Joint Ventures: How they work?

Lecture 6

What is Joint Venture

Joint venture is a separate business entity such that:
Participants (generally two) continue as separate firms May be organized as partnership, corporation, or any other form of business Limited scope and duration Involve only small fraction of participants' total activities Each participant offers something of value (equity, technology, expertise, etc.) No sharing of assets/information beyond venture Need not affect competitive relationships Low risk

Background
Sea explorations in 1960s and 1970s for minerals
By 1980 all of these independent efforts were reduced to five major joint ventures US steel, INCO, Lockheed, Kennecott were US based One was an all French JV Due to technical, economical, and political risks involved, JV was the only way

JVs...where?
Land development and construction Oil and gas pharmaceutical

Design and management of joint ventures

Managers often regard JVs as:
Losing proportions Too complex Too ambiguous Too inflexible

However, they must accept and learn to work with joint ventures as:
The project gets larger Technology becomes expensive Costs of failure becomes huge to be borne alone Nationalist governments such as India and Mexico are demanding that JVs replace autonomous corporate subsidiaries

Some Statistics on JVs

JVs have a high overall failure rate and some are very costly for the partner companies A study by Boston Consulting Group found:
More than 90 ventures in Japan failed between 1972 and 1976. These large ventures involved prominent US companies such as Avis, Sterling Drug, General Mills, TRW.

A Harvard business school study found:

30% of 1100 joint ventures formed before 1967 between major US companies and partners in other developed countries proved unstable These ventures were either liquidated or taken over by one partner

In another Harvard business school study of 37 JVs:

7 collapsed 5 were drastically re-organized Majority of these ventures were run by US or western European companies and all included a local partner

Challenges in JVs
Double parenting
There is more than one parent (owner) They can and will disagree on anything and everything
How fast the joint venture grow? Which products and markets to encompass? How should it be organized? What constitutes a good or bad management?

Specifically this last issue is problematic when one partner believes short term performance and other wants to go after long term goals Since board consists of members from both parents, Board level differences also emerge Straight forward decisions become long and complex

Challenges in JVs
Dominant parent vs. shared management Dominant parent enterprise
Managed by one parent Dominant parent selects all functional managers for the enterprise Board, consists of members from both, plays a ceremonial role Dominant parents executives make all decisions dominant parent is the choice:
If a partner is chosen for reasons other than managerial input, (e.g. Finance, resources, patents, large consumer) Pressure from a host government (e.g. India) Foreign companies try to find passive partner/investor, no knowledge of product, neither a government agency nor controlled by the government Passive partner must trust dominants competent and honesty

Challenges in JVs
Dominant parent vs. shared management Shared management enterprise
Both parents manage the enterprise Both parents contribute functional managers for the enterprise Board, consists of members from both, has a real decision making role Most common in manufacturing where one may supply technology and the other knowledge of local market General managers can play a vital role if given autonomy Deteriorating performance obliges both parents to be more involved in the details of venture Triggers a situation which can throw entire system out of equilibrium

Challenges in JVs
Ownership and Dominance
Ownership and dominance do not necessarily go hand in hand The parent with 24% shares can be exclusive manager (e.g. Indian policy) One parent dominated four other ventures despite these were 50-50 deals Managers point of view:
Ownership makes little difference to a manger in shared venture (50-50) deal Its managers responsibility to ensure a fair decision in 51-49 shared management venture.

