Presentation on theme: "The Design and Management of International Joint Ventures"— Presentation transcript:
1 The Design and Management of International Joint Ventures Chapter 6: Engaging in Cross- Border Collaboration Managing across Corporate BoundariesandReading 6-1:The Design and Managementof International Joint Ventures
2 What is a Strategic Alliance? A formal and mutually agreed commercial collaboration between companiesThe partners pool, exchange or integrate specific business resourcesYet they remain separate businesses, making alliances distinct from mergers and acquisitions
3 Strategic Alliances One of innumerable forms of commercial interaction One of four forms/modes of investment
4 Range of Strategic Alliances Joint Venture(Equity Participation)HighCo-production/BuybackR & DConsortiaCrossLicensingLevel of InteractionFranchisingStrategicAlliancesPatentLicensingCooperationAgreementLowCompetitionCooperationType of Arrangement
5 In the 1960s and 1970s Alliances were Primarily used in Peripheral Markets and Technologies CriticalMarketsTechnologiesAllianceAlliance Frontier
6 In the 1980s the Alliance Frontier Moved to Encompass More Important Markets and Technologies CriticalPeripheralAllianceCriticalAlliance FrontierTechnologiesExamplesFord - MazdaPhilips - SiemensRolls Royce +JapanesePeripheral
7 In the 1990s New Alliance Frontiers were Crossed EquityNonDuration of AgreementLong or UnspecifiedShortOwnershipAlliance Frontier
8 And Now We Are In The Age of International + Alliance Capitalism… StrategicAllianceEmphasisGeographic ScopeEquity JVNon-EquityDo ItYourselfDomesticRegionalInternationalTIME
9 …Where Alliances are Occurring Between Entrepreneurial Start-ups and Large Firms, and Speed of Establishment is IncreasingEntrepreneurialFirmsLargeTime-FrameYearsMonthsLinkages BetweenAlliance Frontier
10 Popular View Says JVs are: A transitional organization form.Less profitable.Impossible to manage.A sure way to lose one’s technology.Only undertaken as a last resort.
11 Why Strategic Alliances Technology ExchangeGlobal CompetitionIndustry ConvergenceEconomies of ScaleReduction of RiskAlliances as an Alternative to Mergers
12 Objective RealityAverage age of international JVs nearly 10 years (similar to greenfield startups; longer than acquisitions).Profitability identical with other organizational alternatives.Managing has become easier, so usage up. 40% of all investments in Asia Pacific are JVs.
13 Objective Reality (cont’d) Some companies which possess strong technology often prefer to use JVs. (i.e., Japanese firms with a Kyousei - group coordination - philosophy)The days of government regulation forcing the use of JVs are behind us.
14 Effect of Foreign Equity Holding on Subsidiary Mortality Risk? Stability Similar to Wholly-owned Subsidiaries Except with Small Equity Holdings4:13:1Mortality Risk2:11:120406080100Foreign equity in the subsidiary (%)1:1 = equivalent to wholly owned subsidiarySource: Dhanaraj, Charles and Paul W. Beamish, “Effect of Equity Ownership on the Survivalof International Joint Ventures”, Strategic Management Journal, 25(3):
15 Strategic Alliance Advantages and Disadvantages On the PLUS side….Reduce costs & risksGain access to complimentary assets and new marketsOpportunities to learn from partnerPossibilities to use alliances and networks as an operational (real) option rather than a financial option.On the DOWN side…Risk of choosing the wrong partnerCosts of negotiation, coordinationPartner opportunismLearning race (tacit vs. explicit knowledge)
16 Selection: Resource Based Considerations VALUE: The creation of value means generating economies of scale for cost reduction, or complimentary skills for tapping new opportunities.Alliances might reduce costs, risks and uncertainties.Alliances allow partners to tap into complimentary assets.Alliances facilitate opportunities to learn.RARITY: Good alliances represent unique situations.Capability rarity.Partner rarity & First Mover AdvantageIMITIBILITY: The alliance’s benefits to the partners should be hard for others to imitate.At the firm level (ex. McDonalds in Moscow).At the alliance level.ORGANIZATION: Do the alliance partners provide resources to manage the partnership?
17 Joint Venture Checklist Test the strategic logic.Do you really need a partner? For how long? Does your partner?How big is the payoff for both parties? How likely is success?Is a joint venture the best option?Ensure congruent performance measures exist.
18 Joint Venture Checklist (cont’d) Partnership and fit.Does the partner share your objectives for the venture?Does the partner have the necessary skills and resources? Will you get access to them?Will you be compatible?Can you arrange an “engagement period”?Is there a comfort versus competence trade-off?
20 Partner Selection: Comfort vs. Competence LowerHigherPartner CompetencePartnerComfort
21 Joint Venture Checklist (cont’d) Shape and design.Define the venture’s scope of activity and its strategic freedom vis-à-vis its parents.Lay out each parent’s duties and payoffs to create a win-win situation. Ensure that there are comparable contributions over time.Establish the managerial role of each partner.
23 Control in Joint Ventures Two types:One parent dominates the venture’s decision making (…but is this a “joint” venture?)Parents are both involved in decision makingsharedsplit
24 Shared Control A B R&D OPS FIN MKT JV Board of Directors Parent A Parent BR&DOPSFINMKT
25 Split Control A B R&D OPS FIN MKT JV Board of Directors Parent A Parent BR&DOPSFINMKT
26 Limiting Opportunism: Contracts Vs. Trust Contractual controls limit opportunism by specifying the exact role and performance criteria of the strategic partners. GOOD FOR SITUATIONS REQUIRING ECONOMIES OF SCALE.Trust takes longer, relationships and informal interdependence. GOOD FOR SITUATIONS REQUIRING FLEXIBILITY AND TAKING ADVANTAGE OF UNFOLDING OPPORTUNITIES.
27 Joint Venture Checklist (cont’d) Doing the deal.How much paperwork is enough? Trust versus legal considerations?Agree on an endgame.
28 Joint Venture Checklist (cont’d) Making the venture work.Give the venture continuing top management attention.Manage cultural differences.Watch out for inequities.Be flexible.
29 In Summary, a True Alliance Differs from a Pseudo Alliance The True AllianceThe Pseudo AlliancePlanned level ofparent input andinvolvementContinuingOne-timeDistribution ofrisks/rewardsRoughly evenUnevenParent attitudetoward the JVA unique organizationwith unique needsOne moresubsidiaryThe formal agreementFlexibleguidelineFrequentlyreferenced rulebookPerformanceobjectivesClearly specifiedand congruentPartially overlapping/ambiguous