International Joint Ventures: Strategy and Operation

Lisa Smirnova

Lisa Consulting

International Strategic Choice

Creating a new, wholly -owned subsidiary Acquiring an on-going company Licensing Contracts Distribution, sales and other agreements Franchising Joint Ventures or other form of alliance

Strategic Alliances and Joint Ventures

  • Strategic Alliance - term given to the relationship between two or more firms working together for mutual strategic Benefit
  • Joint Venture - Two or more firms working together but with a more formalized contract or agreement.
  • International Joint Venture - one or more of the parent organizations has HQ outside the JVs country of operation, or if the JV has significant levels of operations in more than one country.

Growth of Joint Ventures

  • Historically business against shared ownership
  • Rapid growth in 1980s
  • Host government regulations
  • Increasing costs and risk

Joint Ventures

Advantages

  • quick market entry
  • spread of risk and costs
  • pool talents
  • save on scarce resources

Why Strategic Alliances?

Technology Exchange Drivers

  • Rising R&D costs
  • Shortening product cycles
  • Interdisciplinary and inter-industry advances
  • Inadequate internal resources

Global Competition Drivers

  • Coalitions to fight market leaders
  • Dual challenge of competing in global markets while competing versus local competition

Why Strategic Alliances?

Industry Convergence Drivers

  • Convergence of diverse basic technologies e.g. bio-electronic technology, advanced materials, Telecoms.
  • Need to develop complex and interdisciplinary skills necessary in competitive time frame
  • Build market entry barriers by building complex integrated value chains

Why Strategic Alliances?

Economies of Scale and Risk Reduction

  • Pooling of resources and activity concentration can raise the scale of activities or learning rate
  • Sharing and leveraging of specific strengths and capabilities of participating companies
  • Trading of different and complementary resources results in mutual gains and saves on costs of duplication
  • Cost sharing and risk-hedging of joint costs of R&D, personnel and capital
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Some Facts

  • Nearly 15% of sales revenue generated by top 1,000 U.S. firms comes from joint ventures and other alliances--a fourfold increase since 1987
  • Average return on investment in alliances is 16%, more than on other activities
  • 25 most active alliance users earn 17.2%
  • 1997: 60% of top 1,000 U.S. CEOs favorable to alliances (c.f. 20% in 1992)
  • Failure rate about 60% (Hall 1989)

Joint Venture Strategic and Organizational Complexity Costs

  • Additional costs of managing strategic and organizational complexity
  • Costs of combining different administrative heritages, cultures, strategic mentalities and management practices
  • Additional costs of expanded scope of activities
  • Additional complexity due to growing environmental uncertainties

Important Factors

Ditta (1988), Pekar (1989)

  • Assessing strategic need to enter IJVs
  • Initial research and partner selection
  • Forming the IJV
  • Implementation
  • Operation and control

Assessing Strategy

Type of organization and objectives, payoff requirements

Stakeholder attitudes

Environmental forces - Economic, Political and Socio-Cultural

Type of partnership - Dominant parent, Shared parent or independent

Assessment of IJV benefits, is it the best option?

Partner Selection

Can be costly and time-consuming but vital for functioning of IJV.

Local research

  • Getting to know people involved
  • What the partner wants from the arrangement
  • Do they have necessary skills, resources, etc.
  • Potential cultural problems

Forming the IJV

IJV agreement -

Content and structure, scope of venture

Legal aspects and trust

Operational parameters, partner involvement

Exiting the agreement

Implementation plan

Implementation and Operation

Funding Timescales Effects of -

  • Cultural differences
  • Differences in management styles
  • Differences in management perceptions
  • Differences in organizational systems

Getting top management attention

Flexibility

Three Alternatives forManaging IJVs

  • Shared management
  • Assigned Arrangement
  • Delegated Arrangement

In any case, managing an IJV calls for different skills than in managing a subsidiary

Management Alternatives for Alliances

Shared management

  • alliance managers have limited authority
  • requires high coordination
  • most difficult to maintain

Management Alternatives for Alliances

Assigned Arrangement

  • one partner assumes leadership role
  • can create conflict if seen as domineering

Management Alternatives for Alliances

Delegated Arrangement (Joint Venture only)

  • partners delegate responsibility to j.v. executives (e.g. Beijing Jeep)

Important Factors for Successful Ventures

  • Good communications at all levels
  • Understanding of cultural differences
  • Senior management commitment vital
  • Minimizing conflicts in procedures and systems
  • Early agreement on sharing of responsibilities and control

Some HR Management Issues

  • Need for a HRM policy
  • Communicating the nature and importance of the venture
  • Policies for the transfer of staff to aid technology transfer
  • Overcoming cultural differences
  • Management development and organizational learning strategies

HR Management Problems in Sino-Foreign Joint Ventures

  • Retaining ‘old’ culture
  • Staff recruitment
  • Shortage of managerial and technical talent
  • Flexibility of work and working practices
  • Remuneration and benefits
  • Labor Discipline

HR Management Problems in Sino-Foreign Joint Ventures - 2

  • HR development and training
  • Managing expatriates
  • Cultural differences
  • others?

