Lecture 6 Joint Ventures

7/31/2019 Lecture 6 Joint Ventures

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Joint Ventures: How they work?

Lecture 6


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What is Joint Venture

Joint venture is a separate business entity such that: Participants (generally two) continue as separate firms

May be organized as partnership, corporation, or any otherform of business

Limited scope and duration Involve only small fraction of participants' total activities

Each participant offers something of value (equity,technology, expertise, etc.)

No sharing of assets/information beyond venture

Need not affect competitive relationships Low risk


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Background

Sea explorations in 1960s and 1970s for

minerals

By 1980 all of these independent efforts were

reduced to five major joint ventures

US steel, INCO, Lockheed, Kennecott were US

based

One was an all French JV Due to technical, economical, and political risks

involved, JV was the only way


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JVs...where?

Land development and construction

Oil and gas

pharmaceutical


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Design and management of joint ventures

Managers often regard JVs as: Losing proportions

Too complex

Too ambiguous

Too inflexible However, they must accept and learn to work with joint

ventures as: The project gets larger

Technology becomes expensive

Costs of failure becomes huge to be borne alone Nationalist governments such as India and Mexico are

demanding that JVs replace autonomous corporate subsidiaries


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Some Statistics on JVs

JVs have a high overall failure rate and some are very costly for thepartner companies

A study by Boston Consulting Group found: More than 90 ventures in Japan failed between 1972 and 1976.

These large ventures involved prominent US companies such as Avis,

Sterling Drug, General Mills, TRW. A Harvard business school study found:

30% of 1100 joint ventures formed before 1967 between major UScompanies and partners in other developed countries proved unstable

These ventures were either liquidated or taken over by one partner

In another Harvard business school study of 37 JVs: 7 collapsed

5 were drastically re-organized

Majority of these ventures were run by US or western Europeancompanies and all included a local partner


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Challenges in JVs

Double parenting There is more than one parent (owner)

They can and will disagree on anything and everything How fast the joint venture grow?

Which products and markets to encompass? How should it be organized?

What constitutes a good or bad management?

Specifically this last issue is problematic when one partnerbelieves short term performance and other wants to go

after long term goals Since board consists of members from both parents, Board

level differences also emerge

Straight forward decisions become long and complex


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Challenges in JVs

Dominant parent vs. shared management

Dominant parent enterprise Managed by one parent

Dominant parent selects all functional managers for the enterprise

Board, consists of members from both, plays a ceremonial role

Dominant parents executives make all decisions

dominant parent is the choice: If a partner is chosen for reasons other than managerial input, (e.g. Finance,

resources, patents, large consumer)

Pressure from a host government (e.g. India)

Foreign companies try to find passive partner/investor, no knowledge of

product, neither a government agency nor controlled by the government Passive partner must trust dominants competent and honesty


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Challenges in JVs

Dominant parent vs. shared management Shared management enterprise

Both parents manage the enterprise

Both parents contribute functional managers for the enterprise

Board, consists of members from both, has a real decisionmaking role

Most common in manufacturing where one may supplytechnology and the other knowledge of local market

General managers can play a vital role if given autonomy

Deteriorating performance obliges both parents to be more

involved in the details of venture Triggers a situation which can throw entire system out of

equilibrium


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Challenges in JVs

Ownership and Dominance Ownership and dominance do not necessarily go hand

in hand

The parent with 24% shares can be exclusive manager

(e.g. Indian policy) One parent dominated four other ventures despite

these were 50-50 deals

Managers point of view:

Ownership makes little difference to a manger in sharedventure (50-50) deal

Its managers responsibility to ensure a fair decision in 51-49shared management venture.


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Challenges in JVs

Staffing a venture Particularly when functional managers are contributed by both

parents

Communication problems arise due to Language barriers

Attitude towards time Importance of job performance

Material wealth

Desirability of change

Problem between partners from developing and developed countries

American-Iranian venture: American couldnt adapt to dealing with

workforce that had on average 3-grade education, Americans weresent home, Iranian managers were given training in America and givenmanagerial positions and performance improved.

