Chapter 4 Global strategic alliances 2

1. Chapter 4 Global strategic alliances 2

2. Country based joint ventures • Used to be the main entry mode in emerging countries • Most legislationshave changed to open the way to wholly-owned operations • Still required in some countries (e.g. India) or in some sectors (e.g. China, Indonesia, Thailand)

3. What motivates a company to go in to a joint venture? Administrative/legal Capabilities acquisitions • Government industrial policies • Investment laws • Market complexity and cost of entry: • - Resources, assets, competences • - Culture • Speed of entry • Risks

4. Framework for the analysis of M&A and strategic alliances • Implementation • Transition • Integration • Evolution • Strategic value • Defining the scope • Strategic objectives • Value creation potential What are the benefits of the the alliance, aquisition or merger? What do we get from it? Shape expectations • Fit analysis • Strategic fit • Capabilities fit • Cultural fit • Organizational fit Identify issues How workable is the deal? • Negotiation and design • Financial architecture • Operational scope • Interface • Governance How do we contribute to it, organize and manage it? Set the agreement How do we work? Achieve results

5. Value of the parent A Value of parent B Royalties Dividends Management fees Transfer pricing DIRECT VALUE Value coming from the alliance Learning from B Learning from A Cost saving due to combined operations SYNERGY VALUE Value coming from joint operations Increased revenues due to joint marketing and complementary products Increased profitability from joint innovation Value creation in strategic alliances

6. Partner selection in country-based joint ventures Customers/ distributors Diversifiers Same business Suppliers + - + - + - + - Copying/Learning Capabilities Dependence Downward integration Contacts Image Power No operational support Opportunism Resources Market Access Dependence Upward integration Political partner Government Investors + - + - + - Access to decisionmakers No operationalsupport Political liability Opportunism Freedomof action No operationalsupport Power No operationalsupport Politicking

7. Partner analysis

8. Strategic fit CRITICALITY • How strategically important is the business for partners? • To what extent do partners need to achieve objectives (degree of capabilities autonomy)? DIFFERENCES IN EXPECTATIONS • How different are the partners’ expectations? • To what extent are the differences compatible/workable?

9. Strategic fit: criticality and degree of commitment B A + STRATEGIC IMPORTANCE - AA = High commitment BB = No partnership CC = Low commitment DD = Very low commitment AB = Potential conflicts AC = Potential conflicts AD = High chance of conflicts D C - + NEED FOR A PARTNER

10. Strategic fit: differences in expectations in joint ventures VENTURING VIEW EXTRACTIVE VIEW SHARING VIEW INVESTOR VIEW $ POLITICAL PARTNER $

11. Strategic fit: same bed but different dreams What local partners look for in a JV What foreign partners look for in a JV • KNOW -HOW • Product • Processes • Management • MARKET • “1.4 billion pairs of shoes” (China) • Market access • Understand the market • Expand nationally • Distribution • Contacts • UPGRADE • Factory/equipments • Systems • Products • “Get out of the mess” (Chinese SOE) • RESOURCES • Low labour cost • Regional export base • Components • Raw materials • MANAGEMENT • Integration with global/regional • network • Control • MARKETS • Export channels • Marketing expertise • RESOURCES • Experts • Financing • Reputation/ image/brand CH 52

12. Capabilitiesfit What is needed to compete effectively? What do we bring? What does the partner bring? What other investments need to be made? • What are our • contributions to the • joint venture? • Financial and human resource • Other resources • Tangible and intangible • assets • Competencies What new investments remain to be made in new resources, assets, competences? What are the partner’scontributions? Given market opportunities and competitive context: What resources, assets and competences are needed in our value chain to compete effectively? What are the relative competitive strengths of partners ? To what extent does the coming together of partners create a robust business model? • Complementarities • Overlaps • Gaps

13. Cultural fit What are the differences in business objectives? Leaders • Entrepreneurship • Growth • Short versus long term Corporate ownership Corporate cultural differences Corporate history What are the differences in business concepts? • Dominant logics • Ways to compete • Quality orientation • Importance of technology • Customer orientation Experience Industry cultural differences Industry What are the differences in managing business? • Centralisation/decentralisation • Bureaucracy National origin International cultural differences What are the differences in dealing with people? Ethnical origin