Typical Cultural Problems in IJVs

  • Decision making and structural priorities (hierarchies v flexible team structures).
  • Conflicts in management style
  • Communications systems
  • Behavioral differences - reward and punishment
  • Assessment of success/failure
  • Temporal issues

Strategic Alliances: Pitfalls

Incompatibility of partners

  • corporate culture
  • national culture
  • goals and objectives

Disagreement over distribution of earnings

Potential loss of autonomy

Examples of Alliances

Asahi Glass joined its television bulb technology with Corning's television glass

  • Asahi had strength in large size; Corning in all other sizes
  • Corning's way into supply of Japanese electronics producers in U.S.

    • Asahi wanted into U.S. market

  • Save on R&D expenditures/monitoring
  • Already had joint venture since 1965
  • 50% of Corning profits from alliances

Corning Philosophy: Strategic Alliances

  • Know your partner
  • Only partner where corporate cultures are compatible
  • Only form alliances around real business opportunity
  • Alliance must provide real career opportunities for managers
  • Alliance opportunity must be definable so management can set practical goals.

Corning Philosophy: Strategic Alliances - 2

  • Parents make equal contributions of knowledge, skills, capabilities
  • Parents must be of comparable size
  • Don’t choose startup as alliance partner
  • Don’t interfere with alliance management once it is launched
  • Parents must continue to build relationship
  • Only partner with people you trust

Kodak

Kodak, Fuji and 3 Japanese Camera Firms

  • $1 billion over 10 years to jointly develop new film

Rationale:

  • if excluded Fuji could adopt new standard cf. VHS and Betamax

TI/Hitachi

Texas Instruments and Hitachi

  • goal: produce 16 megabit chip
  • alliance (one of several with same company)
  • TI gave 64 and 256 kb technology to Hitachi
  • Hitachi shared manufacturing know-how
  • re-labeled each other's chips for resale
  • jointly conducted research

Pepsi in Russia

  • Early entry - 1970s
  • Good relationships with government
  • Strong mechanisms for technology transfer including quality control
  • Countertrade basis
  • Success of venture paved way for other PepsiCo products - e.g. Pizza Hut

Wood Group in Thailand

  • Joint venture with old-established customer
  • Technology transfer agreement and strategy
  • Confidence despite downturn in Thai economy
  • Good interpersonal relationships

Pilkington Glass in Poland

  • Market opportunities plus need to meet competition locally, especially from Czech Republic
  • Technology transfer strategy
  • Delegated management arrangements
  • Change driven by Polish requirements

Czech Engineering Company

  • Partnership with German firm
  • Germans provided new technology and office systems
  • Intense period of change for Czech firm
  • Venture proved to be divisive within firm, leading to severe HRM problems
  • Firm eventually taken over by Germans

Cocoladovny

  • Joint Venture with Nestle and BCC (France)
  • Nestle - market penetration, host company received new technology
  • Problem in assessing true worth of Czech firm for investment purposes
  • Rapid and significant change in firm and business environment

Anatomy of a Corporate Divorce: Corning-Vitro, 1991-93

Vitro seen by U.S. Managers Corning seen by Mexican Managers
top managers make decisions=slow pace managers too abrupt
executives vague, too hierarchical managers too direct
reluctant to criticize, too formal, outsiders not trusted open criticism of partners shows bad faith
too much time wasted on holidays managers didn't understand Mexico

Lessons

  • Relating the theory to practice
  • Strategic importance and its effect on day to day operations
  • How can we avoid the pitfalls?
  • How can we maximize the advantages of a joint venture
  • Policy issues

Summary

  • Joint ventures can be strategically advantageous for partners but needs commitment and organizational learning
  • Knowing the pitfalls can help in a positive way
  • Strategies at corporate and functional levels an important component
  • Learning to work together calls for additional management skills
  • IJVs evolve