JOINT VENTURES &

STRATEGIC ALLIANCES

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 12
Business Alliances
– Joint Ventures & Strategic Alliances
Context:
Blurring of boundaries between competition and cooperation in certain industries
(particularly in automobiles, computers, aerospace & telecommunications)

Riddle of the Sphinx:

Who is my customer in the morning,
my rival in the afternoon,
and my supplier in the evening?
Jack Welch, former Chairman of G.E.

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Types of Business Alliances
Earlier: 1. Cartels in US & Europe
2. Cross shareholdings in Asia (Keiretsu)
3. Alliances of oil exploration & mining companies to
reduce risk
Now: 1. Joint ventures (multi-purpose & limited purpose)
2. Collaborative research programmes & technology swaps
3. Supply agreements & marketing alliances
4. Reciprocal distribution & promotion arrangements
Explosive growth in the number of business alliances in recent
years
Strategy: Focus on core business and seek out strategic networking
initiatives for peripheral/support functions through
varying degrees of capital and/or operational linkages
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Joint Ventures
A joint venture is usually a separate/new business enterprise
(company) formed with equity contribution by two or more
participating firms.
A joint venture brings together complementary strengths such as
financial resources, technological, managerial and marketing skills
of the participating firms to meet common business objectives
with greater advantage.
e.g.: Maruti Udyog – Jt. venture between Govt of India & Suzuki
TVS-Suzuki - joint venture between TVS and Suzuki
Joint venture of Samsung & Texas Instruments to
manufacture semiconductors in Portugal
Samsung-HP joint venture to market HP’s products in Korea
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Rationale for Joint Ventures
1. To bring together complementary advantages:
One firm has a product idea, the other has finances to
commercialize it
2. Technology transfer:
Berg, Duncan & Friedman (1982) report that 50 % of all JVs
take place for knowledge acquisition.
Learning-by-doing & teaching-by-doing (L/TBD) is the most
appropriate means of knowledge transfer
3. To enlarge one’s business by sharing investment & business
risk (thereby reducing the exposure of each partner)
4. To gain endorsement from government authorities:
(Better chances of approval from anti-trust/monopoly prevention
agencies because JVs lead to creation of more firms, while
mergers reduce them)
Contd..
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Rationale for Joint Ventures (Contd..)

5. To gain economies of scale/critical mass

6. Tax advantage:
If a patent or technology is contributed to a joint venture, the tax
consequences may be less than on royalties earned through a
licensing agreement.
Issues relating to operating loss carryover, multiple taxation, etc.

7. Partners’ risk is limited only to the extent of their investment in

the JV. The partners’ original companies are not at direct risk.

8. To obtain access to distribution channels or raw material supply

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Reasons for Failure of Joint Ventures

Studies by McKinsey & Co and Coopers & Lybrand:

- 70 % of JVs are either disbanded or fall short of
expectations

Other Studies:
- The average JV does not even last half of the term
stated in the JV agreement

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Reasons for Failure of Joint Ventures
Reasons for failure:
1. Rigid contract which does not provide flexibility to permit
adjustments in tune with changing circumstances
2. Partners concerned with their respective businesses. Hence,
inability to give sufficient time and management attention to
the JV
3. Conflict of interest between partners, with both later on
wanting to expand independently in the same business
4. Issues of leadership, cultural incompatibility and inability to
deal with rapid changes in the environment
5. Opportunistic behaviour: Lack of mutual trust and willingness
to cooperate in achieving common goals
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International Joint Ventures
Reasons for international joint ventures:

1. To reduce the risk of entering into a foreign environment

2. Legal requirement: In some countries, joint venture (with a
local firm) is the only way for a foreign company to set up
operations
3. A local partner may be vital for the success of the project
(due to knowledge of local business conditions)
4. To get access to proprietary technologies from a foreign
company (IBM’s JV with Toshiba for the latter’s flat panel
display technology)
5. For competitors to cooperate in developing a cutting edge
technology which can transform the industry
(Fuji-Xerox JV to develop photocopiers)
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Strategic Alliance
A strategic alliance is a cooperative business relationship between
two (or more) firms to attain a limited objective, while
maintaining their independence.

Usually, in a strategic alliance, no new company or legal entity is

formed and there is no specific pooling together of equity
contributions towards a joint enterprise.

A strategic alliance may even be formed with potential or actual

competitors (often in non-competing lines or markets), suppliers
or customers; thereby creating horizontal, vertical or diagonal
linkages.

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Strategic Alliance

e.g.: 1. GM’s components division supplies components to Toyota

2. Canon produces medium volume copiers for sale in Kodak’s
name
3. Alliances of major US airlines with smaller carriers in Europe
4. IBM, Siemens & Toshiba working together to create new
generation memory chips
5. Du Pont & Sony developing optical memory storage products
6. GM & Hitachi collaborating to produce electronic components
for automobiles

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Types of Strategic Alliances
Bleeke & Ernst’s classification (1995) according to power of companies
entering into the alliance and the likely outcome:
1. Collision between competitors:
Strong companies in direct competition enter into an alliance for synergy
(consolidation of products & markets), but leads to conflict. Such alliances with
overlapping capabilities are short-lived. They break-up or end in an acquisition.
Alliance between General Electric and Rolls Royce in jet engines broke up

2. Alliance of the weak:

When weak companies join hands to improve their position, they become weaker
because of inability to provide adequate capital and managerial resources,
and are likely to be acquired by a third party. This is particularly true of
scale intensive businesses.
Alliances among small airlines in the US/Europe eventually led to their being
taken over by larger airlines
Contd..
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Types of Strategic Alliances (Contd..)

