Managing joint ventures and alliances
40% of joint ventures and strategic alliances result in divorce within five years. Making them work is about going beyond best practice, says Dr Alan Barlow, former CEO international engineering group and former partner at PricewaterhouseCoopers.
The world economy is emerging from its biggest ever global recession. Organisations' approach to growth in the 2010s will be very different. Management’s mantra will be how to optimise what’s already in place, at minimum marginal cost with returns over the near term and at low risk.
However management will also be cautiously taking steps to secure growth opportunities. Some cash rich companies will benefit from bottom fishing with acquisition of under-valued companies.
Joint ventures and strategic alliances
Joint ventures and strategic alliances are a proven tactic for management to secure faster and lower risk growth. The alternatives are to grow organically (100% control but generally slower growth); or with acquisitions (faster growth but demanding on capital and challenging to integrate post-acquisition and secure the forecast benefits).
Benefits
Joint ventures and strategic alliances allow faster growth by accessing markets and technology, and sharing and controlling risks. The main catalysts for the growth in such alliances are: the increasing internationalisation of markets; the growing importance of innovation management (with rapid technology transfer and shorter product lives); and, the increasing costs of R&D (with the complexity of technology and convergence of it).
Downsides
With such benefits, there are also potential downsides. 40% of joint ventures result in divorce within three years – which is not necessarily a sign of failure. But, when joint ventures are not properly managed over their life time, then the exit costs can be huge.
For example, after ten years of operating in China with its local partner, the French company Danone accepted an exit settlement of 21% below its book value as payment by its local partner of $450m for the 51% majority ownership of their joint venture*. The divorce took place because Danone accused its joint venture partner (Wahaha) of setting up at least 96 parallel companies, with production and sales networks, that competed with the joint venture.
Danone also believed its local partner was in breach of confidentiality agreements. While Danone ‘controlled’ the joint venture at board level, the Chinese partner had almost total day-to-day control.
Best practice for success
For success at joint ventures and strategic alliances, there is a strong body of best practice. This includes:
- plan, plan and plan - objectives, operations, resources and contingency
- balance trust with self-interest - avoid being selfish or naïve
- anticipate strategic conflict in advance and continuously - avoid the tendency to gloss over conflict
- establish clear strategic leadership - the vision and purpose of the venture with unambiguous and unbiased authority
- learn flexible management - recognise the evolution of the venture, understand all partners’ intents and roles, and communicate effectively
- allow for and gain from cultural differences - the law of requisite variety, and components of culture
- manage strategic asset transfer - including technology and understanding
- learn from the partner and the venture.
Negotiating framework
These are basic, generic requirements. It is important to go beyond them, particularly in three distinct areas. Firstly, it is vital to prepare your own negotiating framework, that is, what is important to you in and from the joint venture. Similarly, it is exceedingly useful to draft what you believe to be the important considerations for your prospective partner. They are likely to be considerably different to yours, as both of you are contributing and requiring different ‘returns’ from the joint venture. Such a framework and assessment then becomes a tool for comparative assessment of what you are achieving and/or acceding in the negotiation, and that of your prospective partner.
Managing differences in organisation structures and business drivers
It is also increasingly important to understand and manage the differences between the parents’ decision making structures and its business drivers. Both of these two considerations vary tremendously between corporations. Organisation structures for western corporations can, for example, vary from centralised-hierarchical to decentralised-federal, with a wide range of variations.
Likewise the four main causes of growth are: cash, market share, growth and profit. It is impossible to maximise all four concurrently, which is another reason for the generally big differences between the businesses forming a joint venture. Again, a clearer understanding of your partner’s mix will greatly help both successful negotiation and subsequent ongoing operations.
The problems above are exacerbated when, for example, western and Asia Pacific organisations form a joint venture. The difference and the impact of factors affecting their business growth and organisational decision making can be dramatic. These must be managed for success.
Joint ventures and strategic alliances only exist because each party has something the other party wants at a point in time. Hence, in the face of changing market circumstances and as corporate learning takes place over time, divergence between the joint venture partners should not be unexpected.
Mastercourse - Joint ventures and strategic alliances
In recognition of the importance of joint ventures and strategic alliances to businesses, CIMA has introduced a new Mastercourse - Joint ventures and strategic alliances presented by Dr Alan Barlow. Through a series of case studies, the Masterclass delivers best practice and proven frameworks for initial and ongoing negotiation and management of joint ventures and strategic alliances for ensuring greater success.
*Source: Financial Times, 10 November 2009.
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