used and implemented as an effective
internationalization strategy

• Reviewed international organizational structure alternatives and rationale

• Reviewed the roles of the corporate centre and Chief Strategy Officer in international business

• Comprehended the decision-making process complexities in a joint venture dissolution case

situation
NEXT CLASS
• Topic
– Global Functional Strategies
– Outsourcing Strategy

• Spotlight
– Russia, Estonia, Finland & Sweden

• Text
– Chapters 14-15

• Case
–You
Tallink: Connecting
can reach Estonia
me at Fongo to Finland,
(289) 644-4199 or Sweden and Russia (Ivey,
jan.klakurka@rotman.utoronto.ca at
9B05E016) your convenience. Don’t hesitate to reach-out to me.
THANKS!