3. Disguised sale:
When a weak and a strong company form an alliance, it would be short-lived.
The weak company is likely to be eventually acquired by the strong one.
In the Siemens - Allis Chalmers alliance in the US, the latter was gradually
acquired by Siemens and finally, completely taken over

4. Bootstrap alliance:
A weak company joins with a strong company and tries to improve its
capabilities with the help of the latter. The alliance can succeed if the weak
company can achieve tangible improvement.
In the Rover – Honda alliance, Rover improved its productivity and reduced
its defect rate by more than half. It later sold 80 % stake to BMW for $1.2 billion

5. Evolution to a sale:
Though an alliance may start with compatible partners, competitive pressures
change the balance of power and in the end one partner sells out to the other.
Contd..
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Types of Strategic Alliances (Contd..)

6. Alliance of complementary equals:

An alliance of strong and complementary partners, which usually lasts longer
than the other types mentioned above.

Some examples:
Dow - Corning (> 50 years)
Fuji – Xerox (> 30 years)
Siecor – Siemens & Corning; fibre optic cables (> 15 years)
Pepsico & Lipton (canned ice tea)
KFC & Mitsubishi (KFC chain in Japan)
Ericsson & HP (network management systems)

Japanese companies learn quickly from their partners and buy them out
once they have acquired their partners’ skills & expertise.

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Types of Strategic Alliances (Contd..)

Classification based on framework provided by Yves L. Doz & Gary Hamel:

1. Alliance between potential competitors to neutralise rivalry:

Airbus consortium by European govts to create a formidable competitor to
Boeing

2. Alliance between companies that have separate specialized resources:

Hitachi & Texas Instruments for development of 256 MB DRAM chip
Hitachi & GE for gas turbines

3. Alliance for acquisition of knowledge by working together or observing

each other:
GM – Toyota: GM to learn Toyota’s lean manufacturing system &
Toyota to learn GM’s superior designs

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Making alliances work
Success of an alliance depends on:
1. Partner selection
2. Alliance structure
3. Manner in which the alliance is managed
1. Partner selection:
Three principal characteristics of a good partner (Charles W. L. Hill):
a) Helps reach strategic goals – product, market, core competency
b) Shares the common visions of the alliance, without having a separate
agenda
c) Will not exploit the alliance for selfish ends – to gain more & give less
GM-Daewoo alliance: GM’s agenda was to use Daewoo as a low cost
production base; Daewoo wanted to use GM’s technology & distribution
system

Contd..

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Making alliances work (Contd..)
2. Alliance structure:
a) Firm up financial & operational aspects such as:
i) Percentage of ownership
ii) Mix of financing
iii) Technology & machinery to be contributed by each partner
iv) Sharing of activities & responsibilities
v) Staffing, location & control
b) Alliance should be designed such that there is reasonable consistency with the
strategic objectives of both partners
c) There should be potential for value addition & address questions like how the
alliance can create value, how it can be maximized for both partners
d) Set out mechanisms for conflict resolution
e) The risk of giving away too much to the partners should be minimized –
transfer only what is meant to be transferred & “wall off” sensitive technologies
f) Built-in contractual safeguards to reduce scope for opportunism by:
i) arranging to swap skills & technologies & through cross licensing agreements
ii) credible financial & other commitments in advance
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Contd..
Making alliances work (Contd..)
3. Managing the alliance:
To maximize benefits from the alliance, the partners need to
a) Build trust
b) Learn from each other
c) Build inter-personal relationships between the firms’ managers
The Ford-Mazda alliance, set a framework of meetings to discuss matters pertaining
to the alliance and also provided for “non-work” time to build better relationship
Hamel, Doz & Prahalad studied 15 strategic alliances over a period of five years
– focusing on alliances between Japanese companies & their western partners:
a) The major determinant of how a company gains from an alliance is its ability to
learn from its alliance partner
b) Japanese companies made greater efforts to learn and emerged stronger than
their western partners
c) Western companies considered the alliance purely as a cost & risk sharing
device and not an opportunity to learn from a potential competitor
d) Most learning takes place at lower levels of an alliance. Operating employees
should therefore be well informed of the strengths of the partner and the
importance of learning
e) To maximize learning benefits from an alliance, learn from the partner and
apply the knowledge within one’s own organization
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Advantages Of Strategic Alliance

Ohmae, Hamel, Doz & Prahalad:

Firms form alliances with actual or potential competitors for various strategic purposes

1. Strategic alliances facilitate entry into foreign markets

Motorola helped Toshiba build microprocessors, and Toshiba in turn helped
Motorola to get government approvals to market its cellular phones in Japan
2. Help in sharing costs & risks associated with development of new products
or processes
a) Motorola & Toshiba shared costs & risks in the microprocessor business
b) Boeing & Japanese firms (Mitsubishi, Kawasaki & Fuji) shared the costs of
developing the Boeing 767
3. Companies can combine skills & assets that neither can develop on one’s own
AT&T and NEC swapped technologies for CAD and advanced computer chips
4. Helps firms to establish technological standards for the industry
Philips & Matsushita established the Digital Compact Cassette system as a
new technological recording standard in the consumer electronics industry
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Disadvantages Of Strategic Alliance

Strategic alliances give competitors a low cost route to technology

and markets
1. Japanese firms gained from project engineering &
production process skills from US firms, but kept high paying,
value added jobs in Japan
2. Success of Japanese firms in machine tool &
semiconductor industries is largely due to technology acquired
from US firms through strategic alliances

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