Differences in corporate background show up in a number of ways: Hierarchy, bureaucracy, decision making (board vs. Functional managers)


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Preventing failure

Recognizing the different types is a key to prevention

If one parents operational skills are unnecessary to the success of a jointventure, the other parent should oversee the venture If forced by local government to choose a partner then look for a passive

partner

If both parents skill are necessary for successful joint venture but oneparents skill can be transferred on a one-time basis, the other parentshould dominate If foreign partner has great technical skills in a slowly changing area, it should

transfer the skills to the venture and allow the local partner to make keydecisions

If the skills of both parents are crucial to the success of the venture, a

shared management joint venture is appropriate Though decision making will be slow, however will result into better decisions

For the sake of efficiency, choose a company with complimentary expertise,given JV manager increased autonomy, and board is involved only whennecessary.


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Why joint ventures

Enter into new markets

Traditionally pursued as a means to expand into

new businesses e.g. NTT Docomo

Exit from existing markets

Phillips, IBM, Honeywell, Dresser have used jint

ventures to exit from non-core businesses


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Phillips-Whirlpool

Dutch electronics multinational reorganize its portfolio in 1980s

Identified its $1.55b major domestic appliances division not essential to itsfuture

Division was supporting nine different brands

Had following problems:

Sales and distribution was not co-ordinated across countries or brands Production was spread haphazardly spread across ten plants in five countries

Plants also needed huge capital investment to develop them into world classfacilities

14000 employees protected by European legislation on job security

Due to these problems, selling the division would only bring Phillips a fire-

sale price The division had valuable assets (manufacturing skills though

underutilized, Europes best known brand, design expertise, pan-Europeandistribution network, number 2 in European market)

Suffered with scarce management and corporate cash


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Phillips-Whirlpool

Whirlpool was the obvious buyer looking for expansion beyond US border

Benefits of inheriting a major share in European market

Whirlpool could alter cost structure if it sourced components globally

Can co-ordinate production, sales, and distribution across countries andproduct lines

Can invest in new plants and machinery and transfer its advancedmanufacturing processes to European operations

However, they were less convinced about the potential of the business How strong was the franchise behind the nine brands?

Would the dealers remain loyal?

How much time it will take to transform a inefficient unit into an efficient one?


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Phillips-Whirlpool

Both parties couldnt agree on a suitable price

Joint venture offered a solution

Phillips offered Whirlpool 53% of its appliances

business for $381m along-with an option to buy47% within three years

Whirlpool found the opportunity attractive since: Learning opportunity about the appliance division to

initiate improvement before taking over

Opportunity for Phillips to prove to Whirlpoolthat business was valuable


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Phillips-Whirlpool

Whirlpool moved in fast Imported technology from its other operations

developed common platforms

standardized components across factories

reduced inventory by one-third

found common suppliers reduced actual suppliers to half

initiated pan-European advertising

integrated sales operations across Europe

retained best talent in appliances division

Employees remained motivated and customers and dealersremained loyal

Venture transformed business into a vibrant and profitableoperation


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Philips-Whirlpool

Whirlpool also benefited from Philips

involvement in marketing decisions

Philips also shared its support systems e.g. IT

For sometime, Whirlpool products were

double branded as Philips-Whirlpool

Allowing Whirlpool to cash on the well

recognized Philips brand in European markets

Finally..............


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Whirlpool exercised its option in 1991 and

purchased 47% of remaining shares for $610m

Philips exited the business smoothly and

that too on more favourable terms

The total valuation of sale previously was $270m


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NTT Docomo-TATA

NTT Docomo - Introduction NTT established in 1952 by Japanese government to to rebuild

countrys war raveged phone system

In 1985, privatized to to promote competition in telecomindustry

In 1992, NTT docomo was formed as a sequel of NTTs mobilenetwork to further reduce NTTs monopoly

NTT docomo became a subsidiary of NTT (61.6% shares)

By 1996, docomo reached subscriber base of 5m

By Feb 2002, the number reached to 40m subscribers

In March 2008, Docomo was leading with 52% market share,revenues of $47.2b, subscriber base of 53.4m

