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The Design and Management of International Joint Ventures

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1 The Design and Management of International Joint Ventures
Chapter 6: Engaging in Cross- Border Collaboration Managing across Corporate Boundaries and Reading 6-1: The Design and Management of International Joint Ventures

2 What is a Strategic Alliance?
A formal and mutually agreed commercial collaboration between companies The partners pool, exchange or integrate specific business resources Yet 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) High Co-production/ Buyback R & D Consortia Cross Licensing Level of Interaction Franchising Strategic Alliances Patent Licensing Cooperation Agreement Low Competition Cooperation Type of Arrangement

5 In the 1960s and 1970s Alliances were Primarily used in Peripheral Markets and Technologies
Critical Markets Technologies Alliance Alliance Frontier

6 In the 1980s the Alliance Frontier Moved to Encompass More Important Markets and Technologies
Critical Peripheral Alliance Critical Alliance Frontier Technologies Examples Ford - Mazda Philips - Siemens Rolls Royce + Japanese Peripheral

7 In the 1990s New Alliance Frontiers were Crossed
Equity Non Duration of Agreement Long or Unspecified Short Ownership Alliance Frontier

8 And Now We Are In The Age of International + Alliance Capitalism…
Strategic Alliance Emphasis Geographic Scope Equity JV Non-Equity Do It Yourself Domestic Regional International TIME

9 …Where Alliances are Occurring Between Entrepreneurial Start-ups and Large Firms, and Speed of Establishment is Increasing Entrepreneurial Firms Large Time-Frame Years Months Linkages Between Alliance 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 Exchange Global Competition Industry Convergence Economies of Scale Reduction of Risk Alliances as an Alternative to Mergers

12 Objective Reality Average 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 Holdings 4:1 3:1 Mortality Risk 2:1 1:1 20 40 60 80 100 Foreign equity in the subsidiary (%) 1:1 = equivalent to wholly owned subsidiary Source: Dhanaraj, Charles and Paul W. Beamish, “Effect of Equity Ownership on the Survival of International Joint Ventures”, Strategic Management Journal, 25(3):

15 Strategic Alliance Advantages and Disadvantages
On the PLUS side…. Reduce costs & risks Gain access to complimentary assets and new markets Opportunities to learn from partner Possibilities to use alliances and networks as an operational (real) option rather than a financial option. On the DOWN side… Risk of choosing the wrong partner Costs of negotiation, coordination Partner opportunism Learning 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 Advantage IMITIBILITY: 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?

19 What Do You Want From Your Partner?

20 Partner Selection: Comfort vs. Competence
Lower Higher Partner Competence Partner Comfort

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.

22 Scope of Activity

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 making shared split

24 Shared Control A B R&D OPS FIN MKT JV Board of Directors Parent A

25 Split Control A B R&D OPS FIN MKT JV Board of Directors Parent A

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 Alliance The Pseudo Alliance Planned level of parent input and involvement Continuing One-time Distribution of risks/rewards Roughly even Uneven Parent attitude toward the JV A unique organization with unique needs One more subsidiary The formal agreement Flexible guideline Frequently referenced rulebook Performance objectives Clearly specified and congruent Partially overlapping/ ambiguous

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