14. Multinationalmatrix Decentralized Bureaucratic Well-defined systems and processes Planning and control Technocratic Performance Career Management Organizational fit Family conglomerate in emerging countries Western multinational STRUCTURE Conglomerate Centralized Autocratic SYSTEMS Loose Personalized Quick decision-making PEOPLE MANAGEMENT Paternalistic Loyalty Family orientation JV 10

15. Types of agreements in joint ventures • Memorandum of understanding • Letter of intent INITIAL: • Joint venture agreement and articles of association • Business plan? (Feasibility) • Technology agreement • Marketing agreement • Procurement contracts • Management contract • Staffing and organization

16. Negotiating CONTRIBUTIONS VALUATION SCOPE • Equity sharing • Technology contributions • Facilities • Brand and goodwill • Additional contracts • Financing • Assets • Price and remuneration • of technology • Shares • Product mix • Geography (domestic/exports) • Capacity NEGOTIATION MANAGEMENT AND STAFFING CONFLICT RESOLUTION • Board • Positions • Decision-making • Control • Recruitment • Careers • Remuneration PROTECTION • Internal arbitration • External arbitration • Renewal • Extinction • Technology • Brand • Territories • New developments JV 42

17. Implementing Empirical evidence… Survival rate: the joint venture decay - Declining mutual benefit; divorce or reactivation Death valley Behavioural issues - Lack of understanding - Lack of communication - “Positional” bargaining - Lack of cultural sensitivity Too much emphasis on structure and not enough on processes

18. The joint venture decay MUTUAL BENEFIT TIME

19. Death Valley low high Phase 5 Creation of a new fused culture based on cultural synergies • Phase 1 • First contact between • the different • cultures • enthusiasm • “honeymoon” • Phase 4 • Change of • mental patterns • problem solving • conflict • management • Phase 2 • Friction for the • first time after fusion • disillusionment • looking for scapegoats • self blame Emotional stress, pressure for change Morale, optimism, productivity • Phase 3 • Crisis • confusion • massive conflicts • cultural antipathy • refusal Taking on the challenge high low Defusion, return to the monoculture JV 11

20. General recommendations 1. Selecting your partner • Invest in a careful search - Multiple sources of information - Check track record - If possible engage in up-front business dealings - Always (if possible) consider several alternatives • Analysis of - Strategic fit - Capabilities fit - Cultural fit - Organizational fit is a “must” • Due diligencein a joint venture is as important (if not more) than for acquisitions • In emerging countries, partner analysis requires a good understanding of “business networks” JV 115

21. 2. Feasibility and negotiation • Joint feasibilitystudy has to be taken very seriously Should lead to a joint business plan • Business planning is a parallel process to the formal legal • and financial negotiations • Operational people should be involved, and some “overlapping” is needed between the negotiation team and the managerial team JV 116

22. 3. The Integration phase • Careful selection of personnel appointed to the joint venture - “Joint ventures are not a dumping ground for deviant managers” - Cultural, relational and pedagogical skills are as important as technical skills • Integration teams in various operational fields - Mixed teams - Concrete agenda (clear objectives) • Invest in training JV 117

23. 4. The issue of control • Formal majorityownership is not a “guarantee” of control • Controlis actually experienced at the operational level - It is important to be in charge of the key operational functions which determine business success (e.g. quality management, customer services) • Controlis closely linked to the ability to demonstrate its leadership, management, and ability to educate and produce results (e.g. Shanghai Volkswagen, Otis China) JV 118

24. 5. Ending joint ventures • Avoid “dramatic” endings • Even in“tense”situations one should always look for a win-win • solution • Use“third party”in case of conflicts • Take overis in most cases the way to end

25. Trust in joint venture • Demonstratecommitment to the joint venture • Appointcompetent andrespectful managers and personnel • Provideadvance warningof your intention • Keepcommunicatingeven in « tough » times • Personalise the relationship • In emerging countriescoaching and trainingis seen as trust