17th positio in golbal mobile network operators

Listed on Tokyo, London, and Newyork stock exchanges


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NTT Docomo-TATA

NTT Docomo - Growth Technology was a major factor in growth

In 1999, docomo launched I-mode: mobile phone with internetconnection

I-mode was targeted at women in their 20s and offered shopping

sites, horoscopes, ring tones downloads, easy mail capabilities etc. I-mode brought revolution in industry across the world that consisted

of operators and vendors only (bringing IT and content providers onboard)

In October 2001, expanded I-mode by launching worlds first fullycommercialized 3-G service

FOMA freedom of mobile multimedia access

Docomo took FOMA to mass market in Japan

By 2005, 3G was a common channel of communication in Japan


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NTT Docomo -TATA

NTT Docomo core competency Executives at Docomo were skilled at managing growth

Volume-led growth was replaced with value-led growth strategy

Value-led growth linked voice communication business with datacommunications business

Catered the Japanese psyche by introducing small, simple, clean, and

convenient gadgets A device that was a cell phone + internet device + mini-computer was an

instant hit

They captured market as they were first movers

The network quality was super: no blind spot, no call drops, excellent voicequality

Built a network of alliances with vendors, customers, franchises, banks,retailers, and content providers

Thus their core competency was their ability to manage and sustainrelationships


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NTT Docomo -TATA

NTT docomo Expansion

I-mode provided them the basic platform to gobeyond domestic market for two reasons:

Domestic users would be able to use their I-mode phoneswhen they go abroad

People around the world will be able to use servicesprovided by companys local franchises

They started portfolio investments in global telecom

markets between 1999-2001 This strategy was unsuccessful and by 2002 they

retreated


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NTT Docomo -TATA

NTT docomo Expansion Learning from it, they decided to acquire subsidiaries in

those markets

Companies in Asia-pacific regions were planning to

introduce advanced mobile networks, that was Docomosstrength

Their strategy was: Target country has a strong GDP growth

Acquisition price is not too high, rather consistent with industrynorm

Target country should also provide opportunities for 3G

Docomo will not make hostile takeover, rather would manageAsian operators in old-fashioned way (i.e. Capital and technology)


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NTT Docomo -TATA

India In 2008, India had 261m wireless subscribers who were serviced

by 12 mobile telecom companies

With a population of 1.2b, India was the second largest marketfor various goods and services

India had overtaken US as second largest wireless market in theworld after China

Indias mobile user pool reach 737m by 2012

Indian government pursuing liberal economic policiesparticularly in IT and telecom however entry was not possible

without a local partner Foreign company was allowed to hold up to 74% however, CEO,

MD, and majority of board members had to be Indians

The only possibility was a JV


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NTT Docomo -TATA

TATA TATA was in seven broad business segments, 98 companies of which 5

in telecom sector, 357000 employees, $58b revenues in 2008, 65%revenues coming from global operations

TTSL was part of TATA group and ranked 5th largest mobile operatorwith a 9.3% market share

TTSL has a pan-Indian licence for GSM and was planning to bid for 3Gto be auctioned by Govt. in 2009

TTSL had a retail chain of 3500 stores and service outlets

Strategy aimed at brand building, innovation, and subscriber growth

TTSL had 24.3m mobile subscribers (target 100m by 2011)

TTSL was looking for an overseas partner for technology and capital TTSL was an unlisted company, financials were not available in public

domain

General understanding was that company was not yet profitale


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Docomo found TATAA company with a very strong core, a very strong centre


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NTT Docomo -TATA

Issues in the proposed JV Equity stake

80% shares of TTSL owned by TATA

TATA will divest 20% shares for Docomo and create additional 6% to be issued to Docomo

Is 26% appropriate stake?

Purchase price TTSL not a listed company so its worth is unknown

Docomo is paying $2.7b for 26% stake

cost per subscriber coming to $427. the standard cost is $711.

Is the deal fair for Docomo

Technology transfer 3G

BSNL and MSNL (govt sector companies) already providing 3G in 380 cities

TTSL would be a major participant in the 3G auction

The issue is knowledge management since India did not have a intellectual property regimen

Veto rights With 26% stake, Docomo would minimize its involvement in management

Innovation would come from Docomo such as 3G, international business, technology, and capital

Veto rights will be a protection for Docomo Would TTSL agree to it?

Staffing Key positions to be filled in by Docomo

Documents

Lecture 6 Joint Ventures