Challenges in JVs
Staffing a venture
Particularly when functional managers are contributed by both parents Communication problems arise due to
Language barriers Attitude towards time Importance of job performance Material wealth Desirability of change

Problem between partners from developing and developed countries American-Iranian venture: American couldnt adapt to dealing with workforce that had on average 3-grade education, Americans were sent home, Iranian managers were given training in America and given managerial positions and performance improved. Differences in corporate background show up in a number of ways:
Hierarchy, bureaucracy, decision making (board vs. Functional managers)

Preventing failure
Recognizing the different types is a key to prevention If one parents operational skills are unnecessary to the success of a joint venture, the other parent should oversee the venture
If forced by local government to choose a partner then look for a passive partner

If both parents skill are necessary for successful joint venture but one parents skill can be transferred on a one-time basis, the other parent should dominate
If foreign partner has great technical skills in a slowly changing area, it should transfer the skills to the venture and allow the local partner to make key decisions

If the skills of both parents are crucial to the success of the venture, a shared management joint venture is appropriate
Though decision making will be slow, however will result into better decisions For the sake of efficiency, choose a company with complimentary expertise, given JV manager increased autonomy, and board is involved only when necessary.

Why joint ventures

Enter into new markets
Traditionally pursued as a means to expand into new businesses e.g. NTT Docomo

Exit from existing markets

Phillips, IBM, Honeywell, Dresser have used jint ventures to exit from non-core businesses

Phillips-Whirlpool
Dutch electronics multinational reorganize its portfolio in 1980s Identified its $1.55b major domestic appliances division not essential to its future Division was supporting nine different brands Had following problems:
Sales and distribution was not co-ordinated across countries or brands Production was spread haphazardly spread across ten plants in five countries Plants also needed huge capital investment to develop them into world class facilities 14000 employees protected by European legislation on job security

Due to these problems, selling the division would only bring Phillips a firesale price The division had valuable assets (manufacturing skills though underutilized, Europes best known brand, design expertise, pan-European distribution network, number 2 in European market) Suffered with scarce management and corporate cash

Phillips-Whirlpool
Whirlpool was the obvious buyer looking for expansion beyond US border Benefits of inheriting a major share in European market Whirlpool could alter cost structure if it sourced components globally Can co-ordinate production, sales, and distribution across countries and product lines Can invest in new plants and machinery and transfer its advanced manufacturing processes to European operations However, they were less convinced about the potential of the business
How strong was the franchise behind the nine brands? Would the dealers remain loyal? How much time it will take to transform a inefficient unit into an efficient one?

Phillips-Whirlpool
Both parties couldnt agree on a suitable price Joint venture offered a solution Phillips offered Whirlpool 53% of its appliances business for $381m along-with an option to buy 47% within three years Whirlpool found the opportunity attractive since:
Learning opportunity about the appliance division to initiate improvement before taking over

Opportunity for Phillips to prove to Whirlpool that business was valuable

Phillips-Whirlpool
Whirlpool moved in fast
Imported technology from its other operations developed common platforms standardized components across factories reduced inventory by one-third found common suppliers reduced actual suppliers to half initiated pan-European advertising integrated sales operations across Europe retained best talent in appliances division

Employees remained motivated and customers and dealers remained loyal Venture transformed business into a vibrant and profitable operation

Philips-Whirlpool
Whirlpool also benefited from Philips involvement in marketing decisions Philips also shared its support systems e.g. IT For sometime, Whirlpool products were double branded as Philips-Whirlpool Allowing Whirlpool to cash on the well recognized Philips brand in European markets Finally..............

Whirlpool exercised its option in 1991 and purchased 47% of remaining shares for $610m Philips exited the business smoothly and that too on more favourable terms The total valuation of sale previously was $270m

NTT Docomo-TATA
NTT Docomo - Introduction
NTT established in 1952 by Japanese government to to rebuild countrys war raveged phone system In 1985, privatized to to promote competition in telecom industry In 1992, NTT docomo was formed as a sequel of NTTs mobile network to further reduce NTTs monopoly NTT docomo became a subsidiary of NTT (61.6% shares) By 1996, docomo reached subscriber base of 5m By Feb 2002, the number reached to 40m subscribers In March 2008, Docomo was leading with 52% market share, revenues of $47.2b, subscriber base of 53.4m 17th positio in golbal mobile network operators Listed on Tokyo, London, and Newyork stock exchanges

