Creating global strategic alliances and managing joint ventures 4 Lecture 4 Creating global strategic alliances and managing joint ventures Copyright © 2015 Karol Pelc; Copyright © 2011 McGraw-Hill Irwin

Initial questions: Is collaboration between companies better than competition? Why or why not, when? 2. What types of business collaboration arrangements are you familiar with? Give examples. 3. Why did strategic alliances become important in the global business environment? 4. What are the factors and conditions influencing stability of strategic alliances?

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

Modes of investment Four forms/modes of investment in commercial interactions and their outcomes:

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

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

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

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

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

…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

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.

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.

Objective Reality (cont’d) Some companies which possess strong technology often prefer to use JVs. (i.e., Japanese firms with a Kyosei - group coordination - philosophy) The days of government regulation forcing the use of JVs are behind us.

KYOSEI – THE JAPANESE CORPORATE RESPONSIBILITY CONCEPT Kyosei means “cooperative living” or “symbiosis.” Ryazaburo Kaku, Chairman of Canon, Inc.: “Kyosei means a ‘spirit of cooperation,’ in which individuals and organizations live and work together for the common good. A company that is practicing kyosei establishes harmonious relations with its customers, its suppliers, its competitors, the governments with which it deals, and the natural environment.” Concept of kyosei has been introduced into Canon, Inc. corporate structure since 1987. R. Kaku noted that the early roots of kyosei applied to corporate life can be traced to the early 17th century set of business guidelines in Tokugawa era, formulated by the Confucian scholar Seika Fujiwara (1561 – 1619). SOURCE: Kaku, R., The path of kyosei, Harvard Business Review, July – August 1997, p. 59.

Example of international JV Parent companies: General Motors Company (GM) , U.S.A. Shanghai Automotive Industry Corporation (SAIC), China Joint Venture (since 1997): Shanghai General Motors Company (Shanghai GM), China Original Investment 50%/50% , total assets value $1.4 billion Since 2009: GM 49%/SAIC 51%, total assets value $8.5 billion. Revenue in 2009: $ 17 billion Profit in 2009: over $1 billion Sales in 2011: over 1,200,350 passenger cars

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.

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?

What Do You Want From Your Partner? ACCESS OR ACQUISITION OF KNOWLEDGE

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

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.

Scope of Activity

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

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

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

Joint Venture Checklist (cont’d) Doing the deal. How much paperwork is enough? Trust versus legal considerations? Agree on an endgame.

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.

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

SUMMARY Modes of investment and forms of strategic alliances Evolution of approach to strategic alliances during the last 50 years. 3. Checklist for creating, developing and maintaining a Joint Venture (JV) 4. Selection of partners for a Joint Venture 5. Modes of control in a Joint Venture