13-Joint Venture Strategic Alliance in case of firm expansion PDF

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what is joint venture and strategic alliance and hoe they are use by the firm to grow themselves into multinational corporations...

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Chapter # 13 Joint venture and strategic Alliance are one of important means firms use to grow and improve performance besides mergers and acquisitions

Joint Venture: • Two or more firms create a legally independent company to share resources and capabilities to develop a competitive advantage. The parties agree to create a new entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise. Example: Maruti Suzuki, joint venture between maruti udyog and Suzuki motors in 1981 currently Suzuki has 56% of equity shares

• The venture can be for one specific project only, or a continuing business relationship such as the Sony Ericsson joint venture. Or for one project only for example GSK and sanofi who of the global pharma giants joined forces to research on vaccine against covid-19 in 2020

Motives for Joint ventures:  Pooling of complimentary resources  Access to raw-materials Access to distribution channels  Access to new markets ( youtong joint venture with master motor to create youtong master motor in Pakistan)  Diversification of risks  Economies of scale (TNK –BP joint venture made it the third largest oil form in 2003)  Tax shelter  Cost reduction  Joint manufacturing ( JF -17 thunder)  Gain of market power  Overcome trade barriers

 Learn new business techniques

Regulation and Joint Ventures: Simply because two companies form a joint venture instead of doing a formal merger or acquisition does not exempt them from some of the same regulatory scrutiny they might face if they merged or if one was acquired by the other. This is definitely the case for antitrust laws. The anticompetitive provisions of the Sherman Act and the Clayton Act can be also applied to joint ventures, where the effect of the venture on the market is to reduce competition. The cases of the Justice Department or the Federal Trade Commission challenging joint ventures are less common than their challenges of M&As Example: In 2006 the US department of justice and British office of fair trading conducted an investigation regarding the price coordination between American airline, united airline and British airways regarding passenger air fare and cargo shipping

Share holder wealth effect of joint ventures:

Reasons for Failure of Joint Ventures: (problems)     

Lower than expected turnover. Expiry of Technical tie up. Economic Recession. Reluctance of Management to accept additional responsibility. Distance and language barrier.

 Unfavorable profitability ratio – Post JV arrangement.  Lack of openers between JV constituent

Strategic Alliance:  We can define strategic alliances as collaborative efforts by two or more companies in which each company maintains its own independence  Normally, a strategic alliance does not result in the creation of new entity unlike a JV. Such arrangements are looser in nature than the JV and can be disbanded easily.  The major advantage of a strategic alliance is that it can be created easily as and when there is a need.  Strategic alliances are formed to facilitate the achievement of the company’s strategic goals.

Types of strategic alliance Equity based strategic alliance: Two or more firms own a portion of the equity in the venture they have created by combining some of their resources and capabilities to develop a competitive advantage.

Non-equity strategic alliance: Two or more firms develop a contractual relationship to share some of their unique resources and capabilities to create a competitive advantage  Licensing agreements  Distribution agreements  Supply contracts  Outsourcing commitments  Turkey projects E.g. BIAL- Bangalore International Airport Ltd. is a joint venture between Central Govt., State Govt. & Switzerland Airport Authority

Types of Strategic alliance at business level:

Complementary strategic alliances Competition response strategy Uncertainty-reducing strategy

Complementary Strategic Alliances (CSA) Firms share some of their resources and capabilities in complementary ways to develop competitive advantages Two types include: CSA and horizontal CSA • 1. Vertical CSA – Partnering firms share resources & capabilities from different stages of the value chain to create a competitive advantage. – Supplier or distributor – Example of proton and alhaj motor alliance, BMW and dewan motor alliance

• 2. Horizontal CSA – partnering firms share resources & capabilities from the same stage of the value chain to create a competitive advantage – commonly used for long-term product development and distribution opportunities – Partners may become competitors – Ex: Pfizer reached marketing agreements with two Indian makers of generic drugs

Competition response strategic Alliance: Occur when firms join forces to respond to a strategic action of another competitor Example: fed ex formed strategic alliance with KPMG in logistic business in response to increasing market share of UPS

Uncertainty-reducing strategic Alliance:

• Are used to hedge against risk and uncertainty • For example, entering new product markets, and developing a new product or technology standard are unknown areas so by partnering with a firm in the respective industry, a firm’s uncertainty (risk) is reduced • Ex: Volkswagen partners with China’s BYD Co. to produce hybrid and electric vehicles powered by lithium batteries.

Risks: Evidence shows that two-thirds of Strategic alliances have serious problems in their first two years and that as many as 70 percent of them fail.  Partners may choose to act opportunistically  Partner competencies may be misrepresented  Partner may fail to make available the complementary resources and capabilities that were committed  One partner may make investments specific to the alliance while the other partner may not

JV Vs. Strategic Alliance: JV Two or more organizations set up a separate, independent organization for a specific purpose

Strategic Alliance B2B collaboration where two or more corporate shares resources and capabilities to achieve some business purpose. Less formal than JV’s. A new entity A formal contract is written need not be created. Boundaries are defined by partnering It has clear and legal boundaries firms

Strategic Alliances Followed by Joint Ventures and M&As Strategic alliances can be a way for the alliance partners to test the relationship between the partners. The commitment level and costs are much lower than M&S and even joint ventures. If the alliance is not fruitful or if the cultures are not compatible, then the alliances are usually easy to terminate. However, if the parties are considering a more involved commitment, such as a merger, then an alliance may be a way to ‘‘test the waters.’...