NTT Docomo-TATA
NTT Docomo - Growth
Technology was a major factor in growth In 1999, docomo launched I-mode: mobile phone with internet connection I-mode was targeted at women in their 20s and offered shopping sites, horoscopes, ring tones downloads, easy mail capabilities etc. I-mode brought revolution in industry across the world that consisted of operators and vendors only (bringing IT and content providers on board) In October 2001, expanded I-mode by launching worlds first fully commercialized 3-G service FOMA freedom of mobile multimedia access Docomo took FOMA to mass market in Japan By 2005, 3G was a common channel of communication in Japan

NTT Docomo -TATA

NTT Docomo core competency
Executives at Docomo were skilled at managing growth Volume-led growth was replaced with value-led growth strategy Value-led growth linked voice communication business with data communications business Catered the Japanese psyche by introducing small, simple, clean, and convenient gadgets A device that was a cell phone + internet device + mini-computer was an instant hit They captured market as they were first movers The network quality was super: no blind spot, no call drops, excellent voice quality Built a network of alliances with vendors, customers, franchises, banks, retailers, and content providers Thus their core competency was their ability to manage and sustain relationships

NTT Docomo -TATA

NTT docomo Expansion
I-mode provided them the basic platform to go beyond domestic market for two reasons:
Domestic users would be able to use their I-mode phones when they go abroad People around the world will be able to use services provided by companys local franchises

They started portfolio investments in global telecom markets between 1999-2001 This strategy was unsuccessful and by 2002 they retreated

NTT Docomo -TATA

NTT docomo Expansion
Learning from it, they decided to acquire subsidiaries in those markets Companies in Asia-pacific regions were planning to introduce advanced mobile networks, that was Docomos strength Their strategy was:
Target country has a strong GDP growth Acquisition price is not too high, rather consistent with industry norm Target country should also provide opportunities for 3G Docomo will not make hostile takeover, rather would manage Asian operators in old-fashioned way (i.e. Capital and technology)

NTT Docomo -TATA

India
In 2008, India had 261m wireless subscribers who were serviced by 12 mobile telecom companies With a population of 1.2b, India was the second largest market for various goods and services India had overtaken US as second largest wireless market in the world after China Indias mobile user pool reach 737m by 2012 Indian government pursuing liberal economic policies particularly in IT and telecom however entry was not possible without a local partner Foreign company was allowed to hold up to 74% however, CEO, MD, and majority of board members had to be Indians The only possibility was a JV

NTT Docomo -TATA

TATA
TATA was in seven broad business segments, 98 companies of which 5 in telecom sector, 357000 employees, $58b revenues in 2008, 65% revenues coming from global operations TTSL was part of TATA group and ranked 5th largest mobile operator with a 9.3% market share TTSL has a pan-Indian licence for GSM and was planning to bid for 3G to be auctioned by Govt. in 2009 TTSL had a retail chain of 3500 stores and service outlets Strategy aimed at brand building, innovation, and subscriber growth TTSL had 24.3m mobile subscribers (target 100m by 2011) TTSL was looking for an overseas partner for technology and capital TTSL was an unlisted company, financials were not available in public domain General understanding was that company was not yet profitale

Docomo found TATA

A company with a very strong core, a very strong centre

NTT Docomo -TATA

Issues in the proposed JV
Equity stake
80% shares of TTSL owned by TATA TATA will divest 20% shares for Docomo and create additional 6% to be issued to Docomo Is 26% appropriate stake? TTSL not a listed company so its worth is unknown Docomo is paying $2.7b for 26% stake cost per subscriber coming to $427. the standard cost is $711. Is the deal fair for Docomo 3G BSNL and MSNL (govt sector companies) already providing 3G in 380 cities TTSL would be a major participant in the 3G auction The issue is knowledge management since India did not have a intellectual property regimen With 26% stake, Docomo would minimize its involvement in management Innovation would come from Docomo such as 3G, international business, technology, and capital Veto rights will be a protection for Docomo Would TTSL agree to it? Key positions to be filled in by Docomo

Purchase price

Technology transfer

Veto rights

Staffing